|
Docket: 2004-4731(GST)I |
|
BETWEEN: |
|
1277302 ONTARIO LTD., |
|
Appellant, |
|
And |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
____________________________________________________________________
Appeal heard on October 20, 2005 at Hamilton, Ontario
|
Before: The Honourable Justice Diane Campbell |
|
|
|
|
|
Appearances: |
|
|
|
|
|
Agent for the Appellant: |
Omar S. Khan |
|
|
|
|
Counsel for the Respondent: |
Stacey Sloan |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act with respect to the reassessment, notice of which is dated January 15, 2004 and bears number 08GP0103806, for the period from January 1, 1999 to December 31, 2001, is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 24th day of February 2006.
|
"Diane Campbell" |
Campbell J.
|
Citation: 2006TCC118 |
|
Date: 20060224 |
|
Docket: 2004-4731(GST)I |
|
BETWEEN: |
|
1277302 ONTARIO LTD., |
|
Appellant, |
|
And |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
REASONS FOR JUDGMENT
CampbellJ.
[1] This appeal is in respect to the period January 1, 1999 to December 31, 2001. The Appellant provides trucking and hauling services on a contract and subcontract basis. On January 15, 2004, the Appellant was re-assessed for unpaid Goods and Services Tax ("GST") plus interest and penalties. Subsequently, in September 2004, the Appellant conceded GST in the net amount of $6,634.34 owing in respect to a 1999 Mack truck.
[2] During the hearing, the Respondent agreed that Item 3 on the Statement of Audit Adjustments (Tab XYZ of Appellant's Document Brief, Exhibit A-1), being an amount of $890.37 in respect to GST collectible on bank deposits, would be reduced by $560.00. The remaining items still at issue were the input tax credits (ITCs) disallowed in respect to a Ford Sable automobile (Item 4 of the Statement of Audit Adjustments referred to above), GST on unidentified bank deposits (Item 7 of this Statement), disallowed ITCs (Items 5, 8 and 9 of this Statement) and penalties.
The Evidence:
[3] The Appellant relied primarily on the evidence of Shabhir Khan, a Certified Management Accountant who provided accounting services to the Appellant. In addition, Luciano Miceli, the owner of the company, gave evidence. The Respondent relied on the testimony of Rehan Shahid, Canada Revenue Agency ("CRA") auditor.
[4] Mr. Khan's evidence was that many of the figures in the GST returns were incorrect and that he filed the returns knowing they were incorrect. However he contended that the general ledger is the key document for sourcing information and that the payments/refunds on the returns were correct because they matched the same amounts contained in the general ledger. In justifying his calculations on these returns, he referred to the GST return for the reporting period January 1, 2001 to December 31, 2001 (Tab F of Exhibit A-1). He essentially took his general ledger refund figure of $1,643.03, then "worked backwards" mathematically to have the return reflect the same refund figure contained in the general ledger. He stated that he took an inflated total sales figure of $113,527.00, multiplied that figure by 7% GST and reported at line 103 of the return that the Appellant collected GST in the amount of $7,946.89. Since he knew his general ledger figures called for a refund of $1,643.03 he "... So what I did, I put in line 106 (ITCS of $9,589.92) the same amount of figure in there to come up with $1,643.03. And that jived with my general ledger..." (Transcript page 124). He acknowledged that the other figures in the returns were inflated to achieve what he referred to as the "correct" refund result of $1,643.03 so that the return would accord with the general ledger refund amount. In addition he thought the auditor used the cash method of accounting rather than the accrual method which Mr. Khan said he used and therefore this different approach could account for some of the differences in the treatment of the amounts.
