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Citation: 2003TCC432
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Date: 20030623
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Docket: 2000-4570(GST)I
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BETWEEN:
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GESTION V.C.C.C.C. INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
LamarreProulx, J.T.C.C.
[1] This is an appeal under the informal procedure from an assessment made under the Excise Tax Act (the "Act") for the period from January 1, 1991, to July 31, 1994.
[2] The issue concerns the method used by the tax authority's auditor to determine the percentage of taxable sales from the appellant's total sales.
[3] The notice of appeal refers to the notice of objection. It is a lengthy presentation of the reasons the method used by the auditor of the Minister of National Revenue (the "Minister") is flawed.
[4] The Reply to the Notice of Appeal (the "Reply") first notes that there is no dispute over the amount of the sales reported in the financial statements and that the auditor's method is the only point at issue. The Reply explains that the method was based on an analysis of the appellant's taxable and non-taxable purchases and that the percentage obtained was applied to total sales for the period.
[5] Sylvain Camirand, the sole shareholder and director of the appellant, testified. The appellant has operated a convenience store since 1990. As Exhibit A-1, the witness filed three handwritten sheets of paper stating the percentage of non-taxable sales from September 1994 to August 2000. What is recorded is the date of the week and, next to it, the percentage of non-taxable sales. For the period from September 1999 to August 2000, the non-taxable sales percentage was 23.3 percent, whereas it was apparently 42.8 percent for the year from September 1994 to August 1995. Mr. Camirand explained the difference by saying that, in previous years, there were many competitors, business hours were longer and, at the time, mainly non-taxable goods such as milk, bread and other food products were what was selling.
[6] Hélène Constantineau, an auditor with Revenu Québec, testified. She has been an auditor since 1989 and has audited a number of convenience stores.
[7] She said that she had gone to the convenience store and had noticed that what sold most were cigarettes, beer, candy, soft drinks and chips, all of which are taxable goods. However, the appellant reported a very low percentage of taxable purchases, that is, approximately 40 percent. She decided to conduct a survey. A non-taxable purchase is resold without tax. A taxable purchase becomes a taxable sale.
[8] She selected three months: September and October 1992 and August 1993, which, she said, were low-, medium- and high-sales months for the convenience store. Sales were $80,000 in September; $90,000 in October; and $100,000 in August 1993.
[9] Ms. Constantineau analyzed all the invoices for those months. The ledger showed the invoices and the amounts paid but had no other description. The cash register tapes had not been kept. The auditor reviewed each invoice and noted and described the non-taxable purchases for those three months. She obtained a percentage of non-taxable purchases of 16.76 percent, whereas, in the appellant's view, the figure was 59 percent. She obtained a percentage of taxable purchases of 83.24 percent, whereas the appellant reported tax collected on 41 percent of sales. The report was filed as Exhibit I-4.
[10] In her experience as an auditor, she said she had not noted any difference in percentages of taxable and non-taxable sales at convenience stores from 1989 to the present.
[11] In cross-examination, the witness said she had considered all the invoices for purchases in the survey months. The total purchases for the three months amounted to $237,620.50, excluding bus and lottery tickets. Mr. Camirand never mentioned any major thefts or losses.
[12] Total sales amounted to $894,306.11 from January to August, 1991; $1,153,101.36 from September 1991 to August 31, 1992; $1,189,615.08 from September 1992 to August 1993; and $1,231,315 from September 1993 to July 1994, excluding bus and lottery ticket sales.
[13] Yves Lepage is a professor at the Department of Mathematics and Statistics of the Universityof Montréal. He acted as an expert witness for the appellant.
[14] He asserted that it was not consistent with the rules of statistics to apply a survey conducted over three months to a 43-month period. He nevertheless analyzed the three months concerned. Unfortunately, he based his analysis on total purchases of $111,827.84, rather than the amount of $237,000. Consequently, he did not consider all the invoices from the three months involved.
[15] Counsel for the appellant then strongly insisted on obtaining a postponement of the hearing to enable the expert witness to proceed with an analysis of all the invoices relating to the three-month sample taken. Counsel for the respondent stated that he had informed his colleague immediately upon receiving the expert report that the total amount of the purchases was incorrect. The expert witness stated that the invoices on which he had worked had been handed over to him by the client and the lawyer. Counsel obtained the postponement by saying that all the invoices had been kept and that the expert witness should be allowed to conduct a proper analysis. Deadlines were then set.
[16] Counsel for the appellant did not meet the deadlines. He sent the expert's amended report at the end of the day before the hearing. He had not communicated with the Court in any manner before. Relying on section 7 of the Tax Court of Canada Rules (Informal Procedure) ("Rules"), counsel for the respondent objected to the production and filing of that report. Filing of the amended report was not allowed.
[17] Mr. Lepage nevertheless continued his testimony on the first report, explaining in what way he thought the three months considered by the auditor were not representative. The assessment period was from January 1, 1991, to July 31, 1994. Between January 1, 1991, and September 1992, eighteen months were not covered. There was nothing either between October 1992 and August 1993 and no months were covered in the last year between August 1993 and July 1994. Thus, long periods of time were not taken into account.
