REASONS FOR JUDGMENT
Hogan J.
[1]
This is an appeal from an assessment made on January 3,
2013, under the Excise Tax Act (the ETA) by the Canada Revenue Agency
(the Minister). This assessment concerns the January 1, 2009, to December 31,
2010, period and regards the operation of a restaurant known under the name of
Olive & Co. (the restaurant) located in the city of Gatineau,
province of Quebec.
[2]
In this assessment, the respondent is seeking
additional tax in the amount of $13,801.16, and a penalty of $6,000 under
section 285 of the ETA. She is also claiming interest in the amount of
$3,204.96 for additional income that she alleges was not reported by the
appellant and which the Minister estimates to be $180,600 for the period ending
on December 31, 2009, and $94,455 for the period ending on December 31,
2010.
[3]
An audit revealed that the appellant used
handwritten meal bills to record sales during the period in question. The
auditor, Marie Carmel Nazon, assisted by her team leader, Hélène Morand,
attempted, unsuccessfully, to reconcile the meal bills with the bank statements
and the cash reported by the appellant.
[4]
For this purpose, the auditors sampled a seven-day
period, for which they reconciled the sales recorded by the appellant by using
the total of payments received by the appellant from various sources. The
Minister's representatives noted a number of anomalies in the meal bills,
making it impossible to reconcile them. First, the total of the daily meal
bills for the seven-day period did not match the total of the bank statements.
Second, there were gaps in the number sequence of the meal bills, with several
numbers missing. Ms. Morand testified that she had checked whether the
missing invoices were used in the days that followed and had found that this
was not the case. Lastly, the meal bills were missing dates.
[5]
In light of these irregularities, the Minister's
representatives suspected that the appellant had not reported all the cash
sales made during the period in question. They therefore used an indirect audit
method to reconstruct the appellant's sales, and their analysis revealed that
the cash sales increased considerably following the implementation of an
electronic system for registering sales in the appellant's restaurant, in
accordance with new provincial tax obligations.
[6]
In fact, since no later than November 1,
2011,
section 350.52 of the Act Respecting the Québec Sales Tax (the
AQST) obliges operators of establishments providing restaurant services located
in Quebec to use a sales recording module (SRM) selected by the Agence du
revenue du Québec to record data relating to such establishments' commercial
transactions. The SRM must be connected to the establishment's electronic sales
registration system and be able to send the information required to print
invoices to a receipt printer. Furthermore, restaurant operators are now
obliged to give their customers a copy of the bill when supplying them with a
meal.
[7]
In order to comply with these new measures, the
appellant installed and activated an SRM in April 2011.
[8]
From that date, and for the year immediately
following the period at issue in this case, the appellant's registered cash
sales represented 20.31% of the business's total sales that year. For the first
four months of 2012, this percentage was 19.08%. According to the appellant's
reports, for the periods ending December 31, 2009, and December 31,
2010, the cash sales represented 10.44% and 9.27%, respectively.
[9]
In light of these findings, the Minister's
representatives reconstructed the business's sales for the periods at issue by
increasing cash sales to 20%, which corresponds to the average cash sales for the
January 1, 2011, to April 6, 2012, period.
[10]
In her testimony, Ms. Morand explained that
the auditor made a calculation error to the appellant's advantage for the
period ending December 31, 2010. In fact, the auditor increased the total
card deposits by applying the reconstructed sales factor of 28%, a figure that
includes tips. Ms. Morand then stated that the auditor should have
increased the total card deposits by a factor of 1.38 to obtain a better
reconstruction of the restaurant's total sales for this period.
[11]
As a result of this error, the Minister
underestimated by $108,874.01 the appellant's unreported sales for the period
ending on December 31, 2010. The Minister nonetheless chose not to amend
its assessment.
[12]
Mario Ménard, the appellant's president,
testified for the appellant at the hearing. According to Mr. Ménard, the
gaps in the number sequences of the meal bills noted by the Minister's
representatives could be explained by the fact that the restaurant's employees
did not use all the bills in the booklets given to them in one day.
