[OFFICIAL ENGLISH TRANSLATION]
Date: 20011213
Docket: 2000-953(IT)I
BETWEEN:
STATION DENA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2000-954(IT)I
DENIS NADEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Gerald J. Rip, J.T.C.C.
[1] The appellants Denis Nadeau
and Station Dena Inc. (the "Corporation"), of which
Mr. Nadeau is the shareholder, dispute income tax
assessments for the 1996 and 1997 taxation years. The Minister of
National Revenue (the "Minister") added the amounts of
$17,405 for 1996 and $36,514 for 1997 to the Corporation's
income as unreported income under subsection 9(1) of the
Income Tax Act (the "Act").[1] The Minister added the
same amounts to Mr. Nadeau's income for the 1996 and
1997 taxation years in accordance with subsection 15(1) of
the Act.
[2] The cases were heard on common
evidence.
[3] Mr. Nadeau was the sole
shareholder of the Corporation during the 1996 and 1997 taxation
years. During those years, the Corporation operated a pizzeria in
Rawdon, Quebec, which was part of a network of franchises known
by the name "Pizza Barba's Limitée"
("Pizza Barba's").
[4] Pizza Barba's received all the
telephone calls and forwarded the orders to the nearest
franchisee for delivery. The Corporation paid Pizza Barba's
monthly fees for access to its single-number telephone order
system. The franchisor was paid no other royalty by the
Corporation or by the other franchisees. However, the franchisees
were required to make their food purchases from a sister company
of the franchisor, Distribution Hellena's Inc.
("Hellena's"). The franchisor checked the
franchisees' sales from a central computer to ensure they
bought from Hellena's.
[5] The central computer of Pizza
Barba's produced a detailed report of daily sales made by
telephone and sent each franchisee the results of its day's
sales.
[6] The Corporation's restaurant
had no dining room. The restaurant made three types of sales:
counter sales without going through the central telephone system
("walk-ins"), counter sales made by telephone
("pick-ups") and deliveries.
[7] The Minister made the assessments
based on discrepancies discovered between the sales reported by
the Corporation and those recorded in Pizza Barba's central
computer. By adding an assumed amount of unreported counter sales
to those discrepancies, the Minister thus arrived at the total
amounts of assumed sales not reported by the Corporation. It was
those amounts of assumed unreported sales that the Minister added
to the income of the two appellants-the Corporation under
section 3 and subsection 9(1) of the Act and
Mr. Nadeau under section 3 and subsection 15(1) of
the Act.
[8] The appellants noted that the
Corporation had always compiled its actual daily sales and
subsequently reported them monthly to the accountant in envelopes
containing the results of daily operations.
[9] Mr. Nadeau testified that all
telephone sales, both deliveries and counter sales, were recorded
in the central computer of Pizza Barba's. At the end of each
day, he added the amounts of the invoices produced by the central
computer to arrive at total telephone sales.
[10] According to Mr. Nadeau, the
invoices for orders placed directly at the counter were produced
by a second Corporation computer, which was not linked to the
franchisor's central computer network. That second computer
recorded all walk-in sales, and each day Mr. Nadeau
added the amounts of the invoices produced by that computer to
obtain the total daily walk-in sales. The appellant
subsequently transferred the total amount of walk-in sales
to the central computer so that the franchisor be aware of all
the Corporation's sales.
[11] Mr. Nadeau contends that he added
the total of the invoices produced by the second computer to the
total of those produced by the franchisor's central computer
to arrive at the day's total sales. He emphasized that he had
entered the day's total sales in daily envelopes, which also
contained the day's expenses. The envelopes were then handed
to the accountant once a month.
[12] The only explanation that
Mr. Nadeau could provide to justify the discrepancies
between the sales reported by the Corporation during the period
in appeal and the sales recorded in the central computer is that
those discrepancies were possibly due to errors made when the
walk-in sales amounts were transferred to the central
computer. He contended that the total of all walk-in sales
for one day was transferred daily to the franchisor's central
computer. He further argued that it was possible that he had made
mistakes when transferring that total. According to
Mr. Nadeau, when making the transfer, once he had entered an
amount and pressed the enter key, it was too late to make a
change. He believed it was impossible to see whether an error had
been made or to correct it if that was the case. The appellant
could have made a mistake of more than $10,000 in making a single
transfer to the central computer. For example, if total
walk-in sales from one day amounted to $115.50 and
Mr. Nadeau forgot the decimal point when transferring that
amount to the central computer, it would have recorded an amount
of $11,550.00. That was his only explanation for the errors.
[13] Mr. Nadeau filed in evidence his
personal balance sheet dated July 24, 2001, which was
prepared by Multi-Services Pierre Lambert Inc. from
information he had provided. The Corporation's annual
financial report for the period ending December 31, 2000,
was attached to the balance sheet. According to the personal
balance sheet, Mr. Nadeau's net worth was $7,319 on
July 24, 2001. According to Mr. Nadeau's counsel,
the amount the Minister alleges that his client appropriated
corresponds to seven times his net worth.
