Panda Marketing (1997) Ltd. v. The Queen, docket 2001-1362(GST)I (Informal Procedure)

Date: 20020311

Docket: 2001-1362-GST-I

BETWEEN:

PANDA MARKETING (1997) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Beaubier, J.T.C.C.

[1]            This appeal pursuant to the Informal Procedure was heard at Calgary, Alberta on March 6, 2002. The Appellant called its accountant, John Dicks, and the Respondent's auditor, Janice Minamide.

[2]            Paragraphs 5 to 9 inclusive outline the basis of the Decision appealed. They read:

5.              By Notice of Assessment number 10CT9900285, dated September 29, 1999, the Minister assessed the Appellant net tax of $142,685.53, penalty of $11,173.44 and interest of $8,432.96 for the reporting periods ending between February 25, 1997 and

March 31, 1999 (the "relevant period"). The amount assessed as net tax was calculated as follows:

net tax reported on returns	867.86
adjustments to GST/HST collected/collectible	73,719.80
adjustment to input tax credits	68,097.87
net tax assessed	142,685.52

6.              By a letter dated January 6, 2000, the Appellant requested an extension of time to file a Notice of Objection to Notice of Assessment number 10CT9900285, which was granted by the Minister by a letter dated January 31, 2000.

7.              The Minister confirmed the assessment by a Notice of Decision dated January 19, 2001.

8.              In so assessing the Appellant, the Minister made the following assumptions of fact:

(a)            the facts admitted or stated above, some of which are repeated here for ease of reference;

(b)            during the relevant period the Appellant was engaged in the business of wholesale/retail flower sales;

(c)            during the relevant period the Appellant also established flower stores that it supplied by way of franchises;

(d)            during the relevant period the Appellant owned and operated or was the franchiser of at least 10 flower stores;

(e)            the supplies the Appellant made during the relevant period were taxable at 7%;

(f)             at all material times the Appellant was a registrant for the purposes of the Act;

(g)            the Appellant was required to file its returns on a quarterly basis;

(h)            the Appellant filed returns reporting tax collectible, input tax credits and net tax as follows:

Period End Date	Date Due	Date Filed	Tax Collected	Input Tax Credits	Net Tax
1997-03-31	1997-04-30	1998-07-06	4,292.34	4,420.54	(128.20)
1997-06-30	1997-07-31	1998-07-06	12,877.01	13,261.60	(384.59)
1997-09-30	1997-10-31	1998-07-06	14,133.62	13,071.35	1,062.27
1997-12-31	1998-02-02	1998-11-25	16,596.71	13,509.59	3,087.12
1998-03-31	1998-04-30	1998-11-25	13,626.71	14,680.75	(1,054.04)
1998-06-30	1998-07-31	1998-11-25	13,626.71	14,680.75	(1,054.04)
1998-09-30	1998-11-02	1998-11-25	9,928.56	10,589.22	(660.66)
1998-12-31	1999-02-01	1999-07-31	0.00	0.00	0.00
1999-03-31	1999-04-30	1999-07-31	0.00	0.00	0.00
Total			85,081.66	84,213.80	867.86

(i)             the Appellant failed to maintain adequate books and records to enable a determination of the Appellant's liabilities, obligations or entitlements under Part IX of the Act;

(j)             the Appellant was incorporated on or about January 31, 1997;

(k)            on or about February 24, 1997, the Appellant bought the assets of 5 companies that were owned and/or operated by David Chong ("Chong's companies);

(l)             the assets the Appellant acquired from Chong's companies included all of the interests in franchised stores that those companies held;

(m)           any franchise fees payable to Chong's companies were assigned to the Appellant;

(n)            during the relevant period the following amounts were paid to the Appellant as franchise fees for franchises that were supplied by one of Chong's companies;

(i)             monthly royalty fee equal to 7% of the gross monthly sales plus GST;

(ii)            monthly advertising fee equal to 3% of the monthly gross sales plus GST; and

(iii)           if a franchised store was resupplied by the franchisee during the relevant period, a transfer fee of $5,000 or 5% of the gross transfer price of the franchised business, whichever is greater, plus GST;

(o)            during the relevant period the following amounts were paid to the Appellant as franchise fees where the Appellant supplied the franchise;

(i)             initial investment costs of approximately $37,200 for equipping, supplying, preparing and furnishing the franchise store;

