Date: 20000814
Docket: 1999-4365-GST-I
BETWEEN:
SOTIRIOS LADAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal from an assessment under Part IX of the Excise Tax Act ("Act") regarding the quarterly reporting periods from January 28, 1993 to December 31, 1996, filed on November 30, 1999.
[2] The Appellant is engaged in a brew-your-own beer and wine business under the name of Brew Experts. The Appellant provides customers the opportunity to make their own beer or wine. The Appellant also provides the raw materials and the storage space, and the customer is expected to process the products himself or herself.
[3] The Appellant was at all times a registrant under Part IX of the Act. Customers pay the Appellant for the supply of food products (a zero-rated supply), for the supply of a storage facility for the beer/wine awaiting pick-up and the filtering of the raw materials during storage (a taxable supply). The Minister of National Revenue ("Minister") assessed the Appellant by Notice dated July 29, 1997 and further reassessed by Notice dated June 18, 1999 for unreported GST payable for the quarterly periods from January 28, 1993 to December 31, 1996.
[4] The issues the Appellant appeals to this court are whether the Minister properly reassessed the Appellant for failure to collect and remit GST with respect to the consideration for multiple supplies in the amounts of $2,944 and $2,917 for the 1995 and 1996 taxation years respectively, and whether the Minister properly assessed interest and penalties.
[5] The basis of the Appellant's appeal is that he disagrees with the apportionment of the consideration related to the zero-rated supply (raw materials) and the taxable supply (services, equipment, storage, work space, etc.) that resulted from the Minister's audit.
[6] The apportionment of the consideration was determined at the audit to be 50% related to the supply of zero-rated items and 50% related to the supply of items taxable at 7%. This increased the Appellant's GST payable in the amounts of $2,944 and $2,917 for the quarterly reporting periods from January 1, 1995 to December 31, 1995 and from January 1, 1996 to December 31, 1996, respectively.
[7] Subsection 165(1) of the Act states that every recipient of a taxable supply shall pay a tax of 7% of the value of the consideration for the supply. It imposes no direct obligation on the supplier. Subsection 221(1) requires that a person who makes a taxable supply collect the tax payable in respect of the supply. "Taxable supply" is defined in subsection 123(1) as being a supply that is made in the course of a commercial activity and "zero-rated supplies" are defined in subsection 123(1) as supplies included in Schedule VI. Schedule VI provides that the raw materials (food products) supplied by the Appellant are zero-rated. Zero-rated goods or services are taxable supplies but are subject to a 0% tax rate. As a result, a vendor who sells zero-rated goods or services is not required to charge tax on the sale price to his customers, yet will be entitled to claim an input tax credit for GST/HST paid on purchases used in making zero-rated supplies.
[8] Subsection 153(2) requires consideration for multiple supplies to be allocated “reasonably” among the supplies. This provision allows the Minister to allocate a percentage between the zero-rated supply and the taxable supply. In this case the Minister allocated 50% to the zero-rated items and 50% to the taxable supply. It must therefore be determined whether this allocation is correct.
[9] The Appellant, alleged that the majority of the floor space is related to the storage of zero-rated product and he makes an analogy that his business is like a grocery store.
[10] The primary activities carried out by the brew-on-premise revolve around purchasing and stocking raw materials, plus providing storage space for the fermenting or aging product. The raw materials and the resultant product are zero-rated given that they are a retail food item. Just as in the case of a retail food store, the vast majority of floor area is taken up by material storage space, including cold rooms. The balance is primarily wash-up area, toilets, office and retailing area, plus hallways between them and the storage space. The least amount of square footage is taken by product preparation and bottling areas where the “service” component of the sale is provided. The Appellant also asserted the "service" component of his business was minimal.
THE AUDITOR’S APPORTIONMENT
[11] The Minister’s audit was founded on the information the auditor obtained from the Appellant by way of interview, observation and information obtained from industry standards. The auditor reported that service input of the Appellant's business was much broader than that asserted by the Appellant. The auditor also stated this extended service information came directly from the Appellant. I conclude that the Appellant understated to the court the extent of his service activities to his customers.
[12] In relation to supply expenditures, for example, the Appellant argued that his advertising expense was solely directed to the sale of zero-rated supplies (raw materials) and that advertising was not directed at the surrounding taxable supply service component of his business. The facts asserted go beyond the threshold of believability.
[13] I am unable to agree with the Appellant’s interpretation of the focus of his advertising expense.
[14] On balance I find the auditor's evidence of apportionment for multiple supplies was reasonably allocated.
PENALTIES AND INTEREST
[15] Both interest and penalties are levied under subsection 280(1) of the Act which provides a penalty of 6% per year and interest at the prescribed rate for failing to remit or pay amounts when required. This is computed for the period beginning on the first day following the day on which payment was required. The penalty under section 280 is one of "strict liability" rather than absolute liability. If the person can show "due diligence" in attempting to comply with the legislation, the penalty will not apply. In this case the Appellant destroyed many of the documents behind the claims he was making. This action does not amount to due diligence of attempting to comply with the legislation when the Appellant is asserting a radical change to the apportionment that he has filed for two years prior in relation to multiple supplies.
CONCLUSION
[16] I find the evidence by the Minister’s auditor was unassailed by the Appellant, either by way of the direct evidence of the Appellant, or by cross-examination of the auditor by the Appellant. The Appellant's evidence did not discharge the onus incumbent upon him to dislodge the Minister's assessment.
DECISION
[17] The appeal is dismissed.
Signed at Ottawa, Canada, this 14th day of August 2000.
"D. Hamlyn"
J.T.C.C.