Citation: 2013 TCC 368
Date: 20131204
Docket: 2011-834(GST)G
BETWEEN:
125319 CANADA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal under
the general procedure from a reassessment dated October 23, 2009, with no identifying
number, made through the Minister of Revenue of Quebec (the Minister) pursuant
to Part IX of the Excise Tax Act, R.S.C. (1985), c. E‑15, as
amended (the ETA) for the period from July 1, 2005, to June 30, 2009 (the period
in question).
[2]
In an assessment dated
October 23, 2009, the Minister assessed the appellant for $83,162.75, including
$57,805.84 in goods and services tax (GST), $14,451.46 in penalties under
section 285 of the ETA and $10,905.45 in interest.
[3]
In assessing the
appellant, the Minister relied on the following findings and assumptions of
fact as stated at paragraph 17 of the Reply to the Notice of Appeal:
[translation]
(a) 125319 Canada Ltd. is a corporation incorporated under the Canada
Business Corporations Act (R.S.C. (1985) c. C-44);
(b) during the period in question, the appellant was registered for the
purposes of Part IX of the Excise Tax Act (hereinafter the ETA);
(c)
the appellant operates a licensed restaurant
doing business as the "Restaurant la Belle Province";
(d)
in its operations, the appellant offers quick
meals for lunch and dinner at the counter, as well as breakfast with table
service;
(e)
the appellant's fiscal year begins on July 1 in
a given year and finishes on June 30 the following year;
(f)
all the supplies made by the appellant in the
operation of the restaurant, a commercial activity, during the period in
question were taxable supplies for which a tax, the GST, of 7% (before July 1,
2006) or 6% (after June 30, 2006) or 5% (after January 1, 2008) on the value of
the consideration for the supply, was payable by the appellant's buyers, to be
collected by the appellant;
(g)
since the appellant's accounting books and
records, given to the Minister when required at the time of the audit, were
incomplete and unclear, the Minister reconstructed the total amount of the
supplies made by the appellant through an indirect audit method for the period
in question;
(h)
In particular, the appellant did not retain the
detailed sales registry (the "Z" tapes), there is no detailed record
for the breakfasts, the bank statements were incomplete and significant gaps
were detected with regard to purchases with many suppliers;
(i)
since the books and records were hardly reliable,
the Minister had to use an alternative method to reconstruct the appellant's
taxable sales;
(j)
since the cash register "Z" tapes were
incomplete, the appellant's cash register was reprogrammed and the complete and
detailed "Z" tapes were obtained for the period from March 29 to June
30, 2009;
(k)
these "Z" tapes were analyzed and
inventoried, as shown in the auditor's worksheets attached to and included in
this Reply, Annex A;
(l)
for the audit period, the purchases from various
suppliers were also analyzed:
|
2007-07-01 to 2008-06-30
|
|
SUPPLIER
|
PURCHASES
NOTED
|
CONFIRMED
PURCHASES
|
DIFFERENCE
|
DIFFERENCE
(%)
|
|
Provigo
|
$10,286.61
|
$10,288.61
|
--
|
0.00
|
|
Molson
|
$433.84
|
$433.84
|
--
|
0.00
