Automobiles Dieudonne Rousseau Inc. v. R., [1997] 1 CTC 2340 (Informal Procedure)

Tremblay J.T.C.C.: — This appeal was heard under the informal procedure at Québec City, Quebec, on October 4, 1995.

1. Point at Issue

According to the Notice of Appeal and the Reply to the Notice of Appeal, the point for determination is whether, in computing the goods and services tax (“GST”) under the Excise Tax Act (the “Act”) for the period from January 1, 1991 to July 31, 1992, the appellant, whose activity consists in the purchase, repair and resale of used automobiles, was correct in not paying the sum of $10,172.25, plus interest incurred, as established by the respondent’s reassessment dated February 25, 1994.

The appellant contends that the respondent did not take into account the source of the amounts deposited in the bank and that she disallowed the input tax credits without providing any explanation.

According to the respondent, the appellant inter alia failed to show that 15 cheques issued by insurance companies and deposited to its bank account had been endorsed by its customers to serve as deposits against the selling price of the motor vehicles purchased by them.

The respondent further contends that she had taken into account non- taxable deposits and also inputs of $6,600.27 in respect of non-automobile purchases.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s reassessment is incorrect. This burden of proof arises from a number of judicial decisions, including a judgment by the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 The facts assumed by the respondent in the instant case are described in subparagraphs (a) to (k) of paragraph 3 of the Reply to the Notice of Appeal. They read as follows:

3. In order to make the reassessment respecting the appellant, the Ministry of Revenue Quebec relied inter alia on the following conclusions or assumptions of fact:

(a) the appellant is registered for the purposes of the application of the goods and services tax (hereinafter called the “GST’);

(b) following an audit conducted by an agent of the Ministry of Revenue Quebec, a notice of assessment was issued on February 17, 1993 in respect of the appellant under the Excise Tax Act (R.S.C., 1985, c. E-15) (hereinafter called the “Act”);

(c) the said assessment originally issued adjusted the net tax taking into account collectible amounts of “GST” and input tax credits (hereinafter called “ITCs”) during the period audited;

(d) in response to the objection made by the appellant in respect of the said notice of assessment issued on February 17, 1993, a notice of reassessment was issued on February 25, 1994 reducing the original assessment by $556.07;

(e) this reduction of $556.07 corresponded to an “ITC” that was apparently

omitted in the calculations made in respect of the “ITC” adjustments;

(f) apart from this addition error in respect of an “ITC”, the audit on which the original assessment was based was meticulously conducted;

(g) indeed, the auditor took into account certain non-taxable deposits, thus contradicting the appellant’s claims;

(h) the same is true of the “ITCs” in respect of non-automobile purchases, the auditor having established them at $6,600.27;

(i) furthermore, the appellant failed in its objection to prove, on the basis of supporting documentation, that the fifteen (15) cheques issued by insurance companies and filed in its bank account had been endorsed by its customers to serve as deposits on the selling price of motor vehicles purchased by them;

(j) in the absence of formal sales agreements providing specifically for such deposits, the respondent was correct in considering those fifteen (15) cheques as representing consideration for taxable supplies;

(k) the respondent was likewise correct in disallowing certain input tax credits in that the supplier’s registration number was not indicated on the invoices in violation of Input Tax Credit Information Regulations (SOR/91-45, December 18, 1990);

[Translation.]

3. Facts Adduced in Evidence

Following the above admissions, the factual evidence was completed by the testimony of Dieudonne Rousseau and Richard Yves Chasse for the appellant and by Mario Bernatchez and Yvon Lizotte for the respondent, as well as by the filing of Exhibits A-1 to A-28 and 1-1 to I-10.

The parties filed written submissions, and the appellant refrained from answering the respondent’s reply. As a result of the complexity caused by the mathematical calculations involved in describing the legal facts, the Court drew to a large degree on the parties’ submissions in order to describe those facts.

3.01 The main points that were the subject of the evidence were as follows:

(a) the automobile sales agreements on the basis of which the GST was calculated;

(b) the accommodation or trade-in agreements;

(c) the comparison of the amounts resulting from sales and services with the total bank deposits.

3.02 Let us first examine how the original assessment and the reassessment were made by the respondent. We shall then consider the evidence brought by the appellant.

3.03 According to the testimony of Mario Bernatchez, the respondent’s investigator, the appellant had no accounting books or records enabling the Minister of National Revenue to control precisely, first, each and every taxable supply made by it during that period and, second, all its purchases of goods and services acquired as part of its commercial activities.

This data proved to be essential in determining the GST that had to be collected for the respondent as well as the appellant’s input tax credits (the “ITCs”). Indeed, for its quarterly reporting periods, the appellant, as a registrant, was allowed to deduct these ITCs from the tax collected or collectible on taxable supplies in order to calculate the net tax that it had to remit or, if the ITCs were greater than the tax collectible, that had to be refunded to it.

3.04 In light of the weaknesses noted in the appellant’s records, the auditor proceeded as follows.

3.04.1 First, he tried to perform a reconciliation of the tax using the IM2C automobile transfer forms (the “IM2Cs”). However, he observed that the information appearing on the IM2Cs was incomplete and that it was impossible to reconcile those documents with the agreements (Exhibit I-3, FT-5001=l).

The auditor then proceeded to compile the agreements by quarterly reporting period (Exhibit I-3, FT-5001=2 to FT-5001=4). This exercise enabled the auditor to establish that the appellant had made total sales of $284,503 for the entire period.

3.04.2 The auditor then proceeded to make a statement of bank deposit slips and to compile the slips themselves. This work revealed that the appellant had deposited a total amount of $333,940 at the Saint-Yves Caisse Populaire (Exhibit 1-3, FT-5002=1 to FT-5002=4).

The auditor then noted that there were differences between the total amounts of the agreements and the deposit totals (Exhibit 1-3, FT-5000=1 to FT-5000=5), that is, a difference of $74,545 between the deposits and the sales in the books (Table 1). First, a comparison between the data appearing in the available accounting documents and that appearing on the deposit slips revealed that the sales figures entered in the books were less than the deposits (Exhibit 1-3, FT-5000=l). Second, a comparison of the deposits plus trade-ins with total vehicle sales, plus deposits unrelated to automobile sales, again revealed differences (Exhibit 1-3, FT-5000=2) amounting to $75,634.01 (Table 2).

1997-02-13

For period from

01/08/91 to 31/07/92: $238,550.52: $212,053.10

Total: $390,540.28: $365,749.82

3.04.3 In all cases, the total amount of the deposits was greater than the amounts appearing in the agreements and accounting records. There is only one logical explanation for these differences: in the deposits, there were necessarily amounts relating to automobile repairs, parts sales and other income sources.

In order to reconstitute the appellant’s sales, the auditor compiled the sales agreements before trade-ins, plus the deposits unrelated to the sales agreements. This result yielded total sales, taxes included. After breaking out the GST and comparing the result obtained to the amount of GST reported and remitted, the auditor observed that there was a difference for each of the appellant’s quarterly reporting periods (Exhibit I-3, FT-5000=3 and FT-5000=4) for a total difference of $11,795.57 (Table 3).

Table 3

3.05 Second, the auditor proceeded to reconstitute the business’s purchases. The auditor began by proceeding with certain tests relating to the purchases. So, he examined the invoices to determine whether the billing requirements had been met (GST number, allowable ITCs vs. ITCs claimed). The auditor concluded that the purchases generally reflected the actual situation (Exhibit 1-6, FT-6002).