[5] In direct examination, Mr. Khan addressed individually the contentious items (4, 5, 7, 8 and 9) contained at Exhibit A-1, Tab XYZ, the Statement of Audit Adjustments. In respect to ITCs claimed for the Ford Sable automobile (Item 4), Mr. Khan testified that this vehicle was used primarily for business purposes by Mr. Miceli for soliciting new contracts, checking on the status of the dump truck, collecting receivables and doing banking. He proposed a percentage of 90% for business use as opposed to CRA's allocation of 10%. Mr. Khan's opinion was that no mileage log was required because Mr. Miceli was the only individual who used this vehicle. In addition he thought it would be unreasonable for Mr. Miceli to use the company dump truck to conduct business errands.
[6] In explaining Item 5 of the Statement of Audit Adjustments, ITCs disallowed for the period ending December 31, 2000, Mr. Khan referred to Exhibit A-1, Tabs D and E. Tab E contained an excerpt from Mr. Khan's general ledger showing a balance of $1,001.34 in the GST Payable account at year end, followed by a credit in the same amount to the so-called GST Receivable account. Mr. Khan stated that, based on the accrual accounting system, in the following year, 2001, this entry at the end of 2000 was reversed from the "GST Payable" account to the "Receivables" account to offset GST accruing during the following 2001 calendar year. Mr. Khan stated that, because the auditor based his audit on the incorrect figures in the returns and did not take into account the "correct" general ledger amounts, the figures contained in the auditor's working papers at Tab D are therefore inconsistent with these so-called "correct" general ledger figures. According to Mr. Khan, most of these problems arose because the auditor refused to check or use the general ledger in completing his working papers. The purpose of the working papers at Tab D was to reconcile the ITCs as per the Appellant's records to the ITCs claimed in the GST return for 2000. The auditor arrived at a figure of $3,043.18 for ITCs, as per the summary of records, compared to ITCs claimed of $6,015.21 in the return, accounting for a difference of $2,972.03. Mr. Khan stated that it was this approach by the auditor that resulted in an incorrect ITC figure ($2,972.03) because the auditor based his calculation on the inflated figure for ITCs contained in the return. He indicated that the ITC amount of $6,015.21 was overstated in the return by $2,817.60. According to Mr. Khan the total ITCs as per the Appellant's records should actually be $4,134.26 and not $6,015.21, resulting in a difference of $1,880.95. Mr. Khan's evidence is that the auditor's figure of $2,972.03 should be replaced with Mr. Khan's figure of $1,880.95. He then suggested that the amount of $1,880.95 should be subtracted from the overpayment of $2,817.20, which he stated should result in a number "close" to the general ledger GST receivables number of $1,001.34. According to Mr. Khan, the problems in the auditor's working papers arose because the auditor treated the figure of $2,817.60 (the amount by which the ITCs claimed in the return were overstated) differently than Mr. Khan did. The auditor incorrectly relied on the so-called incorrect return amount of $6,015.00 to arrive at the calculations which he used in the Statement of Audit Adjustments (Item 5).
[7] In discussing Item 7 of the Statement of Audit Adjustments, the credit of $1,956.53, Mr. Khan argued that the amount of GST owing on unidentified bank deposits was overstated and therefore the credit amount available to the Appellant respecting the GST reported for 2001 should be adjusted. Mr. Khan referred to the auditor's working papers dated May 7, 2003 (Tab J of Exhibit A-1) for the period ending December 31, 2001. The purpose of this paper was to examine the Appellant's total bank deposits in order to compare those amounts to the reported sales. Mr. Khan reviewed invoices and deposit slips which were also contained in Tab J. These documents contained amounts which corresponded to those amounts disallowed by the auditor because of the lack of documentation. Mr. Khan identified a series of invoices plus bank deposits as well as an explanation of a bank deposit of $1,300.00 made by Mr. Miceli (to offset an overdrawn account) which he explained had incorrectly attracted GST.
