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Citation: 2004TCC183
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Date: 20040429
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Docket: 2002-1227(GST)I
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BETWEEN:
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2760-3125 QUÉBEC INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Tardif J.
[1] This
is an appeal of an assessment under the Excise Tax Act (the "Act")
related to the Goods and Services Tax ("GST") for the period from
May 1, 1995 to April 30, 1999, which includes interest and
penalties.
The facts
[2] Since 1992, 2760‑3125 Québec Inc. (the
"Appellant"), better known by the business name of
Dépanneur Péribonka enr., has been operating a service station that
includes a small convenience store.
[3] In his testimony, Roger Martel, the Appellant's
shareholder, believed that 85% of the sales made by his business was the sale
of gasoline.
[4] The company also
operated a small snack bar under the business name La Soupière. The two businesses have
different GST registration numbers. The businesses are located on the
same site.
[5] One of the reasons
for the audit was that the Appellant generally claimed more input tax credits
("ITCs") than he remitted in GST. This practice seemed somewhat
unusual given the nature of the business, and the Respondent therefore
implemented the audit process.
[6] After the audit,
the Minister of National Revenue (Minister) issued, on September 14, 2000, a notice of reassessment with respect
to the Appellant's GST for the period from May 1, 1995 to
April 30, 1999 (the "period covered") in the amount of
$15,824.04 including interest and penalties.
[7] The reassessment applied
only to the service station and the convenience store; the snack bar was in no
way affected by the reassessment.
[8] Initially, in
making the reassessment, the Minister assumed a mark‑up of 25%, which he
established using sampling compiled with the assistance of Mr. Martel's
wife.
[9] On
December 4, 2000,
the Appellant submitted a notice of objection.
On November 29, 2001, the Minister issued a corrected
reassessment in the amount of $9,932.23, including interest and penalties. The
reassessment breaks down as follows: GST = $6,835.59, unjustified
ITCs = $972.56, interest = $1,095.41 and
penalties = $1,028.77. To make the reassessment, the Minister first
reduced the mark‑up to 20%, then, after various observations, to 10%.
[10] Although the 10%
mark‑up was essentially consistent with the Appellant's claims, the
corrected assessment during the objections phase still did not satisfy the
Appellant. In his opinion, the assessment should simply have been cancelled.
[11] To support his
claims, shareholder Roger Martel asserted that the mark-up was much lower
than 10%, after having advanced that this was the applicable percentage.
[12] Mr. Martel also
asserted that the assessment should be cancelled, since the Minister had deemed
as taxable sales all the products offered free as part of business promotions,
all the products and merchandise transferred to the snack bar, and, finally,
goods lost through theft and various damage.
[13] Roger Martel,
the shareholder, confirmed that, on average each week, the Appellant gave away
products of an approximate value of $150 as part of promotions and
sponsorships. He believed that the Appellant's annual budget for promotions and
sponsorships was $7,800.
[14] The Appellant
believes it is reasonable to believe that the value of the taxable goods
offered free as promotions and sponsorships equals approximately 2% of his
annual sales. This percentage applies to total sales, including gasoline sales.
[15] The
Dépanneur Péribonka enr. convenience store and the La Soupière snack
bar shared the same cold storage room. Mr. Roger Martel indicated
that he regularly transferred taxable goods from the convenience store to the
La Soupière snack bar. He assessed these transfers at a value of
approximately $10,000 per year.
[16] The Appellant was
not able to clearly determine the amount of non-taxable sales made during the
period covered. It had no records or documents to permit assessment or
tabulation of the value of the products that were distributed without charge as
part of promotions or the value of the merchandise that was subject to
inventory transfer. Even with respect to the losses caused by theft or damage,
the Appellant's statements were essentially guesswork, or arbitrary answers.
[17] The Appellant's main witnesses were Mr. Martel, his spouse, and
Mr. Langis Landry, a tax expert. The accountant who took care of the
books did not testify.