|
|
Multi-Marques
|
$3,024.12
|
$21,530.00
|
$18,505.88
|
611.94
|
|
Agropur
|
$1,921.18
|
$2,986.01
|
$1,064.83
|
55.43
|
|
Pepsi
|
$11,603.22
|
$11,695.64
|
$92.42
|
0.80
|
|
Conan
|
$13,238.17
|
$17,417.70
|
$4,179.53
|
31.57
|
|
Delstar
|
$11,159.05
|
$19,105.46
|
$7,946.41
|
71.21
|
|
TOTAL:
|
$51,666.19
|
$83,455.26
|
$31,789.07
|
61.53
|
|
2006-07-01 to 2007-06-30
|
|
SUPPLIER
|
PURCHASES
NOTED
|
CONFIRMED
PURCHASES
|
DIFFERENCE
|
DIFFERENCE
(%)
|
|
Provigo
|
$8,217.93
|
$8,217.93
|
--
|
0.00
|
|
Molson
|
$217.06
|
$217.06
|
--
|
0.00
|
|
Multi-Marques
|
$6,870.08
|
$21,836.76
|
$14,966.68
|
217.85
|
|
Agropur
|
$1,074.37
|
$3,227.69
|
$2,153.32
|
200.43
|
|
Pepsi
|
$12,235.85
|
$12,299.49
|
$63.64
|
0.52
|
|
Conan
|
$16,996.50
|
$36,160.03
|
$19,163.53
|
112.75
|
|
Delstar
|
$4,755.22
|
$15,779.16
|
$11,023.94
|
231.83
|
|
TOTAL:
|
$50,367.01
|
$97,738.12
|
$47,371.11
|
94.05
|
|
2005-07-01 to 2006-06-30
|
|
SUPPLIER
|
PURCHASES
NOTED
|
CONFIRMED
PURCHASES
|
DIFFERENCE
|
DIFFERENCE
(%)
|
|
Provigo
|
$9,886.83
|
$9,886.83
|
--
|
0.00
|
|
Molson
|
--
|
--
|
--
|
0.00
|
|
Multi-Marques
|
$5,928.18
|
$23,686.43
|
$17,758.25
|
299.56
|
|
Agropur
|
$2,501.56
|
$3,842.94
|
$1,341.38
|
53.62
|
|
Pepsi
|
$11,534.41
|
$12,442.10
|
$910.69
|
7.90
|
|
Conan
|
$12,762.86
|
$28,124.79
|
$15,361.93
|
120.36
|
|
Delstar
|
$11,433.51
|
$20,301.91
|
$8,868.40
|
77.56
|
|
Brasseurs GMT
|
--
|
--
|
--
|
0.00
|
|
AMD Fruits & Légumes
|
$43.75
|
$43.75
|
|
0.00
|
|
TOTAL:
|
$54,091.10
|
$98,331.75
|
$44,240.65
|
81.79
|
(m)
to reconstruct the appellant's taxable sales,
three items were selected: hotdog, hamburger and submarine buns;
(n)
the resulting calculation revealed that there
are significant differences between the sales reported by the appellant and the
reconstructed sales, as shown in the worksheets attached to and included in
this Reply, Annex B;
(o)
in the calculation of its net tax, the appellant
thus failed to remit the following taxes:
|
PERIOD ENDING
|
GST CALCULATED
|
GST REPORTED
|
GST
DIFFERENCE
|
|
2009-06-30
|
$23,037.84
|
$12,219.47
|
$10,818.37
|
|
2008-06-30
|
$27,589.87
|
$12,462.60
|
$15,127.27
|
|
2007-06-30
|
$29,628.30
|
$14,701.73
|
$14,926.57
|
|
2006-03-30
|
$34,107.98
|
$17,174.33
|
$16,933.24
|
|
TOTAL
|
$114,363.99
|
$56,558.13
|
$57,805.86
|
(p)
the appellant, knowingly or under circumstances
amounting to gross negligence in the exercise of a duty under Part IX of the
ETA, made a false statement or omission in its net tax return for the period in
question by not including the amount of $57,805.86 in the calculation of the
tax it reported during the period in question as GST collected or collectable;
(q)
the appellant therefore owes the Minister the
amount of the adjustments made to its net tax reported for the period in
question, plus interest and penalties;
[4]
The issues in this case
are as follows: did the appellant fail to include GST it collected or was to
collect in the amount of $57,805.86 in the net tax return filed with the
Minister for the declaration periods included in the period in question and is
the appellant subject to the penalty under section 285 of the ETA for $14,451.46,
or 25% of $57,805.86?
