Date: 20060928
Docket: A-521-05
Citation:
2006 FCA 317
CORAM: LÉTOURNEAU J.A.
NOËL J.A.
PELLETIER J.A.
BETWEEN:
RÉAL BEAULIEU
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an appeal from a judgment of the
Honourable Mr. Justice Dussault of the Tax Court of Canada (TCC) dated October
18, 2005, ([2005] GSTC 161) allowing the appeal, in part, from the assessment
issued December 15, 2000, for the period January 1, 1997, to March 31, 2000,
under Part IX of the Excise Tax Act—–Goods and Services Tax, R.S.C.
1985, c. E-15 (ETA). The judge referred the assessment back to the Minister of
National Revenue (the Minister) for reconsideration and reassessment on the
basis that the adjustment of $30,509.43 made to the Goods and Services Tax
(GST) must be reduced to $15,318.88.
[2]
In so doing, Dussault J. vacated the assessment
as issued, but accepted the alternative position put forward by the Minister.
The appellant maintains that this alternative position was raised for the first
time after the limitation period had expired, and therefore Dussault J. did not
have jurisdiction to order a new assessment giving effect to that position.
LEGISLATIVE
CONTEXT
[3]
Under subsection 298(6.1) of the ETA, the
Minister may advance an alternative argument in support of an assessment,
subject to two conditions. Subsection 152(9) of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (ITA) contains a similar provision.
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(6.1) The Minister may advance an
alternative argument in support of an assessment of a person at any time
after the period otherwise limited by subsection (1) or (2) for making
the assessment unless, on an appeal under this Part,
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(6.1) Le ministre peut avancer un nouvel
argument à l’appui d’une cotisation établie à l’égard d’une personne après
l’expiration des délais prévus aux paragraphes (1) ou (2) pour
l’établissement de la cotisation, sauf si, sur appel interjeté en vertu de la
présente partie:
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(a) there is relevant evidence that the person is no longer
able to adduce without leave of the court; and
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a)
d’une part, il existe des éléments de preuve que la personne n’est plus en
mesure de produire sans l’autorisation du tribunal;
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(b) it is not appropriate in the circumstances for the court
to order that the evidence be adduced.
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b)
d’autre part, il ne convient pas que le tribunal ordonne la production des
éléments de preuve dans les circonstances.
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298. (1) Subject to subsections (3) to
(6.1), an assessment of a person shall not be made under section 296
(a)
in the case of
(i) an
assessment of net tax of the person for a reporting period of the person,
. . .
more than four years after the later of
the day on or before which the person was required under section 238 to
file a return for the period and the day the return was filed;
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298. (1) Sous réserve des
paragraphes (3) à (6.1), une cotisation ne peut être établie à l’égard
d’une personne en application de l’article 296 après l’expiration des
délais suivants:
a) s’agissant d’une cotisation visant l’un
des montants suivants, quatre ans après le dernier en date du jour où la
personne était tenue par l’article 238 de produire une déclaration pour
la période et du jour de la production de la déclaration:
(i) la taxe nette de la personne pour sa période de
déclaration,
…
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RELEVANT
FACTS
[5]
The appellant operates a business in Montréal
under the name Aubaines Plus R.B. Enr., which sells taxable supplies
(tobacco products, etc.) within the meaning of the ETA.
[6]
In 2000, Sylvie Lynch, an official of the
Ministère du Revenu du Québec, and acting on behalf of the Minister of National
Revenue, began an audit of the books of account of the appellant’s business
with respect to the application of both the Act respecting the Québec sales
tax, R.S.Q. c. T-0.1 (AQST) and the ETA.
[7]
The auditor found numerous discrepancies in the
appellant’s documents. There was, inter alia, a discrepancy between the
bank statements and the cash register tapes (Z tapes) of the business. The fact
that the tobacco sales were almost never recorded for one day per week, and
other deficiencies in Mr. Beaulieu’s accounting system (the cash registers were
not equipped with a second roll to record sales) exacerbated the problem.
[8]
Ms. Lynch decided to attempt to reconstruct the
sales based on [TRANSLATION]“purchase invoices and purchases
recorded in the appellant’s accounting records plus a gross profit margin”
(respondent’s reply to the notice of appeal, appeal book at page 38). Using
this method, $12,855.72 of QST and $30,509.43 of GST had not been remitted
to the taxation authorities for the period January 1, 1997, to March 31,
2000.
