Citation:
2016 TCC 25
Date: 20160129
Docket: 2015-882(GST)I
BETWEEN:
FUNDY
SPRAY MOTEL LIMITED,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Favreau J.
[1]
This is an appeal from a reassessment dated
December 11, 2014 made by the Minister of National Revenue (the “Minister”) under Part IX of the Excise Tax Act,
R.S.C. 1985, c. E-15, as amended (the “ETA”),
for the quarterly periods from January 1, 2011 to December 31, 2012 (the “periods in issue”). The details of the adjustments
made by the Minister to the unreported net tax of the appellant for the periods
in issue can be found in Schedule “A” attached
to these reasons for judgment.
[2]
In determining the appellant’s net tax liability
for the periods in issue, the Minister made the following assumptions of fact,
as set out in paragraph 10 of the Reply to the Notice of Appeal:
a) the Appellant was a registrant under the Act;
b) the Appellant filed its returns on a quarterly basis;
c) the Appellant was incorporated in the province of Nova
Scotia in 1998;
d) the Appellant’s shareholders were Phillip Graves, Gordon
Avery and Randy Fitch;
e) Phillip Graves (“Graves”) was the majority shareholder of the Appellant;
f) the Appellant had various revenue streams including a
motel, convenience store, and property management;
g) the Appellant managed properties for a related company
(Pine Glenn) for a commission fee;
h) the convenience store included an ATM machine on site,
video rentals and laundry services;
i) the motel and convenience store were open year round
from 7 a.m. to 11 p.m. with the high season in the summer and low season in the
winter;
j) the Appellant had 5 employees including a manager;
k) Graves was the only shareholder with hands on involvement
in the day to day operations of the Appellant;
l) Graves was the Appellant’s bookkeeper and prepared its
GST/HST returns;
m) the Appellant’s books and records were incomplete;
Motel Room and Revenue
n) the Appellant participated in the Checks Ins Nova Scotia
program;
o) the Appellant obtained third party room bookings through
the Checks Ins Nova Scotia program;
p) the Appellant rented its motel rooms at an average rate
of $68.20 per room;
q) the Appellant received revenue totaling $143,970.20 from
its motel service in 2011, as detailed in Schedule “B” to the Reply;
r) the Appellant failed to report revenue of $8,851.59 from
its motel service in 2011;
s) the Appellant received revenue totaling $158,087.60 from
its motel service in 2012, as detailed in Schedule “C” to the Reply;
t) the Appellant failed to report revenue of $8,980.90 from
its motel service in 2012;
u) the Appellant failed to report GST/HST collectible of
$1,327.74 and $1,347.14 in 2011 and 2012, respectively, as detailed in
Schedules “B” and “C” to the Reply;
ATM Fees
v) the Appellant did not own the ATM machine at its
convenience store;
w) the Appellant rented out the space occupied by the ATM
machine;
x) the Appellant received revenue totaling $1,362.00 and
$1,083.00 from renting space for the ATM in 2011 and 2012, respectively, as
detailed in Schedules “D” and “E” to the Reply; and
y) the Appellant failed to report GST/HST collectible of
$177.66 and $141.26 in respect of the ATM business in 2011 and 2012, respectively,
as detailed in Schedules “D” and “E” to the Reply.
[3]
In the course of the hearing, counsel for the
respondent conceded that the ATM revenues were from a financial service that
was exempt from any GST/HST. The appeal in respect of that part of the reassessment
was conceded by the respondent.
[4]
The only issue left concerns the revenues
derived from the renting of the motel rooms.
Position of the Appellant
[5]
The appellant’s position is that the Canada
Revenue Agency (“CRA”) had no authority to make
a reassessment based on projections for the following reasons:
−
the projections made by the CRA had no
statistical value;
−
the books and records of the appellant were
accurate; and
−
all income from room rentals were reported by
the appellant.
Position of the Respondent
[6]
The respondent’s position is that the books and
records of the appellant for the periods in issue were incomplete and were not
remitted to the CRA. The reservation books of the appellant for the periods in
issue were not available and were not filed in Court.
[7]
The CRA had to rely on the third party data,
being Check Ins Nova Scotia, to determine the number of rooms that were rented
by the appellant and at what price.
[8]
There was a discrepancy between Check Ins Nova
Scotia data and the general ledger of the appellant. For this reason, the
Minister was justified to use projections to determine the revenue from room
rentals.
[9]
According to the respondent, the appellant
failed to report revenue of $8,851.59 and $8,980.90 in 2011 and 2012,
respectively from its motel business which represented $1,327.74 and $1,347.14
of unreported GST/HST for the quarterly periods in 2011 and 2012, respectively.
