REASONS FOR JUDGMENT
Justice Tardif
[1]
This is an appeal from the assessment issued
under the Excise Tax Act, R.S.C. 1985, c. E-15 (the “ETA”).
[2]
In 1960, Mr. Nicola Buffolino immigrated to
Canada. In 1970, he purchased a restaurant that served mainly Italian food,
evidently including pizza.
[3]
The restaurant had a good reputation and a
strong customer base and was a popular destination in Sainte-Marie-de-Beauce.
[4]
The restaurant was located on the main floor of
a building, while the family of five—Nicola, his wife and their three
children—lived in an apartment above the restaurant.
[5]
Business was going well, and all three of the
Buffolinos’ children, Enza, Maria and Nicola Jr., worked part-time at the
restaurant while attending school.
[6]
In 1970, the father died suddenly. Although
still relatively young at the time of their father’s death, Enza, Maria and
Nicola Jr. decided with their mother to rise to the challenge of continuing to
operate the restaurant.
[7]
The transition went smoothly, and business
remained strong.
[8]
At one point, a grocery store went out of
business, and the opportunity arose for them to purchase the vacant building and
relocate the restaurant. That building was very large but also strategically located
near the Chaudière River. After some hesitation and deliberation, the mother
decided to buy the building in question. On August 9, 2007, Giovannina Pizzéria
Inc. was registered to accommodate the new restaurant.
[9]
Enza, Maria and Nicola Jr. were the sole
shareholders, and a credit union approved a loan to them in the amount of
$700,000. Additional funding was arranged in the form of an additional loan of
$300,000 from their mother, which was converted into preferred shares. Each of
the three young shareholders guaranteed the loan from the credit union up to
the amount of $70,000 each.
[10]
Under the plan, the future restaurant would be
divided into three sections: a bar with a view of the river, a dining room and
a take-out counter.
[11]
In the light of the scope of the plan and the
substantial cost of its implementation, each shareholder took on specific
responsibilities in a context also requiring their close interaction and
cooperation. Although they had a sizeable budget, they had to make choices on a
regular basis to keep the plan within the originally established parameters.
[12]
Nicola Buffolino explained that the purchase of
an ideal cash register system was consequently put off due to the higher than
anticipated cost, and in the end an adequate, but used, system was acquired at
a much lower cost. This system worked well enough for the dining room and bar,
while it was arranged that the Appellant would use the nearly new cash register
from the former location for the take-out counter.
[13]
Nicola Jr. looked after the renovations and the
computer system in addition to doing the cooking, while Maria did the
bookkeeping and Enza looked after the customers and managed the staff.
[14]
Although the children had authority over their
respective areas, they worked closely together and maintained constant
communication.
[15]
On October 31, 2008, after several months’ work,
the Appellant opened the new restaurant, which had 260 seats in addition to the
bar and take-out counter.
[16]
Nicola Jr. described in detail how sales were
recorded in each of the restaurant’s three sections.
[17]
Maria, meanwhile, explained the nature of her
work as to bookkeeping and accounting. She also explained the circumstances
under which the Appellant hired an accountant, Ms. Laflamme, to oversee the
accounting procedures. The presence and involvement of Ms. Laflamme was also an
essential condition for obtaining the $700,000 loan from the credit union.
[18]
Ms. Laflamme was hired to make verifications;
she was responsible for drawing up and reviewing financial statements to ensure
they were accurate and reliable.
[19]
Ms. Laflamme explained that she conducted
various tests to confirm her conclusions. She explained that she was fulfilling
an obligation at the express request of the credit union, the creditor behind
the $700,000 loan amortized over a 10-year period. She also testified at length
concerning the colossal amount of work required for the audit process.
Genesis of audit
[20]
On August 21, 2001, Louis-Philippe Dion, a
manager at Revenu Québec, and his wife stopped at the Appellant’s business
while in Sainte-Marie-de-Beauce to purchase a pizza at the take-out counter.
[21]
He ordered a pizza and paid cash for it when it
was presented to him. When Mr. Dion asked for a receipt, the server wrote one
out for him by hand, which raised certain suspicions for him, particularly
insofar as observations of this nature generally lead to an audit process to
determine whether or not the sale was recorded.
[22]
To follow up on Mr. Dion’s perception concerning
the possibility that the business could be failing to record, and consequently
report, sales, the Respondent arranged for a Ms. Doucet to return to the site.
The transaction scenario was repeated.
[23]
During testimony, Ms. Doucet did not recall the
date or even the year of this event; she also had not documented it whatsoever
at the time and was relying essentially on her own questionable memory.
[24]
When she visited the Appellant’s premises, she
did not ask any questions concerning its procedure for managing and recording
sales at the takeout counter.
[25]
She first had a meal in the dining room, the
billing for which appeared to be customary and in order. However, when she
proceeded to place a takeout order, the scenario reported by Mr. Dion was
reproduced.
[26]
Believing that the situation could involve unreported
sales, Mr. Dion consequently gave instructions to initiate an audit. This, in
itself, was a legitimate and entirely appropriate reflex.
[27]
At this stage, I find it important to digress to
explain in detail, on the basis of the testimony of Nicola Buffolino Jr., the
procedure followed at the takeout counter at the time of the visits of both Mr.
Dion and Ms. Doucet.
