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Citation: 2003TCC383
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Date: 20030603
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Docket: 1999-1649(GST)I
1999-1650(GST)I
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BETWEEN:
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KHULLAR AU GOURMET INTERNATIONAL LTD.,
and KHULLAR GOURMET FOODS LTD.,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
McArthur J.
[1] The Minister of National Revenue
assessed the Appellants under the Excise Tax Act for
failing to report and remit goods and services tax during the
period July 1, 1992 to March 31, 1996. Also, the amounts for
input tax credits claimed by the Appellants in their GST returns
were in dispute. The appeals were heard on common evidence.
[2] Mr. Khullar is the operator and
sole shareholder of the Appellants' two convenience stores in the
City of Montréal which he ran as a consolidated operation
of two companies, Khullar Au Gourmet International Ltd.
("International") and Khullar Gourmet Foods Ltd.
("Foods").[1] The Appellants sold both taxable and exempt supplies
within the meaning of the Act. Some revenue was derived
from the conversion of foreign currency into Canadian funds. Mr.
Khullar submits that the Appellants were remitting GST and Quebec
Sales Tax at all relevant times.
[3] In the spring of 1996, Yvette
Lambert, a Canada Customs and Revenue Agency auditor, conducted
an audit of the Appellants' accounts with respect to GST and QST
for the period under appeal. At that time, Mr. Khullar was asked
to provide documents relating to the purchases and sales of the
Appellants, including their books of accounts, bank account
statements, cash register receipts, etc. Mr. Khullar gave
her a notebook he used to record such information along with a
bag containing 173 receipts dating from January to April 1996.
The receipts were in disarray and the information contained in
the notebook was, for the most part, unintelligible. Mr. Khullar
admitted that he did not keep either his invoices or the cash
register receipts.
[4] In the absence of the necessary
documentation required to ascertain the sales of the Appellant,
as a last resort the audit was based on bank deposits to the
corporate accounts. The auditor arrived at the amount of total
sales by adding the total deposits and deducting the transfers to
the three accounts[2] which were deposits from the Appellants' lines of
credit, certain corrections and returned goods.
[5] The auditor did not accept Mr.
Khullar's explanation that a number of the deposits were
attributed to loans from his brother or other family members as
he had no documentation or other proof of such loans. She
estimated the Appellants' total sales to be $2,637,526 for
Foods and $2,438,427 for International. The percentage of sales
attributable to taxable supplies she estimated to be 81.64%. The
Minister then calculated that the Appellants failed to remit GST
for Foods in the amount of $81,784 and for International in the
amount of $74,869. The second part of the audit dealt with the
determination of the amount of the Appellants' input tax
credits. Based on existing invoices, the auditor allowed the
additional amount of $2,548.26 for Foods and nil for
International.
[6] On December 20, 1996, the
Appellants filed Notices of Objection to the assessments. Mr.
Khullar was given time to refute the Minister's assessments. He
submits that in May 1998, most of his documents were destroyed in
a flood at the Sherbrooke Street premises. Subsequently, he made
substantial efforts to obtain duplicate receipts from his
suppliers, with limited success. The assessments were confirmed
on December 11, 1998 and the Minister assessed penalties and
interest pursuant to sections 280 and 285 of the Act. The
Appellants subsequently filed Notices of Appeal. In June 2001,
the Appellants submitted further receipts. Additional input tax
credits were recognized in the amounts of $26,314 and $11,260 for
Foods and International, respectively.
[7] The issues include:
(i)
Did the Appellants refute the Minister's GST assessments?
(ii)
Are the Appellants entitled to further input tax credits?
(iii)
Can the Minister assess the Appellants' GST liabilities past the
normal period of reassessment regarding the period July and
August 1992? and
(iv)
Did the Minister properly assess penalties and interest pursuant
to sections 280 and 285 of the Act?
[8] I will now deal with the first
issue. Subsection 286(1) of the Act imposes the obligation
to keep books and records sufficient to enable the Minister to
determine the person's liabilities, obligations and entitlements
under Part IX. Should the necessary information be inadequate or
unavailable, the Act stipulates under subsection 299(1)
that the Minister is not bound by any return and may make his or
her own assessment.