3.06 The auditor then proceeded with a reconciliation of the vehicle purchases (Exhibit I-6, FT-6000=3). This reconciliation and the lists of the appellant’s vehicle purchases made it possible to establish the ITCs by quarter, as follows:

Appellant’s list

+ ITCs on notional trade-ins + ITCs on vehicle purchases - ITCs on amounts already claimed on the monthly list provided by the appellant

- ineligible ITCs Total allowable ITCs

The auditor then compared the allowable ITCs with the ITCs claimed and observed that there was a difference in the appellant’s favour. Indeed, the appellant had claimed an amount of $16,927.70 in ITCs, whereas it was entitled to credits of $17,995.03. Consequently, the auditor allowed it a refund of $1,067.26 (Exhibit I-6, FT-6000) (Table 4).

Table 4

3.10 The witness himself drafted the sales agreements. He handled himself the money received and the deposit book until Mr. Chasse’s arrival. He admitted that he had been paid partly in cash.

3.11 Sales Agreements

With respect to the sales agreements, the witness filed 80 agreements, 15 as exhibits A-l to A-15 and 65 jointly as Exhibit A-17. As Exhibit A-16, the appellant filed a study of the sales agreements consisting of eight 12-column sheets.

3.12 In its written submission, the appellant emphasized that, in six agreements, the respondent had made errors totalling $3,430.85. The Court examined each agreement and found a difference of only $2,056.80. In one agreement, the Court was unable to reconcile the appellant’s figures with the exhibit referred to and thus confirmed that of the respondent.

3.13 Again, under the item “sales agreements”, the appellant emphasized that, if one compares the total from column 1, page 2-V, of Exhibit A-16 filed by it, one notes a total of $277,821.27, whereas the auditor, in his work at pages 5001=1, 5001=2 and 5001=3 (Exhibit I-3), has obtained a total of $284,506.36, GST included, whereas that of the appellant included no tax. If the amount of the tax included in the auditor’s total is subtracted, the total obtained net of tax is $265,839.79.

3.14 To these facts, the respondent replied as follows with respect to the sales agreements:

3.14.1

First, the appellant argues that the total of the sales agreements, established by the auditor as $284,504.36, includes the GST, whereas its own total of $277,821.27 includes no tax. Although the amount of $284,504.36 in fact actually contains the GST, it should nevertheless be specifically stated (which the appellant does not do) that the auditor broke out the GST from that amount by means of the following calculation:

$284,504.36 (Exhibit I-3, FT-5000=4) x 7/107 (tax fraction)	$18,612.43
GST (Exhibit I-3, FT-5000=4)

The expression “tax fraction” is defined in section 123 of the Act as ‘“tax fraction’ means 7/107”. This fraction is used to break out the tax included in an amount, which the auditor did in this case. The auditor then subtracted the amount of the GST from the sales, including the tax, by means of the following calculation:

$284,504.36 - $18,612.43 = $265,891.93 (Exhibit I-3, FT-SOOO=3 and FT-5000=4)

The auditor performed the same exercise with respect to the cash deposits totalling $74,732.46, which the appellant was never able to explain by means of supporting documentation. The auditor multiplied this amount by 7/107, which yielded an amount of $4,889.04 of GST (Exhibit I-3, FT-5000=4). He then subtracted this amount of tax from the amount of $74,732.46, which yielded an amount of $69,843.92 (Exhibit 1-3, FT-5000=3 and FT-5000=4).

Lastly, the auditor established its total sales as follows:

$265,891.93 + $69,843.42 $335,735.35

[Translation.]

3.14.2

On this point, it is important to emphasize the following accounting facts:

(a) in Exhibit I-2, the appellant establishes its total sales excluding tax at $278,154.69;

(b) in Exhibit A-16, the appellant establishes its same total sales at $277,821.26;

(c) since the amount of $284,504.36 includes GST, if the GST is also added to the appellant’s sales of $277,821.26, one arrives at an amount of $297,268.76; this therefore means that the total sales including tax as established by the appellant, that is, $297,268.76, is greater than the auditor’s figure of $284,504.36.

In short, if the GST is subtracted, the total sales computed by the auditor (excluding the unidentified deposits) amount to $265,891.93, whereas the appellant established its total as $277,821.27. When the GST is included in these two amounts, the sales computed by the appellant amount to $297,268.76, whereas those calculated by the auditor amount to $284,506.36.

[Translation.]

3.14.3

Furthermore, in concluding its chapter entitled “Sales Agreements”, the appellant suggests to the Court that there is a difference of $3,430.85 [which the Court reduced to $2,056.80] between its sales figures and those of the auditor. Even supposing that this difference is real (which is expressly denied), the tax incidence is $240.15 ($3,430.85 x 0.07). That being the case, there is good reason to apply the maxim, “De minimis non curat praetor,” that is, that the Court does not concern itself with trifling matters.

[Translation.]

3.15 Accommodation Agreements

3.15.1 An accommodation agreement is one in which the purchaser makes a payment partly in cash and partly by handing over or trading in a used automobile. The Excise Tax Act does not tax trade-ins. According to Exhibit I-4, the GST and QST are charged as follows on this type of transaction:

Vehicle sold: $10 000

Vehicle traded in: $ 5 000

7% GST on $10,000: $700

8% QST on $5,700: $456

$6 156

3.15.2 In its written submission, the appellant stated the following facts:

(a) The respondent stated that she allowed the ITCs (input tax credits) on an amount of $54,600.00, relying on the appellant’s initial work filed by the respondent as Exhibit 1-2, compared to an amount of $28,600.00, which appears at page 2-V, column 2, of Exhibit A-16 filed by the appellant, hence a difference of $26,000.00, which represents the vehicles given as trade-ins under accommodation agreements.

(b) However, to be consistent in our work, we had to remove the amounts of these trade-ins from column 2 of pages 1- V and 2-V because we consider that these were accommodation agreements and that the vehicles thus taken back were taken back by the vendor, not by the appellant. However, we consider not taxable the amount of the sale of each vehicle in each of these so-called accommodation agreements, which amount to $77,800.00, which the respondent considers as taxable and which is included in the total of its taxable agreements.

(c) However, if it is this honourable Court’s view that these agreements were not accommodation agreements, in order to make her work follow logically, the respondent should have allowed the appellant the notional credit on the first vehicles sold in this manner, which were assumed to have been purchased by the appellant from individuals. I would have you note, Your Honour, that in the SAAQ records for each vehicle in question, which were filed jointly by the respondent, the vehicles passed from the individual vendor to the appellant on the date of sale to a third party during the period of the audit, that is, between January 1, 1991 and July 31, 1992.

(d) The first vehicles in issue totalled the sum of $36,750.00, which represents the selling prices excluding taxes, which appear at lines 1, 6, 16, 17, 29, 31 of page 1-V as well as line 20 of page 2-V of Exhibit A-16 filed by the appellant. Checking sheets 5001=2, 5001=3 and 5001=4 as well as sheets 6003=1 and 6003=2 of the auditor’s work, we can see that no notional credit was allowed for these vehicles.

(e) Thus, $36,750.00 X 7/107 = $2,404.20 of input credits which the auditor did not allow the appellant, if it is maintained that the agreements were not accommodation agreements. Let us keep this amount of $2,404.20 in mind because we shall return to it below.

[Translation.]

3.15.3

Note, furthermore, as we have observed in the previous paragraphs, that on the records filed in evidence by the respondent, the appellant’s date of acquisition is always the same as that on which it allegedly resold the vehicle. This is an administrative procedure of the SAAQ for following transfers in ownership of a vehicle from the moment the transfer is not made at its offices. They are thus in a position to know who issued the IM2C in order to make the transfer. This was confirmed for us by Denise Bouchard of the SAAQ’s administrative services.

[Translation.]

