[OFFICIAL ENGLISH TRANSLATION]
Date: 20011213
Docket: 2000-1376(GST)G
BETWEEN:
LES TOITURES LANCOURT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] This is an appeal from a goods and
services tax ("GST") assessment dated January 9,
1998, for the period from March 1, 1994, to
February 29, 1996.
[2] By that assessment, the Minister
of National Revenue (the "Minister") adjusted the
appellant's net tax upward by $2,956.80. That sum consists of
an amount of $1,518.16 in respect of unreported taxable supplies
of $21,688.00 and an amount of $1,438.64 representing ineligible
input tax credits ("ITCs"). Interest of $452.15 and
penalties of $546.20 were also assessed.
[3] At the hearing, counsel for the
appellant stated that an amount of $312.48 representing
disallowed ITCs in respect of professional fees was no longer
disputed. Counsel for the respondent conceded that the appellant
should have been allowed an amount of $315 representing ITCs on
asphalt work. The balance of the ITCs in issue, an amount of
$811.16, relates to the 50-percent portion of amounts paid
by the appellant for employee meals and is not deductible under
section 67.1 of the Income Tax Act.
[4] Pierre Vaillancourt, the sole
shareholder of the appellant, Diane Robichaud, secretary and
bookkeeper employed by the appellant during the period in issue,
and Raymond Villeneuve, the appellant's accountant,
testified for the appellant. Sylvain Gardner, an auditor
with Revenue Canada at the relevant time, testified for the
respondent.
[5] Mr. Vaillancourt incorporated
the appellant in 1991 after disposing of a dairy farm, which he
had previously operated. Although he was the sole shareholder,
Mr. Vaillancourt assigned management of the office to a
certain Richard Landry whom he knew, having worked with him
in construction and roofing. The appellant's headquarters was
located in Saint-Élie-d'Orford, near Sherbrooke,
Quebec, and the roofing work was done by two crews of employees.
The larger crew was directed by Mr. Vaillancourt himself and
performed large jobs, particularly for public buildings (schools
and hospitals) or commercial or industrial buildings, most often
outside the Sherbrooke region. A smaller crew was led by
Mr. Landry and did mainly local residential work. Since
Mr. Vaillancourt himself was almost constantly out of the
office, Mr. Landry directed the office with the help of the
secretary, Diane Robichaud. According to
Mr. Vaillancourt, Mr. Landry saw to everything except
signing the cheques prepared in advance, which he himself did on
Fridays. Thus, the secretary's work, including bookkeeping,
was done under the supervision of Mr. Landry, who also
handled orders to suppliers.
[6] Around March 1996, the secretary,
Ms. Robichaud, apparently resigned as a result of
difficulties with Mr. Landry. One week later, apparently Mr.
Landry also announced that he was leaving because he had been
offered other work elsewhere. Mr. Vaillancourt then
presumably asked him to go and finish work on three sites while
he would manage the office himself. Mr. Landry apparently
did not finish the work on those sites. Presumably,
Mr. Vaillancourt communicated with his accountant,
Raymond Villeneuve, to help him understand what had happened
at the office during his prolonged absences since he was missing
files and documents and found it impossible to determine what the
appellant owed suppliers and what customers owed it.
Mr. Villeneuve then purportedly sent three persons from
his office to help Mr. Vaillancourt make sense of
everything.
[7] Mr. Vaillancourt stated that
federal tax authorities began to audit the appellant at the end
of March 1996. He testified that Mr. Landry had warned him
at one point to be careful of what he said. Mr. Vaillancourt
said he had taken those words as a threat, not really
understanding what they meant.
[8] On April 3, 1996, a fire
broke out in the building where the appellant had its
headquarters. That building, which also housed another business,
belonged to Mr. Vaillancourt personally. The building and
its content, including the business's documents, were
completely destroyed by the fire. The firefighters even prevented
Mr. Vaillancourt from entering the burning building to
recover his computer. According to Mr. Vaillancourt, the tax
audit had begun only one week before the fire, and the auditor
had at that point taken possession of only one or two boxes of
documents.
[9] It was not until after the tax
audit conducted by Sylvain Gardner that
Mr. Vaillancourt said he had been informed that there had
been [TRANSLATION] "unreported work" in connection with
certain residential roofing contracts. Mr. Vaillancourt said
that the appellant mainly specialized in roofing for public
buildings and commercial or industrial buildings and rarely
contracted for residential buildings. In any event, he claimed
that it was the crew directed by Mr. Landry that did that
type of work. Mr. Vaillancourt also went so far as to
suspect that Mr. Landry was misappropriating materials. At
the same time, he said he had also learned that a trailer of
materials intended for the appellant had been diverted and that
the materials had been delivered to Mr. Landry's
residence.