(ii)            initial franchise fee of approximately $25,000 plus GST;

(iii)           monthly royalty fee equal to 7% of the gross monthly sales plus GST;

(iv)          monthly advertising fee equal to 3% of the monthly gross sales plus GST; and

(v)            if a franchise store was resupplied by a franchisee during the relevant period, a transfer fee of $5,000 or 5% of the gross transfer price of the franchise business, whichever is greater, plus GST;

(p)            the Appellant did not record any of the amounts it received as franchise fees during the relevant period in its books and records;

(q)            the Appellant did not record all of its sales transactions in its books and records;

(r)             the Appellant did not issue invoices for some of the sales that it made during the relevant period;

(s)            the Appellant did not maintain copies of all of the invoices it issued during the relevant period;

(t)             not all of the monies received by the Appellant as consideration for the supplies it made during the relevant period were recorded in the Appellant's books and records;

(u)            the Appellant received at least $2,268,592.29 as consideration for the taxable supplies it made during the relevant period;

(v)            tax in the amount of $158,801.46 was collected or collectible by the Appellant on the taxable supplies it made during the relevant period;

(w)           the Appellant failed to report tax of at least $73,719.80 which was collected or collectible on the supplies the Appellant made during the relevant period;

(x)             the Appellant was entitled to input tax credits of no more than $16,115.93 of the $84,213.80 it claimed as input tax credits on the returns it filed for the reporting periods ending during the relevant period;

(y)            the Appellant has no documentation, which includes the prescribed information required by sections 2 and 3 of the Input Tax Credit Information Regulations, to support that it is entitled to input tax credits in excess of $16,115.93 for the reporting periods ending during the relevant period;

(z)             any further input tax credits which the Appellant submits it was entitled to were in respect of property and services which were not acquired for consumption, use or supply in the course of the Appellant's commercial activities; and

(aa)          in or about June 1999 the Appellant sold the assets and equipment of the stores it own and operated or had franchises in to Panda Flowers (1999) Ltd.

B.             ISSUES TO BE DECIDED

9.              The issues to be decided in this appeal are whether, for the relevant period, the Minister correctly assessed the Appellant for unreported tax collected or collectible in the amount of $73,719.80 and correctly disallowed input tax credits in the amount of $68,097.87.

[3]            Assumptions 8(b) to (h) inclusive, (j) to (m) inclusive and (p) were not refuted.

[4]            Thus, during the period the Respondent filed Goods and Services Tax ("GST") returns admitting that it collected $85,081.66 GST and claimed input tax credits (ITCs) of $84,213.80, Mr. Dicks recalculated this (based on the Appellant's bank statements for the Period) to admit collecting $103,132 GST and to claim input tax credits of $74,535.

[5]            After the Appellant bought the business from David Chong's companies Mr. Chong managed the Appellant's business in Calgary. The owner of the Appellant was in Vancouver. Miss Minamide testified that some amounts claimed were disallowed because they were personal to Mr. Chong. It is clear that Mr. Chong did not keep records. Both witnesses testified that there were no cash register tapes to verify sales and Mr. Dicks was clear that the Appellant's records were terrible. However the question ultimately is whether the Appellant's records constituted a correct record of the Appellant's own sales as distinct from sales of flowers stolen from the Appellant and sold by one or more employees, with the result that the Appellant never received GST on those goods.

[6]            Mr. Dicks prepared and filed Exhibit A-1 which is a financial statement of the Appellant's business after the fact. It includes a statement of GST and input tax credits of the Appellant on that basis. Mr. Dicks' statement records all of the sales and purchases made by the Appellant's business based on the bank records. For practical purposes, the Appellant lost money over the Period.

[7]            Miss Minamide's findings were that the corporate financial records did not comply with section 286 of the Excise Tax Act which states:

286.(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.

(2) Where a person fails to keep adequate records for the purposes of this Part, the Minister may require the person to keep such records as the Minister may specify and the person shall thereafter keep the records so specified.

(3) Every person required under this section to keep records shall retain them until the expiration of six years after the end of the year to which they relate or for such other period as may be prescribed.

(3.1) Every person required by this section to keep records who does so electronically shall retain them in an electronically readable format for the retention period set out in subsection (3).

