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Citation: 2005TCC20
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Date: 20050105
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Docket: 2003-1495(GST)I
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BETWEEN:
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AWID, AHMED, MAHMOUD, MOHAMMED AMEREY,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
McArthur J.
[1] This is an appeal from an
assessment by the Minister of National Revenue under the
Excise Tax Act for goods and services tax (GST) for the
period from January 1, 1996 to December 31, 2001 (the period). By
the assessment dated February 15, 2002, the Minister assessed the
Appellants net tax of $348,955.70, penalty of $71,939.21 and
interest of $58,704.90.
[2] The Appellants submit that they
owe nothing to the Minister and claim input tax credits (ITCs) in
the amount of $38,492.06. The outcome is determined on the facts
and there are two factual issues to be established. First, what
is the amount of the GST taxable revenue and second what is the
amount of eligible ITCs? It has been a long and difficult
struggle for both parties from when the Minister commenced its
audit which led to this appeal.
[3] On October 2, 2003, I made the
following interim order:
ORDER
After hearing an issue in this appeal, and upon hearing the agent
for the Appellants and counsel for the Respondent;
It is ordered that:
1. The
Appellants and not Amerey Enterprises Inc. are the proper persons
to be assessed under the Excise Tax Act as they were
operating in partnership in the period January 1, 1996 to
December 31, 2001;
2. The
Appellants shall have until November 3, 2003 to designate a third
party location to store the books and records of the business and
to notify the Respondent of such location;
3. The
Respondent shall provide an independent auditor to review the
books and records of the Appellants, in the presence of the
Appellants and/or their representative accountant, on or before
December 3, 2003; and
4. The hearing
of this appeal is adjourned sine die.
Reasons for the Order were given at the same time. Some of the
facts stated are equally relevant to the present judgment.
[5] This hearing
arises from acrimonious encounters between Canada Customs and
Revenue Agency and the Appellants which included unsuccessful
attempts to audit the Appellants' books and records. Before
proceeding further, I must decide whether it was the Appellants
or Amerey Enterprises Inc. (the "Corporation") that
made the supplies in issue and carried on the business under the
name West's Sports Cards during the relevant period January
1, 1996 to December 31, 2001.
[6] The facts which
are not in dispute include the following. Awid, Ahmed, Mahmoud
and Mohammed Amerey are brothers and the Corporation was
incorporated on November 27, 1990. It was registered for the
purposes of Part IX of the Excise Tax Act on January
1, 1991 and assigned a goods and services tax registration
number. Between January 1991 and April 30, 1993, the Corporation
conducted business and I believe as West's Groceries.
[7] About May 1993,
the Corporation was struck off Alberta's Corporate Registry
as it failed to file annual returns. Immediately prior to this,
Awid, Ahmed, Mahmoud and Mohammed were all shareholders and
directors of the Corporation. The business activity continued to
be carried on while the Corporation was struck off Alberta's
Registry. The business activity was primarily the selling of
trading cards and other sports memorabilia. Also, I think there
was a small convenience store business. The Minister of National
Revenue assigned the Appellants a registration number for GST
purposes during the relevant period.
[8] The Corporation
was revived on August 22, 2000. Its GST registration had been
cancelled March 10, 1997 and reregistered on November 20, 2002,
retroactive to December 31, 1995. The Respondent submits that the
Corporation did not exist during the five-year period 1996 to
2001, and adds that logic and common sense leads to the
conclusion that the Appellants must have made the supplies and
not the Corporation during that period. The Respondent states
that when the Corporation was struck from the Registry, the
Appellants were the sole directors and shareholders and they
continued to carry on West's Sports Cards after the
Corporation was dead and gone.
[9] The Appellants
stated that the Corporation was revived August 22, 2000
retroactive to December 31, 1995, and the business activity
continued after the dissolution, leading to the conclusion that
it was the Corporation carrying on the activity and not the
Appellants personally. Subsection 208(4) of the Business
Corporations Act of Alberta reads,
208(4) A corporation is revived on the date shown in
their Certificate of Revival and subject to any reasonable terms
that the Registrar may impose, and to rights acquired by any
person prior to the revival the Corporation is deemed to have
continued in existence as if it had not been dissolved.
