http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/66416/index.do
9120-1616 Québec Inc. v. The Queen[1] (January 9, 2014) is an extremely fact dependent case. Essentially an audit of the appellant employed an “indirect audit method” that seems to be somewhat related to a “net worth assessment”. The appellant operated a restaurant and the auditor concluded:
(aa) for the fiscal year ending October 31, 2006, the Minister determined that, for combined litre of beer and wine the appellant supplied by sale, the appellant made taxable supplies for the restaurant (food and alcohol) of $74.17 (and not $78.8604 as mentioned in subparagraph 27(h) above).
Based on this $74.17 ratio, and several other adjustments, the Minister concluded that the appellant had underpaid GST by $64,472.75 and overclaimed ITCs by $1,719.88.
The evidence was quite detailed, e.g.:
[10] At the opening of the hearing, the appellant admitted having purchased the quantities, converted in litres, of beer and wine for all of the reporting periods falling within the audit period. Counsel for the respondent explained that the accounting data provided by the appellant for the fiscal year ending October 31, 2006, was the initial focus of the audit. The data provided by the appellant was very detailed and was considered reliable by the auditor for purposes of establishing the ratio that indicates each litre of beer and wine sold (food and alcohol). The ratio determined for the 2006 fiscal year was applied to the other reporting periods included in the audit period because the accounting books and records for those other reporting periods were incomplete and unclear.
[11] Georges Bakopanos testified at the hearing as manager and owner of the restaurant Le Topaze in Lachine, a patio bar with four (4) liquor permits. He explained the audit process and the difficulties he experienced with the auditor to rectify the numerous errors attributable primarily to the theft of alcohol, gratuities, the two-for-one from 4 p.m. to 7 p.m., special orders (food with wine), the personal consumption of staff, the percentage of losses (breakages-returns-clean-ups). Following his submissions, the auditor made adjustments to her first draft assessment. According to the witness, the adjustments made by the auditor were clearly insufficient. For example, the quantities of beer and wine contained in the beverage glasses of various sizes were not measured. According to him, the errors and corrections made by the auditor affect the reliability of the respondent’s data.
[12] The auditor did not testify at the hearing because she no longer works for the Ministère du Revenu du Québec. Counsel for the respondent, however, filed a number of documents prepared by the auditor or used by her in the course of her audit. Among those documents are (a) spreadsheets for the calculation of the ratio of $74.17 per litre of beer and wine sold that was rounded off to $74.00; (b) numerous excerpts from detailed sales reports by menu, category and item provided by the Bacchus Gourmet software; and (c) submissions made to the auditor with respect to the sales made during the period ending October 31, 2006, and with respect to the quantities of beer and wine contained in the various glasses and other containers used for service.
[13] The excerpts from the detailed sales reports filed in evidence primarily demonstrated inconsistencies in the way special orders were recorded in the system. Based on the appellant’s data, special bar orders (0003) represent 556 units of beer sold at an average price of $4.95; special orders (0002) represent 491 units of wine sold with a meal at an average price of $18.95 and special orders (0019) represent 45 pitchers of beer sold at a price of $10.
The court accepted the Minister’s use of the “indirect audit method”:
[34] Based on what was adduced in evidence, it appears to me that the Minister was justified in using an indirect audit method to determine that the appellant’s net tax amounts were indeed reported.
[35] The unjustified gap of $13,000 between the sales reported and the sales recorded in the Bacchus Gourmet system for the 2006 fiscal year, the errors in recording data on special orders and the absence of a record of beer and wine sales made during the two-for-one fully justified the use of an indirect audit method in this case.
[36] The audit was laborious and communication between the appellant and the auditor appears to have been rather difficult. In such a context, it is not surprising that numerous adjustments had to be made to the draft assessment and the assessment itself. Having regard to all the adjustments made, it is still appropriate to conclude that the indirect audit method used by the Minister yielded reliable results.
[37] The accounting data provided by the appellant for the fiscal year ending October 31, 2006, was considered by the auditor as being sufficiently reliable for purposes of establishing the ratio that indicates each litre of beer and wine sold. The quantities of litres of beer and wine purchased during all the reporting periods falling within the audit period were admitted by the appellant. The indirect audit method used by the Minister was approved by a number of decisions of our Court, including those rendered in
9100-8649 Québec Inc. v. The Queen, 2013 TCC 160 (on appeal to the Federal Court of Appeal),
Restaurant Place Romaine Inc. v. The Queen, 2010 TCC 347 and
9110-1568 Québec Inc. v. The Queen, 2009 TCC 554, and is not contested by the appellant.
The court concluded that the Minister’s approach was reasonable and not seriously challenged by the appellant’s evidence:
[40] The allowance of 984 litres granted by the Minister to account for the beer and wine sales made during the two-for-one is reasonable in the circumstances. Considering the fact that Mr. Bakopanos’s testimony is not corroborated by reliable documentary evidence or by the testimony of credible and independent witnesses, it is difficult for me to grant an additional allowance to the appellant.
[41] As for the penalties provided for in sections 280 and 285 of the ETA, counsel for the appellant did not make any submissions at the hearing and are, therefore, uncontested by the appellant. Section 285 provides the application of the penalty when a person “knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission”. The burden of proof regarding this provision is on the respondent. The evidence showed that the appellant repeatedly made false statements or omissions in its tax returns. The appellant did not provide any explanations for its omissions and the only possible conclusion is that they are the result of wilful negligence by the appellant that amounts to gross negligence.
As a result the appeal was allowed but only to the extent of a concession made by the Crown at the opening of the hearing (para. [7]): “ $14,472.75, plus the interest and penalties that will have to be adjusted accordingly”.
[1] 2014 TCC 4.