Other Background Information
[10]
At the end of 2013, the CRA
conducted an audit of the affairs of the appellant for the 2011 and 2012
taxation years. The revenue from the renting of motel rooms was one of the
points covered by the audit. The purpose of the audit on this matter was to
review the Check Ins Nova Scotia information provided by the appellant as a
listing of rooms rented. The number of rooms were grossed-up by the average
room price of $80.63 (before tax) to give a net revenue amount per day which
has then been totaled per month for the purpose of comparing with the actual
revenue reported in the appellant’s books and records. The auditor’s report
dated January 27, 2014 indicated that the total projected room revenue for the
audit period was $357,110.27.
[11]
As a result of the appellant’s representations,
a revised audit was conducted by Mr. D. Benjamin Costello and by Mr. Brent
Poole. The purpose of their audit was to determine a revised average rate per
room rental and check if there was a variance between the average rate via the Z-tapes
and the average rate used in the previous auditor’s projections. For this
second audit, the auditors took all room sales from Z-Tapes for the months of
September to December 2012 and determined the average room rate per month based
on actual sales. The actual average rate was then weighted against the rate
used in projections and the variances were analysed. In their report dated
August 8, 2014, the auditors determined that, based on the Z-tapes and the
general ledger, the average room rate was $68.20. The auditors also found that the
revenues from the room rentals from two important clients of the appellant,
Dexter Construction and Nova Scotia Transportation and Public Works which used
to pay by cheques after receiving an invoice, were not on the Z-tapes.
According to the auditors, there was a considerable variance in the number of
rooms rented which explained the discrepancy between the general ledger and
projections no 2. Using an average room rate of $68.20, the variance was
$8,851.59 for 2011 and $8,980.90 for 2012.
[12]
Mr. Kenneth L. Bower, c.g.a., testified at the
hearing and explained that the CRA had no reasons to make a reassessment based
on projections since all income from room rentals were reported and since the records
of the appellant were accurate.
[13]
Mr. Bower pointed out that during a seven month
period included in the audit, there was no indication that the room rentals
were not reported. The periods in question were from September and December
2012 and from January to March 2013. The period in 2013 was audited but was not
assessed.
[14]
Finally, Mr. Bower explained that the billing
after the stay was not reported on the Z-tapes because the list entries were
not complete during the audit period.
Analysis and Conclusion
[15]
Subsection 286(1) of the ETA 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.
[16]
Subsection 299(1) of the ETA reads
as follows:
The Minister is not bound by any return,
application or information provided by or on behalf of any person and may make
an assessment, notwithstanding any return, application or information so
provided or that no return, application or information has been provided.
[17]
Since the information in the present case was
not adequate or available, the auditor used the data from Check Ins Nova Scotia
to establish the number of rooms rented by the appellant during the relevant
period. No information was provided by the appellant that would have otherwise established
the number of rooms rented. The reservation book would have shown the occupancy
of the rooms. The fact that the occupancy report was given to Check Ins Nova
Scotia by the appellant on a monthly basis and that a hard copy of the Check
Ins Nova Scotia information was remitted by the appellant to the auditor does
not change the situation that the information was obtained from a third party
and not from a reliable source of the appellant. Under the circumstances, the
use of projections by the CRA was acceptable and necessary.
[18]
To succeed in his appeal, 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.
[19]
In Baker v. The Queen, 2007 TCC 106,
Bédard J. wrote at paragraph 25:
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 . . .
[20]
In this case, the appellant did not succeed in
establishing, on a balance of probability, that the reassessment was too high.
The average room rate per month was based on the actual sales for the months of
September to December 2012, extracted from the Z-tapes and the general ledger
of the appellant. The average room rate of $68.20 was based on the appellant’s
own data. The information obtained from the Check Ins Nova Scotia regarding the
listing of rooms rented was not contested by the appellant. Finally, the
appellant did not provide any reasonable information as to why there was a
discrepancy between the Check Ins Nova Scotia data and the Z-tapes and general
ledger of the appellant and as to why the invoices to Dexter Construction and
to the Nova Scotia Transportation and Public Works did not show up on the Z-tapes.
[21]
For these reasons the appeal is allowed only in
respect of the concession made by the Minister and the matter is referred back
to the Minister for reconsideration and reassessment to exclude the GST/HST
collectible in respect of the AMT business revenue earned in 2011 and 2012.
Signed at Montreal,
Quebec, this 29th day of January 2016.
“Réal Favreau”
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