[OFFICIAL ENGLISH TRANSLATION]
2000-1376(GST)G
BETWEEN:
LES TOITURES LANCOURT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 1, 2001, at Sherbrooke, Quebec, by
the Honourable Judge P. R. Dussault
Appearances
Counsel for the Appellant: Robert Jodoin
Mélanie Pelletier (Student-At-Law)
Counsel for the Respondent: Louis Cliche
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated January 9, 1998, for the period from March 1, 1994, to February 29, 1996, is dismissed with costs to the Respondent in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of December 2001.
|
"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 7th day of March 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011213
Docket: 2000-1376(GST)G
BETWEEN:
LES TOITURES LANCOURT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] This is an appeal from a goods and services tax ("GST") assessment dated January 9, 1998, for the period from March 1, 1994, to February 29, 1996.
[2] By that assessment, the Minister of National Revenue (the "Minister") adjusted the appellant's net tax upward by $2,956.80. That sum consists of an amount of $1,518.16 in respect of unreported taxable supplies of $21,688.00 and an amount of $1,438.64 representing ineligible input tax credits ("ITCs"). Interest of $452.15 and penalties of $546.20 were also assessed.
[3] At the hearing, counsel for the appellant stated that an amount of $312.48 representing disallowed ITCs in respect of professional fees was no longer disputed. Counsel for the respondent conceded that the appellant should have been allowed an amount of $315 representing ITCs on asphalt work. The balance of the ITCs in issue, an amount of $811.16, relates to the 50-percent portion of amounts paid by the appellant for employee meals and is not deductible under section 67.1 of the Income Tax Act.
[4] Pierre Vaillancourt, the sole shareholder of the appellant, Diane Robichaud, secretary and bookkeeper employed by the appellant during the period in issue, and Raymond Villeneuve, the appellant's accountant, testified for the appellant. Sylvain Gardner, an auditor with Revenue Canada at the relevant time, testified for the respondent.
[5] Mr. Vaillancourt incorporated the appellant in 1991 after disposing of a dairy farm, which he had previously operated. Although he was the sole shareholder, Mr. Vaillancourt assigned management of the office to a certain Richard Landry whom he knew, having worked with him in construction and roofing. The appellant's headquarters was located in Saint-Élie-d'Orford, near Sherbrooke, Quebec, and the roofing work was done by two crews of employees. The larger crew was directed by Mr. Vaillancourt himself and performed large jobs, particularly for public buildings (schools and hospitals) or commercial or industrial buildings, most often outside the Sherbrooke region. A smaller crew was led by Mr. Landry and did mainly local residential work. Since Mr. Vaillancourt himself was almost constantly out of the office, Mr. Landry directed the office with the help of the secretary, Diane Robichaud. According to Mr. Vaillancourt, Mr. Landry saw to everything except signing the cheques prepared in advance, which he himself did on Fridays. Thus, the secretary's work, including bookkeeping, was done under the supervision of Mr. Landry, who also handled orders to suppliers.
[6] Around March 1996, the secretary, Ms. Robichaud, apparently resigned as a result of difficulties with Mr. Landry. One week later, apparently Mr. Landry also announced that he was leaving because he had been offered other work elsewhere. Mr. Vaillancourt then presumably asked him to go and finish work on three sites while he would manage the office himself. Mr. Landry apparently did not finish the work on those sites. Presumably, Mr. Vaillancourt communicated with his accountant, Raymond Villeneuve, to help him understand what had happened at the office during his prolonged absences since he was missing files and documents and found it impossible to determine what the appellant owed suppliers and what customers owed it. Mr. Villeneuve then purportedly sent three persons from his office to help Mr. Vaillancourt make sense of everything.
[7] Mr. Vaillancourt stated that federal tax authorities began to audit the appellant at the end of March 1996. He testified that Mr. Landry had warned him at one point to be careful of what he said. Mr. Vaillancourt said he had taken those words as a threat, not really understanding what they meant.
[8] On April 3, 1996, a fire broke out in the building where the appellant had its headquarters. That building, which also housed another business, belonged to Mr. Vaillancourt personally. The building and its content, including the business's documents, were completely destroyed by the fire. The firefighters even prevented Mr. Vaillancourt from entering the burning building to recover his computer. According to Mr. Vaillancourt, the tax audit had begun only one week before the fire, and the auditor had at that point taken possession of only one or two boxes of documents.
