[OFFICIAL ENGLISH TRANSLATION]
Date: 20020125
Docket: 2000-3233(GST)I
BETWEEN:
9001-9159 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the
informal procedure concerning an assessment under the Excise
Tax Act (the "Act") for the period from
April 1, 1994, to March 31, 1997. The notice of
assessment bears number 03B1372 and is dated March 17,
1998.
[2] The assessment establishes that
the amount of net tax that should have been reported and paid for
that period was $5,947.73. As rebates had instead been requested
during that period, the adjustments to be made to the net tax,
according to the assessment, amount to total net tax of
$14,294.37, penalties of $2,373.24 and interest of $1,808.70.
[3] Colette Lemay, the auditor
for the Minister of National Revenue (the "Minister"),
testified for the respondent, but she gave testimony first at the
request of the appellant.
[4] The auditor explained that the
appellant owns a convenience store which was purchased in 1994.
According to the information provided to the Minister by the
appellant for the purposes of the Act, the contact person
was a Mr. Noël. The auditor had attempted to meet Mr.
Noël twice at the departmental office in the period from
November 1996 to January 1997, but he did not show up. She
therefore went to the premises in January 1997, after telephoning
to obtain the accounting records. She met Robert Gervasi,
the son of the principal shareholder, Salvatore Gervasi, and
was given a part of the purchase invoices and of the cash
register tapes. She asked to have all the missing documents
before February 15, 1997, and was given purchase invoices
for a full fiscal year.
[5] The auditor then proceeded with an
analysis of the markup rate on the goods sold. She asked
Robert Gervasi what the selling prices of certain goods in
14 categories were. She had the purchase prices, since she
had obtained the purchase invoices. The analysis was filed as
Exhibit I-4. She got markup factors of 1.25 for chips,
1.17 for beer, 1.28 for wine, 1.12 for cigarettes, 1.40 for
chocolate and so on for the other categories.
[6] She arrived at an average factor
of 1.31. Although, according to the department's statistics,
the average markup factor for a convenience store is at least
1.25, she took the factor for beer in this case because, at this
convenience store, beer represented 46 percent of sales. The
markup factor for beer was 1.17.
[7] Exhibit I-3 is a
complete description of all the purchase invoices for the
1995-1996 taxation year, that is, from April 1, 1995,
to March 31, 1996, that were handed over to the auditor.
Exhibit I-10 was the result of the same exercise
carried out for the period from July to October 1996.
[8] Exhibit I-8 shows the
procedure followed by the auditor in determining the amount of
tax for the 1994-1995 fiscal year. She calculated the
purchases of taxable goods from the input tax credits
("ITCs") claimed for that year, which amounted to
$24,040.12. That amount was equal to seven percent paid on
taxable supplies, which gave an amount of $343,430.29 for those
taxable supplies. The auditor deducted allowable expenses and the
year-end inventory of taxable goods based on the financial
statements, and thus arrived at a cost of taxable goods sold of
$279,692.54. She multiplied that amount by 1.17 to get
$327,240.27, which is the amount of taxable sales. The tax
collectable is seven percent of that amount, or $22,906.82.
According to the return, the amount of tax collected was
$19,522.82. As mentioned at the start of this calculation, the
amount of the inputs claimed was $24,040.12.
[9] Exhibit I-5 is the
calculation of the tax for the year 1995-1996. Taxable
purchases, according to the statement of invoices for the year,
amounted to $459,660.12 which, multiplied by 1.17, yielded
taxable sales of $537,802.34. Following a few minor adjustments,
the tax that should have been reported was determined to be
$37,717.15, and the amount of the ITCs to which the appellant was
entitled was $32,510.34. The tax reported was $17,958.97, and the
amount of ITCs claimed was $21,788.31.
[10] Exhibit I-9 is the
calculation of tax for the year 1996-1997. The cost of
goods sold, namely $386,630.39, was taken from the financial
statements. That amount was multiplied by 1.17 to give taxable
sales of $451,733.01. The tax collectable should have been
$31,674.85, and the amount of ITCs should have been $27,064.13.
The amount of tax reported was $22,704.75, and the amount of ITCs
claimed was $48,564.18.
[11] With regard to beer, the auditor
explained that companies sometimes supply convenience stores
therewith at low cost in order to promote their sales. This could
compensate for the beer supplied without markup by the
convenience store for sports activities in the neighbourhood.