[13]
A booklet of bills contains 50 forms (meal
bills). Mr. Ménard explained that he was in the habit of assembling unused
meal bills into packs of 50, which he then gave back to the employees so that
they could use them. Consequently, in his opinion, except for a few invoices
taken by the restaurant's clients, the missing bills for the seven-day period
sampled by the auditor were used during a later period. The appellant, however,
did not produce any documentary evidence to corroborate Mr. Ménard's
testimony. If Mr. Ménard's explanation were true, the appellant could have
adduced the missing bills in order to establish that no sales were being
concealed.
[14]
The appellant could also have called one of the
restaurant's waiters to testify in order to corroborate Mr. Ménard's
testimony.
[15]
Mr. Ménard further testified that 2011 saw
an exceptional percentage of cash sales. According to Mr. Ménard, the
economy in the Gatineau area was sluggish that year. The restaurant's clients
therefore preferred paying cash as a result of the difficult local economic
conditions. This explanation does not seem plausible given that the business's
sales grew by 11.5% from 2010 to 2011. This increase is not consistent
with an ailing economy.
[16]
In my opinion, it is not a coincidence that the
appellant recorded a considerable increase in sales following the implementation
of the SRM in April 2011.
[17]
Serge Lafortune, the appellant's external
accountant, also testified for the appellant. He attempted to demonstrate that
the auditor made significant errors in her calculation of the business's
reconstructed sales for the impugned period. However, except for the
calculation error to the appellant's advantage for the period ending on December 31,
2010, Mr. Lafortune failed to satisfy me that the reconstructed sales were
miscalculated.
[18]
For example, Mr. Lafortune stated that the
auditor failed to consider the amount of cash sales registered by the
appellant. This is not the case. The auditor chose rather to present the cash
sales under two items, bank deposits as recorded in the appellant's bank accounts
and purchases paid for in cash from the money received in cash by the
restaurant. The other error described by Mr. Lafortune does not affect the
reconstructed sales.
[19]
Counsel for the appellant argued that an
alternative auditing method could not be used in this matter because the
appellant had all its accounting records and the auditor did not identify a
significant gap in the information recorded by the appellant.
[20]
With respect, it is well-established that the
Minister may use alternative methods when there are deficiencies in the methods
used by taxpayers to register their sales. In the matter under review, the
audit allowed the Minister's representative to discover significant anomalies
with respect to the meal bills used to register the restaurant's sales during
the impugned period.
[21]
As noted above, the appellant could have adduced
documentary evidence to corroborate Mr. Ménard's testimony that the
missing bills were used during a later period. In fact, the appellant knew that
the missing bills were one of the main reasons leading the Minister to use an
alternative method. In the absence of corroborating evidence, I have to draw a
negative inference with regard to the appellant.
[22]
In light of the evidence before me, I am
satisfied that the Minister had reason to use an indirect method to determine
the sales paid for in cash during the period under review.
[23]
Counsel for the appellant challenged the
reliability of the alternative method, arguing that the sales paid for in cash
should have been computed using a 13.55% average for cash sales for the 2009,
2010 and 2011 taxation years. In my opinion, since the evidence demonstrates
that the appellant did not report all its cash sales in 2009 and 2010, it would
have been incorrect to consider the average cash sales during the relevant
period.
[24]
The evidence reveals significant and repeated
omissions in the appellant's goods and services tax return, namely unreported
sales in the amount of $180,600 and $94,455 for the 2009 and 2010 taxation
years, respectively. As a result, the only possible conclusion is that the
appellant intentionally concealed a signification portion of its cash sales
during the impugned period.
This amounts to gross negligence, which warrants the imposition of a penalty
under section 285 of the ETA by the Minister.
[25]
For
these reasons, the appeal is dismissed.
Signed at Toronto, Ontario, this 24th day of
November 2014.
"Robert
J. Hogan"
Translation certified true
On this 9th day of November 2015
Johanna Kratz,
Translator
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