Citation: 2010 TCC 116
Date: 20100311
Docket: 2007-3557(GST)G
BETWEEN
9116-0762 QUÉBEC INC. (BELLE-OR),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an appeal from
an assessment of $949,548.21 made under Part IX of the Excise Tax Act (the
Act) for the period of May 13, 2002, to October 31, 2004 (the relevant period).
[2]
The $949,548.21 in
question can be broken down as follows:
|
Adjustment to net tax calculation
|
$679,904.57
|
|
Penalties
|
$240,239.00
|
|
Interest
|
$29,404.64
|
|
Total
|
$949,548.21
|
[3]
The above-noted
adjustment to the appellant's net tax calculation of $679,904.57 can be
broken down as follows:
|
Goods and services tax ("GST") collected and
non-remitted
|
$5,001.79
|
|
Input tax credit ("ITC") not claimed and granted after
audit
|
($5,165.88)
|
|
Over-claimed ITC (Bijouterie Massis)
|
$8,175.09
|
|
Calculation error (Celi Kar)
|
($8.06)
|
|
ITC disallowed for lack of supplies
|
$671,901.62
|
|
Total
|
$679,904.57
|
[4]
It should immediately
be noted that this appeal is not about the disallowed ITC of $671,901.62. The
Minister of Revenue of Québec (the Minister) essentially disallowed the ITC
claimed by the appellant on the ground that the tax for which the ITC was
claimed was paid to sub-contractors who had produced invoices characterized as
invoices of convenience and on the ground that the documentary evidence
submitted by the appellant did not meet the documentary requirements prescribed
by the Act and the Input tax Credit Information Regulations (the
Regulations).
Background
[5]
During the relevant
period, the appellant operated a business selling bulk jewellery under the name
Bel Or. I will immediately note that Viken Gebenlian, the appellant's
president, testified that the appellant operated another business during the
same period, as a gold dealer. It is of note that the appellant did not disclose
this activity in its notice of objection, in its notice of appeal or during
negotiations with the tax authorities, even though this other activity
represented 52% (see Exhibit I-1, volume 2, page 124) of the appellant's
sales in 2003 and 44% (see Exhibit I-1, volume 2, page 125) of
the appellant's sales in 2004. During the relevant period, the appellant did
business with several suppliers. The Minister is challenging the invoices from
seven of these suppliers (the "problem suppliers"). These seven problem
suppliers are:
(i)
9111-6566 Québec Inc.
The appellant is claiming ITC of $39,386.17 in regard to goods it
allegedly acquired from this supplier;
(ii)
Créations Ziza Inc.
("Ziza"). The appellant is claiming ITC of $3,139.64 in regard
to goods it allegedly acquired from this supplier;
(iii)
Bijouterie A.S.N.
("ASN"). The appellant is claiming ITC of $40,001.71 in regard
to goods it allegedly acquired from this supplier;
(iv)
Bijouterie Massis
(1988) Inc. ("Massis"). The appellant is claiming ITC of
$89, 937.15 in regard to goods it allegedly acquired from this supplier;
(v)
9106‑4816 Québec
Inc. operated a business under the name Créations Molto‑Bella
("Molto‑Bella"). The appellant is claiming ITC of
$202,547.28 in regard to goods it allegedly acquired from this supplier;
(vi)
9140‑1133 Québec
Inc. operated a business under the name Khristor Inc. ("Khristor").
The appellant is claiming ITC of $91,262.57 in regard to goods it
allegedly acquired from this supplier;
(vii)
9114‑4733 Québec
Inc. operated a business under the name Bijouterie Trésor ("Trésor").
The appellant is claiming ITC of $5,627.09 in regard to goods it allegedly
acquired from this supplier.
[6]
The Minister
acknowledged the legal existence of the problem suppliers. The Minister
acknowledged these suppliers had a registration number for GST and
source-deduction purposes. The Minister also acknowledged that the problem
invoices existed and that the appellant had written cheques in payment of these
invoices. However, on the basis of the profile of these suppliers, the Minister
presumed that the documentary evidence the appellant submitted were invoices of
convenience that created an impression that a regular supply had been made
while in reality, no supply of goods had been made by the suppliers named in
these documents. In regard to the problem suppliers, the Minister presumed
that:
(i)
they did not have the
employees, equipment, offices or capacity required to make the supplies the
appellant claims to have acquired;
(ii)
the addresses of the
suppliers' place of business usually correspond to a residential building or a
commercial office with no relationship to the fabrication or distribution of
jewellery;
(iii)
these suppliers
generally had done no bookkeeping and did not file any net tax returns;
(iv)
these suppliers are
part of a network that produces invoices of convenience for the purpose of
allowing registrants such as the appellant to obtain disallowed ITC.