[9] It was not until after the tax audit conducted by Sylvain Gardner that Mr. Vaillancourt said he had been informed that there had been [TRANSLATION] "unreported work" in connection with certain residential roofing contracts. Mr. Vaillancourt said that the appellant mainly specialized in roofing for public buildings and commercial or industrial buildings and rarely contracted for residential buildings. In any event, he claimed that it was the crew directed by Mr. Landry that did that type of work. Mr. Vaillancourt also went so far as to suspect that Mr. Landry was misappropriating materials. At the same time, he said he had also learned that a trailer of materials intended for the appellant had been diverted and that the materials had been delivered to Mr. Landry's residence.
[10] In response to the revelations of [TRANSLATION] "unreported work", Mr. Vaillancourt says he conducted a personal investigation among four customers, whom he did not identify, but who he says stated they had done business with an individual who had introduced himself as Mr. Vaillancourt, whereas the description given clearly corresponded to the description of Richard Landry. Mr. Vaillancourt testified that the roofing work in issue was performed by Mr. Landry or roofers whom he did not know. He thus suspected Mr. Landry of having worked for someone else, and he stated that Mr. Landry had never handed over the money collected either to him or to the appellant. As to the fire, which Mr. Vaillancourt described as being criminal in origin, he also suspected Mr. Landry even though the investigation yielded no results.
[11] Mr. Vaillancourt said that Mr. Landry disappeared after those events, although he was seen working on a site of a competing business.
[12] The result of the tax audit was devastating for Mr. Vaillancourt. As I understand his testimony, the total additional income assessed amounted to more than $216,000, a result Mr. Vaillancourt characterized as "impossible" in view of the appellant's turnover. Assisted by three or four accountants, Mr. Villeneuve then attempted to reconstitute the business's accounts since all the documents and the computer had been destroyed by the fire. Meetings and discussions with Mr. Gardner followed. Mr. Vaillancourt said that he was advised by his brother Marc and by Mr. Villeneuve. In his view, the tax authorities had wanted to settle the matter as soon as possible because of the limitation period for 1993. Suffering from a severe nervous breakdown, he had also wanted to settle the matter as soon as possible since the fees payable to the accountants were very high. Apparently, following meetings and discussions, the amounts the proposed assessments dealt with were ultimately reduced to $50,000 and the federal income tax case was settled.
[13] In a letter of agreement addressed to Sylvain Gardner of Revenue Canada dated December 23, 1996, Mr. Vaillancourt waived his right of objection and right of appeal with respect to any income tax reassessment that would be made under the agreement (Exhibit I-1). An appendix to that letter refers to amounts of $4,621 and $6,967 for the years ended on February 28, 1995, and February 29, 1996, in respect of the ineligible portion of meal and entertainment expenses under section 67.1 of the Income Tax Act. Mr. Vaillancourt thus acknowledged that a total amount of $11,588 had to be considered as a non-deductible expense. In another appendix (Appendix G), the appellant's additional income for the years ended in 1995 and 1996 was fixed at $21,688. This was the total amount of eight separate contracts, which were purportedly performed by the appellant and not reported.
[14] Although he said that he had been advised by his brother and accountant in discussions with Mr. Gardner, Mr. Vaillancourt said that, in view of his state of health at that time, he would have signed anything in order to stop "the bleeding". He also stated that no one had pointed out to him all the consequences of his acceptance of that letter of agreement since he did not think he had to deal with reassessments, except with respect to provincial income tax, for which he also tried to negotiate a settlement with the authorities. In fact, in the assessment here in issue, the disallowed ITCs and the amounts of additional GST relate directly to the ineligible portion of employee meal expenses and to the additional income referred to above. Although Mr. Vaillancourt accepted the amounts under his income tax agreement with the federal government, he now disputes them.
[15] On the question of the purportedly unreported additional income, as stated earlier, Mr. Vaillancourt holds Mr. Landry, whom he suspects inter alia of having performed [TRANSLATION] "unreported work" and pocketing the proceeds, responsible. As noted above, Mr. Vaillancourt says he made an investigation among four customers and discovered that Mr. Landry had pretended to be him. Since he was virtually always absent, he said he did not really know what had happened with the work performed by Mr. Landry or with the management of the office, which was under Mr. Landry's responsibility. His role, he claimed, was limited to signing the cheques prepared in advance by Mr. Landry or the secretary when he returned to the office on Fridays. He added that, for reasons of convenience, he had even signed in advance a number of contract bids or even contract guarantee forms, which were subsequently completed as needed, presumably by Mr. Landry. In cross-examination, Mr. Vaillancourt had to acknowledge that he himself had completed and signed two bids for unreported work (Exhibits I-2 and I-3). In both cases, the work entailed the installation of an elastomeric membrane, not replacement of asphalt shingles. Furthermore, the only documents signed by Mr. Landry, which were filed in evidence, are a bid and an unnumbered invoice (Exhibit A-5). Both documents were typed on stationery bearing the appellant's name and logo in large characters and were signed by Mr. Landry and the customer. It should also be noted that the work described also involved replacement of the elastomeric membrane and not asphalt shingles.
