9001-9159 Québec Inc. v. The Queen

[OFFICIAL ENGLISH TRANSLATION]

Date: 20020125

Docket: 2000-3233(GST)I

BETWEEN:

9001-9159 QUÉBEC INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Lamarre Proulx, J.T.C.C.

[1] This is an appeal under the informal procedure concerning an assessment under the Excise Tax Act (the "Act") for the period from April 1, 1994, to March 31, 1997. The notice of assessment bears number 03B1372 and is dated March 17, 1998.

[2] The assessment establishes that the amount of net tax that should have been reported and paid for that period was $5,947.73. As rebates had instead been requested during that period, the adjustments to be made to the net tax, according to the assessment, amount to total net tax of $14,294.37, penalties of $2,373.24 and interest of $1,808.70.

[3] Colette Lemay, the auditor for the Minister of National Revenue (the "Minister"), testified for the respondent, but she gave testimony first at the request of the appellant.

[4] The auditor explained that the appellant owns a convenience store which was purchased in 1994. According to the information provided to the Minister by the appellant for the purposes of the Act, the contact person was a Mr. Noël. The auditor had attempted to meet Mr. Noël twice at the departmental office in the period from November 1996 to January 1997, but he did not show up. She therefore went to the premises in January 1997, after telephoning to obtain the accounting records. She met Robert Gervasi, the son of the principal shareholder, Salvatore Gervasi, and was given a part of the purchase invoices and of the cash register tapes. She asked to have all the missing documents before February 15, 1997, and was given purchase invoices for a full fiscal year.

[5] The auditor then proceeded with an analysis of the markup rate on the goods sold. She asked Robert Gervasi what the selling prices of certain goods in 14 categories were. She had the purchase prices, since she had obtained the purchase invoices. The analysis was filed as Exhibit I-4. She got markup factors of 1.25 for chips, 1.17 for beer, 1.28 for wine, 1.12 for cigarettes, 1.40 for chocolate and so on for the other categories.

[6] She arrived at an average factor of 1.31. Although, according to the department's statistics, the average markup factor for a convenience store is at least 1.25, she took the factor for beer in this case because, at this convenience store, beer represented 46 percent of sales. The markup factor for beer was 1.17.

[7] Exhibit I-3 is a complete description of all the purchase invoices for the 1995-1996 taxation year, that is, from April 1, 1995, to March 31, 1996, that were handed over to the auditor. Exhibit I-10 was the result of the same exercise carried out for the period from July to October 1996.

[8] Exhibit I-8 shows the procedure followed by the auditor in determining the amount of tax for the 1994-1995 fiscal year. She calculated the purchases of taxable goods from the input tax credits ("ITCs") claimed for that year, which amounted to $24,040.12. That amount was equal to seven percent paid on taxable supplies, which gave an amount of $343,430.29 for those taxable supplies. The auditor deducted allowable expenses and the year-end inventory of taxable goods based on the financial statements, and thus arrived at a cost of taxable goods sold of $279,692.54. She multiplied that amount by 1.17 to get $327,240.27, which is the amount of taxable sales. The tax collectable is seven percent of that amount, or $22,906.82. According to the return, the amount of tax collected was $19,522.82. As mentioned at the start of this calculation, the amount of the inputs claimed was $24,040.12.

[9] Exhibit I-5 is the calculation of the tax for the year 1995-1996. Taxable purchases, according to the statement of invoices for the year, amounted to $459,660.12 which, multiplied by 1.17, yielded taxable sales of $537,802.34. Following a few minor adjustments, the tax that should have been reported was determined to be $37,717.15, and the amount of the ITCs to which the appellant was entitled was $32,510.34. The tax reported was $17,958.97, and the amount of ITCs claimed was $21,788.31.

[10] Exhibit I-9 is the calculation of tax for the year 1996-1997. The cost of goods sold, namely $386,630.39, was taken from the financial statements. That amount was multiplied by 1.17 to give taxable sales of $451,733.01. The tax collectable should have been $31,674.85, and the amount of ITCs should have been $27,064.13. The amount of tax reported was $22,704.75, and the amount of ITCs claimed was $48,564.18.

[11] With regard to beer, the auditor explained that companies sometimes supply convenience stores therewith at low cost in order to promote their sales. This could compensate for the beer supplied without markup by the convenience store for sports activities in the neighbourhood.