[18] The testimony of Mr. Martel's and his spouse was hardly
convincing. First, I think that Mr. Martel knew a great deal more than he wanted
to let us believe. The inaccuracy, confusion and the lack of answers to some
questions was irreconcilable with the clarity and firmness of some other
answers so that it appears that he adjusted his testimony according to what he
believed was important to his case.
[19] Mr. Martel and his spouse even claimed that they did grocery
shopping several times each day for their personal needs.
[20] Mr. Roger Martel demonstrated a very selective memory: often
very specific for details with little relevance, his answers quickly became
vague, confused and unclear for factors that were, however, very important. See
the transcript of page 63 of the testimony on June 10, 2003:
[TRANSLATION]
Pierre Bernard Bergeron
re-examination of Roger Martel
. . .
Q. Now, let us go
back to a week in which there was a Pepsi promotion.
A. Pepsi promotion?
Q. Yes.
A. Yes.
Q. To one of your
lawyer's questions, you replied that you could have given away up to $400 in
Pepsi in that week.
A. If it was
$13... it cost $13 for eight, there were eight in a… we gave five each day,
sometimes… crates, you know, we gave five of them. That's the promotion we were
running. It actually cost us $0.86, it cost $0.86 per item.
Q. OK. Tell me,
what I want to know is this: did your wife write down in her accounting
"$200/week promotion" or it was – $400 or $100? Was it written down,
under publicity/promotions?
. . .
[21] After sustaining and confirming that promotions could represent up to
$400 per week, when he was required to recognize the actual cost,
Mr. Martel indicated that there had been a promotions book at one time,
but that it had been lost, as he states on pages 69 and 70 of the
testimony of June 10, 2003:
[TRANSLATION]
Pierre Bernard Bergeron’s
re-examination of Roger Martel
. . .
PIERRE B. BERGERON:
Just one little question,
Your Honour.
Q. The promotions
record, you did not find it, you said?
A. No. The
promotions book I had, was in the boxes… when they came to get the boxes, it
was there. We looked until midnight last night to try to find them, I did not
find the sheet, the binder. It was supposed to be in there, but it wasn't. We
looked. We did three boxes to be sure that the promotions book was there, the
sheets we submitted every week were there, the sheets which we submitted every
week, and we didn't find them. They were stapled sheets.
. . .
[22] On several occasions during his testimony, Mr. Martel answered
that his spouse was in a better position to answer the questions adequately.
However, Patricia Carbonneau, who was responsible for the accounting, was
totally unable to provide appropriate answers. It would be more correct to say
that she wrote the journal entries; her testimony revealed that she had neither
the knowledge nor the skill required to understand the significance of the data
she entered.
[23] The Appellant's position could be summarized as follows: [TRANSLATION]
"I collected all the taxes that had to be collected, and I sent them
in. Any assessment is therefore incorrect. I have engaged the services of a tax
expert to prove it."
[24] The tax specialist whose services were retained by the Appellant took
all the Appellant's claims for granted and considered that his mandate was to
convince the Court that the Appellant's claims were correct.
[25] The tax specialist arbitrarily set the percentages for the transfers,
promotions and merchandise lost or stolen and concluded that the Appellant's
claims were well founded. At the same time, he recognized that there were
unusual and significant gaps in the financial statements with respect to the
years used for comparison purposes. He testified about financial statements he
had not prepared, and the individual who did prepare them did not testify. The
following extract, from pages 51, 52, 58 and 61 of the testimony on
November 6, 2003, is quite revealing:
[TRANSLATION]
Frank Archambault’s cross-examination of Langis Landry
. . .
Q. Therefore you
are starting with the total purchases that you took from the forms, in the
manuscripts we saw earlier. OK, so, you are telling me that from
twelve point five percent (12.5%) promotions, you get $7,206. OK.
That percentage for promotions, twelve point five percent (12.5%),
where do you get that? Where are you taking that percentage from?
