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Citation: 2004TCC452
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Date:20040622
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Docket: 2003-1661(GST)I
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BETWEEN:
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OLD WESTERN PIZZA 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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REASONS FOR JUDGMENT
McArthur J.
[1] The Minister of National Revenue
completed a net worth audit of the Appellant's records under
the Excise Tax Act. Houshang Rassaf, on behalf of the
Appellant, appeals the resulting assessment of $44,129 for net
goods and services tax (GST), disallowance of input tax credits
(ITCs), penalty of $6,105 and interest of $4,621 for the period
January 1, 1998, to December 31, 2001, inclusive. Mr. Rassaf
represented the Appellant at the hearing of this appeal. The
audit, no doubt, was initiated because of the Appellant's
aggressive GST filings. Over the period, it reported $7,411 in
GST collected and claimed ITCs totalling $24,802.
[2] The Appellant owned and operated a
Greek and Italian food restaurant business in Vancouver, British
Columbia. Mr. Rassaf and the Respondent's auditor, Mr.
Mohammed, were the only witnesses. In response to the
auditor's request for books and records, Mr. Rassaf provided
him with a garbage bag full of unorganized receipts, cash
register tapes, cancelled cheques and the like. The auditor
painfully sorted the documents by year and attempted to
reconstruct the Appellant's income and expenses to determine
the ITCs and GST collectible.
[3] Mr. Mohammed was familiar with the
restaurant business having operated one himself and was
sympathetic to Mr. Rassaf's situation. I state this because
the Notice of Appeal contains statements which include:
CCRA has produced false information against me without
conducting any audit on my information. Instead they used
imaginary numbers as per Statistic Canada which is outlaw.
...
CCRA staff, auditor Munief Mohammad and his boss, team leader,
Bill Burden kept harassing me on the phone and coming to my
business and resident and threatening me that they can do
anything they want and they told me that they do not want anybody
to find out - it looked like they wanted some sort of extortion
money or kick back from me. They have wilfully produced false
assessment invoices to give hard times they told me that when
they came to my resident which is outlaw and I want Tax Court to
deal with them accordingly.
Mr. Rassaf and the Appellant sued Canada Customs and Revenue
Agency (CCRA) in the Supreme Court of British Columbia and the
presiding judge ordered a stay of proceedings concluding that it
was a matter to be dealt with by the Tax Court of Canada. I
accept the auditor's testimony that Mr. Rassaf was
uncooperative throughout the audit.
[4] Mr. Mohammed stated that when
asked where his figures came from, Mr. Rassaf would reply
"I just know". He took a similar approach during the
hearing of this appeal. In fairness, he probably did know that
the invoices and receipt tapes did not reflect an accurate
picture but it was all that was provided. The Appellant had a
statutory obligation to keep proper records.[1] He was given two years after the
audit to provide evidence. His demeanour during the hearing was
passionate and assertive. He spoke forcefully to the effect that
his boxes of documents would prove his assertions but he provided
no clear accounting evidence. He spoke in generalities, providing
little specificity. He did enter a grocery bag of documents which
were of little assistance. He stated that he could not afford a
lawyer or accountant but urged me to accept on faith, that not
only did the Appellant not owe tax, CCRA owed him or the
Appellant over $130,000. His logic was difficult to follow and in
this vein, I refer again to the Notice of Appeal:
They owe me around $139,083 for the years: 1995, 1996, 1997,
1998, 1999, 2000, 2001 at seven elevations. Total Gross revenue
from my business has been $30,690/year on average since 1995 of
which 1/3 is food cost which means $10,230/year and the net
revenue is $20,460/year. Total cost of running the business is
$43,468/year (i.e. $17,610/year labour cost and $25,858/year
business operation cost) which means we are short by
-$23,008/year that we have had to borrow since 1995 which means
over $100,000 in debt and paying 18% compound interest on it and
CCRA has earned 50% tax profit of interest charges.
I have no difficulty in believing that Mr. Rassaf made the
audit difficult.
[5] I will first deal with the ITCs.
Mr. Mohammed testified that he looked at every receipt the
Appellant provided and they did not add up to the amount claimed.
He correctly disallowed amounts not supported by documentation.
The relevant legislation is subsection 169(4) which states:
169(4) A registrant may not claim an input tax credit
for a reporting period unless, before filing the return in which
the credit is claimed,
(a) the
registrant has obtained sufficient evidence in such form
containing such information as will enable the amount of the
input tax credit to be determined, including any such information
as may be prescribed; and
(b) where the
credit is in respect of property or a service supplied to the
registrant in circumstances in which the registrant is required
to report the tax payable in respect of the supply in a return
filed with the Minister under this Part, the registrant has so
reported the tax in a return filed under this Part.