[10] I will set out some of the
items during the relevant period in favour of each position. The
Respondent states that a partnership and not a Corporation
carried on the activity from 1996 to the end of 2001. There was
no Corporation since it had been stricken from the
Albertacorporate records. The Appellants, being the former
shareholders and directors, commenced the new entity. The
business was audited for a two-year period, 1993 to 1995, as
being carried on by the Appellants in partnership. The results
were favourable to the Appellants to the extent of a $20,000
credit, although the Appellants never received it. They accepted
the results as a partnership and they cannot have it both ways.
And that in effect is the estoppel argument by the
Respondent.
[11] The facts lead to a
conclusion that the Appellants were carrying on a business as
partners. The acceptance by the Appellants of a partnership
situation for two years, 1993 to 1995, indicates their intentions
for the following years. The Appellants fall squarely within the
definition of partners in the Partnership Act and
Alberta's Business Corporations Act cannot change the
way the Appellants in fact acted. For example, sample invoices
viewed refer to West's Sports Cards, Jim and Moe Amerey. I
believe that is a reference to the more active partners, Awid and
Mohammed. They had an obligation to register for GST purposes and
not having done so, GST officers registered for them in their
personal names. And finally, the Appellants did not counter the
assumptions of fact in paragraph 24 of the Reply to the
Notice of Appeal referring to them acting in partnership.
[4] Bryant Town conducted an audit for
the Minister as did Tariq Deeb for the Appellants. The
Minister's position is that the total revenue subject to GST
is $3,973,334, and the GST payable is $278,133 less allowed ITCs
of $218,602 for the period, netting a GST liability of $59,531.
This amount was increased to $107,182 plus interest and penalties
to reflect disallowed ITCs.
[5] The Appellants, through Deeb,
conceded that they had made some errors in their original
returns, taking the position that their revenue for the period
was $3,154,639, with GST payable in the amount of $186,575. The
Appellants argued that they are eligible for ITCs of $225,000,
resulting in the business being in a net refund position of
$38,182.08. The Appellants' case was presented primarily by
Mahmoud Amerey. During the hearing, he made an interim motion to
the effect that the Canada Revenue Agency (CRA) auditors
performed an unreasonable search and seizure in breach of section
8 of the Canadian Charter of Rights and Freedoms. He
alleged that the Minister's auditors attended the designated
location and made photocopies without the Appellants'
knowledge or consent. This motion was dismissed. They had relied
on the trial decision in Norwoodv. The Queen not
realizing that the remedy granted by the trial judge was reversed
by the Federal Court of Appeal.[1] Their Charter
argument was not pursued.
[6] The Appellants' only witness
was their accountant Tariq Deeb. He has been a partner in an
accounting practice since 1996. He does not have an accounting
designation, but he does hold a Bachelor of Commerce and an MBA
and has 17 years' business experience. Deeb was first
retained by the Appellants in October 2003 for the purpose of
examining the correctness of the GST returns. He subsequently
reviewed CRA's audit report in June 2004. At trial, the
Appellants submitted Deeb's report comparing his findings to
those of the CRA auditors. The Appellants also submitted a number
of source documents as evidence of non-revenue bank
deposits.
[7] The Respondent relies on the
working papers prepared by its auditor, Bryant Town, who
testified. Bill Poon, who did not testify, assisted as a
technical advisor in the preparation of the working papers.
Counsel for the Respondent states that, strictly speaking, the
documents submitted into evidence are not an audit report, but
merely working papers, however for convenience, I will refer to
them collectively as the "audit" or the "audit
report". Town does not have an accounting designation, but
he does have a Bachelor of Commerce degree and has been employed
by CRA for 12 years. I do not ascribe any weight to Deeb's
and Town's respective credentials or lack thereof for the
purpose of preferring the evidence of one over that of the other.
Both accountants are well qualified.
[8] The Minister had difficulty
obtaining the material required to make a thorough investigation.
