http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/65044/index.do
125319 Canada Ltée v. The Queen (December 4, 2013 – 2013 TCC 368) was a case involving an “indirect audit” reconstructing the sales of a restaurant for GST/HST purposes:
[5] Using the detailed record of sales (the “Z” tapes) for the period from March 29 to June 30, 2009, the Minister obtained a sales ratio of $4.1030 per unit sold of each of the three items selected: hotdog, hamburger and submarine buns. This ratio was obtained by taking the sample sales (before taxes) of $74,242.91 and dividing by the number of units sold, which was 18,095. Therefore, each unit of bread sold brought in $4.1030 even if the price of a hotdog bun alone sells for $0.89. The reason for this discrepancy is because hotdog buns are often sold in a trio, with a drink, poutine or other item. This ratio was applied for the period from July 1, 2008, to June 20, 2009. For the previous periods, the ratio was adjusted using a rate of deflation of 3% for each period, according to the Statistics Canada data. A deduction of 8% was allocated for loss, theft and consumption by employees. The reconstructed sales were obtained by multiplying the number of items sold by the unit price generated by the sale of these items. According to the Minister’s method, the appellant did not report some income because the reconstructed sales for the periods included during the period in question were as follows:
…
[6] The appellant does not challenge the Minister’s use of an alternative method for determining the reconstructed sales but challenges the method used because it is not reliable, not credible and not objective.
The appellant’s accounting witness suggested another means of reconstruction which would have resulted in a lower amount of sales:
[14] Brigitte Roy, associate partner of the company “Défenseurs Fiscaux Inc.” testified on behalf of the appellant at the hearing to establish prima facie evidence that the method used by the Minister was not reliable. Ms. Roy did not testify as an expert and was not recognized as such by the respondent. Ms. Roy provided three reasons the method used by the Minister was deficient and inaccurate. The first was that the hotdog buns are not representative of the fact that 51% of the sales are steamed hotdog buns (non-weighted sales) and that sales of submarines represent less than 10% of the total sales. The second was that the bread purchases confirmed by the supplier Multi-Marques are significantly higher than the actual purchases; the restaurant’s sales figure is therefore artificially inflated. The third was that in general, bread is not a representative item because it is the item that generates the most important losses.
[15] According to Ms. Roy, using sausages would have been more representative and more reliable. Taking the same inventory used by the Minister and using the purchase of sausages confirmed by the supplier Conan, the appellant’s reconstructed sales would only have exceeded the sales figure reported in the financial statement by 10%, which, she claims, would have been much closer to reality.
Ultimately the court accepted the Crown’s reconstruction and dismissed the appeal, including the appeal of penalties:
[34] The auditor who conducted the appellant’s audit is an experienced auditor who has worked exclusively in the restaurant sector for seven years. In his opinion, the indirect audit method used in this case allowed for a probative and reasonable result in the circumstances. In the context where an indirect audit method is used, the auditor is not required to use the method that is most favourable to the taxpayer. The auditor must find reliable results from the samples taken. The greater the sample size, the better the results.
[35] During his testimony, the auditor explained that he did not use hotdog sausages as the selected item because the data from the supplier Conan was not reliable. In his opinion, Conan supplied contradictory information with regard to two different client numbers and also incomplete information because additional sausage purchases were not reported.
[36] The percentage of loss allowed, 8% of the confirmed bread purchases, corresponds to the reality of the restaurant sector, but according to Ms. Roy, this percentage is not representative for bread purchases. In her opinion, this percentage should be closer to 15-20% but no documentary evidence or statistical data was presented to support this testimony.
[37] Under the circumstances, the appellant and its representatives did not convincingly demonstrate that there were specific deficiencies or clear errors with the indirect audit method used by the Minister.
[38] As for the 25% penalty prescribed under section 285 of the ETA, we must remember that under section 285, the penalty applies when a person “… knowingly, or under circumstances amounting to gross negligence, makes…a false statement or omission in a return”. The burden of proof regarding this provision is on the respondent.
[39] The evidence shows significant and repeated omissions in the returns, namely discrepancies in the GST totalling $57,805.86 over four years. The appellant therefore made false statements in its tax return and did so repeatedly. The appellant did not provide any plausible explanations regarding these omissions and the only possible conclusion is that they were the result of wilful negligence by the appellant that amounts to gross negligence.
[40] For these reasons, the appeal is dismissed with costs.