[8] In respect to Item 8 of the Statement of Audit Adjustments, Mr. Khan referred to excerpts from his general ledger for GST amounts collected (Tab F of Exhibit A-1) for the period ending December 31, 2001. According to Mr. Khan's calculations, the general ledger amount for GST collected in 2001 of $4,949.43 should replace his artificially inflated figure of $7,946.89 which he reported as GST collected in the GST return. In addition the amount claimed for ITCs at line 106 of the return was also an artificial and incorrect amount which enabled Mr. Khan to match what he referred to as his "correct" general ledger figures to the amount in the return. The correct amount according to Mr. Khan's general ledger for ITCs was $5,591.12, not $9,589.92, as recorded in the return. Based on his general ledger amounts, the difference of $641.69 of total GST collected [$4,949.43 and ITCs of $5,591.12] together with the general ledger prior refund of $1,001.34 equals the proper refund amount ($1,643.03) as submitted in the return for 2001. According to Mr. Khan, the problem in this appeal arises again because the auditor ignored the "correct" general ledger entries and relied on the erroneous numbers Mr. Khan included in the returns.
[9] To explain Item 9 on the Statement of Audit Adjustments, Mr. Khan referred to the auditor's working papers respecting ITC adjustments dated July 30, 2003 (Tab G) and the working papers dated June 26, 2003 respecting ITC reconciliation (Tabs H and I). Again Mr. Khan compared the amounts on the returns, the working papers and the general ledger to explain why he included incorrect amounts in the GST return in an attempt to arrive at the same figures contained in his general ledger. He surmised that the amounts referenced in the working papers at Tab I comprising the total ITCs disallowed in the amount of $627.68 would be related to expenses concerning the Ford Sable vehicle ($251.73) and the balance ($375.95) would relate to various miscellaneous expenses for which he could not produce receipts or other supporting documentation. Mr. Khan also reviewed the figures using the working papers at Tab G to show that the auditor's figure of $2,280.21 for adjusted net tax for Item 9 on the Statement would be incorrect as the amounts, beginning with total ITCs claimed in the 2001 return ($9,589.92), used to calculate this figure, are flawed because Mr. Khan included incorrect amounts when he completed the GST returns.
[10] On cross-examination, Mr. Khan admitted that the total reported sales amount and the GST amounts on the GST returns were incorrect. He acknowledged his responsibility for ensuring that the returns should be accurate and correct. Again Mr. Khan explained how he derived the incorrect numbers he used by multiplying an incorrect sales amount by 7% and then working "backwards" from his known general ledger refund amounts in order to obtain the "made up" ITC amount included in each return. He also admitted that there would be no supporting documentation for the differences, which existed between the actual and the reported ITCs. He testified that his method would be correct in the end because the GST return figures were made to match his "correct" general ledger amounts. He also acknowledged that his method would also defray the risk of being audited. He admitted that the GST return contained erroneous figures but that the final result matched his "correct" general ledger figures and that the auditor was aware of the method he had used.
[11] The second witness, Luciano Miceli, is the owner of the company. Because of his difficulty with English and his lack of knowledge respecting the bookkeeping procedures used by Mr. Khan, his evidence was limited to the Ford Sable vehicle. He was unsure if the company bought the car in 2000 or 2001. On cross-examination, he stated that he personally replaced a Ford Aerostar minivan for the Ford Sable which he leased in 1996 or 1998. The lease was transferred sometime later to the company but no supporting lease documentation was provided. He testified that he used the Ford Sable almost entirely for business, including picking up truck parts, collecting money from clients and finding new business. He drives a dump truck and works very long days from five o'clock in the morning until eight o'clock in the evening, five or six days per week. The Ford Sable was the vehicle that was available at his home for personal use. His wife does not drive and occasionally he used the Ford Sable to take his wife to do a few errands. However he testified that it was used primarily to shop for groceries. Other than these occasions, he did not use the vehicle for personal use because his spare time was spent at home, gardening and watching television. Mr. Miceli identified several amounts on the working papers dated July 15, 2003 (Tab D - ITC Reconciliation for 2000) and working papers dated June 26, 2003 (Tab H - ITC Reconciliation for 2001) as claimed ITCs in respect to GST on the Ford Sable lease. His only explanation for the difference in the amount in the month of October 2001 was that it might have been that month when the company purchased this vehicle. However there were no entries in August or September 2001 to reflect this.
[12] The third witness was CRA auditor, Rehan Shahid, who testified that his audit included a review of sales invoices, deposit slips, bank statements, cancelled cheques, personal loans, lines of credit, GST refunds, and expense invoices. Although Mr. Khan disputed that the auditor used the general ledger, noting that it was not referenced in the auditor's methodology, Mr. Shahid testified that he did review the general ledger. Mr. Shahid also reviewed lifestyle issues and compared income statements to industry standards. He testified that the working papers on ITC reconciliation at Tab D contained amounts which were taken from the working papers prepared by Mr. Khan and that those numbers were apparently later recorded in the general ledger. At page 14 of the working papers, the figure used for ITCs claimed was the figure taken from the Appellant's GST return for that year.
[13] Mr. Shahid determined that the bulk of the receipts and invoices respecting ITCs claimed for expenses appeared reasonable. However he had problems concerning the ITCs claimed on the Ford Sable vehicle, which were being claimed at 100% of the GST paid. He was told the lease was with Mr. Miceli but he was not given a lease agreement or a mileage log. Based on his review, he disallowed 90% of the ITCs in regard to this vehicle.
[14] Mr. Shahid used his working papers, dated June 26, 2003 (Tab H) to assist in reconciling ITCs for the 2001 return but testified that since it was impossible to determine the appropriate GST paid by using the general ledger, he based his calculations on actual sales documentation. He therefore worked with the amounts of ITCs claimed in the GST returns filed by the Appellant's accountant.
[15] In determining the reasonableness of the receipts and invoices for 2001, Mr. Shahid stated that it was difficult to use the general ledger because the method Mr. Khan used to summarize the expenses in monthly categories made it difficult to trace an invoice through the ledger. He also testified that Mr. Khan told him he used the cash method of accounting to determine sales and GST amounts.
[16] On cross-examination Mr. Shahid agreed with counsel's suggestion that he became aware during the audit that the GST returns for 2000 and 2001 were in fact completed with incorrect figures, as he noted in his working papers at Tab G. He also acknowledged that his adjustments were based on the erroneous GST returns in determining that those numbers were incorrect. His adjustments were then made to correct the problems. He also testified that, although his working papers never referenced use of the general ledger, he did review it. He noted that the general ledger was not entirely reliable because, based on what Mr. Khan told him, the returns were filed on a cash method. This was contrary to Mr. Khan's evidence that he used the accrual method.
The Appellant's Position:
[17] The Appellant submitted that credibility of the accountant and the auditor was a major issue, particularly in respect to which accounting method was actually employed. He suggested that this problem may have caused some of the disparities in the calculations. Although Mr. Khan admitted he "made up" some of the figures on the GST returns so that they would coincide with the general ledger figures, it was the auditor who was wrong for placing reliance on the erroneous numbers in the returns. For convenience, the auditor either ignored the general ledger or felt the ledger was unnecessary to use in the audit.
[18] In addition to the issues of credibility and erroneous figures contained in the GST returns, the Appellant identified two additional issues: the Ford Sable vehicle and the penalties. The Appellant relied on the evidence of Mr. Miceli that there was a lease of the Ford Sable vehicle by the Appellant and that it was used 90% for business related activities. With respect to penalties, he submitted that the auditor did not show that the general ledger was incorrect but merely that "something" was deficient. The Appellant's mistakes were honest mistakes and therefore penalties would be excessive and contrary to the policy behind the Act.
The Respondent's Position:
[19] The Respondent did not agree with the Appellant's framing of the issues. With respect to the general ledger versus the GST returns, since the accountant acknowledged that the returns were wrong, it would be absurd to find fault with the auditor who relied on the numbers as reported on the returns. The accountant knowingly completed the returns in the way he did to avoid an audit. There was no review to determine exactly how much GST was collected or paid. The Respondent reviewed the charging provision, subsection 169(1), and submitted that the amounts reported on the returns were not actually paid. Although the pleadings allege insufficient documentation to support ITCs, the disallowed ITCs are actually precluded because there was no tax payable in respect to the supply for the amounts listed in the Appellant's returns.