[10] In response to the revelations of
[TRANSLATION] "unreported work", Mr. Vaillancourt
says he conducted a personal investigation among
four customers, whom he did not identify, but who he says
stated they had done business with an individual who had
introduced himself as Mr. Vaillancourt, whereas the
description given clearly corresponded to the description of
Richard Landry. Mr. Vaillancourt testified that the
roofing work in issue was performed by Mr. Landry or roofers
whom he did not know. He thus suspected Mr. Landry of having
worked for someone else, and he stated that Mr. Landry had
never handed over the money collected either to him or to the
appellant. As to the fire, which Mr. Vaillancourt described
as being criminal in origin, he also suspected Mr. Landry even
though the investigation yielded no results.
[11] Mr. Vaillancourt said that
Mr. Landry disappeared after those events, although he was
seen working on a site of a competing business.
[12] The result of the tax audit was
devastating for Mr. Vaillancourt. As I understand his
testimony, the total additional income assessed amounted to more
than $216,000, a result Mr. Vaillancourt characterized as
"impossible" in view of the appellant's turnover.
Assisted by three or four accountants, Mr. Villeneuve
then attempted to reconstitute the business's accounts since
all the documents and the computer had been destroyed by the
fire. Meetings and discussions with Mr. Gardner followed.
Mr. Vaillancourt said that he was advised by his brother
Marc and by Mr. Villeneuve. In his view, the tax authorities
had wanted to settle the matter as soon as possible because of
the limitation period for 1993. Suffering from a severe nervous
breakdown, he had also wanted to settle the matter as soon as
possible since the fees payable to the accountants were very
high. Apparently, following meetings and discussions, the amounts
the proposed assessments dealt with were ultimately reduced to
$50,000 and the federal income tax case was settled.
[13] In a letter of agreement addressed to
Sylvain Gardner of Revenue Canada dated December 23,
1996, Mr. Vaillancourt waived his right of objection and
right of appeal with respect to any income tax reassessment that
would be made under the agreement (Exhibit I-1). An
appendix to that letter refers to amounts of $4,621 and $6,967
for the years ended on February 28, 1995, and
February 29, 1996, in respect of the ineligible portion of
meal and entertainment expenses under section 67.1 of the
Income Tax Act. Mr. Vaillancourt thus acknowledged
that a total amount of $11,588 had to be considered as a
non-deductible expense. In another appendix (Appendix G),
the appellant's additional income for the years ended in 1995
and 1996 was fixed at $21,688. This was the total amount of eight
separate contracts, which were purportedly performed by the
appellant and not reported.
[14] Although he said that he had been
advised by his brother and accountant in discussions with
Mr. Gardner, Mr. Vaillancourt said that, in view of his
state of health at that time, he would have signed anything in
order to stop "the bleeding". He also stated that no
one had pointed out to him all the consequences of his acceptance
of that letter of agreement since he did not think he had to deal
with reassessments, except with respect to provincial income tax,
for which he also tried to negotiate a settlement with the
authorities. In fact, in the assessment here in issue, the
disallowed ITCs and the amounts of additional GST relate directly
to the ineligible portion of employee meal expenses and to the
additional income referred to above. Although
Mr. Vaillancourt accepted the amounts under his income tax
agreement with the federal government, he now disputes them.
[15] On the question of the purportedly
unreported additional income, as stated earlier,
Mr. Vaillancourt holds Mr. Landry, whom he suspects
inter alia of having performed [TRANSLATION]
"unreported work" and pocketing the proceeds,
responsible. As noted above, Mr. Vaillancourt says he made
an investigation among four customers and discovered that
Mr. Landry had pretended to be him. Since he was virtually
always absent, he said he did not really know what had happened
with the work performed by Mr. Landry or with the management
of the office, which was under Mr. Landry's responsibility.
His role, he claimed, was limited to signing the cheques prepared
in advance by Mr. Landry or the secretary when he returned
to the office on Fridays. He added that, for reasons of
convenience, he had even signed in advance a number of contract
bids or even contract guarantee forms, which were subsequently
completed as needed, presumably by Mr. Landry. In
cross-examination, Mr. Vaillancourt had to acknowledge that
he himself had completed and signed two bids for unreported work
(Exhibits I-2 and I-3). In both cases, the work
entailed the installation of an elastomeric membrane, not
replacement of asphalt shingles. Furthermore, the only documents
signed by Mr. Landry, which were filed in evidence, are a
bid and an unnumbered invoice (Exhibit A-5). Both
documents were typed on stationery bearing the appellant's
name and logo in large characters and were signed by
Mr. Landry and the customer. It should also be noted that
the work described also involved replacement of the elastomeric
membrane and not asphalt shingles.