[7]
It must also be noted
that in his Reply to the Notice of Appeal, the Minister claimed to have noted
in the audit calculation that:
[translation]
(i)
the appellant's net tax reports are generally in
credit, which is incompatible with the type of business that the appellant
operates, where supplies are only made in Canada;
(ii)
the appellant has an unusually high number of
transactions, which only generate minimal benefits or losses;
(iii)
the appellant claims to have paid certain
invoices in gold whereas its inventory did not allow for such payments to be
made;
(iv)
the appellant claims to have made an unusually
high number of gold waste supplies.
Issues
[8]
The first issue to
address is whether the appellant has the right to claim the ITC of $671,901.61
in the calculation of its net tax for the relevant period. As an underlying
issue, the Court must determine whether:
(i)
the appellant truly
acquired the supplies for which it claimed the ITC of $671,901.61 in the
calculation of its net tax;
(ii)
the invoices allegedly
prepared by the appellant's suppliers meet the requirements set out in the
Regulations.
The second issue to address is whether the Minister was
entitled to impose a penalty on the appellant as provided under
section 285 of the Act.
Analysis and conclusion
[9]
Hickman Motors Ltd.
v. Canada, [1997] 2 S.C.R.
336 is to the effect that the Minister uses assumptions to make assessments and
the taxpayer has the initial burden of demolishing the Minister's assumptions.
This is met where the taxpayer makes out at least a prima facie case
that demolishes the Minister's assumptions. Then, after the taxpayer has met
the initial burden, the onus shifts to the Minister to rebut the prima facie
case made out by the taxpayer and to prove the assumptions. As a general rule,
a prima facie case is defined as one with evidence that establishes a
fact until the contrary is proved. In Stewart v. M.N.R., [2000] T.C.J.
No. 53, Cain J. states that "[A] prima facie case is one supported
by evidence which raises such a degree of probability in its favour that it
must be accepted if believed by the Court unless it is rebutted or the contrary
is proved. Moreover, in Orly Inc. v. Canada, 2005 FCA 425, at
paragraph 20, the Federal Court of Appeal stated that "the burden of
proof put on the taxpayer is not to be lightly, capriciously or casually
shifted…" considering "[i]t is the taxpayer's business." The
Federal Court of Appeal also stated in the same decision that it is the
taxpayer who "knows how and why it is run in a particular fashion rather
than in some other ways… He has information within his reach and under his
control." As a result, the appellant in this case had to show, with a prima
facie case, that it genuinely purchased the gold supplies from the problem
suppliers. On this matter, the appellant submits it has demolished the
Minister's assumptions that it had not acquired any gold supply from the
problem suppliers by submitting to evidence the credible and uncontradicted
testimony of its president and the directors of the suppliers in question.
[10]
In this case, Haroutian
Dakessian (director of Trésor), Yessai Kratchenian (director of 9111‑6566
Québec Inc.), Hrikor Tufenkjian (director of Tiza), Avedis Karadjian (director
of ASN), Vatche Hititian (director of Molto-Bella and Khristor) and Viken
Gebenlian testified in support of the appellant's position.
[11]
Immediately, I will
note that I give no probative value to the testimony of these directors, in
particular because the companies they were running were, with no exception,
serious tax offenders. The propensity of these companies to avoid their tax
obligations was, to say the least, appalling.
[12]
In regard to the
company Molto-Bella, the evidence shows that:
(i)
for the period of June
1, 2003, to May 17, 2004 (date of its bankruptcy), it did not make or file any
net tax report even though it had made taxable supplies of $28,606,716 during
that same period;
(ii)
it had not done any
bookkeeping. Marina Raposo, the auditor who audited the company Molto‑Bella
for the relevant period, testified that she had to reconstruct the sales of
Molto‑Bella using invoices she had found at the offices of the company's
clients who were also being audited. Moreover, Ms. Raposo explained that she
had found only a few purchase invoices;
(iii)
the net tax assessed
and unpaid for this period is $17,741,026.