[5]
Using the detailed
record of sales (the "Z" tapes) for the period from March 29 to June
30, 2009, the Minister obtained a sales ratio of $4.1030 per unit sold of each
of the three items selected: hotdog, hamburger and submarine buns. This ratio
was obtained by taking the sample sales (before taxes) of $74,242.91 and
dividing by the number of units sold, which was 18,095. Therefore, each unit of
bread sold brought in $4.1030 even if the price of a hotdog bun alone sells for
$0.89. The reason for this discrepancy is because hotdog buns are often sold in
a trio, with a drink, poutine or other item. This ratio was applied for the
period from July 1, 2008, to June 20, 2009. For the previous periods, the ratio
was adjusted using a rate of deflation of 3% for each period, according to the
Statistics Canada data. A deduction of 8% was allocated for loss, theft and
consumption by employees. The reconstructed sales were obtained by multiplying
the number of items sold by the unit price generated by the sale of these
items. According to the Minister's method, the appellant did not report some
income because the reconstructed sales for the periods included during the
period in question were as follows:
|
Periods
|
Reconstructed sales
|
|
2009-06-30
2008-06-30
2007-06-30
2006-06-30
|
$460,756.87
$501,627.97
$493,801.70
$487,259.19
|
[6]
The appellant does not
challenge the Minister's use of an alternative method for determining the
reconstructed sales but challenges the method used because it is not reliable,
not credible and not objective.
[7]
In support of its
claims, the appellant relies on many elements that were not considered by the Minister,
including the establishment profile, i.e.:
—
restaurant is in a
single-purpose building;
—
main clientele is made
up of high school students;
—
busy periods are from
September to December and from April to June;
—
restaurant capacity is
52 seats;
—
the building is old and
in need of repairs and renovations;
—
the restaurant is not
part of the Belle Province chain; and
—
a competing restaurant,
McDonald's, is nearby.
These factors influence the revenue generated by the
restaurant because it is not a place of business frequented by individuals with
a high income; its clients are mostly students with little money and there is
not a lot of media advertizing.
[8]
Moreover, the appellant
states that the bread deliveries carried out by its supplier do not reflect its
actual purchases and the total amount in dollars of all the items sold cannot
be divided by the number of specific items to establish the ratio because each
item sold has its own ratio.
[9]
To show that the method
the Minister used was not credible or objective, the appellant asked the
company "Défenseurs Fiscaux Inc." to conduct analyses of the reconstructed
sales. These analyses were described by Brigitte Roy during her testimony.
[10]
Jean-Claude Nadeau, the
sole shareholder and director of the appellant, testified at the hearing. The
appellant acquired the restaurant in 1996 for $225,000 financed over five years.
The appellant is a tenant of the building where the restaurant is located. The
restaurant's business hours are from 5:00 a.m. to 11:59 p.m., seven days per
week. Breakfasts are prepared and served by Mr. Nadeau's mother-in-law. At
lunchtime, two or three employees worked in the restaurant plus one cashier.
[11]
Mr. Nadeau explained
that the restaurant's clients all paid in cash and he paid his suppliers in
cash. He admitted that he did not keep an inventory of merchandise. In a letter
dated August 20, 2009, addressed to Revenu Québec auditors (presented as
Exhibit I-1), Mr. Nadeau stated that the purchases from suppliers allegedly
produced an erroneous sales figure because from 2003 to 2008, he operated
another restaurant in Longueuil (Le Relais de Térapin) that he supplied with
bread, sauces, desserts and some candies because that restaurant had bad
credit. In this letter, Mr. Nadeau also noted that following the Revenu Québec
audit and better control of the quantity of bread delivered, the expenses for
purchasing bread decreased considerably.
[12]
Mr. Nadeau admitted
that the "Z" tapes were missing for many days and he was unable to
produce the invoices for supply purchases. He provided a list of his suppliers
and the suppliers produced confirmations of the purchases.
[13]
Mr. Nadeau also
claimed that the bread delivery person did not deliver all the bread that was
billed to his restaurant. The bread delivery was done when the restaurant
opened and Mr. Nadon's mother-in-law paid for the order in cash upon
delivery. He had no control over the quantity of bread that was actually
delivered.
[14]
Brigitte Roy, associate
partner of the company "Défenseurs Fiscaux Inc." testified on
behalf of the appellant at the hearing to establish prima facie evidence
that the method used by the Minister was not reliable. Ms. Roy did not
testify as an expert and was not recognized as such by the respondent.