The Appellants were very distrustful of CRA's auditors and
revealed documents piecemeal and upon request. It was not an easy
audit. The animosity between the two parties was evident in the
courtroom particularly during cross-examination. This tainted the
evidence on both sides. The Minister's auditors were not
aware of income expenses from trade shows until after their audit
was complete. Trade shows consisted of setting up a card sales
kiosk with other dealers in a shopping mall primarily in Edmonton
and Calgary. The Appellants believed it was in their best
interest not to make a complete disclosure of their operations.
They trusted Deeb, a long-time friend, and were more forthcoming
with him. Deeb's evidence was summarized in a relatively
brief undated report, probably prepared in January 2004. His
efforts are best described in his words:
The first thing that I wanted to verify was revenue. I started
by gathering all bank accounts and line of credit statements
which I reviewed in detail. I also spot checked personal bank
accounts to see if any irregular deposits were made and was not
made aware of any safe on the premises. I questioned the brothers
about store revenue, on-line sales, and show sales. To that end I
was provided all information that I deemed relevant. My overall
findings are in my backup as provided. I created two charts:
1. Compare
sales revenue to deposits (Appendix A); and
In 1996 the Amerey brothers did a very poor bookkeeping job
but did rectify it in the subsequent years
2. Compares
the auditor's report to my findings (Appendix B);
I tried to understand where and how the auditor arrived at his
figures but could not. There seemed to be inconsistencies in
assumptions and in calculations so I gave up (e.g. GST included
in sales figures, U.S. conversions not consistently done, lines
of credits and loans not accounted for, and transfers between
accounts counted twice). Therefore this is just a comparison
between the two. As you can see there is a wide variance but as I
said above I was unable to understand how the auditor's
figures were arrived at. I have included the entire backup in
this report.
The next step was to look at expenses. To that end I asked for
invoices of all sorts (I did not look at every invoice) and tried
to verify the consistency of the bank statements against the
invoices. I also looked at what kind of inventory they carry and
what dollar amount it was. I was shocked to find that a lot of
their inventory is old stock which probably will never be
recovered. I looked at the nature of the expense (i.e. business
or personal) and what if any impact it had on GST. On the expense
side I used the auditor's report as the basis for discussion.
I found that they were personal expenses paid through the company
and backed those out for GST purposes. On a dollar amount it was
minimal. I take issue with the fact that the auditor disallowed
some expenses. These will be discussed below:
Vehicle Expenses (as related to business) I asked that a
mileage log be provided.
A list by year of vehicle expenses follows:
Travel Expenses
My understanding of the file is that because no revenue was
allocated to the shows that expenses were denied. In my review I
was able to verify the show revenue by receipts therefore I
believe that the travel expenses that were denied during the
audit should be reinstated.
I have two conclusions:
1. With
regards to the business I found that West's Sports Cards is
not anywhere near a lucrative business and that they survive
solely on cash flow, lines of credits, and loans from family
members. In my opinion they stay in the business for two reasons:
they love it and to get out now would mean that they would lose a
lot of money.
2. With
regards to the audit my findings are that West's Sports Cards
are owed $38,492.06 in GST (Appendix I) and that the audit
findings are inconsistent and unreasonable for a business of this
nature.
[9] Town presented hundreds of pages
of working papers including a detailed summary of his audit days
which concentrated on the difficulties he and his colleagues
encountered from October 28, 2003 to December 2, 2003 in their
attempts to complete their audit. His general remarks read as
follows:
Findings:
Revenue reported was significantly understated during audit
period. The revenue assessed was over $1,150,000. The ITCs were
the same as the amounts submitted except for the quarter ending
1999/03/31 was $18,926 higher than the amount documented.
The revenue numbers submitted by the partnership is $520,000
less than the business expenses for the same period. In addition,
the company paid the personal expenses of the partners.
The revenue submitted omitted all card shows, mall sales and
amounts not invoiced. The shows were done because they were
extremely profitable but the revenue has not been included as
their revenue reports were calculated from the till tapes and
invoices (card shows had no till or invoices).
Jim Amerey provided details of how they price their sales.