[13]
In regard to the
company Khristor, the evidence shows that:
(i)
it began its activities
on March 23, 2004, a few days before the company Molto‑Bella (whose
director was also Mr. Hititian) became bankrupt;
(ii)
it became bankrupt on
May 31, 2006;
(iii)
it made taxable
supplies of $24,299,807 during its fiscal year ending February 28, 2005;
(iv)
it made taxable
supplies of $24,034,408 during its fiscal year ending February 28, 2006;
(v)
it made taxable
supplies of $591,609 for the period of March 1, 2006, to May 31, 2006;
(vi)
it had never made or
filed net tax reports;
(vii)
it never paid the GST
collected;
(viii)
many documents
(purchase invoices, deposit slips and cheque stubs) had not been given to Ms.
Raposo.
[14]
In regard to the
company Trésor, the evidence shows that:
(i)
for the period of April
2003 to march 31, 2004, it neglected to pay substantial amounts of GST
collected. For the company Trésor, the Minister made an assessment of
$658,620.26 (amount of net tax) that had not been paid;
(ii)
since March 31, 2004,
it had not filed a net tax report although it had made taxable supplies of
$33,683,721 including $21,335,328 to the company Khristor;
(iii)
it had not done any
bookkeeping;
(iv)
its purchase invoices
were missing;
(v)
most of the bank
statements were missing;
(vi)
the amount of net tax
assessed and unpaid for the period of April 2004, to February 4, 2005, is
$2,499,000;
(vii)
from April 2004 to May
17, 2004, the company Trésor had purchased gold supplies for $4,753,705 from
the company Molto‑Bella, whose director was Mr. Hititian. During this
same period, the company Trésor had sold gold supplies for $871,000 to the
company Khristor, whose director was also Mr. Hititian.
[15]
In regard to the
company Massis, the evidence shows that:
(i)
from January 1, 2003,
to May 8, 2004, it did not file a net tax report and had not done any
bookkeeping, although it had made taxable supplies of $25,603,078 during that
period;
(ii)
all the purchase
invoices, all the deposit slips and all the cheque stubs were missing;
(iii)
it became bankrupt on
May 7, 2004;
(iv)
taxes collected but not
reported for the period of January 1, 2003, to May 8, 2004, were $1,792,742. I
note that this amount remains unpaid;
(v)
the company
9141 7220 Québec Inc. (whose president is the same as that of the company
Massis), also a jewellery wholesaler, began operating its business one week
before the company Massis declared bankruptcy.
[16]
In regard to the
company ASN, the evidence shows that:
(i)
from April 2004 to May
2005, it did not file a net tax report although it had made taxable supplies of
$9,250,485 during that period. It must be noted that this sales figure was
established by Ms. Raposo based on invoices found at ASN's clients (who were
also subject to an audit) since she was unable to obtain the sales invoices for
that period from ASN;
(ii)
the net tax amount
assessed and unpaid for the period of May 1, 2001, to December 31, 2005, is
$1,977,178;
(iii)
the company 9141-2882
(whose president is the same as that for the company ASN) was in operation as
of June 1, 2004, and never filed a net tax report.
[17]
In regard to the company
Ziza, the evidence shows that:
(i)
Anthony Starnino (the
Agency's auditor who conducted the audit of the company Ziza) was unable to
obtain any documents from Ziza related to its activities for the period of
February 13, 2002, to March 31, 2003, despite having served a letter of
requirement to produce them;
(ii)
Mr. Starnino
established the sales figures based on invoices found at Ziza's clients who
were also being audited by the Minister. Mr. Starnino established that Ziza had
made taxable supplies for $4,423,000 during this period;
(iii)
the amount of the net
tax assessed (and still unpaid by Ziza for this period) was $823,239.
[18]
In regard to the
company 9111‑6566 Québec Inc., the evidence shows that:
(i)
during the period of
January 1, 2002, to February 28, 2003, it did not produce a quarterly
statement;
(ii)
it never filed an
income tax report;
(iii)
it had not done any
bookkeeping;
(iv)
Mr. Starnino was only
able to obtain the purchase and sales invoices from 9111‑6566 Québec Inc.
for the period of February 1, 2002, to November 30, 2002;
(v)
the amount of net tax
assessed and still unpaid for this period is $166,545.