There is no need to review the invoice requirement details
because the invoices provided were of little assistance. Without
at least rudimentary accounting, it is not possible to discern
the relevant invoices from the irrelevant ones. It is not
sufficient to leave it to the auditor or the Court to do the
accounting. Subsections 286(1) and (2) read as follows:
286(1) Every person who carries on a business or is
engaged in a commercial activity in Canada, every person who is
required under this Part to file a return and every person who
makes an application for a rebate or refund shall keep records in
English or in French in Canada, or at such other place and on
such terms and conditions as the Minister may specify in writing,
in such form and containing such information as will enable the
determination of the person's liabilities and obligations
under this Part or the amount of any rebate or refund to which
the person is entitled.
286(2) Where a person fails to keep adequate records for
the purposes of this Part, the Minister may require the person to
keep such records as the Minister may specify and the person
shall thereafter keep the records so specified.
[6] Judge Bowman's following
comment in Helsi Construction Management Inc. v. R., with
regard to subsection 169(4) applies equally to the present
case.[2]
13 We are dealing
with one of the technical requirements under a statute that is
somewhat unique for its specificity. Moreover, it is the
foundation of a self-assessing system that operates in the
commercial world. Unfortunate as it may seem to the appellant,
rules are rules. I can do nothing to help the appellant on this
point. The problem is to some extent the appellant's own
doing. Mr. Familamiri has made great efforts to correct the
situation created by the original chaotic state of the records
and he has succeeded to some extent. However there is only so
much that one can do to correct years of disarray.
[7] Focusing on the collection of GST,
as stated, the auditor found the Appellant's records
incomplete and chaotic. He stated that Mr. Rassaf's figures
seemed to come out of the air.
[8] I reviewed a small sample of the
documents contained in the bag (Exhibit A-12) for the month of
October 1998. The receipts provided are undocumented, but have
been separated by the auditor for the month of October 1998. Many
are from London Drugs, one from Rogers Cablevision, several from
gas stations, many from supermarkets in the $15 range for
products and amounts no different from what a small family would
incur. There are four or five receipts from Costco and Saputo
Fords Ltd. for October 1998 totalling approximately $900. This
amount could well be purchases for the restaurant. There were
bank statements, credit card statements and cancelled cheques.
Most, if not all, are in Mr. Rassaf's name alone. They
were of little assistance in my attempting to determine the
Appellant's business income and expenses. It was obviously a
Herculean task for the auditor to sort out the hundreds if not
thousands of documents in some chronological order.
[9] The only way these documents could
possibly assist the Appellant is by it having an accountant
present a review and opinion of the Appellant's situation
after a careful review of the documents. The records were not
only unorganized but completely lacking in required detail.
Mr. Rassaf mingled his personal expenditures, business
receipts and expenditures all together as one. As stated all
these receipts, statements, cheques, etc. he put in a garbage bag
with complete disregard for any order or organization. It is not
the Court's position to perform an audit or accounting on the
Appellant's behalf.
[10] Faced with this situation the Minister
had little choice but to conduct a net worth audit. Mr. Rassaf
aggressively presented that using Statistics Canada and whatever
method the Minister used to determine his personal expenses was
ridiculous although he presented no better solution. He stated
what the Minister should have done was consider the evidence that
his gas utility expenditures averaged about $60 per month and any
pizza-maker knows that on this basis his (the Appellant's)
business income was far less than that arrived at by the auditor.
Mr. Rassaf stated:
... I did my job. And I gave you the evidence, the basic
evidence, without looking at everything, the gas bill. You look
at the gas bill; it's $60 a month. You contact couple of
pizza shops, everybody with $60 a month, how many pizza can you
sell? They will tell you. That's the basic thing without even
looking at everything.
(Transcript page 15 lines 10 to 16)
...
Here, as I said, there are two elements, essential element in
this case. One is the gas bill. If they can present to me the gas
bill that is more than $60 a month then I will say they're
right. Or if they present me with $40,000 -- $44,000 worth of raw
food bought, like mozzarella cheese, tomato paste, blah, blah to
make pizza, then I said they are right. They don't have any
of those and they are making allegation. Anybody can make
allegation, Your Honour. It's easy to make allegations but
it's not easy to prove the case, you know. They don't
have anything to prove their case. They're just hallucinating
and they think they can do this to me.
(Transcript page 27 lines 7 to 19)
In addition, he added that because he was deeply in debt to
several banks and credit card companies, this was evidence that
the Appellant could not be making any money. In this regard there
is no evidence as to when and how the indebtedness arose. He also
stated that the auditor should have checked with his suppliers to
determine how many pizzas he could produce with the products he
purchased. Again, this is not the responsibility of the
Minister's auditor. If the Appellant wanted to advance this
argument, it had the burden of presenting it properly.
[11] I do not accept the Appellant's
position with respect to the conduct of the auditor. He did the
best he could with the information provided. Other than
Rassaf's general statements, there was no evidence of
bribery, extortion or bullying.