This was used to establish sales numbers. In 2001, the deposits
were $429,000 higher than the revenue reported. This amount was
assessed as revenue as there is no other source of funds for the
business.
Jim Amerey refused to verify the pricing when we requested to
verify the amount. The pricing method was used for 1996-1999 and
deposits were used in the last two years as receipts far exceed
revenue. No alternative source of funds. The auditor
verified gross margin for a period in 1999 and found that the
gross margin was substantially higher.
Assessment:
187,534.79
GST not remitted
-80,352.64
ITCs assessed
107,182.15
Total assessment
Conditions: Collections
report submitted
[10] Mahmoud Amerey, a school teacher by
profession, presented his and his brothers case with dogged
determination. Through the direct evidence of Deeb and lengthy
cross-examination of Town, the Appellants raised matters that
question the reliability of the Minister's audit. This is
understandable given the reluctance of the Appellants to make a
complete disclosure. In any event the actual revenue reported on
the Appellants' 1996 GST return differs significantly from
the revenue shown on the Minister's working page. On page 501
of the Respondent's Exhibit R-2, the "Revenue
reported" for 1996 is shown to be $372,884, yet the actual
"Revenue reported" reflected $316,603. There was no
explanation offered for the discrepancy.
[11] In what appears to be a transcribing
error on a worksheet reconciling deposits to revenue, mail order
sales are shown as being the identical amount of $6,554 for two
consecutive months[2] when in fact the Appellants' sales journal shows
the sales as being $3,984 and $6,584 for the two respective
months.[3] The
Minister's auditor included zero-rated grocery items in
calculating GST liability, although the amounts do not appear to
be substantial. The cost of shipping the goods to customers was
included in the selling price for GST purposes, though Town
stated that the reason for this was because the auditors were
told by one of the Appellants that this was the proper method of
calculation. The audit report stated, and Town testified, that
they had requested but did not receive from the Appellants,
Sportsnet sales (which are a certain type of mail order sales).[4] However, another
working paper in the audit report clearly refers to
"sportsnet" sales for the months in respect of which
such sales numbers were requested and allegedly not provided.[5]
[12] In attempting to verify the gross
margin, the auditors mistakenly relied upon purchase and sales
invoices from two different types of products. That is, the cost
of Upper Deck Hard Core 1998-1999 Basketball was subtracted from
the selling price of Upper Deck Basketball Series II, and the
difference was used to calculate the gross margin. The
significance of the gross margin in the context of this audit is
that it was the foundation used to estimate taxable sales.
[13] In attempting to verify the gross
margin, the auditors used a sample size of, in effect, five items
for a period of six years.[6] The gross margin of profit is important in the overall
calculations. While no alternative method was presented, a sample
of five items per year over the six years would give a more
reliable conclusion.
[14] There are other inconsistencies, but it
is not necessary to review them all. Deeb, during oral testimony
and in his report, admitted that the Appellants' bookkeeping
was inadequate during 1996, though in his opinion, the problem
was rectified in subsequent years. There were no invoices for
sales conducted at the mall shows leaving this income very
difficult to determine.
[15] I do not adopt either audit in its
entirety. Neither Deeb's nor Town's audits can be
considered independent. With the obvious mutual distrust both
audits are coloured to favour their respective clients.
[16] Although the Appellants have succeeded
in refuting some of the Respondent's evidence, they have
fallen somewhat short of establishing, through their own direct
evidence, the accuracy of their own revenue numbers. With respect
to their accounting system, the audit report categorically states
that the Appellants have no books of original entry. This is not
correct. The audit report itself attaches copies of computer
spreadsheet printouts of purchases and sales journals and
detailed accounts of expenses. These are "books of original
entry". However, the audit report correctly states that
there is no record of inventory.