[19]
I would add that the
answers given by these five directors were generally vague, inaccurate and
ambiguous, and often incomprehensible. Not only were their answers usually
vague and inaccurate, they were also occasionally contradictory. The vast
majority of these directors testified that their companies had filed net tax
reports, but that testimony was contradicted by the very credible testimony of
Ms. Raposo and Mr. Starnino. Several of these directors stated that their
companies had gone bankrupt because the Minister disallowed the ITC they had
claimed. These explanations are simply not valid considering these same
companies had not even filed any net tax returns. Some of the directors did not
even remember the name of the suppliers of the companies they directed and
their sales figures. Mr. Tufenkjian claimed that the sales figure for the
company Ziza was somewhere around $500,000 and $600,000 in 2002 (see
transcript of April 1, 2009, pages 115 et. seq.). On this, the evidence shows
that the company's sales figure was closer to $4 or $6 million. Moreover, Mr.
Hititian (the director of Khristor and Molto‑Bella) claimed that the
sales figure for the company Khristor, for the fiscal year ending June 28,
2005, was around $10 million (see transcript of April 1, 2009, pages 179 and
180). On this, the evidence shows that the sales figure was closer to $24
million. Lastly, Mr. Dakessian stated that the sales figure for the company
Trésor was around $2 or $5 million for 2004 (see transcript of April 1, 2009,
pages 52 to 54). The evidence shows that the sales figure was around $33
million. Of course, the fact these events occurred many years earlier may
explain some of the directors' inaccuracies or memory blanks; that being said, such
errors regarding the sales figures of the companies they directed are
inconceivable. For all these reasons, I grant very little probative value to
the testimony of these directors.
[20]
In my opinion, it is
also very difficult to give any probative value to the testimony of Mr.
Gebenlian, in particular for the following reasons:
(i)
first, during his
testimony, Mr. Gebenlian did his best to explain that a large portion of the
jewellery purchased was sold as scrap gold. In other words, Mr. Gebenlian
explained that one of the appellant's main activities consisted in speculating
on the price of gold. The evidence in this matter (see Exhibit I-1,
volume 1, pages 124 and 125) shows that 48% and 56% of the jewellery
purchased by the appellant had been sold as custom jewellery to retail
jewellery stores in 2003 and 2004, respectively; the balance of the jewellery
purchased was sold as scrap gold at a price usually equal to the weight of the
jewellery in ounces multiplied by the prevailing market price for an ounce of
gold on the day of the sale. However, Mr. Gebenlian told Ms. Raposo from the
start of the audit that in regard to the appellant's activities, [translation] "sometimes the
jewellery ordered did not all get sold, so they sold it as scrap, even at a
loss" (see Exhibit I-1, volume 1, page 7, from the audit report).
Moreover, did the appellant not indicate in its own notice of appeal that it [translation] "operated a jewellery
shop whose activities were the distribution of bulk jewellery, namely creating
custom jewellery"?
(ii)
Mr. Gebenlian claimed
many times during his testimony that the stock of jewellery the appellant
purchased during the period in question were sold the same day or at the latest
two days after they were acquired. The following statements by Mr. Gebenlian
are worth citing:
[translation]
[758] Q. An invoice like that,
you purchased for a good $30,000…
A. Yes.
[759] Q. ... a little more than $30,000 taxes included...
A. $33,000.
[760] Q. ... all that jewellery, how long does
it take to get rid of it, to sell it all?
A. As I told you this morning, maybe
the same day, maybe two days, but I cannot say. It happens sometimes, half that
jewellery I can sell with another five kilos, that might stay for one or two
days.
[761] Q. Could you be stuck with that in stock
for a month?
A. That is impossible, one month,
because I would go bankrupt, because I need to sell. That is also a reason, I
cannot wait, I do not have the capacity to wait more than two, three, four
days, whatever.
[762] Q. So, basically, jewellery purchased on
a Monday, a lot of jewellery purchased…
THE COURT: On average, is sold four days
later.
A. On average, a few days later...
[763] Q. ... on Friday there is none left?
A. It must be sold, yes.
[764] Q. Either to other jewellers, other bulk
vendors or as scrap gold?
