Lionel Goulard v. Minister of National Revenue, 79 DTC 893, [1979] CTC 3114

The Chairman:—This is the appeal of Lionel Goulard from tax reassessments in respect of the 1974 and 1975 taxation years. The appellant was first assessed on December 24, 1976. Consequently, upon his notice of objection, the appellant was reassessed on August 10, 1977, which resulted in certain adjustments in favour of the appellant being made and penalties, which had previously been imposed, being withdrawn.

Issue

The issue stems from the manner in which the sale of bakery products was computed and reported by the appellant, as compared to the figures found as a result of an audit made on a net worth basis and used by the Minister in the assessment.

Submissions

The respondent’s submissions, as found in paragraphs 8, 9 and 10 of his reply, read as follows:

8. He submits that the appellant had a net income in 1974 from his business in the amount of $5,256.23 and a taxable income in that year in the amount of $4,667.96.

9. He submits that the appellant had a net income in 1975 from his business in the amount of $6,077.14 and a taxable income in that year in the amount of $3,905.56.

10. He submits that as a result of the reassessment of net income for 1974 and 1975, the appellant is liable for the payment for 1974 in the amount of $110.40 and liable for the payment for 1975 in the amount of $193.58 for contribution on self- employed earnings under the Canada Pension Plan.

The appellant contends that the respondent’s figures which were taken from both the appellant’s records and from the records of the bakery from whom the appellant purchased his products, as well as the respondent’s estimated sales, are erroneous and states that he made no profits whatever in the pertinent taxation years.

Facts

The appellant, a broker or jobber in bakery products, lived in Sturgeon Falls and purchased bakery products as an independent contractor from the Cecutti Bakery located in Sudbury, Ontario. He then sold his products to stores and hotels situated as far as 150 miles from Sudbury and covered some 300 miles daily to service his customers. His products were divided into four categories—white breads; variety breads; buns, rolls and cakes; and pasteries.

The appellant obtained a 36% discount on the purchase of the bread from Cecutti Bakery and allowed an “across the board” discount of 5% to his customers. However, having loaded his truck with bakery products each morning and not being certain of how many sales he would make, the appellant was left, on very many occasions, with unsold products at the end of the day. He would then attempt to sell the remaining goods to customers in large quantities at a varying but high discount, rather than returning home with what he called “leftovers” which were, nevertheless, fresh products. On occasion, he could not sell the “leftovers” and returned home with the products which then became what he termed as “stale” products, for which he received no compensation from the Cecutti Bakery and which he had to give or throw away. It is the appellant’s contention that the auditor, in making up his net worth assessment, included the stale bread, which was a total loss to the appellant, with the leftovers which he sold at a discount, and a distortion in his sales figure resulted.

The auditor also assumed that the appellant received a 50% credit from the bakery for stale products and cited some figures from his working papers which indicated that the appellant had received relatively small amounts for stale products in 1975.

The appellant, however, stated that he received no compensation for any stale products which he originally purchased fresh from the bakery each morning, but that on occasion, when the bakery had a surplus of cakes and pastries, the appellant was asked, in a transaction totally separate from his daily purchases, to sell as many of these products as he could and in these circumstances only was the appellant, according to his testimony, reimbursed for unsold products. The figures cited by the auditor were, according to the appellant, credit for surplus pastries and cakes.

Although the appellant kept records of his purchases and sales which were periodically compiled by his son and which the auditor considered, as well as those of Cecutti Bakery, the appellant’s accounting methods were quite rudimentary. Each day the appellant left home without a penny in his pockets and would “purchase” a truckful of bakery products, the cost of which he knew. After selling all day (all cash sales), the amount of money he had in his pocket on his return less the cost of the products, gave him his gross income which he noted each day and gave to his son for recording.

The auditor’s calculations, taken from the records of both the appellant and bakery, were far more elaborate and professional and, indeed, were fair bases for a net worth assessment.

Considerable evidence, at times most confusing, was given by the appellant as to the markups he used and the discounts he gave some of his clients.

Notwithstanding the rather elementary accounting system used by the appellant, he reported purchases for 1974 of $65,336.51. The auditor, with a more sophisticated approach, determined the purchases at $65,486.65—a difference of $150.14. For the 1975 taxation year, the appellant had reported purchases in the amount of $86,114.67. The auditor determined the purchases as being in the amount of $87,292.19—a difference of $1,177.52. On the basis of the auditor’s assumptions and calculations as to sales, the appellant’s incomes, as determined on a net worth basis, were adjusted upward by an amount of $7,311.15 for the 1974 taxation year, and by $11,296.10 for the 1975 taxation year. These figures were reduced by the Minister’s reassessment of August 10, 1977, resulting in a revised final taxable income of $4,667.96 for 1974, and $3,905.56 for 1975.

Finding of Fact

The question to be decided here is whether or not the figures used by the auditor in his net worth assessment are to be relied upon by the Board.

Mr Miller, the respondent’s auditor, made a thorough and conscientious study of what was a difficult net worth assessment because of changing sale prices in varying circumstances and the irregularity of the volume of daily leftovers and stale products. The appellant, on the other hand, had reported in both taxation years, purchases which, in my view given the circumstances, are close indeed to those determined by the auditor. I believe the appellant to be credible and of good faith in reporting his sales as well as his purchases. The procedure used in a net worth assessment is not, by its very nature, an accurate science nor, in fact, is that its purpose.

I am rather surprised that, at a time when the number of appeals filed is increasing, an appeal such as this should find its way for hearing before the Board.

I agree with counsel for the respondent that the discrepancy of $150 between the appellant’s and the auditor’s computations of the amount of purchases made by the appellant in 1974 might well be due to a mislaid invoice. The difference of a thousand or so dollars in the 1975 purchases, as between the appellant’s purchase figures and those of the net worth assessment for the period of a whole year, appears to me to be, in these circumstances, within a reasonable margin of error that might have been made by either the appellant, the auditor or both.

With reference to the sales, the figure of 545 loaves of bread per week sold as leftovers at a lower price can only be an estimated figure in the assessment, even if the figure was arrived at by making phone calls to some of the retailers. Moreover, the evidence is that the auditor assumed that the “leftovers” and the stale products were the same thing and treated them as such in his assessment. Counsel for the respondent conceded that if indeed the stale products were to be treated differently from the leftovers, then the allowance on the leftovers should then be $4,125, to which should be added the allowance for the stale products.

The auditor made an allowance of 1.5% for stale products rather than the 5% used by the appellant. The auditor gave no evidence as to the basis on which the 1.5% was used or why the 5% would be unreasonable when the appellant claimed it to be the minimum allowance for stale products used by all bakery product jobbers.

Although the Department’s calculations are more in keeping with accepted accounting principles than those of the appellant, I cannot, on the basis of the evidence, conclude that the sales figures of the appellant’s business in 1974 and 1975, arrived at by the Department, are more accurate than those of the appellant. The basic assumptions made by the respondent in arrivng at some of the sales figures have, in my opinion and as claimed by the appellant, been shown to be inaccurate, and the Minister’s assessments for the appellant’s 1974 and 1975 taxation years, therefore, are not correct.

Decision

The appeal is allowed and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed.