Date: 19980529
Docket: 97-1983-GST-I
BETWEEN:
BRUCE D. DAVIES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] By Notice of Reassessment number 05EP114017023, dated March 24, 1997, the Minister of National Revenue (the "Minister") reassessed the Appellant Goods and Services Tax ("GST") of $10,471.42, denied Input Tax Credits ("ITCs") of $11,903.22 and reassessed late remittance penalties and interest of $4,186.37 and $4,245.20 respectively.
[2] In making the reassessment, the Minister claims that:
- the Appellant failed to maintain adequate books and records;
- for the period January 1, 1991 to December 31, 1993, the Appellant reported as having collected $15,754.61 of GST, while claiming $18,075.80 of ITCs, with the result that a net tax refund for the period was claimed by the Appellant, for the period, of $2,321.19;
- the Appellant did not report an amount of GST that correlates to the Appellant's revenue;
- the Appellant underreported GST in the period by an amount not less than $10,471.42;
- the Appellant claimed ITCs in the amount of $18,072.80 during the period but was denied ITCs of $11,903.22; and
- the Appellant reported $22,374.64 less of net tax than he was required to report and remit in respect of the period.
[3] The Appellant appeals the assessment under the Excise Tax Act (the "Act") on the basis that he did maintain adequate books and records for the period and that the Minister erred in finding the Appellant underreported GST in the period and that he provided adequate information for the ITCs.
[4] The Appellant also maintains he had acquired for the period in question 'bad debts' and those bad debts should be allowed in the calculation of the assessment.
[5] At trial, the Minister amended the pleaded assumption in the Reply to the Notice of Appeal, paragraph 5(n), from:
(n) the Appellant was required to collect GST of $26,226.03 and was entitled to ITCs of $6,172.58 ...
to:
(n) The Appellant was required to collect GST of $26,226.03 and was entitled to ITCs of $6,608.42 ...
(emphasis added to show the amendment)
THE APPELLANT'S EVIDENCE
[6] The Appellant is a chartered accountant.
[7] The assessment arose from the Appellant generated supply of professional services rendered. As part of his supply of services, the Appellant was a franchisee of a franchisor who developed a business system, that is, a “marketing business and operational methodology designed to assist individuals to operate efficient and effective bookkeeping, accounting and tax return preparation businesses". Throughout the period in question, the Appellant was both a debtor and a creditor of the franchisor.
[8] In his capacity as a creditor, the Appellant, for services rendered, claims he was owed by the franchisor $59,328.91 for 1991 and $34,440.00 for 1992. The Appellant claimed these amounts as bad debts.
[9] In his capacity as a debtor, the Appellant owed for the period in question royalties to the franchisor. The Appellant did not pay these amounts but carried these amounts on his books as liabilities.
[10] The Appellant's efforts to collect the 'bad debts' was minimal. He did nothing more than telephone and write the franchisor seeking payment.
[11] In relation to the alleged document deficiency, the Appellant maintained he kept adequate books and records. However, the books and records were seized by way of other party court proceedings and for a period of time he was denied access to them. When he did obtain access to his documentation he stated he recovered books and found the records were not complete.
[12] Notwithstanding the incompleteness of the books and records, the Appellant added that much of the requisite information required by the Act was within the Minister's knowledge, for example, by reason of GST registration given the identity of parties from his records requisite information could be obtained.
ANALYSIS
BAD DEBTS
[13] The test of whether a debt is bad is essentially a subjective determination, that is, did the Appellant find the debt to be bad. As in all cases, the determination must not be contrived and the finding must be reasonable on the facts. Towards this end, the Appellant must show the Court whether he considered the amount to be uncollectible and unrecoverable.
[14] For the period January 1, 1991 to December 31, 1991, the Appellant reported income of $148,250.00. Under section 165(1), GST is applicable on amounts receivable whether or not it is actually collected. The Appellant in his financial statements did not claim any adjustment for bad debts. At the objection stage, the Appellant claimed an adjustment of $59,328.91 for bad debts. At trial, little documentary evidence was submitted to support this claim.
[15] For the period January 1, 1992 to December 31, 1992, the Appellant reported income of $107,916.00. Once again, the Appellant in his financial statements did not claim any adjustment for bad debts. At the objection stage the Appellant claimed an adjustment of $34,440.00 for bad debts.
[16] For the period January 1, 1993 to December 31, 1993, the Appellant reported income of $135,250.00. The Appellant in his financial statements did not claim any adjustment for bad debts.
[17] It is clear, for the alleged bad debts no tax was collected and no tax was remitted.
[18] In particular, the Appellant did little to attempt to collect the debt. He made a few phone calls and wrote letters while at the same time the Appellant carried on his franchise operation and recorded his liabilities (royalties) owed to the franchisor as they were incurred on the books of his business. He made no attempt to take legal redress action nor did he seek settlement from those monies owed to him by the franchisor against those monies owed by him to the franchisor. I find the evidence is weak, that the Appellant took no reasonable steps to determine if the debts were uncollectible and unrecoverable, and as such has not met the onus the debts were bad.
[19] I conclude, the Appellant was not entitled to ITCs in relation to bad debts pursuant to section 231 of the Act.
ANALYSIS
INADEQUATE DOCUMENTATION
[20] With respect to the claim of inadequate documentation, subsection 169(4) of the Act states that a registrant for the purposes of the Act may not claim an ITC unless certain prescribed information is obtained by the registrant prior to filing the GST return. The required information is listed in section 3 of the Input Tax Credit Information Regulations. Under section 223 of the Act, this information must be disclosed by the vendor on the request of the purchaser.
[21] At the hearing, the Court was taken though several documents filed as exhibits by way of cross-examination of the Appellant and direct examination of the Minister's auditor, Mr. Bala Yasodharan.
[22] This evidence by way of overview and sampling of the auditor’s audit of the Appellant's documentation revealed record deficiencies including the following: missing invoices, missing GST number registration, missing dates of purchase, missing names of purchasers, cheques without subject reference, royalty calculations miscalculated, missing statements and amounts on receipts as to whether GST was paid, and documents purporting to be contracts not signed.
[23] I further conclude the documentation provided and the information provided does not meet the requirements of section 169 of the Act.
CONCLUSION
[24] The Appellant failed to rebut the pleaded assumptions resulting in the Minister's assessment. The onus was upon him to do so.
DECISION
[25] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the limited basis the Appellant was entitled to ITCs of $6,608.42 as pleaded in the Amended Reply to the Notice of Appeal, paragraph 5(n) as amended at trial, for the period in question.
[26] The Appellant is entitled to no further relief.
Signed at Ottawa, Canada, this 29th day of May 1998.
"D. Hamlyn"
J.T.C.C.