Date: 20020325
Docket: 2001-2038-GST-I
BETWEEN:
EDIBLE WHAT CANDY CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Sarchuk J.
[1]
This is an appeal by Edible What Candy Corporation from an
assessment of tax dated October 20, 2000, by virtue of which the
Minister of National Revenue (the Minister) disallowed certain
input tax credits (ITCs) claimed by the Appellant in respect of
the period September 30, 1994 to December 31, 1994. More
specifically, the Minister did not allow the following items:
(a)
ITCs in the amount of $2,186.59 relating to expenditures made
before the Appellant's date of registration, being September
30, 1994 on the basis that they are not expenditures for property
or services contemplated pursuant to subsections 123(1), 171(1)
and 171(2) of the Excise Tax Act (the Act); and
(b)
ITCs in the amount of $7,097.25 relating to expenditures after
September 30, 1994 for which the Appellant did not have adequate
documentation as required by subsection 169(4) of the
Act.
The Minister also assessed late remittance penalties and
interest of $4,291.10 and $3,503.99, respectively.
[2]
At the commencement of the hearing, counsel for the Appellant
informed the Court that it intended to proceed only in respect of
the issue whether the Respondent is statute-barred by the
provisions of subsection 298(4) of the Act from
reassessing the Appellant.
Background
[3]
The Appellant was incorporated on February 7, 1994. It had
obtained a licence from a patent holder and licensor of a product
described as a three-dimensional "holographic
candy" and intended to carry on the business of
manufacturing and distributing this product. Joel Hock, who
testified on behalf of the Appellant, was at all relevant times
its president. He and two other individuals, one charged with the
management of sales and the other responsible for
"overseeing" product manufacturing and quality control
formed the whole of the Appellant's staff.[1] Since the Appellant's
business model was to focus all of its sales in the United
States, the actual production of the candy was subcontracted to
an American supplier and sales in the US were to be managed and
conducted through a "broker force". There were no sales
whatsoever in Canada during the existence of the Appellant nor
had selling the product here been contemplated at any time.
Although the Appellant's first sales did not take place until
November 1994, from the outset it incurred various expenses
related to the organization of the new business. In addition, it
was responsible for the development of the packaging, i.e. the
candy wrap, the produce boxes as well as the floor display which
housed the product. All of these were designed and produced in
Canada and the costs so incurred formed part of the basis for the
ITCs claimed.
[4]
According to Hock, from the perspective of the Appellant, all of
the foregoing services related directly to the period following
registration for goods and services tax purposes as the first
shipments were not made by it to the American manufacturer until
November 1994. The collection of GST was never an issue
considered since all of its products were to be sold in the US.
However, since GST had in fact been paid on all of its purchases
(both prior to and subsequent to registration), the Appellant
believed that it was entitled to claim ITCs. To do so, it
registered for GST purposes in September 1994 and claimed ITCs in
the amount of $18,655 in its return for the period September 30,
1994 to December 31, 1994. This return was filed on March 6,
1995, and the total amount of the refund claimed was received by
the Appellant.
[5]
Shortly after the commencement of production in the US, it became
apparent that the contractor was unable to meet the required
quality standards in that barely 50% of the yield was fit for
sale as a holographic candy. This created a shortfall of product
and led to a failure by the Appellant to comply with the
licensing requirements, which in turn, led to its licence being
cancelled. The Appellant discontinued its business and closed its
doors at the end of February 1995. Hock said they had taken a
substantial loss on this project and were deeply disappointed
with the Appellant's failure. The closing down was abrupt and
all documents, papers and other material were simply boxed and
placed in a back room in the office.[2] Subsequently, the premises were
vacated and these boxes together with a number of other unrelated
items were placed in storage where they remained until the
Appellant learned of the proposed audit in late May 1999. When
the Appellant learned of the concerns of Canada Customs and
Revenue Agency (CCRA), concerted efforts were made to find all of
the documentation that the auditor required. As a result of the
proposal letter sent by CCRA on August 17, 2000, Hock said
"we spent a lot of time diligently going through a lot of
boxes to find any other information that wasn't supplied in
the first audit" and did in fact locate some documents which
substantiated a few additional ITCs.
[6]
Evidence on behalf of the Respondent was adduced from Salim
Dawood, an auditor with CCRA. He explained that all
taxpayers' files "end up" in Ottawa on a
"mainframe system" and are subject to what appears to
be a random review. In the spring of 1999, the Appellant was
"selected", the computer data relating to it was
forwarded to the Toronto North Tax Services Office and ultimately
came to him for consideration. Between March 26 and April 21,
1999, he attempted to contact the Appellant at the telephone
number listed on its registration form and on each occasion, the
response was by way of unidentified voicemail. He then accessed
Hock's personal income tax returns and the Appellant's
corporate registration, obtained their addresses, and attended at
the Appellant's former premises to find it "painted all
in black, deserted, and there was no answer and it looked
empty". On May 20, 1999, Dawood attended at Hock's
residence and upon learning he was not at home, left his business
card. Several days later, Hock called and in the course of their
conversation, Dawood learned for the first time that the
Appellant had been inactive for a number of years. Hock undertook
to contact a chartered accountant to make arrangements with
Dawood for a review. On September 27, 1999 the accountant,
Mr. Miniaci, provided a number of documents to CCRA and was
advised of Dawood's concern regarding the disorganized state
of the material as well as the absence of financial statements.