[17] While I do not find the CRA audit
report to be completely reliable, I also cannot take all of the
evidence in Deeb's report at face value to the extent that
there is little or no corroborating evidence. I am faced with
having to choose between two unreliable evidential accounts of
the facts. Often this would result in a dismissal of the appeal
because the Minister's assumptions of facts are accepted
unless demolished by the Appellant. In this instance, the
Minister's conclusions are questioned as well as the
Appellants. The best conclusion I can reach from this
unsatisfactory situation is to find that the revenue amount is
somewhere between the figures presented by the parties. I apply
the reasoning of Walsh J. in the Bibby Estate v. The
Queen,[7] which
reads:
While it has frequently been held that a Court should not,
after considering all the expert and other evidence merely adopt
a figure somewhere between the figure sought by the contending
parties, it has also been held that the Court may, when it does
not find the evidence of any expert completely satisfying or
conclusive, nor any comparable especially apt, form its own
opinion of valuation, provided this is always based on the
careful consideration of all the conflicting evidence. The figure
so arrived at need not be that suggested by any expert or
contended for by the parties.
Taxable Revenue
[18] Deeb stated in examination that his
report is a re-creation of revenue "from scratch".
Under cross-examination, he stated that the Appellants recorded
their revenue via till tapes, sales journals and deposit books.
According to Deeb, the taxable revenue was somewhat higher than
the amount that the Appellants had originally reported, but was
significantly lower than the CRA auditor's estimate.
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1996
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1997
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1998
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1999
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2000
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2001
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Revenue, per CRA
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538,218
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517,079
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785,246
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725,777
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546,315
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803,235
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Revenue, per Deeb
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336,792
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410,277
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603,160
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627,537
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470,677
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706,193
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[19] The methodology used by the
Minister's auditor in arriving at the estimated revenue was
to take the dollar amount of purchases for the period and divide
it by 0.8, which supposedly represented a gross margin
calculation. This calculation would presume that the gross margin
is 25%. Town confirmed under cross-examination that during
the audit the Appellants had told him that the gross margins were
20% for single boxes or packages of cards that are sold to
individual consumers, 10% for cases that are normally sold to
wholesalers, and 5% for sales to dealers. During the audit, it
appears that Town was not able to confirm with the Appellants the
proportion of sales that were sold to dealers and wholesalers
versus sales to retail consumers. The Appellants suggested during
the cross-examination of Town that wholesalers are likely to
account for a greater proportion of revenues than individual
retail consumers. That is certainly possible, but without a
breakdown of the types of sales, I cannot assign any weight to
this submission. That being said, it is clear that the
Minister's auditors took an aggressive approach to estimating
the revenue by choosing a gross margin higher than that stated by
the Appellants and applying it globally.
[20] The result of this gross margin
calculation was the initial estimate in the Minister's audit
report. The resulting number was adjusted upward for the 2000 and
2001 taxation years. The reason for this adjustment was that, in
the auditor's opinion, a comparison of the bank deposits to
the revenue estimate showed deposits that exceeded the
auditor's initial revenue estimate. The auditor's initial
estimate was therefore adjusted upward. On the other hand, as the
Appellants pointed out, no downward adjustment was made in 1996
where the CRA revenue estimate exceeded bank deposits by over
$222,000.
[21] I have undertaken the tedious task of
examining in detail the audit report, the report of Deeb, and
other documentary evidence submitted with respect to non-revenue
deposits. The Appellants stated that these were various loans and
lines of credit and not revenue. Deeb stated that these
non-revenue deposits were not taken into account by the CRA
auditor when deposits were compared to reported revenue in order
to determine the reasonability of the latter. Deeb also testified
that the non-revenue deposits came from the individual
partners' lines of credit. The result, the Appellants
submitted, is that the audit report includes in revenue amounts
that were in fact loans from the individual partners, capital
injections, and other non-revenue items such as reversals of bank
errors. If Deeb is correct, the revenue estimate made by the CRA
auditor exceeds the bank deposits of the business for several of
the taxation years in issue.
[22] Counsel for the Respondent stated
during closing argument that this evidence of non-revenue
deposits should be given no weight because the documents were not
entered as exhibits through a reliable source such as one of the
parties to the transactions. The Respondent did not have the
opportunity to cross-examine the lenders. Clearly the documents
are hearsay and may not be admissible under the strict rules of
evidence. However, in this informal procedure appeal, this Court
is not bound by the rules of evidence: Tax Court of Canada
Act.
