Citation: 2007TCC106
Date: 20070219
Docket: 2005-938(GST)G
BETWEEN:
BOBBY LEE BAKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] The Minister of
National Revenue, through the Quebec Minister of Revenue (the “Minister”), issued
an assessment against the appellant under the Excise Tax Act (the “Act”)
because the appellant had failed to report and pay the goods and services tax
(“GST”) during the period from January 1, 1997, to December 31, 2000 (the
“relevant period”).
[2] During the relevant
period, the appellant operated a business involving the sale of rebuilt
vehicles (the “business”). In 1997 and 2000, the appellant did not keep records
relating to the operation of his business. In addition, the records for 1998
and 1999 were incomplete. When the Minister did his audit, the documents, in
particular the supporting documentation (such as sales invoices), pertaining to
the operation of the business during the relevant period, which documents would
have enabled the Minister to establish the appellant’s obligations and
responsibilities under Part IX of the Act, were not made available to the
Minister when he requested them. Only part of the supporting documentation
relating to purchases made by the appellant in the operation of his business was
made available to the Minister.
[3] The appellant
declared the following gross revenues and net revenues from the operation of
his business during the relevant period:
|
|
1997
|
1998
|
1999
|
2000
|
|
Gross revenue
|
Nil
|
$130,906
|
$54,560
|
$7,540
|
|
Net revenue
|
Nil
|
$23,661
|
($11,358)
|
$7,540
|
[4] In the absence of
the necessary information, the audit of the appellant’s sales was based, as a
last resort, on the bank deposits made to the appellant’s only bank account.
[5] Thus, using these
bank statements, the Minister compiled all of the appellant’s deposits for each
year of the relevant period and rightly deducted from the deposits all of the
amounts that cannot be considered to represent sales, such as loans and
rebates. The total net deposits so calculated by the Minister are as follows:
|
|
1997
|
1998
|
1999
|
2000
|
|
Net deposits
|
$55,666.63
|
$200,010.45
|
$130,215.33
|
$98,831.04
|
[6] The Minister arrived
at a total sales amount for the relevant period by adding the total net
deposits and making the adjustments appearing in the tables prepared by the
auditor and reproduced in Schedule A attached hereto.
[7] Thus, for 1997, the
Minister determined that the appellant’s net deposits totalled $55,666.63. To calculate the appellant’s
sales for that year, the Minister deducted the following amounts from these net
deposits:
(i) the employment
income declared by the appellant for the same year, i.e., $1,272.00;
(ii) $30,000.00 under
the small supplier rule.
[8] For 1998, the
Minister determined that the appellant's net deposits totalled $200,010.45. To
calculate the appellant’s sales for that year, the Minister subtracted the
following amounts from these net deposits:
(i) $130,906.54
representing the gross revenue declared by the appellant for the same year
(Exhibit 1-4);
(ii) $2,093.46
representing the GST declared by the appellant for the same year;
(iii) $18 000.03. The appellant paid a GST
amount corresponding to sales totalling $148,906 for the period from January 1,
1998, to December 31, 1998, while the sales declared by the appellant in his
income tax return for the 1998 taxation year (Exhibit 1-4) totalled
$130,906.54. The Minister took into account this difference of $18,000.03 in
establishing the appellant’s sales during that taxation year.
[9] For the 1999
taxation year, the Minister determined that the appellant’s net deposits
totalled $103,215.33. To determine the sales for that year, the Minister made
the following adjustments:
(a) he first subtracted the following
amounts from the net deposits:
(i) $54,660.00 representing the gross
revenue declared by the appellant for that year (Exhibit I-5);
(ii) $3,862.19 representing the GST reported
by the appellant for that year;
(iii) $3,256.88 representing the QST reported
by the appellant for that year.
b) he added to the net deposits the sum of
$20,000 representing a personal expense paid by the appellant in cash that did
not come from the appellant’s bank account. This personal expense was related
to the appellant’s payment of a fine of $20,000 that he had incurred for being
found guilty of vehicle theft.