[16] On the question of the amounts paid for
employee meals, Mr. Vaillancourt explained that, under the
regulations of the Commission de la construction du
Québec, an allowance had to be paid to employees working
on outdoor sites, unless the employer itself provided board and
meals. Mr. Vaillancourt stated that the appellant had
proceeded in both ways, directly providing employees with board
in some cases, instead of paying them an allowance for that
purpose. As to meals, an allowance was paid in all cases.
However, Mr. Vaillancourt was unable to establish the
proportion in which the allowance was paid to employees for board
rather than meals, since the appellant did not make such a
breakdown. For the purposes of the income tax assessment made
pursuant to the agreement, Mr. Gardner assumed that
60 percent of the total amounts paid to the employees were
attributable to board and 40 percent to meals. The income
tax assessment was then made on the basis that 50 percent of
the amount relating to meals was not deductible under
section 67.1 of the Income Tax Act. Of course, the
amount of the ITCs in this case was also determined on the same
assumptions.
[17] The testimony of Diane Robichaud,
who was the secretary and also did bookkeeping for the appellant
at the relevant time, did not really add to
Mr. Vaillancourt's testimony. She worked under
Mr. Landry's supervision. Billing and payment were done
by computer. Collections were done by Mr. Vaillancourt,
Mr. Landry or by mail. Ms. Robichaud prepared the
deposits, which Mr. Landry most often made because
Mr. Vaillancourt was not on site. Each amount deposited
corresponded to an invoice and everything was accounted for. With
respect to the Revenue Canada audit, Ms. Robichaud did not
remember the question of the allowances paid to employees and
said she had no personal knowledge of any unreported income. To
the question whether Mr. Landry could be doubted on the
basis of certain facts, she simply answered that it was apparent
near the end that things were not normal.
[18] Raymond Villeneuve is an
accountant. In addition to preparing the annual financial
statements and the income tax returns for the appellant, he did
Mr. Vaillancourt's personal taxes and tax planning. He
testified that the tax audit lasted not one week, but
five weeks, three of which were at the appellant's place
of business. Around the end of March 1996, a meeting was
apparently held with the auditor, Sylvain Gardner. It was
not until that meeting that Mr. Vaillancourt supposedly
learned that the residential shingle roofing work had been done.
Apparently, he appeared surprised since the appellant specialized
mainly in commercial and industrial work and used elastomeric
membrane as material for those jobs. As to the work stated in
Schedule G of the agreement of December 23, 1996
(Exhibit I-1), Mr. Villeneuve asserted that no
deposit could be traced. He said that the auditor had traced the
work that was done through the purchases and delivery of
materials to customers' homes. According to
Mr. Villeneuve, some customers visited did not even know
Mr. Vaillancourt.
[19] On the question of the allowances paid
to the employees for board and meals in accordance with the scale
of the Commission de la construction du Québec,
Mr. Villeneuve disputed the 40 percent figure, which
the auditor had assigned to meals. He admitted, however, that the
appellant had kept no records and had no information on which to
establish a breakdown of the amounts paid.
[20] Lastly, it is important to note that
Mr. Villeneuve stated that it was Mr. Vaillancourt who
had asked Mr. Landry to leave, that an amount equal to
four percent (of his salary, I assume) was paid to him to
put an end to certain controversies and, lastly, that there was
an agreement between the two establishing that the appellant owed
Mr. Landry nothing further.
[21] It should be noted that counsel for the
appellant had a subpoena served on Mr. Landry, but he did
not appear to testify.
[22] Sylvain Gardner testified
concerning his audit of the appellant's business. He was able
to determine unreported income from documents obtained at the
appellant's place of business prior to the fire. From
addresses written on documents, which did not correspond to
income reported, he observed that some income had not been
reported in respect of residential roofing work. In his audit,
Mr. Gardner also examined supplier bids and invoices, more
particularly those of the waste removal business, Jarbec, to
determine where the work had been performed. He also contacted
customers of the appellant, in particular the
eight customers whose contracts or work are in issue in this
case. One customer said he had done business with
Mr. Landry and another with his business. In the case of a
third, a bid and invoice signed by Mr. Landry were filed in
evidence (Exhibit A-5). Three other customers stated
that they had contracted with Mr. Vaillancourt. One of those
persons even said that Mr. Vaillancourt was a friend, that
he had supervised the work performed by him and that he had paid
him cash. In the case of the other two, Exhibits I-2
and I-3 also establish that bids were completed and signed
by Mr. Vaillancourt himself. We have no information
concerning one of the last two customers. As to the other,
Mr. Vaillancourt admitted that he himself had signed the
guarantee document. However, he noted during his testimony that
he had signed a number of those documents in advance.
[23] The amounts assessed by
Mr. Gardner in respect of the work performed at the homes of
the eight customers correspond to the amounts that those
customers said they had paid in cash for the work performed, not
to the higher amounts which, in certain cases, were stated in the
documents obtained.