[28]
In the light of the importance of the modus
operandi at the takeout counter, I cite from the text of the Appellant’s
written argument, which covers the flow of events and the explanations brought
to light by the evidence:
−
the customer calls or goes to the restaurant and
places an order;
−
a waiter on duty takes down the order on an
order slip;
−
the same waiter gives the order slip to the kitchen
so the order can be prepared;
−
when the order is ready, the order slip is
attached to the pizza box containing the pizza ordered by the customer;
−
the box containing the pizza and bearing the
order slip is then placed in the oven used to keep food warm;
−
for telephone orders, when the customer opens
the door to enter the takeout area, an alarm alerts the waiters in the dining
room that a customer is at the counter;
−
the next available waiter, who may not
necessarily be the server who took down the order when the original call came
in, goes to the takeout counter to give the pizza to the customer and accept
payment for the order;
−
at this time, the server enters the order into
the cash register and the order price is displayed on a screen to the customer;
−
the order, as entered into the cash register, is
then printed on the tape mounted inside the cash register which is used to keep
track of all sales at the takeout counter;
−
the customer pays for the order and leaves with
the takeout order;
−
during the period in issue, Revenu Québec did
not yet require the use of a sales recording module (“SRM”) in restaurant
establishments. Use of the SRM did not become mandatory until November 1, 2011;
−
in that context, the Appellant did not provide a
receipt to customers who placed orders at the takeout counter, because the cash
register was not equipped to print customer receipts;
−
however, if a customer requested a receipt for a
transaction conducted at the takeout counter, the waiter who took the payment
issued a paper receipt indicating the restaurant name, the restaurant number,
the transaction date, the transaction amount and the Appellant’s GST and QST
numbers, and the receipt had to be signed by the issuing waiter.
[29]
In accordance with Mr. Dion’s directives, the
audit process was initiated via a letter followed by a preliminary visit on
November 7, 2011, from a Mr. Toth, the auditor assigned to the file.
[30]
That visit was brief; the Appellant’s
representatives were asked very few questions, who then turned over all requested
documents properly organized and filed in three boxes.
[31]
At that time, Maria provided the auditor oral
explanations concerning the number and size of the boxes used to sell pizza at
the takeout counter as well as the quantity and size of the boxes used in the
restaurant’s dining room for customers wishing to take home with them any
uneaten food.
[32]
The auditor left the premises with three boxes
of accounting books and records with a view to conducting a review and analysis
of them at the office of the Appellant’s accountant, who had taken the
initiative to set aside a space for the auditor to use for this task.
[33]
Five days later, on November 11, 2011, the
auditor returned all of the documents to the Appellant.
[34]
Upon completion of his audit, Mr. Toth identified
an overpayment in relation to GST and a shortfall in relation to QST. After reconciliation,
the final result was an overpayment in the amount of $156.34 in favour of the
Appellant.
[35]
Between this date and the date of presentation
of the first proposed assessment on June 3, 2012, the auditor exchanged
information with the Appellant’s various suppliers, including brewers, pizza
box manufacturers and so on.
[36]
On June 3, the auditor returned to the
restaurant accompanied by his supervisor, Jean-Pierre Pueil, to present his
proposed assessment.
[37]
The Buffolinos, astonished and totally
flabbergasted, brought to the auditor’s attention that he had neglected to take
into account the transactions conducted at the takeout counter.
[38]
Given the extent of this oversight, Mr. Toth
became uncomfortable in the presence of his colleague, and the conversation
quickly came to a close with the auditors agreeing that they would leave the
site to perform additional audit work. They then left with the cash register
tapes but without the boxes of documents they had returned to the Appellant on
November 11, 2011.
[39]
On October 14, 2012, or 14 months after the
launch of the audit process, the auditor presented a second proposed
assessment.
[40]
Completely stunned, even traumatized by the auditor’s
presentation, Nicola Jr. and Maria expressed their total disapproval of Mr.
Toth’s findings. They made arguments essentially similar to the information
they provided at the first meeting, notably the fact that the vast majority of
nine-inch pizza boxes were used not at the takeout counter but rather in the
dining room for customers to use as “doggy bags” when they did not finish their
meals.
[41]
In the light of the nearly total absence of
receptiveness on the part of the auditor, the Appellant’s representatives
decided to fully and unreservedly seek to demonstrate that the assumptions
followed by the auditor were completely unsupported and in no way reflected
reality.
[42]
To validate and confirm their claims, they
brought in their accountant, who proceeded to undertake a colossal amount of
work with a view to demonstrating beyond reasonable doubt that the information
used by the auditor was baseless and that the information provided by the
Appellant was what corresponded to reality.
[43]
To validate and support its claims, the
Appellant implemented a system in the dining room to track the exact number of
pizza boxes used for customers to take uneaten food home from the dining room.
[44]
The log it put in place tracked the exact dates,
quantities and box sizes. This log was simple but reliable, particularly since
a waiter had to initial every time a box was used for this purpose. In addition
to having the waiters follow the new procedure to the letter, the Appellant
performed recounts on a daily basis to confirm the numbers recorded.
[45]
In the face of the Appellant’s strong
opposition, the auditor agreed to make certain trivial and essentially
arbitrary adjustments, increasing its assigned proportion of the number of
boxes used in the dining room from 4% to 10%. It did not accept the arguments
of the Appellant’s representatives. Insofar as the number of pizza boxes used
in the dining room constitutes a fundamental issue with respect to the outcome
of the appeal, it is highly interesting to note the very detailed description
in paragraphs 47 et seq. of the Appellant’s written argument:
47. [translation] On October 4, 2012,
following presentation of the proposed assessment, Mr. Toth emailed
Marie-Carmel Nazon, an auditor at Revenu Québec, to request her assistance in
handling the Appellant’s file. The content of his email message, reproduced
below, is highly revealing as to Mr. Toth’s areas of concern:
“Hello Ms.