[12] I am sure there are capable
restaurateurs who rely on the amount of product and utilities
purchased over a given period to arrive at the value of sales of
a restaurant business. This is not a satisfactory method in any
situation. The Appellant did not keep records in such form or
containing such information to enable the Minister to determine
its liabilities and obligations as is required by section
286.
[13] I accept the Minister's method over
that of the Appellant's. CCRA routinely uses Statistics
Canada's figures in similar circumstances. This has been
accepted by this Court many times as being the better of two
inaccurate systems. In Cox v. The Queen,[3] Bowman J. stated:
The net worth statement proceeds on the assumption that the
appellant's personal living expenditures are as set out in
Schedule B to the net worth statement. This schedule is over
three pages of figures consisting of an attempt to determine the
appellant's personal living expenses.[4] A very large part of these expenses
are based on Statistics Canada's ("StatsCan")
estimates of what it costs two people to live, reduced by 1/2.
These figures suffer from the same unreliability as those in
Bigayan, where I said
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I am faced here with two sets of unreliable numbers. The
Department of National Revenue in many instances used
figures taken from Statistics Canada ("StatsCan")
for the expenditures made by a family consisting of a
husband and wife ...
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[14] Mr. Mohammed used the same methodology
as referred to in Cox. It may not be accurate and perhaps
is not reasonable but, it is the best I have under the
circumstances.
[15] In determining Mr. Rassaf's
personal cost of living, for the most part, the auditor used Mr.
Rassaf's own figures. He concluded that Mr. Rassaf's
personal expenditures were $31,000 annually and therefore the
Appellant had to generate a minimum profit of $31,000 for him to
survive. While the Minister's rationale was not presented in
detail, I had no other amounts to consider
[16] To establish the value of the
Appellant's taxable supplies, the auditor obtained a figure
for profit margin that he obtained from Statistics Canada. In
Ramey v. The Queen,[5] Bowman J. made the following
often-quoted statement that applies to this appeal:
I am not unappreciative of the enormous, indeed virtually
insuperable, difficulties facing the appellant and his counsel in
seeking to challenge net worth assessments of a deceased
taxpayer. The net worth method of estimating income is an
unsatisfactory and imprecise way of determining a taxpayer's
income for the year. It is a blunt instrument of which the
Minister must avail himself as a last resort. A net worth
assessment involves a comparison of a taxpayer's net worth,
i.e. the cost of his assets less his liabilities, at the
beginning of a year, with his net worth at the end of the
year. To the difference so determined there are added his
expenditures in the year. The resulting figure is assumed to
be his income unless the taxpayer establishes the
contrary. Such assessments may be inaccurate within a range
of indeterminate magnitude but unless they are shown to be wrong
they stand. It is almost impossible to challenge such
assessments piecemeal. The only truly effective way of
disputing them is by means of a complete reconstruction of a
taxpayer's income for a year. A taxpayer whose business
records and method of reporting income are in such a state of
disarray that a net worth assessment is required is frequently
the author of his or her own misfortunes. Mr. Boudreau
stated that Mr. Allan Ramey's records were inadequate, that
he had a history for years prior to 1981 of being assessed on a
net worth basis and that his business, that of owning coin
operated machines, such as pinball machines and slot machines of
various types, was cash based and was therefore difficult to
audit. The Minister had no alternative but to proceed as he
did. While I have sympathy for someone in the position of
the appellant whose liability for his father's tax is
secondary, I can see no basis for adjusting the assessments made
against his father to any greater degree than that to which the
respondent has already agreed.
These remarks apply equally to Mr. Rassaf and the
Appellant.
[17] The Appellant had the burden of proof
and should have come prepared to completely reconstruct its
income for the years in issue. It cannot turn over hundreds of
undocumented receipts, cheques, statements and the like to the
auditor with the attitude that its income be determined from the
gas utility bills. To be successful, the Appellant must address
the auditor's methodology line by line with clear and
specific evidence and not general global statements. While the
results may be unfortunate, the Appellant has only itself to
blame, not the auditor. Commenting on the assumptions of fact
contained in the Reply to the Notice of Appeal, paragraphs
6(e)(f)(g)(h) and (i), Mr. Rassaf simply stated that these
statements were a lie. That is not sufficient. Again the
Appellant had the burden of proving his assertions.
[18] In conclusion (i) the Appellant is not
entitled to ITCs in excess of the amounts allowed by the Minister
during the assessment period because the Appellant has not
provided sufficient documentation to support further ITCs, as
required by subsection 169(4) of the Act and the ITC
Regulations; and (ii) the Appellant did not exercise the
degree of care, diligence and skill to prevent the failure to
remit that a reasonably prudent person would have exercised in
comparable circumstances. The appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of June, 2004.
McArthur J.
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