3.15.4 To the above facts advanced by the appellant, the respondent answered as follows:

3.15.4(1)

Accommodation Agreements

In this chapter, the appellant carries out an exercise that consists in particular in breaking out from its taxable sales an amount of $77,800 which it claims relates to accommodation agreements. If this amount is added to the taxable amounts appearing in column 3 of Exhibit A-16 (pages 1-V and 2-V), that is, $215,633.27, we arrive at a total of $293,433.27. If we add the tax to this amount ($293,433.27 x 7%), the GST amounts to $20,540.33. By adding this last amount to $293,433.26, we arrive at a total of $313,973.60. However, as we saw above, the total amount of the sales computed by the auditor including the tax was established as $284,506.36. That being the case, the appellant’s figures not only confirm the automobile sales established by the auditor, but furthermore demonstrate that those sales are greater than the amounts actually assessed.

[Translation.]

3.15.4(2)

But there is more.

As shown during the investigation and the hearing, the allegations concerning the accommodation sales do not hold up under analysis of the appellant’s documents adduced in evidence, in particular record I-2 and the bank statements and deposit slips I-5.

It was established at the hearing that, for there to be an accommodation sale:

— the vehicle must not be entered or recorded in the dealer’s inventory;

— the dealer must not receive or cash any amount whatever relating to the transaction except the Quebec sales tax (QST).

However, a comparative analysis of records A-16 and 1-2 reveals the following:

First, it was noted that a number of amounts respecting the vehicles traded in at the time of automobile sales were removed from Exhibit A-16 (which moreover was prepared solely for the purposes of the trial). On this point, it is sufficient to compare column 2 (“Trade-ins”) of Exhibit I-2 and column 2 (“Trade-ins”) of Exhibit A-16.

Second, the appellant collected QST only on the balance of the selling price, not on the total amount of the transactions in question.

Third, the appellant received and deposited to its accounts the amounts received at the time of its sales.

[Translation.]

3.15.4(3) The following transactions speak for themselves and, in the respondent’s view, should be emphasized:

(a) Exhibit 1-2 - Sale of a 1990 Suzuki to J.-Clément Morneau on January 25, 1991 (line 1)

The price of this sale was $10,750, the trade-in $1,500, the QST collected $740 for a total deposit of $10,000 on January 28, 1991 (Exhibit 1-5, FT-5003=5, deposit slip of 28/01/91). The vehicle traded in was a 1982 Suzuki, which was resold on February 27, 1991 to Régis Roussel (line 14) for $1,050 + QST of $89.90 and GST of $73.50 for a total deposit of $1,213.40 on February 27, 1991 (Exhibit I-5, FT-5004=5, deposit slip).

(b) Exhibit A-16 - Sale of a 1990 Suzuki to J.-Clément Morneau on January 25, 1991 (line 1)

The $1,500 trade-in amount in the column entitled “Trade-in” was deleted. Furthermore, the QST amount, $740, represents 8% of the difference between the selling price of $10,750 and the trade-in value of $1,500 ($9,250 x 8% = $740), which trade-in was deleted. Furthermore, the GST of $73.50 on the sale of the automobile traded in, that is, the 1982 Suzuki (line 14), to R*gis Roussel for $1,050, was also deleted (Exhibit 1-2, line 14) and included in the deposit of $1,213.40 (exhibits I-2 and I-5, FT-5003=5).

Thus, the documentary evidence described above shows that the sale in question was not at all an accommodation sale in that:

(a) the automobile traded in was transferred to the appellant and resold to a third party;

(b) the GST was charged when the automobile traded in was resold;

(c) the QST was calculated only on the balance of the selling price of the 1990 Suzuki;

(d) the amount of the QST and the selling price of the 1990 Suzuki were deposited to the appellant’s bank account.

[Translation.]

3.15.4(4)

With respect to the fact that the appellant calculated the Quebec sales tax only on the balance of the selling price, we refer the Court to section 1 of the Regulation concerning exchange or trade-in and the Retail Sales Tax Act (RRQ 1981, c. I-1, r. 5), which reads as follows:

Where a movable property is given as part payment of another taxable property sold retail, the tax applies to the total sale price less the credit allowed for the property given in exchange, provided the property so traded in be:

(a) used;

(b) taxable;

(c) the property of the one who trades it in;

(d) traded in to the vendor who makes the retail sale.

Where the movable property given as part payment does not meet all the conditions stated in subparagraphs a, b, c and d of the first paragraph, the purchaser must pay the tax on the total transaction.

The appellant correctly collected the Quebec sales tax by calculating it solely on the balance of the selling price since it accepted a trade-in in partial payment of the selling price. This being the case, the appellant is not in a position to claim that this was a simple accommodation sale. Exhibit 1-2 shows that the appellant accepted a number of vehicles as trade-ins since the QST was calculated only on the balance of the selling price.

[Translation.]

3.15.4(5)

Exhibit 1-2 - Sale of a 1991 Honda Accord to Claire Pelletier on August 5, 1991 (line 30)

The selling price was $18,000, the trade-in $9,000, the QST collected $720 and the GST collected $1,260 for a deposit of $8,452 on August 12, 1991 (Exhibit 1-5, FT-5010=4, deposit slip). The trade-in was a 1989 Suzuki, which was resold to Yvon Potvin (line 31) on August 19, 1991 for $8,000, including a 1987 Suzuki accepted as a trade-in for a consideration of $4,400. The QST was charged only on the balance, that is, $3,600 x 8% $288. The 1987 Suzuki was resold to Claude Fortin on August 23, 1991 (line 34) for $5,000. The QST was charged on this amount ($5,000 x 8% = $400). The deposit included the selling price and the QST, that is, $5,400 (Exhibit I-5, FT-5010=5, deposit slip dated August 26, 1991).

[Translation.]

3.15.4(6)

Exhibit A-16 — Sale of a 1991 Honda Accord to Claire Pelletier on August 5, 1991 (line 30)

The $9,000 trade-in amount of the 1989 Suzuki and the $4,400 trade-in amount of the 1987 Suzuki were deleted (lines 30 and 31). For the sales made to Claire Pelletier and Yvon Potvin (lines 30 and 31), the QST was charged only on the balance of the selling price:

— 1991 Honda: $18,000 - $9,000 x 8% $720

— 1989 Suzuki: $ 8,000 - $4,400 x 8% = $288

It should also be pointed out that the 1989 Suzuki resold to Yvon Potvin and considered by the appellant as the subject of an accommodation sale was not resold at the same price. It was taken as a trade-in for $9,000 on Claire Pelletier’s agreement and resold for $8,000 on Yvon Potvin’s agreement (lines 30 and 31). The same situation occurred with respect to the 1987 Suzuki, which was taken as a trade-in on Yvon Potvin’s agreement: $4,400 vs. $5,000 (lines 31 and 34).

[Translation.]

3.15.4(7)

Other sales considered as accommodation sales of which the trade-in values were deleted from Exhibit A-16

Purchaser's name/Trade-ins deleted

Jean-Yves Rodrigue (line 6): $1,500 (Exhibit 1-2)

Lynda Roy (line 9): $ 800 (Exhibit I-2)

Réal Lévesque (line 13): $1,000 (Exhibit I-2)

Sylvie Carrier (line 20): $2,000 (Exhibit I-2)

Carol Lizotte (line 29): $5,000 (Exhibit I-2)

Martin Lepage (page 2-V, line 18): $ 800 (Exhibit I-2)

Sales of inventory vehicles arising from trade-ins with third parties

Purchaser's name/Make of vehicle/Purchase price/Vehicle source

Bruno Rousseau: (1. 16) 1984 Renault: $800: Réal Lévesque (1. 13) Martine Fraser: (1. 21) 1981 Chevrolet: $900: Éliane Banville (1. 28)

Gervais Létourneau: (page 2-V, I. 19) 1982 Pontiac: $800: Martin Lepage (page 2-V, 1. 18)

Sales of vehicles in inventory at December 31, 1990

The appellant also considers as an accommodation sale a transaction involving a 1988 Honda sold to Michel Pouliot (Exhibit 1-2, FT-5028, line 22 and Exhibit A-16, page 2-V, line 22). However, Exhibit 1-2 indicates that this vehicle was part of the appellant’s inventory at December 31, 1990 (see FT-5033, line 3, Exhibit 1-2).