Nazon,
I submitted
a project today for a pizzeria (Giovannina Pizzéria) in Sainte-Marie-de-Beauce.
This is my first file at RQ. The restaurant has 230 seats. He tells me that he
gives out more than 150 pizza boxes a week as doggy bags!! (7,800/year,
which corresponds to 40% of his annual pizza box purchases)
My question
is this:
1-
Over the years, have you ever come across a
pizzeria that gave out so many doggy bags in a year? . . .”
48. Ms.
Nazon forwarded Mr. Toth’s message to Michel Charrette, department head at
Revenu Québec.
49. On
October 19, 2012, Mr. Charrette replied to Ms. Nazon as follows:
. . . It’s
more a matter of logic; in order to need doggy bags, the food portions have to
be large. Someone who orders a small pizza is not going to ask for a doggy bag.
. . . How many people were at the table (going by the number of beverages
ordered) if a large was ordered? Also, there are no doggy bags for delivery
orders. . . .
He could
run a test like this over a period of one month. .
. . [my emphasis]
[46]
The very basis of the Appellant’s claims depends
on the implementation of a reliable, closely managed system in this regard. In
other words, the Appellant went beyond the advice offered to the auditor by
colleagues of his with experience and expertise in this field of business
activity.
[47]
Indeed, a log for tracking the exact quantity
and size of pizza boxes used in the dining room was put in place on November 8,
2012, for a period of not one month, as suggested, but instead more than two
months, or until January 13, 2013.
[48]
The evidence also showed that all employees were
involved in maintaining this log and had followed the very strict instructions
by initialling each transaction.
[49]
Although the effort undertaken by the Appellant
was thorough and professional, it was also monitored and supervised very
closely by the accountant, Ms. Laflamme. The auditor never showed any interest
in it on the pretext that the data in question were compiled after the period
targeted for audit.
[50]
Subsequent to this highly pertinent and
revealing demonstration as to the quality and merit of the Appellant’s
arguments, no real progress was made on the file, as Mr. Toth maintained his
position despite the thoroughness and relevance of the Appellant’s submissions.
[51]
Additionally, Mr. Toth, for whom this was the
first case in this area, decided to disregard his colleagues’ advice or
suggestions and to rely on his intuition, which, according to the evidence, was
not based on any reliable or even detailed information.
[52]
When it came to the objection, the case was
never subjected to genuine analysis, as the officer assigned to it, Ms.
Latendresse, limited her effort to consulting the auditor. She mainly followed
Mr. Toth’s advice to uphold the assessment and followed the same arguments to
the effect that the data were inadmissible since they had been compiled after
the period targeted for audit.
[53]
During her testimony, she explained the work she
performed, which included conversations with auditor Toth.
[54]
She explained further that she did not take the
Appellant’s submissions into account on the grounds that they were prepared
subsequently to the audit. She was unable to describe the nature of the work
actually carried out insofar as she had documented little to no descriptive
information concerning the work in question.
[55]
When asked why she had taken nearly a year to
conclude, she stated that she had complied with the standards.
[56]
Remaining taciturn throughout her testimony, Ms.
Latendresse was on the defensive, stating that she had always acted within the
parameters of her responsibility.
[57]
Instead of conducting her own analysis on the
basis of the relevant information submitted, she opted for the easier route of
relying on the opinion of Mr. Toth, the first auditor on the file.
[58]
However, despite coming to that quick
conclusion, she held on to the file for nearly a year. That kind of behaviour
may not necessarily reflect bad faith, but it certainly constitutes a serious
breach of her obligation to conduct a proper audit by proceeding with a new
analysis in accordance with the standards of her profession.
[59]
When a notice of objection is filed, the file
should be handed over to one or more different auditors whose responsibilities
include reviewing the work that led to the notice of assessment. That exercise
is to be carried out in an objective and impartial manner. The new evaluation
and analysis must be independent and allow for, and encourage, the exchange of
information and documents with the assessee.
[60]
However, Ms. Latendresse’s testimony shows
convincingly that these guidelines were not followed. She merely reviewed the
exchanges with auditor Toth and was unable to explain or provide details
concerning the work she performed despite having control of and responsibility
for the file for a period of one year.
[61]
She essentially confirmed the assessment solely
on the grounds provided by Mr. Toth to the effect that the basis of the
Appellant’s arguments was data collected subsequent to the period targeted for
audit.
[62]
The memo prepared by the auditor and forwarded
to counsel for the Respondent prior to trial reads, in part, as follows:
[translation]
In conclusion, I can state that there is nothing new in the boxes submitted and
that I would be very disappointed if an agreement were reached since we have
an ironclad case and it would be a shame for the restaurant to get out of it in
any way.
[My emphasis.]
These comments
are clearly inappropriate and totally unacceptable. The Court has every reason
to believe that the auditor had the same attitude and behaviour with Ms.
Latendresse, who clearly followed Mr. Toth’s directive to the letter despite
the fact that this was his first experience with a case of that nature.
[63]
This interpretation was also confirmed by the
strategy adopted by the Respondent to place greater importance on the testimony
of Mr. Toth than that of Ms. Latendresse, who, both in fact and in law, established
the assessment being appealed from. However, the auditor maintained control
over the Appellant’s file and never allowed any discussion of the case, which,
in his mind, was airtight.