[24] Counsel for the appellant contends that
the assessment in issue should be vacated with respect to the tax
on the unreported additional income, essentially on the ground
that Mr. Landry operated a parallel business while employed
by the appellant.
[25] There is no doubt in his mind that
Mr. Landry is responsible not only for the misappropriation
of certain materials but also for the money collected for the
[TRANSLATION] "unreported work performed". Counsel for
the appellant emphasized that Mr. Landry left when the
situation started getting tight and when the fire occurred. He
also noted that, despite the subpoena served on him,
Mr. Landry was absent from the hearing. He moreover
emphasized the credibility of Mr. Vaillancourt's
testimony and noted inter alia that Mr. Vaillancourt
had not only attempted to recover his computer from the fire, but
had also conducted a personal investigation among some customers.
Since neither Mr. Vaillancourt nor the appellant apparently
benefited from the money collected, he contends that the
assessment has no basis as regards the appellant.
[26] As to the question of the ITCs
disallowed on the non-deductible portion of amounts paid for
employee meals, counsel for the appellant argued that assigning
the figure of 40 percent of the total amount paid for meals
is utterly arbitrary and merely the result of a general policy
followed by tax authorities.
[27] Counsel for the respondent contends for
his part that the appellant made the taxable supplies with regard
to the work in issue and that the tax is owed from the moment the
invoice becomes payable. He emphasized the fact that the
appellant is a registrant, which, as an agent of the Crown, must
ensure the tax is collected at the moment it becomes due. In his
view, a person may not avoid this obligation by simply saying
that he trusted other persons.
[28] As to the ITCs on the non-deductible
portion of the meal expenses, counsel for the respondent
emphasized that the appellant itself did not make a breakdown of
the amounts paid for board and meals and that it did not in any
way show that the allocation of 60 percent for board and
40 percent for meals was not reasonable.
[29] It cannot be established from the whole
of the evidence adduced that it was not the appellant, through
its sole shareholder, Mr. Vaillancourt, or through
Mr. Landry, a key employee in whom Mr. Vaillancourt had
complete trust, that made the taxable supplies to the
eight customers identified in Schedule G of the letter
of agreement of December 23, 1996. The misappropriation of
funds by an employee, if it can be believed and to the extent one
can believe it, does not alter the situation. Need I recall that
all the documents filed in evidence bear, in large characters,
the appellant's name and logo. It may also be seen that
Mr. Vaillancourt himself completed and signed certain
documents concerning the work in issue. It is hard to believe
that he could have been surprised that work was performed in the
places described. Furthermore, it was from documents and
information obtained at the appellant's place of business
that the auditor, Mr. Gardner, was able to determine that
certain work had not been reported. It is not really necessary to
go any further.
[30] Subsection 221(1) of the Excise
Tax Act (GST) provides as follows:
Every person who makes a taxable supply shall, as agent of Her
Majesty in Right of Canada, collect the tax under
Division II payable by the recipient in respect of the
supply.
[31] In Division II,
subsection 168(1) of that Act stipulates:
Tax under this Division in respect of a taxable supply is payable
by the recipient on the earlier of the day the consideration for
the supply is paid and the day the consideration for the supply
becomes due.
[32] In light of the evidence adduced, I
find that the assessment of the appellant with respect to the
taxable supplies made at the homes of the customers mentioned in
Schedule G of the letter of agreement of December 23,
1996, is correct. These are not cases of bad debts. The customers
paid cash for all the work to either Mr. Vaillancourt or
Mr. Landry, who, I repeat, was a key employee.
Mr. Landry was the appellant's agent at the relevant
time. There is insufficient evidence to conclude that he operated
a parallel business, as counsel for the appellant contends. On
the contrary, some evidence tends to show that the work was
performed on behalf of the appellant. Moreover, the appropriation
of funds by a key employee does not exempt the appellant from
collecting the tax payable to the extent that it made a taxable
supply.
[33] As to the part of the assessment
relating to the disallowed ITCs, I believe it is also correct.
Subsection 236(1) of the Excise Tax Act (GST)
concerns the restriction applicable to ITCs or, in other words,
provides for an increase of net tax where the deduction of
expenses is limited by section 67.1 of the Income Tax
Act. That restriction must be applied in the instant
case.
[34] As to the allocation of the total
amount paid to the employees on the basis that 60 percent of
the sum was paid for board and 40 percent for meals, the
appellant brought no evidence to show that this allocation was
not reasonable in the circumstances. The appellant never made any
breakdown whatever and never provided information, which would
have made possible an even slightly rigorous calculation that
would have yielded a different result.
[35] As a consequence of the foregoing, the
appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 13th day of December 2001.
J.T.C.C.
Translation certified true
on this 7th day of March 2003.
Sophie Debbané, Revisor
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