[Translation.]

3.15.4(8) Notional Credits

The appellant further claims that the respondent did not grant it any notional credits [3.15.2] for certain vehicles appearing on lines 1, 6, 16, 17, 29 and 31 of page 1-V of Exhibit A-16 and line 20 of page 2-V of the same exhibit. These claims are without foundation.

Indeed, as to the vehicles appearing on lines 1, 6, 17 and 29, the following should be emphasized:

(a) these vehicles do not appear in the inventory at December 31, 1990 (Exhibit 1-2, FT-5033);

(b) no purchase invoice or other supporting documentation was filed by the appellant, either with the Court or at the time of the audit;

(c) the audit revealed problems relating to the identification of a number of vehicles accepted as trade-ins (Exhibit 1-3, FT-5000=1 to FT-5000=4), but for which notional credits were nevertheless allowed.

As regards the vehicles appearing on lines 16 and 31, the auditor did allow the appellant the notional credits in question. As for line 16, which concerns Bruno Rousseau, we refer the Court to Exhibit I-3, FT-5001=2 where a notional credit of $1,000 was allowed on the trade-in with Réal Lévesque on April 25, 1991. As to line 31 concerning Yvon Potvin, a notional credit of $9,000 was granted on the trade-in with Claire Pelletier on August 5, 1991 (Exhibit 1-3, FT-5001=3).

The calculation of these notional credits appears in Exhibit 1-6, FT-6001=2, in the column entitled “ITC Allowable on Trade-Ins”.

With respect to the vehicle appearing on line 20, we refer the Court to Exhibit I-3, FT-5001=4, in the column entitled “Amount Including GST, Sales Agreement” and the remark “Accommodation”. The appellant was entitled to no notional credit since the sale was in fact an accommodation sale which the auditor considered as such.

[Translation.]

3.15.4(9)

SAAQ

With respect to exhibits I-9 and I-10, that is, the computer files of the Société d’Assurance Automobile du Québec concerning the transfers of ownership of various motor vehicles, the appellant argues that this was simply “an administrative procedure of the SAAQ” [3.15.3]. However, these documents speak for themselves and indicate that the appellant became the registered owner of each and every vehicle appearing in these files. For example, we note that a 1984 Renault belonging to Réal Lévesque was conveyed to the appellant on May 3, 1991; the appellant remained its owner until the 24th of the same month, then sold it to Bruno Rousseau on that date. Exhibit I-10 also indicates that, on April 3, 1990, Bertrand Couture conveyed a 1986 Mazda to the appellant; the appellant remained the owner of this vehicle until April 12, when it sold it to Yves Rousseau. In closing, let us also keep in mind that, on January 7, 1992, the appellant purchased a 1986 Hyundai from Denis Rousseau and that it remained its owner until February 21 following, when it sold that vehicle to Louise Morissette.

Lastly, as regards the appellant’s claims respecting the notional credit of $71.18, the respondent answers as follows. On line 13 of Exhibit A-16, one notes that the selling price of the vehicle that Réal Lévesque purchased is $2,800, not $1,926. Furthermore, a notional credit of $1,000 was allowed on the vehicle given as a trade-in in this transaction (Exhibit 1-3, FT-5001=2).

[Translation.]

3.16 Comparison with Bank Deposits

On this subject, the appellant stated the following facts:

It is very important that this section be kept in mind because it shows this honourable Court the greatest error committed by the auditor which contributed to the issuance of an assessment higher than it should have been. The total of the bank deposits made during the period concerned is $333,940.28, and the parties are in agreement on this amount. Moreover, the appellant filed the original bank statements accompanied by the deposit slips.

[Translation.]

3.16.1

The total of the other, non-taxable deposits which appear on the auditor’s work sheets 5002=1, 5002=2 and 5002=3, which were filed in evidence by the respondent, is $71,304.80. However, to this amount should have been added the sum of $2,500.00 entered on work sheet 5002=2 dated 01/10/1991 in the “cash deposit” column and another sum of $2,000.00 entered in the same column on work sheet 5002=3 dated 24/12/1991. The copies of the deposit slips for these amounts were filed in evidence by the appellant because they concerned transfers made by the owner. Thus, an amount of tax of $315.00 was computed on this amount by the auditor. We shall therefore retain this amount because it will serve our purposes below.

[Translation.]

3.16.2

The total of column E “Deposits Received in Respect of Agreements Traced” on work sheets 5002=1, 5002=2 and 5002=3 filed by the respondent is $187,903.02, and it is here that one begins to understand the error committed by the auditor. He in fact made the following calculation:

Total bank deposits: $333,940.28

Less other, non-taxable deposits, para. 1: $ 71,304.80

Less traced amounts under the agreements, para. 2: $187,903.02

Taxable difference for GST purposes: $ 74,732.46

However, to the following question put to the auditor during his testimony by the appellant’s agent, “What is the final amount that was used in computing the GST payable by the appellant?”, the auditor, after consulting his work, answered as follows, “$359,236.82, that is, $284,504.36 from the sales agreements and $74,732.46 from the untraced amounts in the bank deposits”. Consequently, the calculation is as follows:

Sales agreements $284,504.36 X 7/107 =: $18,612.43

Taxable difference $ 74,732.46 X 7/107 =: $ 4,889.04

Total GST collected: $23,501.47

Less ITCs (registrant’s inputs): $18,551.09

Total GST payable by registrant: $ 4,950.38

Plus refund received by registrant: $ 6,088.29

Less payments made by registrant: $ 866.42

Auditor’s total assessment: $10,172.25

The appellant filed in evidence the cheque stubs that it [the registrant] received in payment of the amount of $6,088.29 as well as the return forms for the amount of $866.42, and the respondent herself moreover recognized it in the two work sheets that she filed bearing the following titles:

Calculation of tax payable ITC reconciliation summaries F/T 6000

[Translation.]

3.16.3

The appellant respectfully submits to this Court the following facts which were neglected in the making of the above assessment.

An amount of Quebec sales tax was not subtracted in the calculation of the taxable difference based on the bank deposits. This amount is $16,335.56, as shown on page 2-V, column 4 of Exhibit A-16 filed by the appellant and supported by the original agreements also filed by the appellant.

Again, in establishing the taxable difference for GST purposes, the calculation at the start of paragraph 2 above, the auditor took into account only the amount that he was able to reconcile with the sales agreements, that is, $187,903.02. There therefore remained in his work a number of agreements with which he was unable to associate payment, and there remained cash amounts and cheques that he was unable to associate with specific agreements, which does not necessarily mean that they are not paid. Indeed, the original agreements filed by the appellant are all indicated as having been paid and the financial statements also filed by the appellant show no receivable different from the previous fiscal year. I respectfully submit that the contrary was not proven. Thus, the difference between $284,504.36 and $187,903.02, that is, $96,601.34, was taxed twice since the total agreements were already taxed. It is precisely this point that the appellant’s agent tried to make the auditor understand and alleged in his notices of appeal and objection, though with no success.

We submit to you that the appellant agrees to pay what it owes, no more and no less, and that the respondent’s purpose is to claim only what is owed her, no more.

[Translation.]

3.16.4 To these facts submitted by the appellant, the respondent answered as follows:

3.16.4(1)

Comparison with Bank Deposits

On page 5 of its written argument, the appellant argues that a QST amount of $16,335.56 was not subtracted in computing the taxable difference on the basis of the bank deposits. This claim is utterly false because the auditor did not consider the sales agreements in the deposits. Effectively, he subtracted the total amount of the traced sales agreements from the deposits. Moreover, in paragraph 2 of page 4 of its argument, the appellant admits this fact when it refers to the auditor’s calculation of the taxable difference for GST purposes as follows:

Total bank deposits: $333,940.28

Less other, non-taxable deposits, para. 1: $ 71,304.80

Less traced amounts under agreements, para. 2: $187, 903.02

Taxable difference for GST purposes: $ 74,732.46

[Translation.]