[64]
The Appellant emphasized that its accounting was
done in accordance with professional standards and was verified by a reputable
accounting firm whose representative, Ms. Laflamme, had been assigned specific
responsibility in this regard and was required, among other requirements, to
follow the strict criteria of the restaurant’s main backer so the latter could
monitor the Appellant’s financial position to ensure the security of its debt.
[65]
Meanwhile, the Appellant admitted and
acknowledged having made certain errors, which it called minor and that were
always corrected very quickly. It emphasized further that the shareholders
responsible for operation and management had fully cooperated and promptly
provided all relevant documents in neatly organized format, without exception.
[66]
The Appellant emphasized that the auditor had
intended purposely from the start to follow a particular method for auditing
the Appellant’s file, this being an estimation method.
[67]
The Respondent, for her part, submitted that the
Appellant’s accounting system entirely justified the use of this estimation
method. It listed and described the problems and/or shortcomings forming the
basis of its decision to make use of an alternative audit method:
−
the observation made by Mr. Dion and confirmed
over the following days through an anonymous visit by Ms. Doucet;
−
multiple errors;
−
the electronic system in place at the take-out
counter was inadequate, notably due to the fact that it was not connected to
the company’s main system;
−
cash register tape that did not provide purchase
details;
−
ratio of cost to profit margin;
−
no mention concerning credit notes;
−
duplicate entries;
−
lack of consistency;
−
cash drawer always open.
[68]
Taken of context and without further
explanation, the list of problems appears to support the auditor’s submission
concerning its choice of audit method.
[69]
In actuality, however, and in view of the
context and highly credible explanations, things appear quite differently.
[70]
The auditor took into account information
provided by a leading expert in the restaurant industry to guide his work and
conclusions. Unfortunately, those experts did not testify. Worse, he opted to
disregard the advice of industry experts in his own office who suggested the
use of a log to collect reliable data.
[71]
It is important to note that the dispute relates
primarily to sales at the take-out counter. The two other areas, the bar and
dining room, were not problematic; indeed, the audit of these two areas
resulted in determination of a QST and GST overpayment by the Appellant.
[72]
In essence, the Respondent’s position may be
summarized as follows:
−
First, the situation required use of an
alternative audit method. The audit was conducted in accordance with
professional standards while maintaining objectivity at all times.
−
Second, the Appellant’s shareholders implemented
a system for unjustified and unacceptable reasons to hide sales of a
considerable amount.
[73]
My first impression is that prior to launching a
large-scale audit, it would have been wiser for Mr. Dion to question the
existing situation or for someone else to visit the site to collect more information
to confirm his initial impression.
[74]
Lastly, the Respondent disregarded the Appellant’s
submissions on the grounds that their basis was subsequent to the period
targeted for audit. The Respondent fails to note that Maria had indicated the
75% percentage of boxes at the start of the audit.
[75]
Mr. Dion’s report was interpreted not as a doubt
or suspicion but rather as a reality the presumable objective of which was to
hide income in disregard of all tax responsibilities.
[76]
Although the Respondent has never admitted to
being biased against the Appellant from the start, the approach taken with
respect to the file from start to end points toward the contrary.
[77]
Indeed, that situation might raise certain
doubts, particularly since it involves a business sector in which,
unfortunately, too many companies abuse and defraud the system by failing to
live up to their tax obligations.
[78]
That being said, bad faith is not presumed, and
when it comes to QST and GST, the registrants are Crown agents. Now, an agent
is expected to fulfil its obligations arising from the law but also to be able
to count on the cooperation of the principal so that a harmonious relationship
might ideally exist between the two. In this context, mutual respect is
absolutely essential.
[79]
Mr. Toth, the representative in charge of the
file, was clearly biased against the Appellant; that is a serious assertion,
but confirmed by a whole series of factors, in particular :
●
He asked very few questions despite the admitted
and acknowledged cooperation of the Appellant’s representatives; from the
start, the shareholders and their accountant offered their fullest cooperation;
●
He raised few to no questions concerning the
various observations made subsequent to questioning at the first meeting;
●
Although the audit work was carried out at the
office of the company’s accountants, once again the exchanges were minimal to
nonexistent with the accountant thoroughly familiar with the matter;
●
Following review and audit of the file, in his
rush to proceed with assessment, he completely forgot to take into account the
cash register tapes at the takeout counter, an oversight that the Appellant’s
representatives happened to notice in the presence of his supervisor at the
meeting to present the first proposed assessment;
●
That oversight was significant and could surely
have discredited the entire quality and reliability of Mr. Toth’s work on his
first file of this type. Was Mr. Toth’s ego possibly hurt?
●
When presenting the second proposed assessment,
the auditor was generally unreceptive to the Appellant’s arguments and
submissions;
●
Despite the colossal and very thorough work
prepared by the Appellant’s agents, the auditor was not at all receptive;
●
The Appellant then invested considerable money
and energy to confirm the quality of its submissions by putting in place a log
in which to collect relevant data;
●
The auditor rejected all of this work outright
on the pretext that the data collected were subsequent to the period in
question;
●
Auditor Toth’s interactions with the objection
officer who apparently urged him to confirm the quality of his work;
●
The lack of consideration of advice from more
experienced colleagues;
●
The auditor maintained authority and control
over the file even during the objection phase, which ultimately proved mainly
an academic exercise;
●
Despite the outright refusal to take into
account the work undertaken by the Appellant, the Respondent deliberately held
onto the file for months for no apparent reason. The file was open for a period
of 1,689 days (from November 7, 2011, to June 22, 2016). Notice of appeal to
the Tax Court of Canada was issued on July 4, 2014;
●
Finally, the auditor’s memo to counsel for the
Respondent prior to trial reads as follows:
[translation] In conclusion, I can state
that there is nothing new in the boxes submitted and that I would be very
disappointed if an agreement were reached since we have an ironclad case and it
would be a shame for the restaurant to get out of it in any way”
[My emphasis.]