[10] Finally, for the
2000 taxation year, the Minister determined that the appellant’s net deposits
totalled $98,831.04. To determine the appellant’s sales for that year, the
Minister made the following adjustments:
(a) he first subtracted
from the net deposits the sum of $7,540 representing the gross revenue declared
by the appellant for that year (Exhibit 1‑6);
(b) he then added to the
net deposits the sum of $8,500 representing the purchases made by the appellant
in the operation of his business, which purchases were paid for in cash that
did not come from his bank account.
[11] The Minister thus determined
the appellant’s sales from the operation of his business during the relevant
period to be $234,732.35, that is, $54,394.63, $49,010.42, $61,536.26 and
$99,791.04 for the years 1997, 1998, 1999 and 2000 respectively.
[12] After determining
that the appellant’s total sales from the operation of his business were
$234,732.35 during the relevant period, the Minister calculated the total
amount of GST that the appellant was required to collect on the total amount of
taxable supplies to be $16,431.26.
[13] From the audit of
the appellant’s bank deposits, the Minister was able to see that in the
operation of his business the appellant had made purchases that entitled him to
input tax credits (“ITC”). So the Minister subtracted an amount of $2,337.71 that
he allowed as ITCs from the total GST amount of $16,431.26 that the appellant
was required to collect on the total of the taxable supplies for the relevant
period. The amount of the adjustments to the net tax reported was therefore
established at $14,197.55, i.e., $16,431.26 less $2,233.71, and this is the
amount that was assessed. According to the Minister, the appellant therefore
owed the amount of the adjustments made to his net tax reported for the
relevant period, plus interest ($2,880.54) and penalties ($6,383.90).
[14] The following are
the questions raised in this case:
(i) Did the appellant
refute the GST assessment made by the Minister?
(ii) Was the appellant
entitled to receive additional ITCs?
(iii) Did the Minister assess
the penalties and interest in accordance with sections 280 and 285 of the Act?
Appellant’s evidence
[15] The appellant’s
evidence was essentially based on his own testimony as well as on the report
and testimony of his expert witness, Gérard Côté, CGA.
Appellant’s testimony
[16] The appellant’s
memory was faulty and his implausible testimony did not tell us much of any
relevance, apart from the fact that most of the supporting documents related to
the operation of his business were apparently destroyed when his residence was
flooded. It should be pointed out that the appellant did not tell us anything
regarding the circumstances of the flooding of his residence. He did not even see
fit to specify the date of the flood. The appellant could have filed as
evidence documents pertaining to the flooding, such as a proof of claim submitted
to his insurers showing that the flooding took place. He did not do so. The appellant
could have supported his allegations concerning the flood by calling
independent and credible witnesses. He did not do so. I conclude from this that
such evidence would have been unfavourable to him.
[17] The appellant
presented as evidence the report of his expert witness, Gérard Côté, CGA,
filed as Exhibits A-1 and A‑2. Mr. Côté testified that he had obtained
information from the Société d’assurance automobile du Québec (“SAAQ”) showing
that the appellant and his spouse had made during the relevant period the
following transactions:
(a) Vehicle purchases
|
|
Appellant
|
Spouse
|
|
1997
|
14
|
|
|
1998
|
41
|
1
|
|
1999
|
10
|
7
|
|
2000
|
7
|
14
|
|
Total
|
72
|
22
|
(b) Vehicle sales by the appellant and his
spouse
|
1997
|
17
|
|
1998
|
39
|
|
1999
|
14
|
|
2000
|
5
|
|
Total
|
75
|
[18] Mr. Côté testified
that the appellant had 5 vehicles in inventory at the end of the relevant
period and that he had also kept 23 vehicles to salvage the tires.
[19] Mr. Côté testified
that the Minister should have established the sale price of the 75 vehicles in
question and the cost of the 103 vehicles in question on the basis of the values
used by the SAAQ for the purpose of determining licensing fees, which values
are taken from the Guide d’évaluation des automobiles et des camions légers
(car and light truck evaluation guide) published by Hebdo Mag inc. (the
“Guide”). Mr. Côté pointed out that the SAAQ establishes the value of a used
vehicle as being the higher of the two following amounts:
(i) the purchase price;
(ii) the average
wholesale selling price shown in the Guide.