3.16.4(2)

Furthermore, the appellant argues that an amount of $96,601.34 was doubly taxed [3.16.3]. The respondent responds to this argument as follows. In automobile sales, trade-in vehicles constitute partial consideration for the selling price. Consequently, the total amount of the trade-in vehicles, that is, $54,600, must be added to the deposit amounts traced at the time of the audit relating to the automobile sales agreements.

[Translation.]

3.16.4(3)

In this case, the deposits concerning the automobiles sales agreements amount to $187,903.02 (Exhibit I-3, FT-5002=1 to FT-5002=3). The total value of the trade-in automobiles amounts to $54,600 (Exhibit I-2, FT-5027 and FT-5028, column “Trade-ins”). The total of these amounts is $242,503.02. This being the case, the difference concerned amounts to $42,001.34 ($284,504.36 - $242,503.02), not $96,601.34.

However, Dieudonné Rousseau’s cross- examination shows that he received payments in cash. In addition, the Minister rightly took into account deposits unrelated to the vehicle sales agreements, that is:

- repairs made for insurance companies;

- unexplained deposits;

- other cheques received from customers for various goods and services (transportation, repairs, parts);

- cash received and unrelated to the purchase of vehicles.

On this point, we refer the Court to deposit slips I-5 bearing the following dates:

[Completed by the Court.]

- July 31, 1991: (FT-5009=5): $1,415.76

- November 15, 1991: (FT-5013=3): $3,000.00

-January 15, 1991: (FT-5003=4): $3,600.00

- February 12, 1991: (FT-5004=5): $ 268.65

- January 22, 1991: (FT-5003=5): $1,500.00

- March 15, 1991: (FT-5005=5): $ 608.00

- May 22, 1991: (FT-5007=5): $2,297.97

- April 3, 1991: (FT-5006=5): $1,999.52

- May 21, 1991: (FT-5007=4): $4,999.99

Furthermore, the statements of revenue and expenditure made by Donald DeschEnes, C.G.A. (Exhibit I-5, FT-5003=1 and FT-5009=1) show that the appellant’s commercial activities included parts sales, repairs, transportation and automobile sales.

The appellant also claims that amounts of $2,500 and $2,000 constituted non-taxable deposits. These amounts appear in the deposit slips filed jointly as Exhibit A-22. The slip dated October 3, 1991 shows a deposit of two $1,000 bills totalling $2,000. The slip dated October 4 of the same year indicates a deposit of 125 $20 bills totalling $2,500. At no time, however, either at the hearing or during the audit, did the appellant file any supporting documentation whatsoever respecting the source of these funds.

[Translation.]

3.17 Initial Assessment

To summarize its position, the appellant suggested that the initial assessment should have been as follows:

3.17.1

Thus, without taking into account the minor errors that we have emphasized throughout the presentation, we submit to you below the assessment as it should originally have been calculated.

Total bank deposits: $333,940.28

Less other, non-taxable deposits: $ 71,304.80

Less taxed sales agreements: $284,504.36

Less QST not included in agreements:$ 16,335.56

Plus trade-ins on agreements: $ 54,600.00

Taxable difference for GST purposes: $ 16,395.56

ASSESSMENT

Sales agreements $284,504.36 X 7/107 =: $ 18,612.43

Taxable difference $ 16,395.56 X 7/107 =: $ 1,072.60

Total GST collected: $ 19,685.03

Less ITC (input credits): $ 18,551.09

Total GST payable: $ 1,133.94

Plus refund received by registrant: $ 6,088.29

Less payments made by registrant: $ 866.42

Assessment to be issued by auditor: $ 6,355.81

Consequently, based on the evidence filed and without taking into account any correction of the errors that have occurred, we respectfully submit to you that the said assessment should have been in an amount of no more than $6,355.81.

[Translation.]

3.17.2

However, to be fair and supposing that you would support the respondent’s allegations with respect to the so-called accommodation agreements, the errors mentioned throughout this presentation, evidence of which has been put before you and appears in bold letters, must be corrected in this assessment.

Thus, we shall now make the same assessment below, but this time correcting the said errors.

Sales Agreements

The amount of $284,504.36, which was taken into account in making the assessment, should be reduced by the amount of the elements mentioned in paragraphs 1 to 6 of the section “A-SALES AGREEMENTS”, that is, $3,430.85 indicated in bold letters in the last paragraph of the section in question.

$284,504.36 - $3,430.85 = $281,073.51 (A)

ITC (Input Tax Credits)

We have mentioned, and on this the parties, according to the testimony, are in agreement, that a difference of $994.73 arising from the credit allowed for the inventory at December 31, 1990, separated them.

Thus, $19,545.82 (A-16) less $18,551.09 $994.73.

The appellant has filed evidence of this inventory for an amount of $53,725.00.

Consequently, $53,725.00 X 50% X 7/107 $1,757.36.

Thus, there is a difference between this amount and the amount allowed by the auditor ($31,060.00 X 50% X 7/107 = $1,015.98) of $741.38 (Bl).

If the amount of the inputs allowed by the auditor, $18,551.09, is corrected for the amounts for which evidence has been filed with you, we obtain the following amount:

Amount of inputs allowed: $18,551.09

Plus inventory correction (Amount Bl): $ 741.38

Plus amount (para. 1, section B) on the first accommodation sales vehicles: $ 2,404.20

Plus amount (para. 3, section B) for incorrect trade-in entries: $ 71.18

Total correct ITCs according to evidence (B): $21,767.85

[Translation.]

3.17.3

The appellant would have this honourable Court note that the total of the inputs is higher than that which it claimed in its working paper. This is due to the fact that, in the working paper, we considered the agreements in issue as accommodation agreements. So, our taxable amount on the cars is much lower, that is, $215,633.26 and that, in order to be logical, we took no tax credits on any of the vehicles involved in these transactions, as you can see at pages 1-V and 2-V of Exhibit A-16. The final result of the following calculation will be approximately the same as that on page 8-R of the same exhibit filed in evidence.

Other, Non-Taxable Deposits

The amount of the other, non-taxable deposits considered by the auditor is $71,304.80. However, this amount must be corrected to reflect those of section C “COMPARISON WITH DEPOSITS”, paragraph 1, indicated in bold letters and for which the exhibits were filed with the Court by the appellant. So, the corrected amount is as follows:

Amount of other deposits: $71,304.80

Plus correction for owner’s deposits: $ 4,500.00

Total of other, non-taxable deposits (C): $75,804.80

[Translation.]

3.17.4

ASSESSMENT

We are now able to make the true assessment as it should initially have been made and for which all the evidence has been filed.

Total bank deposits: $333,940.28

Less other, non-taxable

deposits (amount C): $ 75,804.80

Less sales agreements (amount A): $281,073.51

Less QST not included in agreements: $ 16,335.56

Plus trade-ins on agreements

(no cash outflow): $ 54,600.00

Taxable difference for GST purposes: $ 15,326.41

Final Assessment

Sales agreements $281,073.51 X 7/107 =: $ 18,387.99

Taxable difference $ 15,326.41 X 7/107 =: $ 1,002.66

Total GST collected: $ 19,390.65

Less ITC (amount B): $ 21,767.85

Plus refund received by registrant: $ 6,088.29

Less amounts paid by registrant: $ 866.42

Assessment to be issued: $ 2,844.67

We submit to you that this amount is very close to that on page 8-R of Exhibit A-16 filed by the appellant, that is, an amount of $2,733.99, which is explained by the difference in the amount of the inventory at December 31, 1990 for which we were unable to provide you with supporting documentation. We note a reduction in the issued assessment of $7,237.58.