Ms. Roy provided three reasons the method used by the Minister was
deficient and inaccurate. The first was that the hotdog buns are not
representative of the fact that 51% of the sales are steamed hotdog buns (non-weighted
sales) and that sales of submarines represent less than 10% of the total sales.
The second was that the bread purchases confirmed by the supplier Multi-Marques
are significantly higher than the actual purchases; the restaurant's sales
figure is therefore artificially inflated. The third was that in general, bread
is not a representative item because it is the item that generates the most important
losses.
[15]
According to Ms. Roy,
using sausages would have been more representative and more reliable. Taking
the same inventory used by the Minister and using the purchase of sausages
confirmed by the supplier Conan, the appellant's reconstructed sales would only
have exceeded the sales figure reported in the financial statement by 10%,
which, she claims, would have been much closer to reality.
[16]
Ms. Roy presented
many other analyses showing that the method used by the Minister produced
inaccurate results. Among these analyses was the average daily sales method.
Using the same inventory, the same number of days (93 days), the same base
calculation used by the Minister and taking into consideration the 10 days the
high school was closed, the average daily sales would have been $820 during the
busiest period and $723 for the days included in the period that was least
busy. On this basis, the reconstructed sales would only have amounted to $282,000,
or half the sales the Minister reconstructed for the same period.
[17]
Another analysis
consisted of comparing the ratio of reported purchases/reported sales, which is
a recognized ratio in the restaurant sector. In 2006, the average ratio for
Quebec restaurants was 28.14%. In 2007, it was 24.61% and in 2008, it was 22.61%.
In the appellant's case, the application of this ratio to the available confirmed
purchases (i.e. minus the losses estimated at 15%) would have reduced the gap
between the reported sales in the financial records and the reconstructed sales
by 80%.
[18]
A last analysis consists
of calculating the average service time for portions sold each day by
establishing the daily sales according to the audit (test 1) and according to
the presumed availability of the bread items (test 2). According to this
analysis, the average time of service of portions sold each day would be 23
hours (test 1) and 24 hours (test 2), whereas the restaurant is only open 19
hours per day.
[19]
Yan Fortier, Revenu Québec
auditor, testified at the hearing. He explained that he conducted an undercover
visit to the restaurant to have breakfast with his team leader. He noted that
there was only one employee who prepared and served their meals, that no entry
was made to the cash register and they were not given a bill. They were,
however, given a hand-written receipt. The audit began in early 2009. During a
first visit, the auditor asked Mr. Nadeau to complete a questionnaire and
provide the appellant's accounting books and records. The cash register "Z"
tapes were provided but many were missing and those provided were not detailed
enough to identify the various trios that were sold. The auditor then asked the
appellant to have the cash register reprogrammed. On March 30, 2009, the
auditor returned to the restaurant to see whether the cash register had in fact
been reprogrammed. The auditor noted that the cash register had been
reprogrammed to clearly identify each meal by a code. The auditor then informed
the appellant that he would return around three months later to pick up the
detailed "Z" tapes. As agreed, the auditor returned to get the
"Z" tapes and he proceeded with an analysis of the sales for the
period from March 29, 2009, to June 30, 2009, a period of 93 days.
[20]
The auditor explained
that the breakfasts only had one entry in the cash register (lump sum amount
for all the breakfasts per day). When the cash register was reprogrammed,
breakfasts were not included. As a result, purchases of sliced bread were not
considered.
[21]
The auditor also
confirmed that the appellant did not provide purchase invoices from its
suppliers. Information was obtained from the suppliers themselves but the purchase
invoices were not produced. The information contains many errors and was
sometimes incomplete; for example, the client was not identified or the client
number did not appear on the statement. At times, two client numbers appeared for
the same address. Moreover, the supplier Saputo does not appear on the list of
the appellant's suppliers. According to the auditor, purchases made with the
suppliers simply indicated that significant gaps existed between the reported
purchases and the confirmed purchases.
Applicable legislative provisions and burden of proof
[22]
Subsection 286(1) of
the ETA sets out the agent’s duty to keep books and records:
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.