[80]
The Court accepts the following excerpt from
pages 33, 34 and 35 of the Appellant’s written argument:
g)
[translation]
On April 3, 2014, Ms. Latendresse confirmed that she was rejecting the
submissions and upholding the assessments;
h)
the objection decision was rendered on April 29,
2014;
i)
following a procedure in place at the Direction
des oppositions, the objection officer completed a risk detection and
assessment questionnaire to ensure that the Appellant’s file could be closed
without concern. According to Ms. Latendresse, there was no risk in closing the
Appellant’s file since the latter did not evince any of the following
characteristics:
i.
it did not raise a sensitive issue (“examples:
impact on taxation policy, perception of inequity, lack of integrity or bias,
insinuation concerning violation of confidentiality guidelines, possible media
coverage . . .”);
ii.
the financial consequences were not deemed
“significant” by Revenu Québec (the amount in dispute was less than
$1 million and the objecting party was not a large company on the verge of
bankruptcy);
iii.
the Appellant’s file had no incidence on other
agents;
iv.
the matter in dispute in the file at hand did
not appear on the list of significant disputes;
v.
the matter in dispute did not appear on the
“list of topics on the monitoring of trends, maintenance of the administration’s
consistency and law enforcement . . .”;
vi.
the Appellant’s file was not subject to media
coverage and did not involve any individuals involved in politics;
vii.
there was no risk of significant impact on other
files of the decision rendered concerning the Appellant’s file;
j)
based on the responses provided on the
questionnaire, Ms. Latendresse could close her file with peace of mind
knowing there was “no risk”;
k)
when questioned concerning the grounds for
rejecting the submissions, Ms. Latendresse asserted as follows:
i.
she did not consider the information provided by
the Appellant because it was based on data subsequent to the period targeted
for audit;
ii.
Ms. Latendresse asserted further that some data
were not accompanied by supporting documentation; for example, the inventory of
pizza boxes purchased was not accompanied by invoices for the purchase of pizza
boxes;
iii.
when asked whether she had contacted the
Appellant’s representatives to request the documents she deemed missing, Ms.
Latendresse stated that in keeping with procedure, an objection officer reviews
a file assigned to him or her once the taxpayer has definitively made all
submissions and supplied all supporting documentation;
iv.
Ms. Latendresse asserted that it was up to
taxpayers to ensure that they make complete, exhaustive and final submissions;
v.
according to Ms. Latendresse, an objection
officer is under no duty whatsoever to interact with taxpayers to request
relevant missing information not included in their submissions;
vi.
despite the thorough submissions by the
Appellant (23 pages of text and 18 pages of schedules), Ms. Latendresse decided
that the lack of certain documents justified the closing of the file without
first contacting the Appellant;
l)
the rigid, circular approach taken by Ms.
Latendresse in reviewing this case is deplorable and leads to an undesirable
increase in the judicialization of numerous files that could be resolved by the
Direction des oppositions;
m)
the Appellant’s file was not handled in compliance
with basic guidelines in this regard as set out in the brochure “Filing an
objection: it’s your right. Make it work for you! ” According to the Appellant,
the Direction des oppositions did not follow the following requirements;
i.
“have your notice of assessment reviewed by a
work team other than the one that issued the notice in order to ensure the
impartiality of the process.”
By handing the file back to Mr. Toth, Ms. Latendresse abdicated her duty
to conduct an impartial analysis of this file and assigned her powers as
objection officer to the auditor. Ms. Latendresse’s conclusions concerning the
Appellant’s submissions are, in fact, Mr. Toth’s conclusions. Ms. Latendresse’s
analysis, to the extent that there was one, was distorted by the position of
the auditor;
ii.
“give you the opportunity to be heard” and “allow you to discuss your
file.”
By failing to contact the Appellant’s representatives at any time or to give
any indication concerning the submissions made, the Direction des oppositions
did not give the Appellant the opportunity to be heard.
[81]
Marginalizing a file such as the Appellant’s
shows a lack of responsibility.
[82]
As for the burden of proof, the Court accepts
the Respondent’s position that the burden of proof was on the Appellant.
[83]
However, surprisingly, the Respondent refers to
the case law, which holds that the burden of proof may be reversed. I refer in
particular to the excerpts from pages 25 and 26 of the Respondent’s written
argument:
. . .
- [translation]
The tax assessment has a presumption of validity (s. 1014 Income Tax Act),
which may be rebutted by the taxpayer.
-
The taxpayer’s initial burden involves “demolishing”
the veracity of this presumption by establishing a prima facie case.
-
Where the taxpayer makes such a case, the burden
of proof is reversed.
-
The tax authorities must then refute the prima
facie case and prove the assessment issued by presumption.
. . .