Before closing by proving the opposite, that is, explaining the difference of $7,237.58, with the aid of two simplified examples, we shall demonstrate how the two major errors that resulted in an assessment that was too high occurred, that is, the reconciliation of the bank deposits and the accommodation agreements.

EXAMPLE

The bank deposits for the period amount to $120,000.00. Sales of $100,000.00 before trade-ins. Trade-ins of $15,000.00. GST charged of $7,000.00. QST charged of $8,000.00. The amount of the deposits that it was possible to associate with the agreements was $60,000.00.

So, the total of the amounts that the business deposited to its account from sales is $100,000.00, that is, sales of $100,000.00 less $15,000.00 in trade-ins, since it charges only the difference, plus GST of $7,000.00, plus QST of $8,000.00. The respondent’s auditor thus made the following calculation:

Total bank deposits: $120,000.00

Less traced amounts on slips: $ 60,000.00

Less trade-in amounts: $ 15,000.00

Taxable difference for GST purposes: $ 45,000.00

GST payable

Agreements including GST $107,000.00 X 7/107: $7,000.00 Taxable difference $ 45,000.00 X 7/107: $2,944.00

GST payable: $9,944.00

However, we know that the GST charged on the agreements is $7,000.00 and that the other taxable sales amount to $20,000.00, tax included. Therefore, $20,000.00 X 7/107 = $1,308.00, for total tax of $8,308.00. How then to explain the difference of $1,636.00?

It may be explained by the fact that the QST was neglected in the calculation as well as the difference between ($107,000.00 - $15,000.00) and $75,000.00, including the trade-ins, that is, an amount of $17,000.00 which was nevertheless deposited in the bank, no matter whether it could be reconciled or not.

Therefore, $25,000.00 X 7/107 $1,636.00.

Consequently, one had to take the total of the agreements, $107,000.00, plus QST of $8,000.00 and subtract the amount of the trade-ins, that is, $15,000.00 because we did not collect money in respect of the trade-ins, for a total amount received of $100,000.00 to be subtracted from the deposits, which leaves a taxable balance of $20,000.00, GST included, not $45,000.00.

[Translation.]

3.17.5

With respect to the accommodation agreements, we will use the same figure, assuming that only one vehicle was sold. The first vehicle involved in the transaction was that sold for $100,000.00 which did not belong to the third party that conducted the transaction. If we consider that the agreement was not an accommodation agreement, that is assuming that the third party purchased the vehicle and was thus entitled to claim the notional credit under section 176 of the Excise Tax Act (thus, $100,000.00 X 7/107 $6,542.05).

Therefore, $107,000.00 X 7/107 $7,000.00 in tax collected. Less $15,000.00 X 7/107 $981.30 of ITC for the trade-in. Less $100,000.00 X 7/107 $6,542.05 ITC on the vehicle purchased.

GST claimable ($523.35)

However, if we consider that this sale was made under an accommodation agreement, no amount is taxable and no credit can be claimed. We therefore consider that the respondent helped us to establish our evidence by filing the SAAQ records, because all the vehicles were registered in the appellant’s name during the period concerned and no credit was allowed in respect of them on the purchase or sales slips or in the inventory to December 31, 1990.

Before closing, we shall briefly proceed with the converse of our evidence, that is, to explain the difference between the assessment issued and that calculated in the amount of $7,237.58 cited above.

Correction of sales agreements: $ 3,430.85 X 7/107: $224.45

Diff. between deposits and sales: $38,570.49 X 7/107: $2,523.30 QST not considered: $16,335.56 X 7/107: $1,068.68

Cash deposits not considered: $ 4,500.00 X 7/107: $ 294.39

Difference inventory: 31/12/90 $22,665.00 X 3.27%: $ 741.38 Correction in respect of a trade-in: $ 1,088.08 X 7/107: $71.18 First vehicle accom. agreement: $36,750.00 X 7/107: $ 2,404.20

Total: $ 7,237.58

We emphasize that all these amounts are supported by evidence filed by the appellant at the hearing and well analyzed and explained in the preceding pages.

As a result of the foregoing, we submit to this honourable Court that the appellant has quite successfully discharged its burden of proof and shown beyond any doubt that the assessment issued was much too high. So, the appellant has clearly proven that it was right to deny paragraphs 3(c), 3(f), 3(g), 3(h), 3(j) and 3(k) of the Reply to the Notice of Appeal filed by the respondent.

While admitting at the outset that there was a deficiency in its bookkeeping, the appellant contends that this is not sufficient ground to over-estimate and maintain an assessment despite the points submitted to the respondent, and it is so that justice would be done that the parties have appeared before this honourable Court.

[Translation.]

3.17.6 In response to the above assessment, the respondent submitted the following considerations:

3.17.6(1)

(a) The figures advanced by the appellant for the purposes of making “its assessment” are incorrect.

It has already been mentioned that the audit method used proceeded in two stages with respect to sales: (1) there has been a compilation of the automobile sales agreements on which the GST was calculated and (2) from the total of the deposits noted, the auditor subtracted the following elements:

(a) all deposits relating to automobile sales; (b) all deposits relating to the expropriation, tax refunds, payments to the CSST and the Société d’Assurance Automobile du Québec (SAAQ);

(c) all the capital outlays made by Immeuble DDR Inc. and by

Dieudonné Rousseau backed up by supporting documentation.

(b) This being the case, the amount of $74,732.46 about which the appellant has no records or supporting documentation and which appears on page 4 of the appellant’s argument [3.16.2] represents the total of the sale amounts with respect to:

— automobile repairs for insurance companies;

— parts sales;

— automobile repairs for various customers;

— income from transportation.

(c) The particulars of the deposits for which the appellant provided no supporting documentation appears in Exhibit 1-3 on work sheets FT-5002=1 to FT-5002=4. Column A indicates the cash deposited in the company’s account for which no supporting documentation exists; column B concerns cheques received from customers which were not related to vehicle purchases. As to column C, it indicates the cheques received from insurance companies.

As emphasized above, these various revenues were moreover accounted for in the monthly statements of revenue and expenditure prepared by Donald Deschenes, C.G.A. (Exhibit I-5, FT-5009=1).

(d) Consequently, the amount of $16,335.56 in respect of QST was not taken into consideration by the auditor in analyzing the deposits. Furthermore, in light of the figures advanced by the appellant, the appellant does not admit any supply of parts or transportation apart from automobile sales, whereas Exhibit I-5 proves quite the contrary:

— monthly statement of income for July 1991 (FT-55009=l);

— deposit slips mentioning automobile repairs, revenue from transportation and so on.

(e) With respect to the ITCs, the auditor considered an amount of $35,010 in respect of the refund of the federal sales tax on the used vehicle inventory to December 31, 1990 (Exhibit I-2, FT-5033). This amount was calculated on the basis of supporting documentation provided and of the rule stated in paragraph 120(3)(b) of the Act, which provides that the Minister shall value the goods at the lesser of their cost or their fair market value.

In this case, at page 7-I of Exhibit A-16, the appellant claims a refund in respect of four vehicles for which no supporting documentation was provided, that is:

— 1989 Honda: $100

— 1986 Honda: $100

— 1984 Suzuki: $100

- boat and trailer: $1,850.

The appellant further claims a refund in respect of two vehicles that do not appear in the 1992 inventory (Exhibit 1-1 signed by Dieudonné Rousseau) and that were not sold (Exhibit A-16, pages 1-V and 2-V), that is:

— a hydraulic truck box: $12,225

—a 1989 Cadillac: $6,250

(Exhibit A-16, page 7-1)

(f) The balance of the difference between the parties results from the application of paragraph 120(3)(b) of the Act in that the Minister adopted the lesser of the cost of the goods and their fair market value as a valuation (Exhibit 1-2, FT-5033). The Minister moreover had no other choice in this case because the value of certain assets was clearly “inflated”. Let us consider, for example, the sale of a 1988 Honda to Michel Pouliot on October 23, 1991 for $9,000. The vehicle was valued at $16,900 in the inventory of December 31, 1990 (Exhibit 1-2, FT-5033 and FT-5028).