[20] Mr. Côté indicated
in his testimony that, if the Minister had used that method:
(a) The appellant’s
taxable supplies would have totalled:
(i) $82,700 in 1997;
(ii) $274,107 in 1998;
(iii) $119,375 in 1999;
and
(iv) $42,300 in 2000.
(b) The purchases would have totalled:
(i) $51,200 in 1997;
(ii) $259,702 in 1998;
(iii) $64,315 in 1999;
(iv) $22,650 in 2000.
[21] Mr. Côté estimated
the operating costs of the appellant’s business at 15% of the value of his
purchases, i.e. $7,680, $38,955, $9,647 and $3,397 for 1997, 1998, 1999
and 2000 respectively.
[22] Mr. Côté estimated
the selling costs related to the operation of the appellant’s business at 5% of
his sales, i.e., $4,135, $13,705, $5,968 and $2,115 for 1997, 1998, 1999 and
2000 respectively.
[23] Mr. Côté calculated as
follows the appellant’s net tax for the relevant period:
|
|
1997
|
1998
|
1999
|
2000
|
|
Taxable supplies
|
$82,700.00
|
$274,107.00
|
$119,375.00
|
$42,300.00
|
|
Vehicle
purchases
|
$51,200.00
|
$259,702.00
|
$64,315.00
|
$397,867.00
|
|
Operating costs
(15% of purchases)
|
$7,680.00
|
$38,955.30
|
$9,647.25
|
$59,680.05
|
|
Selling costs
(5% of sales)
|
$4,135.00
|
$13,705.35
|
$5,968.75
|
$25,924.10
|
|
Total
|
$63,015.00
|
$312,362.65
|
$79,931.00
|
$483,471.15
|
Tax due
|
|
1997
|
1998
|
1999
|
2000
|
|
GST
|
$5,789.00
|
$19,187.49
|
$8,356.25
|
$2,961.00
|
|
Input tax credits
|
$4,411.05
|
$21,865.39
|
$5,595.17
|
$1,971.38
|
|
GST payable
|
$1,377.95
|
($2,127.90)
|
$2,761.08
|
$989.63
|
Analysis and conclusion
[24] Subsection 286(1) of
the Act sets out the obligation of every person who carries on a business to
keep sufficient records to allow the Minister to determine the obligations,
liabilities and rights of the person under Part IX. If the required information
is not adequate or available, the Act specifies at subsection 299(1) that the
Minister is not bound by any return and may make his own assessment. Since the
information in the present case was not adequate or available, the auditor, as
a last resort, used the bank deposit method to establish the appellant's sales
related to the operation of his business during the relevant period and made
the necessary adjustments. Under the circumstances, this approach was
acceptable, indeed necessary.
[25] In this case, the appellant
had to demonstrate, on a balance of probabilities, that the Minister’s numbers
were erroneous, doing so through the use of supporting documentation or through
the testimony of independent and credible witnesses. It is incumbent on the
taxpayer to establish, on a balance of probabilities, that the assessment is
too high in light of the applicable law and the pertinent facts. It is not
enough for the taxpayer to demonstrate that it is conceivable that the
assessment is too high. The taxpayer cannot use another, equally arbitrary method,
to demonstrate that the amount of net tax assessed by the Minister was too
high. Moreover, I note that the sales amount established by the appellant’s
expert is greater than that established by the Minister using the bank deposit
method and making certain adjustments.
[26] To establish the appellant’s
net tax, Mr. Côté calculated the input tax credits using a purely arbitrary
method. I would point out that Mr. Côté established the appellant’s ITCs on the
basis of the cost of vehicle purchases, i.e., the average wholesale price as it
appears in the Guide, the estimated operating costs of the business and the
estimated selling costs related to operating the business, determined using an
equally arbitrary method and not based on supporting documentation.