[14] In making the assessments in appeal,
the Minister assumed inter alia that the Corporation had
not recorded counter sales in the central computer of Pizza
Barba's during the years in issue. The Minister alleges that
the appellant controlled his sales recording system.
[15] Gabriel Lavoie, an auditor with
the Canada Customs and Revenue Agency, testified for the
respondent. Mr. Lavoie was the auditor in the
appellants' case. The Minister claims that sales during the
years in issue were entered in the ledger by Les Multi-Services
Pierre Lambert Inc. from daily envelopes filled
manually by Mr. Nadeau. Unfortunately, neither the
Corporation nor Mr. Nadeau retained the daily sales reports
produced by the central computer of Pizza Barba's or the cash
register tapes recording the sales.
[16] The Minister also asserts that the
amount of sales recorded by the central computer of Pizza
Barba's is reliable. Hellena's uses the same central
computer to do its billing and record its sales. The amount
appearing on the Corporation's purchase invoices corresponds
to Hellena's monthly sales reports produced by the central
computer.
[17] When Mr. Lavoie audited the
appellants' accounting, he compared the sales recorded in the
Corporation's ledger with the sales entered in the central
computer and carried over to the annual summary of Pizza
Barba's sales. In the Minister's view, this
reconciliation of accounting records showed that there was a
discrepancy, which resulted in the assessments in issue. In his
calculation of counter sales, Mr. Lavoie estimated that an
average of six customers per day purchased the least
expensive menu, calculated at $6.50 for each of the 363 days
of activity a year.
[18] Both counsel agreed that
Mr. Nadeau's credibility would determine the appeal and
I agree with them.
[19] Mr. Lavoie testified that it was
not until the trial that Mr. Nadeau explained that he had
entered walk-in sales in the central computer, despite a
thorough audit. Counsel for the respondent thus contended that,
if Mr. Nadeau was entering all the amounts in the central
computer, he was doing the work twice because he was reporting
the same amounts in the cash register and in his own
computer.
[20] Counsel for the respondent also
contended that the Corporation was the only franchisee that
reported less sales in its income tax return than appeared on the
information sheets provided by Pizza Barba's. According to
counsel, it appears that all the other franchisees reported
greater sales than those recorded by Pizza Barba's. Counsel
contends that this situation undermines Mr. Nadeau's
credibility. However, as counsel for the appellant emphasized, no
evidence was brought to my attention of the sales that the other
franchisees had reported. I cannot consider uncorroborated
allegations by the Crown; I can only take into account actual
evidence. It is not advised, and indeed is even considered wrong,
to make allegations such as those of counsel for the
respondent.
[21] In preparing these reasons, I had some
reservations about the appellant's credibility, particularly
because of his testimony that, once an amount was entered in the
central computer, that amount, even if entered by mistake, could
not be corrected. I believe I may take judicial notice of the
fact that there is always someone who can enter corrections, if
not Mr. Nadeau then perhaps an employee or a representative
of Pizza Barba's who has access to the computer. On second
thought, it is highly possible that Mr. Nadeau did not have
the power or skill required to perform that task. In my view,
Mr. Nadeau did not give an implausible description of the
manner in which he recorded walk-in sales and counter
sales.
[22] According to the information entered
and appearing in the central computer, the Corporation's
gross sales were $189,197 for 1996 and $186,061 for 1997.[2] The original sales of
all franchisees fell from 1996 to 1997 along with those entered
in the Corporation's central computer. The sales of all the
franchisees were $946,572 in 1996 and $791,424 in 1997, a decline
of approximately 16.5 percent. After subtracting the
Corporation's gross sales from those of all franchisees, the
gross sales of the five other franchisees were $757,364 in 1996
and $605,363 in 1997, a drop in gross sales of nearly
20 percent. The Corporation's gross sales according to
the central computer fell by approximately 1.5 percent.[3]
[23] The Corporation reported sales of
$185,950 in 1996 and $163,703 in 1997, a decline of nearly
12 percent corresponding more to the decline of Pizza
Barba's other franchisees. It was not proved in the instant
case that similar sales of the other franchisees were greater
than those recorded in the central computer.
[24] To allow the amounts of income that the
respondent claims the Corporation did not report in its income
for 1996 and 1997, I would have to rely on evidence that does not
exist. In the audit of the appellants' accounting, the
Minister's officials may well have had knowledge of evidence
that would support the assessments, but that evidence was not put
before me. I am not at all convinced that the income reported by
the Corporation is correct-errors were made. However, in view of
the facts brought to my knowledge, the Corporation's figures
are likely closer to reality than the Minister suspects.
[25] Consequently, in view of the
circumstances, the appeals are allowed with costs.
Signed at Ottawa, Canada, this 13th day of December 2001.
J.T.C.C.
Translation certified true
on this 6 thday of March 2003.
Sophie Debbané, Revisor
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