[16] On the question of the amounts paid for employee meals, Mr. Vaillancourt explained that, under the regulations of the Commission de la construction du Québec, an allowance had to be paid to employees working on outdoor sites, unless the employer itself provided board and meals. Mr. Vaillancourt stated that the appellant had proceeded in both ways, directly providing employees with board in some cases, instead of paying them an allowance for that purpose. As to meals, an allowance was paid in all cases. However, Mr. Vaillancourt was unable to establish the proportion in which the allowance was paid to employees for board rather than meals, since the appellant did not make such a breakdown. For the purposes of the income tax assessment made pursuant to the agreement, Mr. Gardner assumed that 60 percent of the total amounts paid to the employees were attributable to board and 40 percent to meals. The income tax assessment was then made on the basis that 50 percent of the amount relating to meals was not deductible under section 67.1 of the Income Tax Act. Of course, the amount of the ITCs in this case was also determined on the same assumptions.
[17] The testimony of Diane Robichaud, who was the secretary and also did bookkeeping for the appellant at the relevant time, did not really add to Mr. Vaillancourt's testimony. She worked under Mr. Landry's supervision. Billing and payment were done by computer. Collections were done by Mr. Vaillancourt, Mr. Landry or by mail. Ms. Robichaud prepared the deposits, which Mr. Landry most often made because Mr. Vaillancourt was not on site. Each amount deposited corresponded to an invoice and everything was accounted for. With respect to the Revenue Canada audit, Ms. Robichaud did not remember the question of the allowances paid to employees and said she had no personal knowledge of any unreported income. To the question whether Mr. Landry could be doubted on the basis of certain facts, she simply answered that it was apparent near the end that things were not normal.
[18] Raymond Villeneuve is an accountant. In addition to preparing the annual financial statements and the income tax returns for the appellant, he did Mr. Vaillancourt's personal taxes and tax planning. He testified that the tax audit lasted not one week, but five weeks, three of which were at the appellant's place of business. Around the end of March 1996, a meeting was apparently held with the auditor, Sylvain Gardner. It was not until that meeting that Mr. Vaillancourt supposedly learned that the residential shingle roofing work had been done. Apparently, he appeared surprised since the appellant specialized mainly in commercial and industrial work and used elastomeric membrane as material for those jobs. As to the work stated in Schedule G of the agreement of December 23, 1996 (Exhibit I-1), Mr. Villeneuve asserted that no deposit could be traced. He said that the auditor had traced the work that was done through the purchases and delivery of materials to customers' homes. According to Mr. Villeneuve, some customers visited did not even know Mr. Vaillancourt.
[19] On the question of the allowances paid to the employees for board and meals in accordance with the scale of the Commission de la construction du Québec, Mr. Villeneuve disputed the 40 percent figure, which the auditor had assigned to meals. He admitted, however, that the appellant had kept no records and had no information on which to establish a breakdown of the amounts paid.
[20] Lastly, it is important to note that Mr. Villeneuve stated that it was Mr. Vaillancourt who had asked Mr. Landry to leave, that an amount equal to four percent (of his salary, I assume) was paid to him to put an end to certain controversies and, lastly, that there was an agreement between the two establishing that the appellant owed Mr. Landry nothing further.
[21] It should be noted that counsel for the appellant had a subpoena served on Mr. Landry, but he did not appear to testify.
[22] Sylvain Gardner testified concerning his audit of the appellant's business. He was able to determine unreported income from documents obtained at the appellant's place of business prior to the fire. From addresses written on documents, which did not correspond to income reported, he observed that some income had not been reported in respect of residential roofing work. In his audit, Mr. Gardner also examined supplier bids and invoices, more particularly those of the waste removal business, Jarbec, to determine where the work had been performed. He also contacted customers of the appellant, in particular the eight customers whose contracts or work are in issue in this case. One customer said he had done business with Mr. Landry and another with his business. In the case of a third, a bid and invoice signed by Mr. Landry were filed in evidence (Exhibit A-5). Three other customers stated that they had contracted with Mr. Vaillancourt. One of those persons even said that Mr. Vaillancourt was a friend, that he had supervised the work performed by him and that he had paid him cash. In the case of the other two, Exhibits I-2 and I-3 also establish that bids were completed and signed by Mr. Vaillancourt himself. We have no information concerning one of the last two customers. As to the other, Mr. Vaillancourt admitted that he himself had signed the guarantee document. However, he noted during his testimony that he had signed a number of those documents in advance.