[23] Some of the documentary evidence with
respect to non-revenue deposits is reliable. For example, an
appendix to Deeb's report indicates a non-revenue deposit of
$6,000 dated November 5, 1999. The documentary evidence to
support this transaction is a statement from Ahmed Amerey's
TD Bank line of credit, which shows a cheque drawn on November 6.
There is a photocopy of a duplicate cheque of the same date for
the same amount, the payee being West's and the memo section
marked "Loan". The business bank account shows a
deposit on the same day for the same amount. I accept this as
evidence of a loan to the business by Ahmed Amerey.
[24] On the other hand, some of the
transactions are unclear. Counsel for the Respondent alluded to
some of these during cross-examination. Some of the evidence for
these transactions simply takes the form of bare statements in
Deeb's report with no documentary evidence offered in
support.
[25] On the whole, there are over 200
alleged non-revenue deposits, of which I find about half to have
some measure of reliability in that there is corroborating
documentary evidence. I also find this evidence to be of some
probative value in this particular case. However, being cognizant
of the lack of opportunity on the part of the Respondent to
cross-examine the parties to the transactions, balanced with the
somewhat limited probative value of the documents, I accord this
evidence little weight.
[26] In conclusion, I find the revenue to be
as follows:
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1996
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1997
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1998
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1999
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2000
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2001
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Total
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$437,505
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$463,678
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$694,203
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$676,657
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$508,496
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$754,714
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3,535253
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This is calculated by taking one-half of the difference
between the Minister's assessed revenue and the
Appellant's revenue as set out by Deeb and adding that amount
to the Appellant's amount.
Input Tax Credits
[27] Turning to the issue of the ITCs, most
of them were allowed by the Minister except those that the
auditor believed were not business expenses. Many of the amounts
in dispute were not significant. For example, an ITC claimed in
respect of cat food was disallowed on the grounds that it
constituted a personal expense. Deeb under cross-examination
testified that his clients told him that they had a mouse problem
in the store, the implication being that feeding the cat was a
necessary business expense.
[28] The more contentious point relates to
ITCs in respect of vehicle expenses. The auditor disallowed the
vehicle expenses in their entirety. The Appellants did not
provide him with a mileage log at the time of the audit. The
Appellants did provide a mileage log at trial as an appendix to
Deeb's report. During cross-examination, counsel for
the Respondent referred to trips from Edmonton to Calgary that
the Appellants had said were made for the purpose of selling
their products at trade shows. Deeb testified that the distance
between the two cities is approximately 300 kilometres, which
would make a return trip 600 kilometres not including any mileage
accumulating while driving in the city. The mileage log, however,
shows those trips to amount to distances of as much as 1,042,
1,114 and 1,236 kilometres. There is no evidence before the Court
as to the duration and authenticity of these particular trips.
Taking the totality of the evidence into consideration, I do not
allow any ITCs in excess of the $218,602 allowed by the Minister.
The Appellant's evidence in this regard was unsatisfactory
and I do not allow the Appellants any mileage.
[29] In summary, I find as a fact that the
revenue subject to GST is $3,535,253 for the period in issue. In
light of all of the evidence, the Minister's taxable sales as
assessed stretch the bounds of reasonableness. In 1996, for
example, the revenue suggested by the Minister exceeds bank
deposits by over $222,000. Town suggested under cross-examination
that there were substantial cash sales and implied that the
partners purchased vehicles with cash rather than depositing
proceeds from sales into the bank account. In my view, this
theory of events is not very likely. Under cross-examination,
Deeb stated that he performed due diligence by, among other
things, examining the business premises and finding no safe to
keep cash. The evidence shows that in 1996, the brothers owned
two used vehicles. I have no doubt that the Appellants had a
modest standard of living.
[30] The appeal is allowed and the matter
referred back to the Minister for reconsideration and
reassessment on the basis that the Appellants' gross revenue
for the six-year period is $3,535,253 and the ITCs are in the
amount of $218,602 allowed by the Minister. The penalties and
interest are to be reduced in accordance with the revised
assessments.
Signed at Ottawa, Canada, this 5th day of January, 2005.
McArthur J.
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