Miniaci was given an extension of time and subsequently called
Dawood on three or four occasions requesting additional time to
locate missing documents. On August 17, 2000, not having
heard from the Appellant Dawood sent a proposal letter setting
out adjustments to the Appellant's tax return. This was
followed on October 20, 2000 by a notice of reassessment[3] in the amount of
$84,062.98.[4] On
November 14, 2000, the Appellant filed a notice of objection
to the assessment.
[7]
Dawood produced a schedule prepared in the course of his review
leading to the October 20, 2000 assessment.[5] It reflects his analysis of the
various receipts and other material submitted on behalf of the
Appellant with respect to the ITC issue. This analysis formed the
basis of the Minister's initial assessment. The Appellant
subsequently provided additional documentation which satisfied
CCRA with respect to some further ITCs claimed.[6] It would also appear that the
material provided disabused CCRA's belief that the sales had
taken place in Canada.
Analysis
[8]
The issue before the Court is whether this taxpayer falls within
the scope of section 298 of the Act thereby allowing the
Minister to reassess it beyond the normal period of time set out
in the legislation. Section 298 provides:
298(1) Subject to subsections (3) to
(6), an assessment of a person shall not be made under section
296
(a)
in the case of
(i)
an assessment of net tax of the person for a reporting period of
the person,
...
more than four years after the later of the day on or before
which the person was required under section 238 to file a return
for the period and the day the return was filed;
298(4) An assessment in respect of any
matter may be made at any time where the person to be assessed
has, in respect of that matter,
(a)
made a misrepresentation that is attributable to the person's
neglect, carelessness or wilful default;
...
[9]
The basic principles with respect to the onus of proof in these
circumstances are found in Venne v. The Queen,[7] where Strayer J.
in considering subsection 152(4) of the Income Tax
Act made the following comment:
Subparagraph (4)(a)(i) is relevant to the present case:
it means that in order to reassess for more than four years
counted backwards from the date of re-assessment (in this case
September 3, 1980) it was necessary for the Minister to show that
there has been "misrepresentation that is attributable to
neglect, carelessness or wilful default" or
"fraud" by the taxpayer in filing the return or in
supplying information under the Act. It appeared to be
common ground in this case that for the notices of re-assessment
to be effective for taxation years 1972, 1973, 1974, and 1975, it
is necessary for the Minister to prove misrepresentation or
fraud.
Subsection 152(4) of the Income Tax Act is virtually
identical to the relevant language in subsection 298(1) and (4)
of the Act. Thus, it is for the Minister to establish on a
balance of probabilities that he was entitled to reassess beyond
the normal period of time.
[10] According
to Dawood, the factors which led to the decision to invoke
subsection 298(4) of the Act and reassess the Appellant
beyond the statutory limitation period were, inter
alia:
(i)
ITCs were claimed in respect of certain expenses and services
incurred prior to the Appellant's date of registration.
(ii)
Certain invoices did not meet the requirements of subsection
169(4) in that the suppliers were not registered for GST purposes
and/or there was no registration number on the invoice; there was
an absence of vouchers for certain expenses; and a number of
invoices were not made out to the Appellant.
(iii)
During the September 27, 2000 meeting, the documents requested
had not been provided; there was no response to his registered
letter regarding CCRA's proposal and subsequently when the
material was provided, it consisted of incomplete records.
(iv) No
source deductions had been made for the three employees and there
was no record of filing with respect to outstanding corporate
income tax returns.
[11] The
Appellant's position is that the Minister is precluded from
reopening the statute-barred years to reassessment because he has
failed to satisfy the burden of proof placed on him by subsection
298(4) of the Act. The Appellant contends that given the
delay in reassessing, it was not possible to locate all of the
documents supporting the ITCs claimed and maintains that there is
no evidence before the Court to support a conclusion that the
amount claimed was inflated or falsified.
[12] I am
unable to agree. The fact remains that there is overwhelming
evidence that the Appellant did not maintain adequate books and
records for the period in issue. It did not have the resources to
retain an accountant and availed itself of a part-time bookkeeper
who looked after the disbursements and cash receipts. Hock
testified that the bookkeeping was done manually and at this
stage of the business was rather basic in that the bookkeeper did
not even keep an accounts payable or accounts receivable ledger.
In fact, Hock was uncertain whether he even kept a general ledger
but did say there were 'ongoing' records and invoices and
receipts for the purchases. With specific reference to the ITC
return he "believed" the bookkeeper calculated the
amount based on all of the disbursements that were paid and all
of the receipts that the Appellant had at that time. The
Appellant's staff at that time consisted of Hock and two
other individuals all of whom had "some kind of shareholding
in the company". Hock was the president and project manager.