[9]
These amounts were claimed in assessments issued
by the Ministers acting within their respective jurisdictions under the AQST
and the ETA, and the appellant exercised his right to appeal in both cases.
[10]
The QST appeal was heard by the Court of Québec
prior to the appeal before the Tax Court under the ETA. At the Court of Québec,
the appellant, through his expert (Mr. Hamelin), challenged the auditor’s
calculation method. He established that this method was unreliable, as Ms.
Lynch had failed to take into account the cost of opening and closing
inventories in determining the cost of goods sold. During his testimony, the
appellant’s expert acknowledged, however, that the appellant had not remitted
$3,721.30 of QST and $15,318.88 of GST during the relevant time period.
[TRANSLATION]
No. 500-02-099049-012,
Court of Québec (Aznar, J.C.Q.), June 10, 2004
[45] On this issue, the Court is of
the view that it is not necessary, at this stage, to rule on the legality or
validity of any future assessment.
[46] If the Minister of Revenue
decides to issue an assessment, and the applicant decides to challenge its
validity based on the limitation period or for any other reason, he may do that
at the appropriate time.
[47] At this stage, it is not necessary
for the Court to determine whether the assessment that might be issued by the
Ministère du Revenu would be out of time.
[13]
After the Court of Québec’s ruling and on
consent of the appellant, the respondent amended its reply to the notice of
appeal to include the following paragraph:
[TRANSLATION]
[9] If not, the respondent
submits in the alternative that the adjustment to the net tax should be
$15,318.88, based on the appellant’s cash register tapes (or “Z” tapes), as
will be established at the hearing through the appellant’s documents to be
filed and his own testimony.
[14]
The respondent acknowledges that the limitation
period had expired before the amendment was made.
[15]
As stated in the agreement as to the facts filed
by the parties, the appeal before the TCC was heard on the evidence that had
been before the Court of Québec, although both the appellant’s expert and the
auditor were called to testify again. The agreement set out the issue in dispute
as follows:
[TRANSLATION]
C. THE APPELLANT AND THE RESPONDENT STATE THAT THE ONLY ISSUE IS THE QUESTION
OF THE $15,318.88 THAT APPEARS ON PAGE 10 OF THE REPORT BY THE EXPERT, FILED AT TAB 7 OF THIS AGREEMENT
9. The appellant submits
that the $15,318.88 is not part of the amounts determined and assessed by the
notice of (re)assessment, and the respondent submits that this sum is included
in the assessment at issue.
10. More specifically, the
appellant submits that the Tax Court of Canada does not have jurisdiction to
decide in respect of the $15,318.88 and that under the ETA, the Minister of
National Revenue may not issue a notice of assessment in respect of that
$15,318.88, having regard to the four-year limitation.
11. The respondent
submits that because the issue is one of net tax, the $15,318.88 is included in
the assessment at issue.
12. The appellant
does not agree with the respondent’s statement in paragraph 11, and points out
that according to the notice of (re)assessment, a $30,509.43 adjustment was
made at the time of the audit and that this figure cannot include the
$15,318.88.
13. The appellant
acknowledges that the amounts shown on page 10 of the report by the expert (Tab
7) are not contested.
D. CONCLUSIONS
ACCORDINGLY, the parties state that this is the only issue in this
case and agree to proceed on the basis of the documents appended to this
agreement.
[16]
At the hearing before the TCC, the appellant’s
expert reiterated his opinion that the $30,509.43 adjustment in the notice
of assessment was incorrect, because it was based on an invalid method. He also
repeated that the unpaid GST and QST amounted to $15,318.88 and $3,671.30,
respectively. According to the expert, the discrepancies between the taxes
reported and remitted according to the FPZ-500 forms and the taxes collected
according to the Z tapes were used to identify these amounts (Exhibit A-1, Tab
7).
[17]
The auditor acknowledged that she had adopted
the reconstructed sales method, and not the discrepancies revealed by the Z tapes,
to determine the assessment of $30,509.43.
DECISION OF
THE TCC
[18]
Dussault J. pointed out in his decision that
counsel for the respondent was no longer defending the $30,509.43 adjustment in
the assessment, but rather the lower amount of $15,318.88—which the
appellant himself admitted was valid (Reasons, paragraph. 34).