[9] Because the Appellants did not
keep proper records, the auditor, as a last resort, completed a
modified net worth of the Appellants as documented in their bank
transactions. Under the circumstances, this approach was
acceptable and necessary. The auditor concluded that the
Appellants' total sales were $2,637,526 for Foods and $2,438,427
for International. Applying a percentage of 81.64% in the
auditor's calculations,[3] this yielded GST liabilities of $81,784 and $74,869
for Foods and International, respectively. This method operates
primarily on the assumption that all the amounts deposited were
from the Appellants' sales. Counsel for the Appellants
vigorously challenged the Minister's methodology.
[10] In commenting on the use of a similar
method under subsection 152(7) of the Income Tax Act which
is the counterpart of subsection 299(1) in the Excise Tax
Act, Judge Bowman summarized the problems a taxpayer
faces when a net worth method is applied in the case of Ramey
v. The Queen:[4]
... The net worth method of estimating income is an
unsatisfactory and imprecise way of determining a taxpayer's
income for the year. It is a blunt instrument of which the
Minister must avail himself as a last resort. A net worth
assessment involves a comparison of a taxpayer's net worth,
i.e., the cost of his assets less his liabilities, at the
beginning of a year, with his net worth at the end of the year.
To the difference so determined there are added his expenditures
in the year. The resulting figure is assumed to be his income
unless the taxpayer establishes the contrary. Such assessments
may be inaccurate within a range of indeterminate magnitude but
unless they are shown to be wrong they stand. It is almost
impossible to challenge such assessments piecemeal. The only
truly effective way of disputing them is by means of a complete
reconstruction of a taxpayer's income for a year. A taxpayer
whose business records and method of reporting income are in such
a state of disarray that a net worth assessment is required is
frequently the author of his or her own misfortunes. ...
The Minister's reliance on this imprecise method of
calculating the Appellants' GST liability was because of the
lack of proper business records. As stated by Judge Bowman,
although the resulting tax liability may be questionable, unless
shown wrong, it stands. The Minister has the right to challenge
the legitimacy of the taxpayer's numbers if they are suspect.
The onus falls on the taxpayer to show that the figures of the
Minister are incorrect.
[11] By virtue of subsection 299(3) of the
Act, an assessment is deemed to be valid unless it is
vacated on an objection or appeal. To be successful, the
Appellant must demonstrate on a balance of probabilities that the
assessment is incorrect.[5] Bonner, J. of this Court in Fletcher v. The
Queen[6]gives a
good description of a taxpayer's burden of proof,
stating:
In an appeal from an assessment of income tax the onus is on
the taxpayer to establish on the balance of probabilities that
the assessment is too high having regard to the law and the
relevant facts. It is not enough for the taxpayer to show that
the assessment might conceivably be too high. He must adduce
credible evidence showing that on a proper and complete net worth
his income is lower than the Minister found it to be. Where a
taxpayer has placed himself in a position in which a direct and
accurate measurement of income is impossible he can hardly
complain in the course of an appeal from a net worth assessment
of the inaccuracies inherent in that method.
Appellants' Evidence
[12] The Appellants admitted that their
records were either non-existent or in disorder. Mr. Khullar
attempted at great length to re-create the Appellants'
respective financial situations. He produced five large boxes of
evidence containing forty exhibits, some of which had
sub-exhibits. They included: (i) a large number of invoices from
some of the Appellants' larger suppliers (Molson's
Breweries, Provigo, Messageries de Presse Benjamin, among
others); (ii) provision agreements; (iii) a great number of
cancelled cheques; (iv) bank documents (originals and
photocopies); (v) photocopies of journal entries presumably made
by Mr. Khullar; (vi) handwritten lists outlining loans made
to the Appellants and the lending parties; and (vii) the lease
agreements of the Appellants and their respective stores'
floor plans.
[13] Some items, such as the lease
agreements and floor plans, were of little assistance. I would
add to this category the letters and faxes sent by the Appellants
to suppliers asking for copies of past invoices, the lists of
unintelligible figures submitted without explanatory notes, and
the numerous photocopies of bank tellers' stamps on otherwise
blank deposit stubs.
[14] Of interest were the handwritten and
computer-generated spreadsheets composed by Mr. Khullar
containing his version of the Appellants' purchases.