A. Well, the
percentages, we did… that percentage, I, I have here the follow‑up from
the first day of the hearing, that this was admitted, in any case by our side,
that the transfers were more or less $13,000 according to Mr. Martel’s
testimony and the promotions… in any case, there were… transfers plus the…
there were $18,500 per year, on average. So, then, $18,500 per year, that was
quite a lot, so I reduced it a bit, it would have been thirty percent
(30%), but I dropped it a bit.
Q. O.K. So…
A. But really, I
had room to play with up to $18,500 if I relied on the first day of the
hearing. But you know, 12.5%, I set it a bit… I put 25% for both of them
together, the two factors.
Q. You had 25%
based on the testimony of Mr. Martel, is that what I am to understand?
A. Well yes,
it's… yes…
Q. O.K. There is
no documentation, then, to support what you are saying, that's what I
understand.
A. Correct.
. . .
Q. So with
respect to the percentages set for the promotions, transfers, it's, essentially
to summarize, it was established based on the testimony of Mr. Martel.
With respect to the usual losses that you assessed at three percent (3%),
and which you estimated at $1,730 for 1998, that's based on what? What is the
basis for the percentage of losses?
A. Ah! It's…
Q. How do you get
it?
A. It's a bit…
there is no standard, it's... I set it there. The…
. . .
A. Yes, I was not
there, I don't know which transfer… there are transfers, but which elements
were transferred…
. . .
[26] In short, the Appellant asserted that the many taxable products that
were not sold but given to clients free as part of promotions to boost gasoline
sales, the business' main source of income, partially explain the gap noticed
by the Respondent. With respect to the rest, it was explained that other
products, also taxable, that were not sold but were simply the Appellant's
inventory transferred to the inventory of the snack bar, the La Soupière, as part of the mutual cooperation that existed
between the two businesses.
[27] Mr. Martel completed the explanations by confirming
that certain products bought were not sold because of theft or because these
were products that became unmarketable due to damage. He stated vigorously that
all the sales made at the service station were in fact recorded and that the
tax had been collected.
[28] To support his statements, he reported strict instructions given to
his children and his staff, even adding that when he took a package of chewing
gum, he entered and paid for it.
[29] The significance of the amounts at issue for the inventory transfers,
the promotions and free giveaways of various products during gasoline sales
were also factors that were completely improbable.
[30] The Respondent issued an assessment based on a limited analysis of the
service station and the convenience store, even though the close relationship
with the other business was mentioned. The basis was established using a sample
of the products sold at the convenience store; the mark-up was based on
information given by Mr. Martel's spouse.
[31] Ms. Renée Potvin, the auditor, stated that the Appellant
kept his books very well; on the other hand, she indicated that the records and
the available accounting data did not permit a precise assessment of mark‑up.
She also indicated that the contents of the cash register Z readings could
not be validated or confirmed. According to Ms. Potvin, she could not
verify whether the taxable sales had been recorded in the cash register as
non-taxable or were simply not recorded.
[32] She explained that she had to use an alternative method because it was
totally impossible to confirm the taxable sales with the books that were kept
on‑site. It seems that there was no way to confirm the taxable sales;
therefore, she used an alternative method.
[33] The taxable sales were based on the taxable purchases for which the
Appellant requested ITCs because these were taxable purchases that would later
be sold. Ms. Potvin explained the discussions she had with
Rosaire Tremblay, the Appellant's accountant; he did not testify.
[34] The work conducted by Ms. Potvin seems well summarized in the
following extract from the transcripts, on pages 63, 64, 65, 67 and 68 of
the testimony of November 6, 2003.
[TRANSLATION]
Frank Archambault’s examination of
Renée Potvin
. . .
Q. Can you explain to us briefly
how… what method you used, with respect to your audit, and why you used this
method?
A. OK. First, I used… I did… the
audit took place in two phases. I did one part that is quite standard. I
verified that the taxes in the books were submitted correctly, that the
statements made to the Minister were correct, that there were supporting
documents for the ITCs and the input tax refunds claimed and that this was in
fact in the books.