[23]
Subsection 288(1) of
the ETA confers on duly authorized persons the authority to audit, among other
things, an agent’s books and records to determine the agent’s tax liability:
An
authorized person may, at all reasonable times, for any purpose related to the
administration or enforcement of this Part, inspect, audit or examine the
documents, property or processes of a person that may be relevant in
determining the obligations of that or any other person under this Part or the
amount of any rebate or refund to which that or any other person is entitled...
[24]
Under subsection 296(1)
of the ETA, the Minister of National Revenue may make an assessment, a
reassessment or additional assessment to determine, among other things, the net
tax of an agent for a reporting period, and penalties and interest payable by
the agent.
[25]
Pursuant to subsection
299(3) of the ETA, an assessment is valid and binding, subject to being vacated
on an objection or appeal under this Part.
[26]
In Amiante Spec Inc.
and Her Majesty the Queen, 2009 FCA 139 (CanLII), the Federal Court of
Appeal made the following comments about the burden of proof in cases where a
taxpayer wishes to challenge the validity of an assessment or reassessment:
[15]
Hickman reminded us that the Minister proceeds on
assumptions in order to make assessments and that the taxpayer has the initial
burden of demolishing the exact assumptions stated by the Minister. This initial onus is met where the
taxpayer makes out at least a prima facie case that demolishes the
accuracy of the assumptions made in the assessment. Lastly, when the taxpayer
has met his or her onus, the onus shifts to the Minister to rebut the prima
facie case made out by the taxpayer and prove the assumptions (Hickman,
supra, at paragraphs 92, 93 and 94).
...
[23] A prima facie
case is one “supported by evidence which raises such a degree of probability in
its favour that it must be accepted if believed by the Court unless it is
rebutted or the contrary is proved. It may be contrasted with conclusive
evidence which excludes the possibility of the truth of any other conclusion
than the one established by that evidence” (Stewart v. Canada, [2000]
T.C.J. No. 53, paragraph 23).
[24] Although it is not
conclusive evidence, “the burden of proof put on the taxpayer is not to be
lightly, capriciously or casually shifted”, considering that “[i]t is the
taxpayer’s business” (Orly Automobiles Inc. v. Canada, 2005
FCA 425, paragraph 20). This Court stated that the taxpayer “knows how and why it
is run in a particular fashion rather than in some other ways. He [or she]
knows and possesses information that the Minister does not. He [or she] has
information within his [or her] reach and under his [or her] control” (ibid.).
Analysis and conclusion
[27]
Considering the
evidence presented, it seems clear to me that the Minister was justified in
using an indirect method to determine whether all of the appellant's income was
reported. Counsel for the appellant did not challenge the Minister's use of an
indirect audit method but it questioned the reliability of the alternative
method used by the Minister. According to counsel for the appellant, the alternative
method used by the Minister provided unreliable and implausible results
considering the circumstances and characteristics of the restaurant.
[28]
Counsel for the
appellant cited, in support of his position, Brasserie Futuriste de Laval
Inc. v. The Queen, 2006 TCC 503, a case decided by Justice Dussault, where
he stated that the presumption of an assessment’s validity does not
automatically carry with it a presumption that all the assumptions on which the
Minister relied to make the assessment are valid and that no evidence of any
kind need ever be offered. At paragraph 158, Justice Dussault made the following
comment:
...
In short, when a taxpayer can raise a serious doubt, it must be shown that the
markup used is not a purely subjective standard, but, rather, a standard that
is objective, reliable and acceptable under the circumstances. One cannot hide
behind the presumption of an assessment's validity in order to avoid having to
offer such evidence. To claim otherwise is to open the door to arbitrariness by
allowing the tax authorities to propound any theory with the assurance that it
would be deemed valid. Just because a taxpayer has failed to meet its
obligations, has deficient accounting, does not have the appropriate documents,
or has destroyed those documents, does not mean that all assumptions are
warranted and that those assumptions will be deemed valid under all
circumstances...