[24] While the evidence may not be
conclusive, the burden of proof put on the taxpayer is not to be lightly or
arbitrarily shifted taking into consideration the fact that it is the taxpayer’s
business (Orly Automobiles Inc. v. Canada, 2005 FCA 425 at paragraph
20). This Court clarified that it is the taxpayer who knows how and why his
business is run in a particular fashion rather than in some other ways. He
knows and possesses information that the Minister does not. He has information
within his reach and under his control.
. . .
[44] I therefore constantly had to remind
him that the burden of proof was upon the Appellant. To meet this burden, it is
not sufficient to criticize or attack the quality of the audit; this may be
useful and necessary, but most certainly is insufficient. It is essential to
demonstrate that the complaints laid or the errors revealed had a direct effect
on the well-foundedness of the assessment.
[45] On the other hand, it is equally
important to demonstrate what the assessment should have been, based on the
available and verifiable accounting data, not on intuitive assessments or
arguments based on reasonableness.
[84]
In this case, the Appellant’s attacks and
criticisms are not trivial. The attacks are substantial and also discredit
entirely the quality of work on the basis of entirely unjustified assumptions
and an intuition clearly shaped by the objective, from the start of the audit
process, to assess the Appellant.
[85]
The basis of the assessment being appealed is
estimative, arbitrary and even essentially intuitive; it has absolutely nothing
to do with the real facts described by the Appellant’s representatives.
[86]
The Appellant’s officers are perfectly familiar
with every aspect of their business. They are earnest, determined and committed
to building their business on a solid foundation. They are open and receptive
to anything that is likely to have transparent, reliable and effective results.
Any advice or suggestion that might improve the situation is rapidly
implemented.
[87]
The poor quality of the work performed by both
the auditor and the objection officer arises directly from the selection of the
estimation method. Indeed the results thus obtained are entirely and quickly
discredited by the evidence and by the reliability of the Appellant’s
submissions, the basis of which is neither hypothetical nor arbitrary,
intuitive nor speculative. They are instead founded on thoroughness,
objectivity and reliability confirmed by reasonableness.
Estimation method
[88]
The auditor’s decision to follow an estimation
method was unwarranted due to the fact that the Appellant had in its possession
all documents, logs and information required to allow for a classic approach to
the audit.
[89]
The Appellant did not merit perfect marks; on
the other hand, the accountant’s eagerness to cooperate and willing involvement
had to compensate for certain deficiencies, which were also corrected in full
even prior to issuance of the auditor’s written recommendations.
[90]
The quality of the evidence submitted is based
in part on the logs put in place to count and track the distribution of pizza
boxes, mainly the nine-inch boxes. That exercise confirmed the accuracy of the
information conveyed orally to the auditor at the start of the audit process.
[91]
The conclusions were once again proven correct
following the implementation of the system linking all the operations.
[92]
Moreover, neither the auditor nor the objection
officer made any attempt whatsoever to attack or discredit the quality or
credibility of the data garnered by the Appellant.
[93]
The sole motive and reason for which they
rejected outright and refused to take into account this data is the fact that
it was collected subsequently to the period targeted for audit.
[94]
What makes this all the more odd is that the
auditor’s more experienced colleagues also advised and suggested that he follow
that very approach to prove or disprove the assertions made by the Appellant at
the start of the audit process.
[95]
It would have been entirely logical for the
auditor to question and analyze the work performed by the Appellant’s
accountant. Despite the fact that he posed few questions from the start, that
he felt the need to consult one or more colleagues, that he was working on his
first file in this field, that he committed a serious error early in the
process by failing to take into account transactions conducted at the takeout
counter and that he took only five days to complete his analysis of the file;
despite the fact that the initial audit resulted in an overpayment on the part
of the Appellant; and despite the fact that the Appellant turned over all
information during the auditor’s first visit to Sainte-Marie-de-Beauce and the
Appellant’s and the Appellant’s accountant’s representatives offered their
fullest cooperation, which the Respondent has admitted, the Respondent
persisted in maintaining that it had valid grounds for disregarding the
reliability and credibility of the evidence submitted by the Appellant.
[96]
At the commencement of the audit, Maria had
informed the auditor that 75% of all nine-inch pizza boxes were given out to
guests in the dining room to use as doggy bags.
[97]
According to the auditor, however, only around
4% of boxes were used for that purpose. This figure is not only arbitrary but
also completely unreasonable.
[98]
He then increased the proportion of boxes used
in the dining room from 4% to 10%, once again without ground or verification.
[99]
The evidence submitted by the Appellant meets
the requirements defined by the case law as to the reversal of the burden of
proof. This is because the putting in place of a comprehensive log under the
specific instructions of the company’s accountant confirmed and proved the
Appellant’s submissions.
[100] Indeed, the facts at the origin of the audit were particular, and
the file in question certainly called for an audit. The Respondent was
consequently fully justified in taking the matter seriously and verifying whether
the Appellant was complying with the law and observing fully its fiscal duties.
[101] This file highlights a serious shortcoming in our judicial system:
it is no secret that the cost of going to trial is frequently prohibitive to
the point that frequently, and unfortunately, reasonable persons without great
ability to pay conclude that they are better off simply paying what is being
sought from them rather than standing up for their rights.
[102] Other persons may decide that they do not care whether or not they
can pay and go to trial on principle, in which case failure can have dramatic
impact on their lives or the existence of the companies they lead.
[103] In the present case, the Appellant’s shareholders are young,
intelligent, driven to succeed and committed to a business venture in which the
obstacles are many and significant. They are operating within very strict
financial constraints and have to report regularly to their financial backer.