[19]
After explaining the method used by the auditor
to arrive at the $30, 509.43, Dussault J. recognized at the outset
that the amounts of $30,509.43 and $15,318.88 cannot be added together.
(Reasons, paragraph 30).
It seems obvious, and only logical, that
she could not have added the discrepancies previously identified by analysing
other documents or records, including the Z tapes, to the discrepancies
identified based on all the reconstructed sales. The result of doing that would
obviously have been double taxation, since some sales, and the GST applicable
to those sales, would have been counted more than once.
[20]
Despite this, he ruled that the $15,318.88 was
included in the assessment. According to him, the underlying assumption of the
assessment in dispute is that the GST collected by the appellant on all of his
sales was not remitted, and the method used for determining the amount of the
shortfall is only one means of identifying the extent of the unremitted amount.
It follows that the lower amount established based on discrepancies in the Z
tapes is included in the assessment. (Reasons paragraph 53).
[21]
Counsel for the respondent acknowledged that the
assessment was only valid with respect to the discrepancies revealed by the Z
tapes. Dussault J. found that an assessment that was reduced in this way is
included in the first assessment. The alternative argument advanced in support
of the assessment is at most a new argument, under subsection 298(6.1) of
the ETA (Reasons, paragraph 54).
ALLEGED
ERRORS IN THE DECISION UNDER APPEAL
[22]
The appellant contends that the $15,318.88 is
not part of the $30,509.43 adjustment that underlies the disputed assessment.
In fact, the appellant says, it is clear that the unremitted taxes that make up
the first amount are not the same as the taxes that make up the second. That is
the only finding the judge had to make to dispose of the dispute in accordance
with the issue submitted by the parties.
[23]
Be that as it may, the appellant maintains that
Dussault J. could not ignore the “admission” by the auditor at the hearing that
the $15,318.88, as determined by the discrepancies between the remitted amounts
and the Z tapes, is not included in the amount assessed under her calculation
method.
ANALYSIS
[25]
To answer this question, the trial judge began
with the auditor’s testimony and the facts she considered in issuing the
assessment. It is useful to reproduce, in its entirety, part of the reply to
the notice of appeal, as filed by the respondent in its original form, entitled
[TRANSLATION]
“Facts Considered in Support of the Notice of
(Re)assessment”:
[TRANSLATION]
8.
In order to
determine the assessment in dispute, the auditor authorized by the respondent
to perform the said audit considered the following findings of fact:
(a) The appellant
was a registrant under the E.T.A. during the entire period in dispute, i.e.
January 1, 1997 to March 31, 2000, as it appears from paragraph 9 of the notice
of appeal;
(b) The appellant
operates a business under the name Aubaines Plus R.B. Enr. located at 2325
rue Des Ormeaux, in Montréal, as it appears from paragraphs 1 and 8 of the
notice of appeal;
(c) The taxable
supplies sold by the appellant included tobacco products and small items in the
$1 to $5 range, which are all taxable supplies under the ETA;
(d)
An officer of
the respondent began an audit of the appellant’s activities following the
appellant’s application for a permit under section 6 (collection officer) of
the Tobacco Tax Act, R.S.Q. c. I-2. In addition, the
appellant’s tax returns had shown credit balances several times, which, at
first glance, is unusual for this type of business;
(e) The audit was
made more difficult because of the appellant’s lack of co-operation, i.e. he
refused to provide the information and the documents required to determine his
net tax. Accordingly, on April 12, 2000, the auditor directed the appellant to
produce his purchase invoices, cash register tapes and accounting records;
(f) On April 19,
2000, the appellant asked the auditor for three more weeks to provide the
documents and records;
(g) On May 1,
2000, the auditor began an audit at the appellant’s place of business. Her
first step was to count the tobacco products. There were 1300 cartons of
cigarettes at that time. The appellant had two cash registers, one in front for
the various small items, and the other at the back of the store for tobacco and
lottery ticket sales;
(h) The auditor
then examined the accounting records, invoices, cash disbursements and cash
receipts, and bank statements for the period covered by the audit (from 1997 to
2000).