(g) Lastly, to resolve the question of the ITCs, it is not unhelpful to note that the appellant claimed only an amount of $16,927.70, but that the Minister allowed it an amount of $18,551.09 (after the addition of an amount of $556.07 by the Objections Directorate).

(h) As to the example that the appellant cited in its attempt to explain the difference between “its assessment” and that of the Minister, it appears that it is fallacious in that:

(a) it does not take into account the trade-ins for the purposes of computing total sales;

(b) only a portion of the amounts resulting from the automobile sales was deposited in the appellant’s bank account.

The appellant furthermore recognizes at page 8 of its argument that it had income from various sales, an important fact that it fails to deal with on pages 1 to 7 inclusive of its argument.

[Translation.]

4. ACT- CASE LAW-ANALYSIS

4.01 The Act

The provisions of the Excise Tax Act involved in the instant case are sections 165, 169, 221, 225, 228, 286 and 123 (definitions of “supply” and “taxable supply”). They read as follows:

165. Imposition of tax (1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada a tax in respect of the supply equal to 7% of the value of the consideration for the supply.

169. General rule (1) Subject to this Part, where property or a service is acquired or imported by a registrant for consumption, use or supply exclusively in the course of commercial activities of the registrant, the input tax credit of the registrant in respect of the property or service for a reporting period of the registrant is the amount of any tax that became payable or, if it had not become payable, was paid by the registrant in that period in respect of the acquisition or importation by the registrant of the property or service.

221. Collection of tax (1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.

225. Net tax (1) Subject to this Subdivision, the net tax for a particular reporting period of a registrant is the positive or negative amount determined by the formula

A-B

where

A is the total of

(a) all amounts that became collectible and all other amounts collected by the registrant in the particular reporting period as or on account of tax under Division II, and

(b) all amounts that are required under this Part to be added in determining

the net tax of the registrant for the particular reporting period; and

B is the total of

(a) all amounts each of which is an input tax credit for the particular reporting period or a preceding reporting period of the registrant claimed by the registrant in the return under this Division filed by the registrant for the particular reporting period, and

(b) all amounts each of which is an amount that may be deducted by the registrant under this Part in determining the net tax of the registrant for the particular reporting period and that is claimed by the registrant in the return under this Division filed by the registrant for the particular reporting period.

228. Calculation of net tax (1) Every registrant who is required to file a return under this Division shall in the return calculate the net tax of the registrant for the reporting period for which the return is required to be filed.

(2) Remittance. Where the net tax for a reporting period of a registrant is a positive amount, the registrant shall remit that amount to the Receiver General on or before the day on or before which the return for that period is required to be filed.

(3) Net tax refund. Where the net tax for a reporting period of a registrant is a negative amount, the registrant may claim in the return for that reporting period that amount as a net tax refund for the period, payable to the registrant by the Minister.

286. Keeping books and records (1) Every person who carries on a business or is engaged in a commercial activity in Canada, every person who is required under this Part to file a return and every person who makes an application for a rebate or refund shall keep records in English or in French in Canada, or at such other place and on such terms and conditions as the Minister may specify in writing, in such form and containing such information as will enable the determination of the person’s liabilities and obligations under this Part or the amount of any rebate or refund to which the person is entitled.

123. Definitions (1)

“supply” means, subject to sections 133 and 134, the provision of property Or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

“taxable supply” means a supply that is made in the course of a commercial activity, but does not include an exempt supply;

4.02 Case Law

The following cases were cited by the parties:

(1) F.W. Woolworth Co., Re, (sub nom. F.W. Woolworth Co. v. R.), (sub nom. F.W. Woolworth Co. Ltd. v. The Queen) [1957] S.C.R. 738, 10 D.L.R. (2d) 225;

(2) Baie-Jolie Auto Inc. v. Quebec (Sous-ministre du Revenu), [1992] R.D.F.Q. 280(D) (C.Q.)

4.03 Analysis

4.03.1 The Court shares the view of counsel for the respondent that the real angle from which this case must be addressed is that of a mandatary with respect to his mandator. This is not an ordinary proceeding under the Income Tax Act.

According to subsection 221(1) of the Act, the appellant is the respondent’s agent responsible for collecting the GST payable by the recipient in respect of a taxable supply under the terms of subsection 165(1). The words “supply” and “taxable supply” are defined in section 123 of the Act. The expression “taxable supply” means “a supply that is made in the course of a commercial activity”, but does not include an exempt supply; the term “supply” means “the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition”. Under subsection 228(2), the appellant, in its capacity as a registrant, must remit to the respondent the positive amount of its net tax on or before the day on or before which it is required to file its return under sections 238 and 245 of the Act.

Furthermore, section 286 of the Act required the appellant to keep complete records to enable the determination of its liabilities and obligations under the terms of the Act.

The appellant was thus subject to the obligations incumbent upon a mandatary with respect to its mandator. In F.W. Woolworth Co. (4.02(1.)), the Supreme Court of Canada had to rule on the obligations of an agent of the respondent that had failed to discharge its obligation. Rand J. wrote as follows at page 743:

What is confused is the nature of the claim: it is taken to be an action for taxes. But it is not such an action at all: in substance, it is the simple claim by a principal against his agent for money had and received by the latter, nothing more; and it is agreed that the taxes were properly collected. In determining the amount we are at large with the statute and the long-established principles governing an agent's obligation to account.

It should be emphasized that the statute creates two distinct liabilities: that of the purchaser of goods to pay the tax, and that of the seller to collect and remit.

[Emphasis added.]

As to the appellant’s obligations in respect of its accounting books and records, Rand J. continued in the following terms at pages 743 in fine and 744:

As can be seen from the facts of this dispute, the determination of the amount after some time has elapsed from the collection will necessarily depend upon the seller's records: and if these are such as do not furnish all the essential evidence there must necessarily be something less than mathematical correctness. Here is a good example of a business, in its own interests, adopting a mode of recording transactions which prevents a strictly accurate check and which puts the Government at the risk of the performance of duty by clerks.

It is unnecessary to point out that the seller is in possession of all the available facts, that they are his facts, and that if they can be used to falsify the estimate he is the person possessing the best, if not the only, means of doing it.

[Emphasis added. ]

4.03.2 Furthermore, articles 1709, 1710 and 1713 of the Civil Code of Lower Canada provide:

Art. 1709. The mandatary is obliged to execute the mandate which he has accepted, and he is liable for damages resulting from his non-execution of it while his authority continues.

He is obliged, after the extinction of the mandate, to do whatever is a necessary consequence of acts done before, and if the extinction be by the death of the mandator, he is obliged to complete business which is urgent and cannot be delayed without risk of loss or injury.

Art. 1710. The mandatary is bound to exercise, in the execution of the mandate, reasonable skill and all the care of a prudent administrator.

Nevertheless, if the mandate be gratuitous, the court may moderate the rigor of the liability arising from his negligence or fault, according to the circumstances.

Art. 1713. The mandatary is bound to render an account of his administration, and to deliver and pay over all that he has received under the authority of the mandate, even if it were not due; subject nevertheless to his right to deduct therefrom the amount of his disbursements and charges in the execution of the mandate.

If he have received a determinate thing he is entitled to retain it until such disbursements and charges are paid.

In the instant case, the appellant failed to keep accounting books and records enabling the respondent to verify each and every supply and purchase made during the period in issue. Having appealed from the assessment issued, the appellant, in its capacity as a mandatary, had the burden of establishing on the basis of supporting documentation that it had collected the GST payable and that it had faithfully remitted it to the respondent, which it did not do.