[29]
Counsel for the
appellant raised the following reasons to challenge the reliability of the
indirect audit method used by the Minister:
(a)
the inventory period of
93 days, from March 29 2009, to June 30, 2009, is the busiest time of the year,
which artificially inflated the annual sales results;
(b)
the choice of bread as the
selected item is not representative because this is an item with a higher rate
of loss than other items such as sausages, cheese, etc. Another issue with
using bread as the selected item is that the bread purchases confirmed by the
supplier Multi-Marques are greater than the actual purchases. Lastly, because
the sale of steamed hotdog buns was not weighted, the method used became
unrepresentative.
[30]
It is true that any indirect
audit method used by the tax authorities, used when required by a taxpayer's affairs
or documents or lack thereof, can only generate approximate results, which do
not necessarily fully reflect reality. It is in the nature of any alternate method
to produce questionable and less reliable results.
[31]
In the present case, it
is difficult, in my opinion, to claim that the method used by the Minister is
purely arbitrary and estimated.
[32]
Indeed, the ratio of $4.1030
per item sold was reached on the basis of the complete and detailed
"Z" tapes for the period from March 29 to June 30, 2009, and therefore
was based on actual and accurate data. The inventory period was determined on
the basis of the date of the beginning of the audit, in early 2009. The audit
took place as described at paragraph 19. The choice of the period was therefore
random and occurred as soon as the information was available. The auditor
cannot be blamed for the choice of audit period.
[33]
The items selected for
analysis purposes were hotdog, hamburger and submarine buns. This choice is
logical because they are the most reliable items that were sold the most, by
themselves or in a trio. The claims in the letter dated August 20, 2009, that
the appellant sent to the auditor, claiming that:
(a) the purchases from
suppliers could not be used to calculate its sales figure because part of the
purchase of bread, sauces, desserts and certain candies were supplied to
another restaurant operated by Mr. Nadeau; and
(b) there were irregularities
with the bread deliveries because after the audit and a better control over the
quantity of bread delivered was implemented, the expenses for bread purchases
decreased considerably,
cannot render the bread inadmissible as selected
items. None of the claims in the letter were supported by documentary or
testimonial evidence. The bread delivery person was not called to testify and
there is no evidence to show that an accusation or complaint was brought
against him.
[34]
The auditor who
conducted the appellant's audit is an experienced auditor who has worked
exclusively in the restaurant sector for seven years. In his opinion, the
indirect audit method used in this case allowed for a probative and reasonable
result in the circumstances. In the context where an indirect audit method is
used, the auditor is not required to use the method that is most favourable to
the taxpayer. The auditor must find reliable results from the samples taken.
The greater the sample size, the better the results.
[35]
During his testimony,
the auditor explained that he did not use hotdog sausages as the selected item
because the data from the supplier Conan was not reliable. In his opinion, Conan
supplied contradictory information with regard to two different client numbers
and also incomplete information because additional sausage purchases were not
reported.
[36]
The percentage of loss allowed,
8% of the confirmed bread purchases, corresponds to the reality of the
restaurant sector, but according to Ms. Roy, this percentage is not
representative for bread purchases. In her opinion, this percentage should be
closer to 15-20% but no documentary evidence or statistical data was presented
to support this testimony.
[37]
Under the
circumstances, the appellant and its representatives did not convincingly demonstrate
that there were specific deficiencies or clear errors with the indirect audit method
used by the Minister.
[38]
As for the 25% penalty
prescribed under section 285 of the ETA, we must remember that under section
285, the penalty applies when a person "... knowingly, or under
circumstances amounting to gross negligence, makes...a false statement or
omission in a return". The burden of proof regarding this provision is on
the respondent.
[39]
The evidence shows
significant and repeated omissions in the returns, namely discrepancies in the
GST totalling $57,805.86 over four years. The appellant therefore made false
statements in its tax return and did so repeatedly. The appellant did not
provide any plausible explanations regarding these omissions and the only possible
conclusion is that they were the result of wilful negligence by the appellant
that amounts to gross negligence.
[40]
For these reasons, the
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 4th day of December 2013.
"Réal Favreau"
Translation
certified true
on this 13th day
of March 2014.
François Brunet,
Revisor
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