(i) During her
visit, the auditor noted unrecorded sales and, according to the cash register
“Z” tapes, there were almost never any cigarette sales for one day per week;
(j) Based on
that determination and numerous discrepancies in the documents presented by the
appellant (e.g.: GST vs. QST; bank statements vs. cash register “Z” tapes;
taxes according to accounting records vs. taxes remitted to the Department,
etc.) the auditor decided to reconstruct the sales based on the purchase
invoices and purchases recorded in the appellant’s accounting records, plus a
gross profit margin, that method having been determined to be the one that
offered the best guarantee of reliability for the purpose of establishing the
appellant’s net tax;
(k) To calculate
the tax, the auditor determined and applied the gross margin based on the
financial statements provided and prepared by the appellant or in his name,
i.e. from the profit margin reported by the appellant in fiscal years 1997,
1998, 1999 and the first three months of 2000. Non-taxable supplies and sales
of lottery tickets were not included in the calculation of the markup of
purchases by the gross margin of sales of purchases;
(l) To avoid
burdening the presentation of the facts, the purchase data collected by the
auditor is presented in tables for the years 1997 to 2000, attached and
incorporated. All of them are numbered as pages 5 to 10-4;
(m) As it appears
from the table “Reconstruction of Revenues”, attached and incorporated, in
order to calculate the reconstructed sales, the auditor marked up the purchases
by a factor equivalent to the profit margin reported by the appellant based on
the category. She was then able to calculate the tax that the appellant should
have collected;
(n) The auditor
then prepared a summary table showing the difference between the net tax
reported and remitted and the net tax that should have been remitted based on
the reconstructed sales, as set out in that summary table, attached and
incorporated into this reply;
(o) The
appellant disputed the auditor’s calculation method by submitting his own
calculation sheets, but those sheets led to the same result: that the tax
reported and remitted was lower than the tax that should have been remitted to
the Department;
(p) The appellant
was assessed as follows:
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Period
ending on:
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Unremitted
taxes collected
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March
31, 2000
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$5,991.70$
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December
31, 1999
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$12,026.51
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December
31, 1998
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$10,058.47
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December
31, 1997
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$2,432.75
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Total
adjustments:
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$30,509.43
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Penalties:
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$2,635.15
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Interest:
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$2,283.09
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Amount due:
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$35,427.67
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9. The respondent submits that
this reply is well-founded in fact and law.
[Emphasis added.]
[26]
It is evident from paragraphs 8(g), (h), (i) and
(j), that the auditor in fact based the assessment as issued on the
discrepancies between the Z tapes and the taxes remitted. However, because the
auditor believed, based on the evidence, that the appellant’s books of account
were not reliable, and that the discrepancies revealed by the Z tapes might
establish a higher amount of tax evasion, she decided to reconstruct the sales
and to fix the shortfall at $30,509.43, instead of $15,318.88 according to
the Z tapes.
[27]
In my view, this does not have the effect of
removing the discrepancies based on the Z tapes from the assessment. The
appellant knew it was those discrepancies that caused the auditor to issue the
assessment, and he could not legitimately expect the assessment to be reduced
to nil without dealing with them. Indeed, paragraph (o) of the reply to the
notice of appeal points out that the appellant objected to the method used by
the auditor, but concedes that, despite these representations, the tax remitted
was “lower than the tax that should have been remitted.”
[28]
The auditor’s alleged “admission” during her
testimony corresponds to the allegation in the reply to the notice of appeal.
In fact, it is not disputed that the auditor decided to reconstruct the sales,
and to fix the shortfall at $30,509.43 instead of $15,318.88, according to the
discrepancies revealed by the Z tapes. However, as the reply to the notice of
appeal indicates, it cannot be argued that these discrepancies were not among
the facts relied on by the auditor in issuing the assessment.
[29]
In the final analysis, Dussault J. properly
concluded at paragraph 53 of his reasons that the basic assumption on which the
assessment is based is that the tax collected by the appellant on all of his
sales was not reported and remitted. The fact that the amount is lower than the
amount determined by the reconstructed sales does not preclude imposing a
lesser amount based on the discrepancies established by the Z tapes.
[30]
I would dismiss the appeal with costs.
“Marc Noël”
“I concur.
Gilles Létourneau, J.A.”
“I concur.
J.D. Denis Pelletier, J.A.”
Certified true
translation
Mary Jo Egan, LLB
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