A. Exactly.
I must note that most of the directors of the problem
suppliers also confirmed this modus operandi during their testimony,
that, as the appellant, they sold the lots of jewellery purchased almost
immediately. However, the appellant's financial statements (see Exhibit I-1,
volume 1, pages 149 to 152) indicate that it could not have disposed of
this stock of jewellery purchased in such a short time. In fact, these
financial statements indicate that the turnover rate of the appellant's stock
(the Dictionnaire de la comptabilité et de la gestion financière
[Accounting and Financial Management Dictionary], 2nd edition, produced by
Louis Ménard, FCA et al., defines the turnover rate as: [translation] Ratio of activity
indicating the average number of times the inventory is renewed during a period
and which allows for an assessment of the level of stock in relation to the
stock going out, being consumed or sold, and the efficiency with which the
directors manage and dispose of their stock. The turnover rate corresponds to
the quotient that results from dividing the disposition, consumption or sale of
an article, family of articles or all of an article, by the corresponding
average physical inventory. The two terms of this ratio must be expressed on
the same basis, either in quantity or in purchase value, the latter generally
used more often. Frequently, the average physical inventory is replaced with
the inventory at a given time (end of the month, end of the fiscal; year,
etc.), when there is no better option; in this case, it is better to use the
term specific turnover rate.) was 28.83 for its 2003 fiscal year (the figure
obtained by dividing the cost of sales, in this case $1,926,976, by the average
inventory of $77,606) and 16.50 for its 2004 fiscal year (the figure obtained
by dividing the cost of sales, in this case $3,791,059, by the average
inventory of $229,657). Since the appellant likely operated its business for
around 260 days per fiscal year, it would have taken an average of 9.01
business days in 2003 to sell its stock (figure obtained by dividing the number
of business days, in this case 260, by the turnover rate for the period in
question, 28.83) and 15.75 business days in 2004. Moreover, it can also be
stated that if it took the appellant one to three days to sell its stock, as
Mr. Gebenlian claimed, the appellant's average inventory in 2003 would have
been around $7,411 and $22,233 rather than $77,606 according to the
financial statements and its average inventory in 2004 would have been around
$43,742 rather than $229,657 according to its financial statements. I note that
Mr. Gebenlian was unable to explain these significant discrepancies in the time
required to sell the stock stock between his claims and the appellant's
financial statements. It is certainly not by providing contradictory evidence
on such a fundamental point that the appellant might hope to convince me that
it presented a prima facie case that demolished the accuracy of the
Minister's assumptions.
[21]
I would add that the
Ms. Raposo's analysis and conclusion (see Exhibit I‑1,
volume 1, page 10 of her audit report) that indicate it was highly likely
that during the period of May 2004 to October 2004, the company Khristor could
not have sold gold stock for $3,262,524 to the appellant, only added to my
doubts as to the reality of appellant's acquisition of supplies for which it
claimed an ITC of $671,901.61 in its net tax calculation. Two invoices were
issued by the company Trésor (see Exhibit 1‑1, volume 3, pages
657 and 660) on September 17, 2004, and November 17, 2004. I noted that these
two invoices are identical (same description, same payment terms and same sale
price) except they were issued one month apart. What is the likelihood that the
price of gold would be the same on September 17, 2004, and November 17, 2004?
The submission of these two invoices to evidence only adds to my doubts as to
the appellant's real acquisition of supplies for which it claimed an ITC of
$671,901.61 in its net tax calculation. Moreover, it seems unlikely to me
that the appellant was actually involved in activities related to gold
speculation considering it could not easily make a profit by purchasing
jewellery stock at a price that included the cost of labour to make it and then
selling it almost immediately after purchase at a price established solely
based on the market value of gold on the date of sale.
[22]
In my view, the
appellant has not met its initial burden of proof, to present at least a prima
facie case demolishing the Minister's assumptions. The evidence adduced by
the appellant consisted essentially in the testimonies of Mr. Gebenlian and the
five directors of the problem suppliers; these testimonies were simply not
credible in my opinion. Considering my conclusions, it seems useless to address
the second issue and determine whether the invoices prepared by the problem
suppliers meet the requirements set out in the Regulations.
[23]
It is now relevant to
answer the following question: did the Minister meet his burden under section
285 of the Act? Since I am persuaded that the appellant did not genuinely
acquire the supplies for which it claimed ITC of $761,901.61 in its net
tax calculation, the Minister has met his burden of proof as set out in section
285 of the Act.
[24]
For all these reasons,
the appeal is dismissed with costs.
Signed at Ottawa, Canada, this 11th day of March 2010.
"Paul Bédard"
on this 1st
day of June 2010.
François Brunet,
Revisor
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