According to him, any advice or direction the bookkeeper needed
came from one of the other two whose background and experience
was not put before the Court thus it is not surprising, given the
cavalier approach which appears to have been taken by the
Appellant's management, that substantial misrepresentations
were uncovered by Dawood in his analysis. In this context, it
should be noted that the Appellant claimed ITCs totalling $18,655
of which $9,283.84, almost 50%, was disallowed by the Minister.[8] No acceptable
explanation for the misrepresentations has been presented to the
Court.
[13] The
Appellant also contends that its claim for ITCs in the amount
$2,186.59 relating to expenditures incurred before its date of
registration should not be considered a misrepresentation because
the Appellant did not understand how section 171 of the
Act worked but did not misrepresent the facts when
"while putting in an accurate figure of the GST that he had
paid, didn't realize and understand that in law some of that
was ineligible".
[14] It cannot
be disputed that the language of section 171 of the Act is
convoluted and difficult. If the Appellant was aware of the
relevant provision, and on the facts it was, but was uncertain as
to its application, some reasonable steps should have been taken
to clarify its position. In Can-Am Realty Limited et al v. The
Queen,[9] Rouleau J. of the Federal Court - Trial
Division, made the following observations with respect to the
obligation of a taxpayer:
Furthermore, as pointed out in the Venne decision, it
is the taxpayer himself who carries the ultimate responsibility
for ensuring his tax returns contain accurate data. That
obligation is not altered by the fact the taxpayer has engaged
the professional services of an accountant or other agent to
prepare and complete his returns. In Howell v. Minister of
National Revenue (1981), 81 DTC 230, the Tax Review
Board made the following observations concerning this principle
at pp. 233 and 234:
There are certainly income tax situations in which only a
comprehensive review and specific explanations by professional
help would make the income tax return intelligible to even a
knowledgeable and interested taxpayer. Those situations are the
exception, not the rule, when a personal income tax return is at
issue.
I am in agreement with counsel for the respondent —
there is a bottom limit to the responsibility which must be
accepted by even the most inexperienced or trusting taxpayer.
The bottom limit is not simply to read the last
relevant line of the return (a balance owing or a refund). It
must demonstrate a reasonable effort on his part in the
circumstances and within his own framework of comprehension and
competence to understand the component elements of that final
result.... (emphasis
added)
[my emphasis added]
Surely in the present circumstances, if there was any question
regarding the eligibility of these expenses for ITC purposes,
some effort should have been made to resolve that concern either
by enlisting the assistance of a competent accountant or by
communication with Revenue Canada. That was not done.
[15] In
Venne, supra, Strayer J. observed:
I am satisfied that it is sufficient for the Minister, in
order to invoke the power under subparagraph 152(4)(a)(i)
of the Act to show that, with respect to any one or more
aspects of his income tax return for a given year, a taxpayer has
been negligent. Such negligence is established if it is shown
that the taxpayer has not exercised reasonable care. This is
surely what the word "misrepresentation that is attributable
to neglect" must mean, particularly when combined with other
grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to
intentional misconduct. Unless these words are superfluous in the
section, which I am not able to assume, the term
"neglect" involves a lesser standard of deficiency akin
to that used in other fields of law such as the law of tort.
Adopting the comments of Strayer J. above, I have no
hesitation in concluding that the Appellant did not exercise
reasonable care in filing its return for the period in issue and
"has made a representation that is attributable to
neglect" thereby entitling the Minister to reassess pursuant
to the provisions of subsection 298(4) of the
Act.
[16] The
appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of March, 2002.
"A.A. Sarchuk"
J.T.C.C.
COURT FILE
NO.:
2001-2038(GST)I
STYLE OF
CAUSE:
Edible What Candy Corporation and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
February 5, 2002
REASONS FOR JUDGMENT BY: The
Honourable Judge A.A. Sarchuk
DATE OF
JUDGMENT:
March 25, 2002
APPEARANCES:
Counsel for the Appellant: Douglas Langley
Counsel for the
Respondent:
Scott Simser
COUNSEL OF RECORD:
For the
Appellant:
Name:
Douglas Langley
Firm:
Wilson Vukelich
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-2038(GST)I
BETWEEN:
EDIBLE WHAT CANDY CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 5, 2002, at Toronto,
Ontario, by
the Honourable Judge A.A. Sarchuk
Appearances
Counsel for the
Appellant:
Douglas Langley
Counsel for the
Respondent:
Scott Simser
JUDGMENT
The
appeal from the assessment made under the Excise Tax Act
(for goods and services tax), notice of which is dated October
20, 2000 and bears number 00000100102, for the period September
30, 1994 to December 31, 1994 is dismissed.
Signed at Ottawa, Canada, this 25th day of March, 2002
J.T.C.C.
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