Unfortunately, even the most pertinent pieces of
Mr. Khullar's evidence were riddled with errors which
not only have the effect of discrediting the evidence he put
forward but also placing Mr. Khullar's own mathematical
abilities in doubt. For instance, Mr. Khullar referred to
invoices from Provigo, bringing several examples to the
Court's attention, in the hope of illustrating that the
percentage of the Appellants' sales attributable to taxable
supplies was far less than the 81.64% calculated by the Minister.
However, the determination of the liabilities for GST should be
calculated by multiplying the total taxable sales by seven
percent, not the total of taxable purchases. The method selected
by Mr. Khullar was more illustrative of the GST liability of
Provigo than that of the Appellants. Even if Mr. Khullar
could show that the figure of 81.64% was not representative of
the percentage attributable to taxable supplies on the Provigo
invoices, this would only impact the amount the Appellants would
receive as input tax credits. Ironically, he may be doing himself
a disservice by arguing that this percentage is lower as it is
the equivalent of arguing that the Appellants should receive less
money from the Minister in ITCs.
[15] Further, Mr. Khullar committed basic
mathematical errors in failing to subtract the GST from the total
amount of the invoice before determining the percentage
attributable to taxable supplies. The result is that his figure
for the total amount of taxable purchases is divided by 107% of
the total purchase price instead of 100%. Consequently, the
resulting percentages in Mr. Khullar's calculations are
approximately 10% lower than that should be (i.e. when he says
50%, the actual amount is closer to 60%). In any event, these
mathematical errors pale in comparison to the conceptual errors
made by Mr. Khullar. His method of examining the invoices of the
Appellants' suppliers fails to take into account the
Appellants' mark-up. This significant factor affects the
Appellants' respective percentages of total sales
attributable to taxable products. There is nothing to indicate
that this mark-up was the same for all supplies, whether taxable
or not. The only documents which can illustrate the true
percentage of sales attributable to taxable products would be the
Appellants' cash register receipts. In the absence of this
evidence, the method of the net worth analysis had to be
used.
[16] The Appellants' claims that the net
worth analysis does not take into account loans made to them by
various parties is well-founded. They had the burden of proving
that such loans exist. The only evidence was the disjointed,
handwritten spreadsheet submitted as Exhibit A-20. It was
recreated from Mr. Khullar's memory several years after the
events in question. Despite the testimony from
Mr. Khullar's brother, who was vaguely aware of some
loans made to the Appellants by members of the Khullar family,
these figures were completely uncorroborated. Rather generously
during the hearing of the appeals, the Minister conceded
unilaterally that $94,500 and $44,546 were loans made to Foods
and International, respectively. With respect to the GST
liability, I therefore conclude that the Minister's
reassessment is correct. In conclusion, the appeal with respect
to the GST liability issue is allowed only to deduct these loan
amounts from the Minister's total sales calculation.
Input Tax Credits
[17] Pursuant to subsection 169(1) of the
Act, GST registrants who make taxable supplies are
entitled to input tax credits for the tax paid on purchases of
any property or service for use in the course of their commercial
activities. These claims are computed on a self-assessing basis.
Paragraph 169(4)(a) of the Act requires that
registrants, before filing their returns, obtain sufficient
evidence to determine the amount of input tax credits allowable.
The Input Tax Credit Information Regulations in the
Act (the "Regulations") set out the
required evidence in section 3, and define "supporting
documentation" in 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
the supply made by the registrant in respect of which there is
tax paid or payable;
[18] 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 input tax credits
claimed without having provided the supporting documentation
required.[7] In
these appeals, the Minister alleges that the Appellants failed to
provide sufficient documentary evidence that would entitle them
to the input tax credits claimed during the period under appeal.
Unlike the determination of GST liabilities, in determining the
amount of allowable input tax credits, the Minister does not
attempt to attribute a percentage representing taxable supplies
to the total amount of purchases made by each respective
Appellant. The amount is assumed to be nil, until the registrant
adduces the documentation described.