[12] Salvatore Gervasi, who described
himself as retired and is the principal shareholder of the
appellant, testified that the convenience store, called
Dépanneur Oma's, was located in Verdun near the
Hôpital Douglas, a psychiatric hospital, whose patients
were customers of the convenience store. Mr. Gervasi stated
that there were thefts nearly every day and that he spent almost
$15,000 a year to sponsor sports teams by selling them beer at
his cost price.
[13] Guy Guertin, a chartered
accountant, testified for the appellant. He was the
appellant's accountant when it acquired the convenience store
in 1994. Following the auditor's initial visits around June
1997, the appellant asked him to prepare its financial
statements.
[14] Mr. Guertin explained that he did
not dispute the results arrived at by the Minister's auditor
with respect to the cost of the taxable goods. Regarding the
amount of the taxable sales, however, he did dispute the markup
factors. He commented on Exhibit I-4, which is the
study on the profit margins on 14 categories of goods. In
particular, he commented on the "beer", "juice and
beverages" and "dairy products" categories. He
said that for a case of beer the stated cost price of which was
$19.95, the cost price should actually be $20.71, in order to
arrive at a profit margin of 12 percent. He said that he had
seen a few invoices indicating that price and suggested that the
profit margin for juice and beverages should be 21 percent
instead of 44 percent. For dairy products, the margin should
be 20 percent, not 27 percent. His argument is that the
average markup factor was 1.12. He stated in his testimony that
his client had told him that the markup factor was 1.14.
[15] The Notice of Appeal states the
following:
[TRANSLATION]
. . .
5. The
aforementioned audit resulted in a $5,947.73 increase in taxes
payable, a penalty of $2,373.24 and interest of $1,808.70, as
stated in a notice of assessment dated March 30, 1998, and
bearing number EB1372.
6. In carrying
out the audit, the auditor from the Department of Revenue did a
sampling, assuming a gross profit rate. Thus, using the gross
profit rates for the various goods, she multiplied purchases by
that rate to arrive at potential sales, from which she calculated
taxes payable.
C. ARGUMENT
7. The
appellant respectfully submits that the rates used by the auditor
are not real and that she overestimated the said rates.
8.
Furthermore, in calculating the purchases, the auditor
disregarded the fact that the appellant subsidized various
charities and that certain goods were sold at cost, as a
consequence of which taxes payable were increased unduly.
9. The auditor
also disregarded the percentage of thefts, which is a known
factor in the type of business operated by the appellant.
10. The appellant submits
that the assessment is ill-founded in fact and in law, inter
alia, for the following reasons:
(a) it in no way
reflects the appellant's income; the rates used do not
reflect the actual situation and there are significant
discrepancies for all goods;
(b) the impact of
non-profit organizations was disregarded;
(c) the thefts that
occur in this type of business were disregarded.
. . .
[16] In his argument, counsel for the
appellant restated the arguments set out in the Notice of Appeal.
He argued that the markup factor should be only 1.12, as
suggested by the accountant.
[17] Counsel for the respondent stated that
the price of beer suggested by the accountant was not
corroborated by any documents. The same was true of the alleged
thefts. There was no evidence, such as police reports or other
documents, concerning those thefts. Nothing was given to the
auditor before the hearing.
Conclusion
[18] In his testimony,
Salvatore Gervasi did not discuss his business's average
markup factor. No question was put to him on that subject or on
his business's accounting. It should be noted that
Robert Gervasi, the manager of the business, did not come to
testify.
[19] Mr. Guertin said he had seen a
number of invoices for cases of a certain beer at $21.70, not
$19.95. For juices and beverages, the markup factor which he
arrived at was 1.21, not 1.44, and, for dairy products, it was
1.20 instead of 1.27.
[20] The problem with these statements is
that they are not supported by any documentary evidence. Neither
invoices nor any analysis document were filed at the hearing. In
fact, such documents should be shown to the other party prior to
the hearing. The Reply to the Notice of Appeal clearly stated how
the auditor had established the markup factor at 1.17. The onus
was thus on the appellant to adduce satisfactory evidence against
that position, particularly since it is a position that seems
highly reasonable in the circumstances. The markup factor of 1.17
is less than the lowest rate in the department's statistics,
which is 1.25, and applies to the product that represented
46 percent of the convenience store's sales.
[21] As the amount of the input tax credits
was not disputed and only the amount of the tax was at issue, I
must therefore, on a balance of probabilities, dismiss the
appeal.
Signed at Ottawa, Canada, this 25th day of January 2002.
J.T.C.C.
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