Baie-Jolie Auto Inc. (4.02(2.)) concerned, as in the instant case, a corporation that operated an automobile sales and repair business. Like the appellant in the instant case, that corporation had failed to keep proper records and supporting documentation for the purposes of fully reporting on its management in respect of the sales tax which it had to collect and remit. At page 7 of the judgment, the Court wrote:

However, the status of merchant is very clear in law: with its licence, it assumes the obligation, as a mandatary of the Ministry of Revenue, to collect all the sales tax on the sales of automotive parts and has the obligation to remit all the sums collected to the Ministry.

This is not a vague or approximate obligation since the mandatary is required to collect and remit all of the tax. This is the reason for which the law formally requires that the mandatary have an accounting system that provides a clear and distinct accounting with clear and distinct supporting documentation.

[Emphasis added; translation. ]

4.03.3 In this case, not only did the appellant keep no books or records making it possible to establish accurately all the supplies made and its purchases, but it also put before the Court an argument based on a litany of figures that had no foundation whatever. Just consider, for example, the following facts:

1. Inventory to July 31, 1992 In its financial statements for the fiscal year ended on July 31, 1992 (Exhibit A-26), the appellant reported inventory of $151,318 (page 4).

However, according to the inventory report to July 31, 1992 signed by Dieudonné Rousseau himself (Exhibit I-1 ), the inventory amounts to $118,405. There is a difference of $33,000.

2. Input Tax Credit (ITC) According to the evidence in the record, the appellant claimed only $16,927.70 in ITC. The auditor of record allowed $17,995.03 in ITC (3.06).

In its written argument, the appellant now claims $21,767.85 in ITC. [This amount of $21,767.85 is explained by the appellant in paragraphs 3.15.2 (e) and 3.17.2. The difference of $3,772.82 ($21,767.85 - $17,995.03) was rebutted in substance by the respondent in paragraphs 3.17.6(l)(e) and 3.15.4(1), (2) and (8).]

3. 1990 Inventory In the book of account that Richard Yves Chasse provided to the auditor, and that was filed as Exhibit I-2, the appellant reports inventory of $98,350 to December 31, 1990. However, the appellant provided invoices for an amount of only $31,060.

4. Income from Various Sources The applicant made many supplies with respect to automotive repairs for insurance companies. Consider, for example, the following: Exhibit 1-5, work sheets (a) FT-5006=5, deposit slip dated April 3, 1991 in the amount of $1,999.52 indicating repairs for “Guardian Canada”,

(b) FT-5007=4, deposit slip dated May 21, 1991 in the amount of $4,999.99 indicating repairs for “Guardian Canada”, (c) FT-5007=5, deposit slip dated May 22, 1991 in the amount of $2,297.97 indicating repairs for “Société Mutuelle d’Assurance generale de 1’Est”, (d) FT-5012=4, deposit slip dated October 9, 1991 in the amount of $2,613.88 indicating repairs for “La Capitale” and (e) FT-5012=5, deposit slip dated October 25, 1991 in the amount of $1,918.80 indicating repairs for “Guardian Canada”.

(f) The deposit slips also indicate that the appellant made transportation supplies. Thus, Exhibit 1-5, FT-5003=5, indicates that the appellant received a payment of $437.63 in respect of such supply from “Pintendre Automobile”.

(g) In column 1, page 8-R of Exhibit A-16, the appellant argues that the “other taxable sales” are in the order of $18,106.37, tax included. This sum apparently represents the amounts received from the insurance companies for automobile repairs. However, the auditor traced deposits totalling $27,998.46 from the insurance companies. On what basis can the appellant claim that the difference between these amounts does not represent taxable supplies of repairs? Where are the supporting documentation to back up such an argument?

5. Supplies Paid in Cash In cross-examination, Dieudonné Rousseau expressly admitted that the appellant was often paid in cash for the supplies that it made. Where are the records accurately establishing the amounts received by the appellant in cash? The appellant was not even in a position to provide the Court with any order of magnitude whatsoever respecting this income, which appears nowhere in its books and records.

6. Refunds Claimed vs. GST Remitted The appellant’s statements of quarterly returns for the period in issue, which were filed with the Court prior to the hearing in accordance with subsection 308(2) of the Act, indicate the following: 1997-02-13

Penod	Tax	[TC	Refund	Tax	Tax
	collected
OIADIAI to		468.71	468.71
311A
012291 to	1.524.90	3,007 12	1,482.22
010591 wo	2,940.00	2,405.64		534.36
31079!
01/0891	2,355.50	2.21*73		138.77
31/10/91

•VII/91	19500	5249.63	3,854.63
JI® 1/92
•JXO9210	1,322.55	1,605.28	282.73
OIAK/92 to	2,167.95	1,974.66			19329
3140792
			6.01129	673.13	12

As it may be seen, there is no possible comparison between the refunds that the Minister allowed the appellant and the tax that the latter collected and remitted for its own account. Furthermore, in expressly admitting in its written argument that the assessment is at least founded in part, the appellant thereby admits that its tax remittances were distinctly less than what they should have been.

7. Record I-2 vs. Record A-16 Record I-2 was handed over to the auditor after he issued his draft assessment, at a time when there was no dispute between the appellant and the respondent. This record indicates in profuse detail the vehicles that the appellant received as trade-ins at the time of the automobile sales. This document consequently has very great probative value.

Record A-16, on the other hand, is a document that was prepared exclusively for the purpose of the hearing for this Court. Consequently, it radically alters the accounting information appearing in Exhibit 1-2.

8. GST/QST Comparative Analysis We submit to the Court that the principal exhibit that establishes beyond any doubt that the argument put forward by the appellant is without foundation is Exhibit I-7. This comparative study reveals that the appellant remitted QST of $21,587.55 to the respondent for the period in issue. However, such an amount of tax requires taxable sales totalling $269,844.38 (page 2). Indeed, the appropriate exercise is relatively simple: one divides the amount of tax remitted, that is, $21,587.55 by the tax rate ($21,587.55 divided by 0.08).

In its record A-16 (page 8-R, column 1), the appellant claims that it had to pay GST of only $16,191.52. If we perform the above exercise again, we arrive at sales of only $231,307 ($16,191.52 divided by 0.07).

It may therefore be seen that the appellant’s claims are not even consistent with its remittances of the Quebec sales tax, which make it possible to establish accurately the amount of its taxable sales. Indeed, will the appellant claim that it remitted more QST than it in fact collected? We repeat, $21,587.55 $ of QST requires transactions amounting to $269,844.38. But there is more: under the Retail Sales Tax Act (R.S.Q., c. I-1), which was in effect during this period, only the sale of movable property was taxable. Section 6 of that act read as follows:

Every purchaser, at the time of making a purchase at a retail sale in Québec, shall pay a tax equal to 8% of the purchase price of any movable property; in the case of a lease, the tax is payable at the time prescribed by regulation.

According to section 2 of this Act, the term “movable property” meant all property which is not considered immovable by the laws of Québec, and included gas, electricity, telephone service, and lighting service.

This being the case, if the appellant had taxable sales of $269,844.38 in respect of the sale of movable property only, that amount necessarily had to be much greater with respect to the GST since the Excise Tax Act also taxes the supply of services. One therefore realizes that the amount of $269,844.38 is a figure less than the actual figure. It therefore can only be concluded that the vehicle sales, established by the auditor at $284,504.36, are in every respect consistent with the actual situation since, in addition, the QST, unlike the GST, was chargeable only on the balance of the selling price after the trade-in, vide infra.

4.03.4 It is the Court’s view that the reasons given by the respondent and the assessment issued on February 25, 1994 should be confirmed.

The absence of a proper accounting system is the main reason why the mandatary did not adequately discharge his obligations with respect to the mandator.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.