Then, I proceeded with the
second step, and, well, with respect to the convenience store, we know that
there was a lot of… there are non‑taxables; therefore there are… We did
tests to see whether the taxes were claimed correctly. Then, well, when I did
the first tests, I could see that the taxes claimed were very high compared to
the taxes that were remitted. Because, normally, a taxable sale, we start with
the principle that a taxable sale will… a taxable purchase, excuse me, will
lead to a taxable sale, therefore there must be a certain percentage profit
taken from it. Therefore we decided that… Since it's difficult because the non‑taxables
are counted from the cash register Z readings, from the books, we decided to
use a method, an alternative method that is based on reconstructing the ITCs,
so the ITCs for the convenience store resales.
THE HONOURABLE JUSTICE
Q. Tell me about the accounting, I
mean, what was available for this work?
A. Well, what was available were the
books we had there, the general ledger, the journals with each purchase
entered, with the taxes claimed, each cash register Z reading, each end-of-day
cash reconciliation with income, taxes payable, gasoline sales and all that,
which were recorded daily. That's what was available, with all the invoices to
support it and the cash register Z readings, the little… the summaries for each
day on the cash register.
. . .
A. Those, those were amounts that
were… that were assessed because, well, at the time of the purchase, the
amounts were claimed, which is completely normal, except that there are suppliers
who were paid with stock that was taken, either gasoline or stock taken from
the convenience store then, at that time, the ITCs and input tax refunds were
claimed a second time. So that was claimed twice, so I cut a part; the part
that was claimed twice, I assessed it.
. . .
Analysis
[35] The Appellant had several means available to him to support the
validity of his claims, such as the presence of competent witnesses to
demonstrate the reality of the competition to which he referred several times
to justify the many giveaways and to ensure the concession for gasoline sales.
[36] Was there a relationship between gasoline sales and the generous
promotions? Nothing of the sort was demonstrated; Mr. Martel testified
according to his recollection, which, more often than not, was vague, hazy and
very unclear.
[37] When a business decides to invest in publicity and promotion,
especially when it involves an unusual, if not uncommon, scenario that is not
very consistent with custom and usage, it therefore becomes imperative to
gather as much information and documentation as possible in order to attest to
the its validity, especially when the business is an agent for the collection
of taxes, as a rule, on all sales.
[38] Although the Appellant's claims were that the giveaways and transfers
were negligible in comparison to the amount of gasoline sales, this does not
excuse or justify the total absence of records in this respect, all the more
because these were products presumed to be taxable.
[39] Having the burden of proof or the responsibility therefore is very
demanding. This is a very heavy, challenging and restrictive obligation, not a
banal statement with no impact. It is not sufficient to criticize and attack
the evidence presented by the other side or to bring out vague factors likely
to make the desired conclusions possible.
[40] It is essential to demonstrate, using objective and credible factors,
that the desired conclusions are reasonable and probable. There must be, among
other things, probable, reasonable, coherent claims that are consistent with
all the facts and accounting data available. If an agent does not fill out the
necessary records to enable him to be accountable with all the relevant
supporting documents, he exposes himself to having to assume the consequences
of his arbitrary explanations.
[41] When an individual does not ensure he has in his possession all the
relevant documents to support his claims, he must therefore use an alternative
method, which is arbitrary by nature.
[42] Unfortunately, the government must often use such methods to collect
what it is owed. The argument that the same logic can be used to support the
merits of an appeal does not hold. The total or partial absence of relevant
information or documents constitutes negligence, if not an error, which has
consequences for the person who committed it. In other words, it is totally
unacceptable for an agent to use evidence that is essentially verbal and
unsupported by evidence that is relevant for the rendering of accounts required
during an audit.