[19] At the outset, International presented
no required documentation to the auditor and she concluded that
the amount of allowable input tax credits was nil. Subsequently,
$11,260 was allowed after Mr. Khullar provided a number of
invoices which specified the amount of GST paid for
International's purchases. Similarly, the figure for Foods
was raised from $2,548 to $26,314. The amounts claimed and
received by International and Foods before the audit were $25,401
and $29,600, respectively. The Appellants argued that these
amounts should be increased. Mr. Khullar presented in evidence
multiple spreadsheets, both handwritten and computer-generated,
which address the purchases made by each Appellant in the period
under appeal. As was the case with the evidence produced in the
determination of the Appellants' GST liabilities, there are
several problems with the evidence submitted by Mr. Khullar.
[20] One major problem, which was explored
by counsel for the Respondent in cross-examination, was Mr.
Khullar's arbitrary divisions from suppliers who provided the
Appellants with both taxable and exempt supplies
("non-taxable" items, to use the term employed by Mr.
Khullar). His spreadsheet contained separate columns for taxable
and non-taxable purchases. He divided the Appellants'
purchases between the two, depending on the type of supply
provided by the company in question.
[21] The difficulty arises with invoices
from suppliers of both taxable and non-taxable items such
as Provigo.[8] In
acknowledging the overlap, Mr. Khullar divided the purchases
between the two columns. In some cases, for example in his
spreadsheet for purchases made by Foods between October 1992 and
September 1993, 50% of a purchase would appear under the
"taxable" column, and the other 50% of that purchase
would appear under the "non-taxable" column. For
Foods' next taxation year, the amounts under the
"taxable" column doubled those of the
"non-taxable" column, indicating a 66% to 33% ratio.
For their following taxation year, this ratio was reversed to 33%
"taxable" and 66% "non-taxable". This
latter ratio was applied to the majority of the spreadsheets
submitted for International.
[22] This method did not withstand close
scrutiny. In cross-referencing receipts furnished by Mr. Khullar
with the entries on his spreadsheets, the amounts attributable to
taxable supplies varied greatly for each purchase.[9] I believe
Mr. Khullar made his arbitrary allocations in order to
simplify his task. It did not illustrate a true representation of
the Appellants' taxable and non-taxable purchases.
[23] Further, thespreadsheets contained the
most basic mathematical errors. For instance, the monthly
spreadsheet for purchases made by International in
April 1994 contains two lines of totals, neither of which
reflects the amounts in either the "taxable" or
"non-taxable" columns. Just as troubling, the monthly
totals for purchases made by Foods from October 1992 to September
1993 and for purchases made by International from October 1993 to
September 1994 do not add up to the total yearly amounts
indicated. Given these basic faults, Mr. Khullar's credibility is
questionable. I accept the Minister's reassessments subject to
the subsequent adjustments referred to earlier. It is the most
accurate of the two calculations.
[24] I turn now to the question of the
application of the limitation period in these appeals. By virtue
of subsection 298(1) of the Act, the Minister, in the
ordinary course of events, is limited to assessing registrants
for their GST liability no later than four years after the later
of the day on or before which the person was required under
section 238 to file a return for the period and the day the
return was filed. The Appellants contend that the period under
appeal is from July 1, 1992 to December 31, 1996, but the
reassessments were dated September 27, 1996. As a result, the two
months of July and August 1992 were already beyond the limit of
four years. The Respondent asserts in the Replies to the Notices
of Appeal that the Minister may assess the GST liability of a
registrant under subsection 298(4) at any time where the person
to be assessed has made a misrepresentation that is attributable
to the person's neglect, carelessness or wilful default. This
provision requires the Minister to show that a misrepresentation
in respect of the matter has been made, and that this
misrepresentation was attributable to neglect, carelessness or
wilful default.
[25] Under the Income Tax Act, the
onus lies on the Minister to prove on a balance of probabilities
that the Appellants made a misrepresentation that is attributable
to neglect, carelessness or wilful default or that they committed
any fraud in filing their income tax return.[10]
[26] The first element to be established by
the Minister is that there was a misrepresentation made on behalf
of the Appellants. The term 'misrepresentation' was
defined by Cameron J. in M.N.R. v. Taylor[11] as follows:
I have reached the conclusion that the words 'any
misrepresentation', as used in the section, must be construed
to mean any representation which was false in substance and in
fact at the material date, and that it includes both innocent and
fraudulent misrepresentations.