(3.2) The Minister may, on such terms and conditions as are acceptable to the Minister, exempt a person or a class of persons from the requirement in subsection (3.1).

(4) Where a person who is required under this section to keep records serves a notice of objection or is a party to an appeal or reference under this Part, the person shall retain, until the objection, appeal or reference and any appeal therefrom is finally disposed of, every record that pertains to the subject-matter of the objection, appeal or reference.

(5) Where the Minister is of the opinion that it is necessary for the administration of this Part, the Minister may, by a demand served personally or by registered or certified mail, require any person required under this section to keep records to retain those records for such period as is specified in the demand.

(6) A person who is required under this section to keep records may dispose of the records before the expiration of the period in respect of which the records are required to be kept if written permission for their disposal is given by the Minister.

[8]            Because of the lack of records Miss Minamide's audit was based on her calculation of the Appellant's average daily sales for a short period ending March 31, 1997. She then projected this for 310 workings per fiscal year to which she added a profit margin of 14.3% based on Statistics Canada's records for flower shops. To this result she applied the 7% GST rate.

[9]            As a result the assumptions have a very narrow factual base which is the few days of sales in the fiscal 1997 year. Miss Minamide was asked about Income Tax assessments on the Appellant; such an assessment might indicate a Revenue Canada determination of the Appellant's profit. She had no knowledge of such an assessment.

[10]          Mr. Dicks' calculations establish to the Court's satisfaction that the Appellant in fact suffered a loss during the Period. As a result, the Court does not accept Miss. Minamide's addition of the 14.3% profit margin to her calculations for assumption purposes.

[11]          On the evidence before the Court, it appears that the principal owner of the Appellant lived in Vancouver as an absentee owner who was content with Mr. Chong's management as long as he was not called upon to inject cash to cover losses. However the owner allowed the deterioration of operation and records of operation to occur. At the same time Mr. Chong was charging personal items to the Appellant's business and, on the evidence, the cash sales were not going into the Appellant's bank account. It appears from the evidence that is available that the Appellant's employees may have been stealing flowers from the Appellant and selling them for their own profit; this view is supported by the lack of invoices. On the other hand, the employees may have been selling the Appellant's flowers in its name and pocketing the cash proceeds. There is no clear evidence of either scenario, since there is no testimony from anyone with first hand knowledge of what was happening in the business.

[12]          The Respondent's auditor did not distinguish between franchisee sales and the Respondent's own sales. Assumptions (n) and (o) are based on the franchise contracts, and not on any record of receipts. On the basis of both witnesses' testimony, Mr. Chong was very unco-operative and was profiting personally from his operation of the business. In these circumstances, it is doubtful that all of the income from Mr. Chong's former business was going to the Appellant. There is no clear evidence respecting the Appellant's alleged income from the franchises.

[13]          The Respondent's calculation of input tax credits is based on a series of assumptions with a limited base. Mr. Dicks' is based on the Appellant's bank records. As a result Mr. Dicks' are accepted. The Court finds that the input tax credits to which the Appellant is entitled for the period total $74,545.

[14]          The Court accepts the Respondent's assumption respecting GST collected for the period except that no 14.3% profit margin shall be included in the calculations. Instead, no profit margin whatsoever is to be included in the calculations.

[15]          The appeal is allowed and this matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

Signed at Ottawa, Canada, this 11^th day of March, 2002.

"D. W. Beaubier"

J.T.C.C.

COURT FILE NO.:                                                 2001-1362(GST)I

STYLE OF CAUSE:                                               Panda Marketing (1997) Ltd. v. The Queen

PLACE OF HEARING:                                         Calgary, Alberta

DATE OF HEARING:                                           March 6, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                                       March 11, 2002

APPEARANCES:

Agent for the Appellant:                     John W. Dicks

Counsel for the Respondent:              R. Scott McDougall

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1362(GST)I

BETWEEN:

PANDA MARKETING (1997) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on March 6, 2002 at Calgary, Alberta by

the Honourable Judge D.W. Beaubier

Appearances

Agent for the Appellant:                                 John W. Dicks

Counsel for the Respondent:                         R. Scott McDougall

JUDGMENT

          The appeal from the assessment made under the Excise Tax Act, notice of which is dated September 29, 1999 and bears number 10CT9900285 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 11th day of March, 2002.

"D. W. Beaubier"

J.T.C.C.