[104] These observations lead me to raise the following question. Is it
possible that three intelligent young people would agree to take on a judicial
challenge likely to jeopardize their future based on a dubious and uncertain
case? First of all, they were confident that their arguments were sound and
were determined to show that they had properly fulfilled their fiscal
obligations. According to he preponderance of the evidence, they were correct.
[105] The Respondent, meanwhile, argued that all conditions required for
the use of this method were present to the point that it was the only viable
approach to carrying out the audit.
[106] The use of that type of method is evidently not ideal in that the
results obtained are based on assumptions and speculation marked by
arbitrariness.
[107] When using this type of method, it is consequently essential to be
able to confirm and prove the reliability of the assumptions.
[108] The auditor opted for hearsay, speculation, assumptions and
arbitrariness over the simplicity, reliability and reasonableness argued by the
Appellant.
[109] The fact that three young people with little experience, but with a
clear sense of commitment, determination and responsibility, were able to
obtain $700,000 in funding to operate a restaurant, which most financial backers
would classify as a high-risk investment, testifies to their financial and
moral credibility.
[110] The accountant testified at length. She was perfectly familiar with
the file and able at all times to supply simple and clear responses, revealing
the thoroughness of her work. Each of the arbitrary and speculative assumptions
used by the auditor was rejected on the basis of convincing arguments.
[111] In the light of the accountant’s testimony, it is reasonable to
conclude that the exercises and scenarios put in place to quantify the number
of boxes and their use generated results that were tangible and reliable as
well as reasonable in terms of representing the reality that should be
accepted.
[112] The testimonies of the accountant, Nicola Buffolino Jr. and Maria
Buffolino, have revealed the following facts:
●
In the dining room, nine-inch boxes are mainly
used for doggy bags; maintaining that it is necessary to apply the same
percentage distribution to all box sizes is quite simply unreasonable;
●
A log was put in place to track boxes and box
sizes over a two-month period and proves the accuracy of the Appellant’s
assessment of the situation at the commencement of the audit;
●
The data garnered concerning the average number
of pizza boxes used per transaction following installation of the new cash
register system produced the following result:
|
2012
|
2013
|
2014
|
2015
|
|
|
July 31
|
July 31
|
July 31
|
July 31
|
Average
|
|
1.23
|
1.31
|
1.22
|
1.22
|
1.25
|
●
According to the Respondent, one pizza box per
transaction is given out to customers at the takeout counter based on an
analysis of the cash register tapes. It submitted that the same analysis
revealed the occurrence of approximately 3,000 transactions under $7 each for
the period ended July 31, 2009.
●
During her testimony, Ms. Laflamme completely
contradicted the data garnered by the auditor. Based on her analysis, she
showed that there were an average of six transactions under $7 each per week,
which would yield a total of approximately $325 in place of the 3,000 used by
the auditor.
●
All demonstrations submitted by the accountant
were supported by comprehensive, and highly credible, tables.
●
I do not find it necessary to reproduce these
tables.
●
According to the auditor, the Appellant
generated net profit of between 16.19% and 23.33% for the period between 2009
and 2011. This was in the early days of the business, when certain challenges
are inevitable. Since installation of the SRM, however, net profit has ranged
between 7.76% in 2015 and 14.69% in 2012.
[113] The Appellant destroyed the basis determined by the auditor, Bernard
Toth, given thorough and reliable grounds as well as common sense, leading to
reversal of the burden of proof, which, in accordance with certain casuistic
authorities, results in the vacation of the assessment.
[114] Through this convincing demonstration and the use of the numerous
tables, which the Tribunal did not find it necessary to reproduce, it also
established and shown that its own submissions and arguments were those to be
used by the Tribunal as justification for vacating the assessment.
[115] Additional individuals apparently also visited the site. They did
not testify, as the Respondent chose to call Ms. Doucet only to testify.
[116] Any audit should be initiated from a calm, open and objective
viewpoint. Certain facts and contexts may not allow for this type of climate or
approach.
[117] In the present case, there might have been grounds for having
certain suspicions concerning the specific practice followed for takeout
orders. That is evident in view of Mr. Dion’s and Ms. Doucet’s observations.
[118] However, it would have been logical and reasonable to start by
questioning this particular aspect; the auditor could then have heard the same
explanations submitted by Nicola Buffolino Jr. to the Court. Rather than
proceeding in this manner, the auditor, Bernard Toth, chose instead to
reinforce his own clearly negative suspicions and biases. He then developed a
game plan that left no room for any meaningful cooperation or exchange with the
Appellant’s representatives.
[119] For these reasons, the appeal is allowed in that the notices of
assessment are vacated. The associated penalties are also vacated with costs in
favour of the Appellant.
Penalties
[120] Carelessness, indifference, bad faith, mismanagement, a lack of
accounting and a significant gap between reported income and actual income are
all aspects logically demonstrating gross negligence justifying the imposition
of penalties. In the present case, the burden of proof is on the Respondent.
[121] To justify the imposition of a penalty, the Respondent is relying on
assumptions that auditor Bernard Toth developed and upheld in establishing
notices of assessment based on the estimation method. Now, according to the
preponderance of evidence, the assumptions in question have been discredited.
[122] The management of the “takeout orders” component was not entirely
beyond reproach. In this regard, the evidence has shown that the Appellant was
going through a transition period while also experiencing notable growth in
sales.
[123] The dining room component needed to incorporate into its processes a
new approach supporting more reliable tracking of sales as is imposed by the
tax authorities.