[43] Challenging the validity of an assessment is difficult and restrictive
as a result of the obligation to satisfy the burden of proof. It is especially
perilous to do so when one does not have possession of the evidence, documents
or other items to challenge the accuracy of an assessment in a probable and
reasonable manner, from which arises the real danger of having to assume the
consequences of an assessment, even though it is marked by arbitrariness. An
assessment is always assumed to be correct and well founded.
[44] The need to use an alternative method does not exempt the government
from the obligation to proceed in keeping with generally accepted practices.
An assessment must be the result of serious professional work that is
conducted consistently with generally accepted practices in the circumstances.
[45] In this case, the Respondent audited the Appellant's file using an
alternative method. The information and explanations available during the tour
of the premises made the reality of the two businesses clear, so that it would
have been appropriate, under the circumstances, to audit both businesses, all
the more so because the Appellant used the snack bar to justify the taxes that
were not collected on products from the convenience store.
[46] Yet the information was not validated by an audit of the snack bar;
the assessment was based on a percentage that was considered normal in these
matters. Then everything was rounded down, first by 5% and then by an
additional amount of 10%, or a difference of 15% between the
first assessment and the assessment that was corrected at the objections
stage.
[47] Although sometimes there may be difficulties and obstacles primarily
caused by accounting that was totally deficient, if not totally non-existent,
and therefore likely to produce an arbitrary result, it is still important to
show the credibility and reasonableness of the assessment, by facts or
documents specific to the business and not only using standards related to the
economic activity of the business that is being audited.
[48] The fact that the burden of proof is on the individual contesting the
accuracy of the assessment should have no effect on the quality of the work
done to establish or justify some laxness.
[49] In this file, the Respondent was responsible for establishing a
convincing assessment. It appears from the evidence that the assessment was
based on incomplete facts. Although it was certainly the Appellant's
responsibility, the Respondent could still have validated a portion of his
claims by conducting a parallel audit of the snack bar, thereby obtaining very
relevant information.
[50] The Appellant required the cooperation and presence of a tax
specialist to support his claims. Rather than submit a presentation based on
the Appellant's accounting data, he essentially referred to a working document
prepared by the Respondent, the reliability of which was questionable, since it
was a document prepared as part of negotiations to which he was not a party.
[51] The data that appear therein are essentially working hypotheses
developed during discussions between the auditor and Mr. Tremblay, the
Appellant's accountant, who furthermore did not testify.
[52] During his testimony, the tax specialist never used any compilation of
data from the Appellant who had in fact dealt with an accountant. Essentially,
the specialist attempted to criticize the work conducted to establish the
assessment. He should have focused his energies on developing work that was
based on the Appellant's accounting data instead of trying to ridicule the work
that gave rise to the assessment.
[53] To satisfy the burden of proof, it is not sufficient to contest
certain points here and there and to suggest certain interpretations of certain
figures presented by the opposing party. It is essential to base one's
reasoning and arguments on relevant and, especially, real data from the
business involved.
[54] Yet, in this respect, the evidence essentially attempted to
demonstrate that, according to the Appellant, there was a specific context with
the objective of selling as much gasoline as possible. In other words, the
focus was on selling gas, at the risk of operating the convenience store at a
loss. This approach was neither documented nor proven.
[55] Such a scenario was possible, but unlikely, especially because the
only available piece of evidence with which to judge its validity was the
self-serving testimony of Mr. Martel, which was of no value since it is
not credible.
[56] The credibility of a testimony has nothing to do with the difficulties
an individual might have in life. Credibility lies in the facts and data that
could validate the verbal explanations. The confusion relating to some answers
and the exemplary precision in other cases is surely an indicator that a great
deal of caution is required with respect to credibility, if not the pure and
simple rejection of a testimony.
[57] In any case, I simply do not believe the statements that quite
significant amounts of money were invested in promoting activities related to
gasoline sales.
[58] The assessment being appealed was assumed to be correct. It was the
Appellant's responsibility to prove that is was not justifiable in terms of the
law.
[59] To do this, the Appellant provided verbal explanations that were
unsubstantiated by appropriate accounting. It essentially advanced
uncorroborated hypotheses.