[27] Under subsection
169(1) of the Act, GST registrants that make taxable supplies are entitled to
receive ITCs on the purchase of goods or services that are to be used in their
business activities. ITC claims are calculated on a self-evaluation basis.
Paragraph 169(4)(a) of the Act requires that, before filing their
returns, registrants obtain sufficient information to determine the amount of
ITCs that can be granted. Section 3 of the Input Tax Credit Information
(GST/HST) Regulations made under the Act (the “Regulations”) sets
out the necessary evidence, while the concept supporting documentation is
defined at section 2 as follows:
“supporting documentation” means the form in which information
prescribed by section 3 is contained, and includes
(a) an invoice,
(b) a receipt,
(c) a credit-card
receipt,
(d) a debit note,
(e) a book or
ledger of account,
(f) a written
contract or agreement,
(g) any record contained in a computerized or
electronic retrieval or data storage system, and
(h) any other document
validly issued or signed by a registrant in respect of a supply made by the
registrant in respect of which there is tax paid or payable. (pièce
justificative)
[28] Subsection 169(4) of
the Act and the Regulations are clear and the courts have adopted the position
that a registrant is not entitled to receive the ITCs claimed before the
required supporting documentation has been filed. In this case, the appellant
did not produce as evidence the required supporting documentation and, therefore,
he was not entitled to receive the ITCs claimed.
[29] As for the interest
payable by the appellant under section 280 of the Act, I will simply point out
that the power to cancel such interest can only be exercised by the Minister
under the provisions of section 281.1 of the Act and is not subject to review
by this Court.
[30] To establish the
penalties applicable to the appellant, the Minister relied, in particular, on
subsection 280(1) of the Act, which provides as follows:
280(1) Subject to this section and section 281, where a person fails to
remit or pay an amount to the Receiver General when required under this Part,
the person shall pay on the amount not remitted or paid
(a) a penalty of 6%
per year, and
(b) interest at
the prescribed rate,
computed for the
period beginning on the first day following the day on or before which the
amount was required to be remitted or paid and ending on the day the amount is
remitted or paid.
[31] The penalties
imposed under this subsection relate to offences that fall under the category
of strict liability offences and these penalties can be challenged if the
taxpayer exercised due diligence. As a result of the implicit acknowledgement
of the due diligence defence with regard to section 280, the registrant has the
burden of proving that he or she has exercised due diligence with respect to
the payment of the correct GST amount. In this case, the appellant has not
submitted any evidence in that respect.
[32] As for the penalty
imposed under section 285 of the Act, I am of the opinion that the respondent
had the burden of proving, on a balance of probabilities, that the appellant,
knowingly, or under circumstances amounting to gross negligence, made a false
statement or an omission in his GST returns and that the assessment of the penalty
prescribed in section 285 of the Act was therefore justified.
[33] I will point out in
this regard that the evidence revealed that:
(i) Lise Tétrault had
notified the appellant on January 13, 1999 (Exhibit 1-8) that he had to have a
bank account for his business and that he had to issue invoices for each
vehicle sold, but he disregarded the notice so given;
(ii) the appellant kept
no books for 1997 and 2000, but did keep books for 1998 and 1999;
(iii) the appellant
filed a form (Exhibit 1-7), signed on April 30, 2000, indicating that he had
ceased his operations on December 31, 1999, while his tax return filed for his
2000 taxation year indicated that his gross business income was $7,540;
(iv) the tax return
filed by the appellant for his 1997 taxation year indicated that he had not
operated any business, yet the evidence in this case very clearly demonstrated
the opposite;
(v) the appellant had
kept practically no documentation justifying the amount of GST that he paid and
the input tax credits that he claimed.
[34] These facts are more
than sufficient grounds for concluding that the appellant knowingly made false
statements for the years concerned in this appeal.
[35] For these reasons,
the appeal is dismissed with costs.
Signed at Ottawa, Canada, this 19th day of February 2007.
“Paul Bédard”
on this 8th day of
February 2008.
Erich Klein, Revisor
Email this Content