[124] In any case, the Appellant implemented the new approach within the
prescribed time frame. In addition to complying with tax requirements, the new
system confirmed the Appellant’s claims, which on its own should have led the
auditor to question the validity of his conclusions.
[125] Despite their good faith and cooperation, the company’s
administration and management did not deserve a 10 out of 10 score. However,
their cooperation and good faith largely shown, along with the genuine and
clear willingness to take appropriate corrective action, should have produced a
climate of mutual or reciprocal trust, exchange and cooperation leading the
auditor to take a more objective approach to the file. On the contrary, the auditor
and the objection officer adopted an approach based on mistrust, doubt and
great suspicion of the Appellant that was unfounded and inappropriate.
[126] Nicola Buffolino Jr.’s testimony was clear and unrehearsed. His
responses were accurate and consistent.
[127] Some explanations appeared questionable at first; I refer notably to
a flooding problem that was cited repeatedly to justify the loss of important
documents.
[128] The witness confirmed that information by producing a bill for
repairs to the roof. He explained further that the basement area was so large,
and so rarely used, that the boxes moved there following the flood were
subsequently forgotten. In short, the evidence dispelled any possibility that
his explanations may have been misleading.
[129] The accounting was certainly not perfect at the time of the audit,
but there is nothing to show that it was deficient to the point of calling for
outright rejection to the benefit of an arbitrary estimation approach.
[130] Indeed, adequate tax accountability depends on two basic elements:
the first is the existence of adequate records, and the second, just as
important, is the availability of relevant and reliable documents and
information provided by persons of faultless credibility.
[131] As such, it is possible for the accounting to be faultless but for
the individuals involved in a matter of this nature to be incredible, in which
case an alternative method would be entirely warranted and appropriate.
[132] In the present case, the accounting was perhaps somewhat flawed but did
not preclude the taking into consideration of reasonable, factual explanations,
which in itself was sufficient to prevent the need for the arbitrary estimation
approach.
[133] Auditing is demanding work. It is to be performed in a serious,
professional and objective manner. It is also to be performed with respect.
[134] Taxpayers have a right to respect at all times, which implies that
their explanations merit analysis, particularly if they are credible and backed
up by an objective approach.
[135] The event having triggered the audit is not in issue; Mr. Toth
acknowledges that the Appellant’s shareholders cooperated fully from the start.
They made themselves available and ensured that the auditor had a proper
workspace, including space directly at the office of their accountant, who was
also highly cooperative. They responded promptly without hesitation or holding
back information.
[136] The fact that the auditor asked very few questions leads one to
wonder whether he was concerned that the responses might discredit his
perception or intuition.
[137] This being his first file, he consulted a colleague but then did not
follow the colleague’s recommendations, which consisted in the implementation
of a post-audit system.
[138] He was present on site for a very short time, taking only five days
to complete his analysis of three boxes of documents. He returned all documents
in question at the end of the five days. He then presented an initial proposed
assessment that failed to take into account sales at the takeout counter, which
is at the root of the dispute.
[139] It is very important to note and emphasize that the Appellant
supplied to the auditor exactly what a colleague of his had suggested, in fact
provided a better sample that covered a longer period.
[140] That is sufficient information to conclude that the auditor was biased
against the Appellant from the start. The auditor acted in a tendentious manner
toward the Appellant. That view and that harsh conclusion are confirmed, at the
very least in part, by the content of the memo the auditor forwarded to counsel
for the Respondent prior to trial.
[141] Where the use of an estimation method is warranted, that does not
mean that an auditor can take a shotgun approach and then pick and choose the
information that suits him according to a clearly predetermined objective. The
use of an estimation or alternative method requires great discipline and the
consideration of all substantial information, which the Appellant provided to
him.
[142] I accept the Appellant’s argument as being more reliable, reasonable
and convincing with respect to the results. The penalties will be vacated as
they are in no way justified in view of the quality of the Appellant’s evidence
:
●
the good faith of the Appellant’s shareholders;
●
the highly acceptable quality of their
bookkeeping and accounting;
●
the quality and credibility of all of the
Appellant’s witnesses;
●
the preponderance of the evidence;
●
the willing and unlimited cooperation of the
Appellant’s representatives with the auditor and the objection officer;
●
the very close management of the administration;
●
the involvement of the highly competent
accountant.
[143] The Respondent questioned and disputed the Appellant’s decision to
delay the purchase of an ideal electronic system for the “takeout orders” component
on the pretext that that purchase would cost very little in comparison to the
overall investment in the business.
[144] Were the context disregarded, this criticism might be valid and be
recorded as a point on the negative side.
[145] Considered in context, however, that criticism is not as significant
as argued by the Respondent.
[146] The only fact that might call for the imposition of a penalty is the
observations of Mr. Dion and Ms. Doucet. However, those were isolated
transactions conducted by an operation whose management was highly acceptable
overall. Moreover, the laws and regulations governing the management of billing
in restaurants were not in force at the time of the mandatory audit.
[147] Additionally, vacating the assessment constitutes a fundamental
event resulting necessarily in vacation of the penalties.
[148] For these reasons, the Court allows the appeal and vacates the
assessment subject to appeal; the Court also vacates the penalties, with costs
in favour of the Appellant.
Signed at
Ottawa, Canada, this 28th day of October 2016.
“Alain Tardif”
Translation certified true
On this 23rd day of June 2017
François Brunet, Reviser
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