[12] Salvatore Gervasi, who described himself as retired and is the principal shareholder of the appellant, testified that the convenience store, called Dépanneur Oma's, was located in Verdun near the Hôpital Douglas, a psychiatric hospital, whose patients were customers of the convenience store. Mr. Gervasi stated that there were thefts nearly every day and that he spent almost $15,000 a year to sponsor sports teams by selling them beer at his cost price.

[13] Guy Guertin, a chartered accountant, testified for the appellant. He was the appellant's accountant when it acquired the convenience store in 1994. Following the auditor's initial visits around June 1997, the appellant asked him to prepare its financial statements.

[14] Mr. Guertin explained that he did not dispute the results arrived at by the Minister's auditor with respect to the cost of the taxable goods. Regarding the amount of the taxable sales, however, he did dispute the markup factors. He commented on Exhibit I-4, which is the study on the profit margins on 14 categories of goods. In particular, he commented on the "beer", "juice and beverages" and "dairy products" categories. He said that for a case of beer the stated cost price of which was $19.95, the cost price should actually be $20.71, in order to arrive at a profit margin of 12 percent. He said that he had seen a few invoices indicating that price and suggested that the profit margin for juice and beverages should be 21 percent instead of 44 percent. For dairy products, the margin should be 20 percent, not 27 percent. His argument is that the average markup factor was 1.12. He stated in his testimony that his client had told him that the markup factor was 1.14.

[15] The Notice of Appeal states the following:

[TRANSLATION]

. . .

5. The aforementioned audit resulted in a $5,947.73 increase in taxes payable, a penalty of $2,373.24 and interest of $1,808.70, as stated in a notice of assessment dated March 30, 1998, and bearing number EB1372.

6. In carrying out the audit, the auditor from the Department of Revenue did a sampling, assuming a gross profit rate. Thus, using the gross profit rates for the various goods, she multiplied purchases by that rate to arrive at potential sales, from which she calculated taxes payable.

C. ARGUMENT

7. The appellant respectfully submits that the rates used by the auditor are not real and that she overestimated the said rates.

8. Furthermore, in calculating the purchases, the auditor disregarded the fact that the appellant subsidized various charities and that certain goods were sold at cost, as a consequence of which taxes payable were increased unduly.

9. The auditor also disregarded the percentage of thefts, which is a known factor in the type of business operated by the appellant.

10. The appellant submits that the assessment is ill-founded in fact and in law, inter alia, for the following reasons:

(a) it in no way reflects the appellant's income; the rates used do not reflect the actual situation and there are significant discrepancies for all goods;

(b) the impact of non-profit organizations was disregarded;

. . .

[16] In his argument, counsel for the appellant restated the arguments set out in the Notice of Appeal. He argued that the markup factor should be only 1.12, as suggested by the accountant.

[17] Counsel for the respondent stated that the price of beer suggested by the accountant was not corroborated by any documents. The same was true of the alleged thefts. There was no evidence, such as police reports or other documents, concerning those thefts. Nothing was given to the auditor before the hearing.

Conclusion

[18] In his testimony, Salvatore Gervasi did not discuss his business's average markup factor. No question was put to him on that subject or on his business's accounting. It should be noted that Robert Gervasi, the manager of the business, did not come to testify.

[19] Mr. Guertin said he had seen a number of invoices for cases of a certain beer at $21.70, not $19.95. For juices and beverages, the markup factor which he arrived at was 1.21, not 1.44, and, for dairy products, it was 1.20 instead of 1.27.

[20] The problem with these statements is that they are not supported by any documentary evidence. Neither invoices nor any analysis document were filed at the hearing. In fact, such documents should be shown to the other party prior to the hearing. The Reply to the Notice of Appeal clearly stated how the auditor had established the markup factor at 1.17. The onus was thus on the appellant to adduce satisfactory evidence against that position, particularly since it is a position that seems highly reasonable in the circumstances. The markup factor of 1.17 is less than the lowest rate in the department's statistics, which is 1.25, and applies to the product that represented 46 percent of the convenience store's sales.

[21] As the amount of the input tax credits was not disputed and only the amount of the tax was at issue, I must therefore, on a balance of probabilities, dismiss the appeal.

Signed at Ottawa, Canada, this 25th day of January 2002.

"Louise Lamarre Proulx"

J.T.C.C.