[18] Is that the only reason why they are not representative? Perhaps the history of the convenience store should have been considered, but Mr. Lepage did not do this. He did not do this because he had in his possession only the documents provided by the Minister.
[19] When the Court asked him how many months would have been needed, he answered: [TRANSLATION] "Perhaps not necessarily more months, but they could have been selected more appropriately, for example, by observing the business's operating method; surely there were months when there were more purchases, fewer purchases-so that should have been taken into account in the sampling." In response to a supplementary question by his counsel, he said that perhaps a five-month period would have been better.
[20] He admitted in cross-examination that he did not know the taxable percentages in the convenience store industry at all.
[21] Mr. Camirand said that, in the food sector, theft and losses in a business account for approximately one to four percent. He also noted that profit margins are higher for non-taxable goods than for taxable goods.
[22] Daniel Le Hesran Jr. testified for the respondent party. A report by Mr. Le Hesran had been filed on August 23, 2002, to stand as an expert report at the hearing of September 9, 2002. However, at the hearing on December 5, 2002, Mr. Le Hesran was presented as an ordinary witness. Mr. Le Hesran is an auditor and a resource person in convenience store cases at Quebec's Ministère du Revenu. The purpose of his testimony was to corroborate the auditor's findings with other evidence, namely, relating to input tax credits ("ITCs"). His findings were based entirely on data from the appellant.
[23] The appellant's financial statements were filed as Exhibits I-5 to I-8. Counsel for the appellant objected to the filing of those financial statements because he said they had been used by an auditor after the Quebecgovernment's auditor to corroborate findings she had made. Leave was given to file them on the basis that documents were relevant to the case. In addition, the Quebec government's auditor had used them to determine the total sales stated in paragraph 12 of these Reasons.
[24] The information from the appellant's tax returns for the years in issue were filed as Exhibit I-9. Counsel for the appellant also objected to that filing. Leave to file them was obtained. These are relevant documents. Mr. Le Hesran's testimony does not alter the basis of the appellant's assessment, and its sole purpose was to confirm it. Furthermore, the witness's conclusions did not take the appellant party by surprise since the witness's report had been served long before this hearing.
[25] Exhibit I-9 shows that $65,239 in ITCs were claimed for 1994, whereas $34,072.92 in GST had been collected. For 1993, $65,547.84 in ITCs were claimed while GST collected was $34,144.60. For 1992, ITCs claimed totalled $66,417.37 and GST totalled $51,067.25. For 1991, ITCs claimed totalled $48,318.77 and GST totalled $47,914.56.
[26] Mr. Le Hesran explained that, by dividing the GST remitted by 7 percent, taxable sales are $486,756 for 1994; $487,780 for 1993; $729,532.14 for 1992 and $684,493.71 for 1991.
[27] To calculate taxable purchases based on ITCs claimed, the witness used 1994 as an example. First, based on information from the financial statements, he computed expenses that resulted in ITCs and that were not purchases for resale. Those expenses totalled $89,586 for 1994. That amount multiplied by 7 percent yields ITCs of $5,748.44, adjusted for the 11-month period. He deducted those ITCs from the total ITCs of $65,239 claimed for 1994. The ITCs paid on expenses not incurred for sale purposes must be deducted from the said amount of $5,748.44 and balance sheet adjustments of $357 resulting in $59,133.57. That amount, divided by 7 percent, yields $844,765.21 in taxable purchases.
[28] Thus, based on the registrant's remittances, its taxable purchases are distinctly greater-nearly two times greater-than its taxable sales.
Conclusion
[29] Subsection 165(1) of the Act provides that every recipient of a taxable supply made in Canada shall pay Her Majesty in Right of Canada tax in respect of the supply calculated at the rate of 7 percent on the value of the consideration for the supply. Subsection 221(1) of the Act provides that every person who makes a taxable supply shall, as agent of Her Majesty in Right of Canada, collect the tax under Division II payable by the recipient in respect of the supply. Subsection 225(1) provides that the net tax for a particular reporting period of a person is the positive or negative amount determined by the formula A - B where A is the total of all amounts that became collectible and all other amounts collected by the person in the particular reporting period as or on account of tax under Division II, and B is the total of all amounts each of which is an input tax credit for the particular reporting period.
[30] In the instant case, counsel for the respondent often repeated that the appellant had in its possession all the invoices for this period. The appellant thus had the opportunity to conduct an analysis similar to that made by the Quebecgovernment's auditor based, in accordance with its claims, on additional and more representative months. The appellant did not do so. That clearly shows that it could not destroy the assessment on the basis of the purchase invoices.
[31] The appellant also could have conducted an analysis of its sales. It knew the resale price of the items purchased. It did not do that either; it merely disputed the survey method.
[32] The evidence of the expert witness cannot be considered on this point either since it was based on inaccurate information.
[33] Furthermore, by considering the appellant's information itself, as analyzed by the Minister's auditor, one realizes that it leads to illogical results.
[34] I must therefore find, on a balance of probabilities, that the assessment was made in a manner consistent with the facts and the law. The appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 23rd day of June 2003.
J.T.C.C.
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