[23] The amounts assessed by Mr. Gardner in respect of the work performed at the homes of the eight customers correspond to the amounts that those customers said they had paid in cash for the work performed, not to the higher amounts which, in certain cases, were stated in the documents obtained.
[24] Counsel for the appellant contends that the assessment in issue should be vacated with respect to the tax on the unreported additional income, essentially on the ground that Mr. Landry operated a parallel business while employed by the appellant.
[25] There is no doubt in his mind that Mr. Landry is responsible not only for the misappropriation of certain materials but also for the money collected for the [TRANSLATION] "unreported work performed". Counsel for the appellant emphasized that Mr. Landry left when the situation started getting tight and when the fire occurred. He also noted that, despite the subpoena served on him, Mr. Landry was absent from the hearing. He moreover emphasized the credibility of Mr. Vaillancourt's testimony and noted inter alia that Mr. Vaillancourt had not only attempted to recover his computer from the fire, but had also conducted a personal investigation among some customers. Since neither Mr. Vaillancourt nor the appellant apparently benefited from the money collected, he contends that the assessment has no basis as regards the appellant.
[26] As to the question of the ITCs disallowed on the non-deductible portion of amounts paid for employee meals, counsel for the appellant argued that assigning the figure of 40 percent of the total amount paid for meals is utterly arbitrary and merely the result of a general policy followed by tax authorities.
[27] Counsel for the respondent contends for his part that the appellant made the taxable supplies with regard to the work in issue and that the tax is owed from the moment the invoice becomes payable. He emphasized the fact that the appellant is a registrant, which, as an agent of the Crown, must ensure the tax is collected at the moment it becomes due. In his view, a person may not avoid this obligation by simply saying that he trusted other persons.
[28] As to the ITCs on the non-deductible portion of the meal expenses, counsel for the respondent emphasized that the appellant itself did not make a breakdown of the amounts paid for board and meals and that it did not in any way show that the allocation of 60 percent for board and 40 percent for meals was not reasonable.
[29] It cannot be established from the whole of the evidence adduced that it was not the appellant, through its sole shareholder, Mr. Vaillancourt, or through Mr. Landry, a key employee in whom Mr. Vaillancourt had complete trust, that made the taxable supplies to the eight customers identified in Schedule G of the letter of agreement of December 23, 1996. The misappropriation of funds by an employee, if it can be believed and to the extent one can believe it, does not alter the situation. Need I recall that all the documents filed in evidence bear, in large characters, the appellant's name and logo. It may also be seen that Mr. Vaillancourt himself completed and signed certain documents concerning the work in issue. It is hard to believe that he could have been surprised that work was performed in the places described. Furthermore, it was from documents and information obtained at the appellant's place of business that the auditor, Mr. Gardner, was able to determine that certain work had not been reported. It is not really necessary to go any further.
[30] Subsection 221(1) of the Excise Tax Act (GST) provides as follows:
Every person who makes a taxable supply shall, as agent of Her Majesty in Right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
[31] In Division II, subsection 168(1) of that Act stipulates:
Tax under this Division in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.
[32] In light of the evidence adduced, I find that the assessment of the appellant with respect to the taxable supplies made at the homes of the customers mentioned in Schedule G of the letter of agreement of December 23, 1996, is correct. These are not cases of bad debts. The customers paid cash for all the work to either Mr. Vaillancourt or Mr. Landry, who, I repeat, was a key employee. Mr. Landry was the appellant's agent at the relevant time. There is insufficient evidence to conclude that he operated a parallel business, as counsel for the appellant contends. On the contrary, some evidence tends to show that the work was performed on behalf of the appellant. Moreover, the appropriation of funds by a key employee does not exempt the appellant from collecting the tax payable to the extent that it made a taxable supply.
[33] As to the part of the assessment relating to the disallowed ITCs, I believe it is also correct. Subsection 236(1) of the Excise Tax Act (GST) concerns the restriction applicable to ITCs or, in other words, provides for an increase of net tax where the deduction of expenses is limited by section 67.1 of the Income Tax Act. That restriction must be applied in the instant case.
[34] As to the allocation of the total amount paid to the employees on the basis that 60 percent of the sum was paid for board and 40 percent for meals, the appellant brought no evidence to show that this allocation was not reasonable in the circumstances. The appellant never made any breakdown whatever and never provided information, which would have made possible an even slightly rigorous calculation that would have yielded a different result.
[35] As a consequence of the foregoing, the appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 13th day of December 2001.
|
"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 7th day of March 2003.
Sophie Debbané, Revisor