[60] The snack bar was not audited. On the other hand, the original
assessment was corrected significantly, which creates the impression that the
Respondent never was comfortable with the basis for the assessment. To top it
all off, the Respondent indicated that the Appellant's bookkeeping was
acceptable.
[61] Given this, I cannot disregard the fact that the burden of proof is
upon the Appellant. Certainly it was useful to show the arbitrariness used when
establishing the assessment, but that was insufficient for drawing a conclusion
with respect to the validity of the appeal. The Appellant had to credibly and
plausibly establish that his conclusions were correct and well founded.
[62] The Appellant freely chose to operate two business activities through
two businesses with separate GST registrations, accounting and bank accounts.
According to the testimony of Mr. Martel and his spouse, they made this
distinction to the point of completely separating their personal food needs.
[63] According to their testimony, they took absolutely nothing from either
of the businesses and did their shopping at a specific supplier’s in order to
avoid any confusion.
[64] Both businesses were operated using two separate GST registration
numbers, which has a whole series of consequences, specifically, two accounting
systems, two registration numbers, two inventories, two tax returns, etc.
[65] After making this demanding choice, without doubt for reasons of
transparency and to ensure better follow-up, these same people then state that
they might make exchanges, loans and merchandise repayments for amounts of up
to $7,000 to $10,000, without any records.
[66] What explanation can there be for such strict discipline for one
aspect of the operations and such a jumble for aspects such as transfers and
promotions, which have considerable tax implications?
[67] After we were told that the accounting was adequate, which in fact was
recognized in part by the Respondent's auditor, it appears that the accounting
was not sufficiently detailed to permit an audit that could provide conclusive
findings. This is clear from the following extract on pages 116 and 117 of
the transcripts from June 10, 2003:
[TRANSLATION]
Pierre Bernard Bergeron’s
examination of Langis Landry
. . .
A. . . .
So then, the analysis… after some searching we became aware that if we deflated
the "Purchases" account by the promotions and transfers that were
made to the other restaurant, we would have arrived at a lower amount of
purchases, and we could have compared it with the sales and could have managed
to re-establish the gross margin.
However, the
problem was the accounting book in which the "purchases" item was not
deflated by the promotions and transfers to the restaurant. So I said to
Ms. Potvin, about this: "You might want to… there were transfers to
the restaurant, or so we should, if we want to have a real idea, we should
audit the restaurant..."
[68] On several occasions over the two days of the hearing, I stressed the
need to submit rationally based evidence to the court, so that it would be
possible to deduce reliable conclusions with a reliable basis.
[69] Unfortunately, such evidence did not arrive, and I must dispose of the
appeal in accordance with the evidence submitted, which does not permit a
rational conclusion.
[70] Although the parties' evidence was presented by witnesses who were
supposed to have the necessary expertise and skills to submit an articulate,
coherent and reliable presentation, this was not the case.
[71] Although the evidence demonstrated otherwise, the Respondent indicated
that the Appellant's accounting was acceptable. I admit I did not understood
how the Appellant's accounting could be called acceptable, since it did not
permit an adequate audit with respect to the Appellant's obligation to collect
and remit GST on taxable supplies and with respect to his right to claim the
ITCs due.
[72] No doubt believing that our court has the innate ability to discover
what the assessment should have been, the parties were satisfied with
incomplete and totally deficient evidence.
[73] For all these reasons, given the impossibility of making a conclusion
based on reliable foundations, the appeal is allowed, and I am referring the
file to the Respondent for review and reassessment in consideration of the fact
that the GST amount, which was $6,835.39, must be reduced to $3,500, to
which must be added $972.56 for the ITCs that were not due, plus the interest
and penalties under the Act. The whole without costs.
Signed at Ottawa, Canada, this 29th day of
April 2004.
Tardif J.
Translation certified true
on this 20th day
of September 2004.
Shulamit Day, Translator
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