In light of the evidence presented at trial which indicated
that the Appellants committed numerous errors in their
calculations and estimates, I have no hesitation in concluding
that these were misrepresentations. In disposing of cash register
receipts and invoices, the Appellants' misrepresentations are
attributable to their neglect and carelessness and therefore,
there is no time limit for reassessment.
[27] In assessing the Appellants for
penalties, the Minister relies on subsection 280(1) of the
Act, which provides:
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.
Penalties imposed under this subsection fall within the
category of strict liability offences and can be challenged where
the taxpayer demonstrates due diligence.[12] As stated, the Appellants did not
exercise "reasonable care" in filing their GST returns.
This raises the point of whether exercising "reasonable
care" and the common law defence of "due
diligence" are synonymous, or whether there exists a
hierarchy of terms. In the reasons of Robertson, J.A. in
Consolidated, he equated the two concepts as follows:
...an implied due diligence defence with respect to s.
280 places the onus on the registrant to establish that he or she
had exercised reasonable care in remitting the correct amount of
GST.
[28] The Appellants' negligence was as a
result of Mr. Khullar's inability to retain documentation to
substantiate the amount of GST he was remitting and the input tax
credits he was claiming. There is nothing odd or burdensome about
keeping cash register receipts and other pertinent documents in
the course of running a business. This is an entirely reasonable
practice, consistent with basic business principles. While the
Appellants made great effort following the audit, it was too
late. They did not exercise "due diligence" during the
period under appeal. The penalties assessed under
section 280 are justified.
[29] With regard tothe imposition of
interest pursuant to paragraph 280(1)(b) of the
Act, the Court can provide no relief against the
assessment of interest and that the only relief available is
where the Minister decides to exercise his discretion under
subsection 280(1).[13] The concessions made by the Respondent upon the
examination of the evidence submitted by the Appellants in the
period leading up to these appeals will impact the amount of
penalties and interest.
[30] Mr. Khullar had to go to great lengths
to provide evidence with respect to the actual financial
situations of the Appellants because of his negligence and
carelessness in the first instance. Had he simply kept his
invoices, cash register receipts and made appropriate
documentation of the alleged loans made to the Appellants, the
auditor could have been presented with a much clearer picture.
Had this been done, Mr. Khullar's objections to the
auditor's conclusions, not to mention these appeals, would
have been unnecessary. Unfortunately, he was the author of his
own misfortune. As Judge Bonner stated in Fletcher,[14] how can
he now complain of possible inaccuracies by the Minister?
[31] Counsel for the Appellants went to
great length in portraying the Minister's assessment as a
"travesty of justice",[15] referring not only to policy, but
also to the Canadian Charter of Rights and Freedoms.[16] It has been
frequently held that fairness and equity have nothing to do with
tax law.[17]
[32] Finally, it is worth mentioning that
the Appellants, both in their written and oral submissions,
mentioned that this matter should have been resolved long ago. I
agree. It has been more than six years since the initial audit
took place, and more than ten years since the beginning of the
period in question (July 1992). However, if one were to examine
the causes for delay - whether it be the inadequate maintenance
of records, the destruction of records, the health of Mr.
Khullar, or boxes of evidence arriving on the day this matter was
to go to trial - there is no doubt that the Appellants are not
without fault.
[33] My findings are consistent with the
decisions in cases such as Louie v. The Queen[18]and
Entrepreneur Peintre J.L. Inc. v. The Queen[19] wherein the
taxpayers were found not to keep adequate records in the course
of operating their businesses. Counsel for the Appellants stated
that there were outstanding ITCs unclaimed by the Appellants
including ITCs on the rents and public utilities paid for the
business premises. No specifics were given and there was no
evidence whatsoever that they had not been claimed previously or
what amounts had not been claimed. The Appellants' pleadings
made no reference to this and of course, the Respondent did not
address it. Again, failing specifics and documentation, no
finding is made with respect to ITCs.
[34] For the above reasons, the appeals are
dismissed, but for the amounts conceded by the Respondent during
the hearing.
Signed at Ottawa, Canada, this 3rd day of June, 2003.
J.T.C.C.
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