[20] The Respondent submitted that an auditor's role is to review all relevant documentation which a taxpayer provides. The Appellant admits that, although the returns are incorrect, the general ledger is the key source of information. The Respondent argued that a general ledger reflects a history of accounting and may be wrong or deficient. A return concerns tax and the auditor relied on those returns to reassess. Even if some of the amounts in the return are incorrect, it is these amounts that the auditor had the right to adjust. Evidence adduced to discredit the auditor's findings does not discharge the Appellant's onus. Without supporting source documents, the Appellant's onus is not discharged by simply referencing the general ledger to support a correct amount for ITCs.
[21] Respecting the Ford Sable issue, the Respondent submitted that because there was conflicting evidence as to who leased this vehicle and when, no documentation produced and no specific detailed information provided respecting the location of the dump truck, distances to the bank, distances concerning personal errands, the Appellant has not satisfied the burden of proof.
[22] In respect to the issue of penalties, the Respondent argued that this issue is a strict liability offence subject to a due diligence defence. This defence requires affirmative proof that all reasonable care was exercised to ensure that errors were not made. The Respondent argued that intentional errors were made when the GST returns were completed and filed. The auditor properly reviewed all documentation and numbers, compared those to the returns and then made adjustments.
[23] The Respondent also pointed out that, whether the net accounting figures were balanced or not, is not relevant because tax for accounting purposes is different than tax for filing purposes. The issue is more fundamental than that contemplated by subsection 169(4) because the difference, between real ITCs and those claimed, has no bearing on the amount of GST actually paid. There was no supporting documentation provided because no GST was ever paid in respect to those claimed ITCs. Therefore it is subsection 169(1) that precludes a claim for ITCs making it unnecessary to look to subsection 169(4).
The Issues:
[24] When I look at the Appellant's characterization of the issues and his arguments presented in submissions, the issues at first glance would appear to involve complex questions of whether the auditor could rely on a GST return that is known to be incorrect, whether the general ledger alone provides a sufficient evidentiary basis and whether the auditor used the incorrect accounting method. However I view the issues as much more basic because I do not believe the Appellant has presented a sufficiently strong enough case to place those questions into issue. The issues as I see them are simply:
(1) Should ITCs be allowed, and to what extent for the period in question in respect to the Ford Sable vehicle?
(2) Did the Appellant successfully demolish the Respondent's reassessment with respect to Items 5, 7, 8 and 9 as listed on the Statement of Audit Adjustments (Tab XYZ of Exhibit A-1)?
(3) Were penalties properly assessed?
Analysis:
[25] The Respondent set out a number of assumptions in the Reply to the Notice of Appeal and the law is settled that the onus is upon the Appellant (with the exception of penalties) to demolish or overcome those assumptions (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336). With respect to GST appeals, the same onus applies (Molenaar v. The Queen, 2005 DTC 897). With this in mind I want to address separately each of the items referred to in the issues, beginning with the one item I am allowing.
- Item 7:
[26] With respect to Item 7, dealing with tax charged on unidentified bank deposits, I have concluded that Mr. Khan's presentation of copies of supporting documentation, by way of banking deposits and invoices, together with his explanations, sufficiently disposes of this item in favour of the Appellant. However on the remaining items this onus was not met.
- The Ford Sable Vehicle:
[27] There is simply insufficient evidence with respect to ITCs claimed for this vehicle to satisfy the onus which is upon the Appellant. I am sure this vehicle was used for both business and personal activities, but I was not provided with the necessary evidence to alter in any way the auditor's conclusions. I do not believe it is essential in every case to provide a mileage log, but if one is unavailable, then it is essential for an Appellant to provide detailed evidence relating to how often the vehicle was used for business versus personal use with the distance and times travelled for business related activities such as banking, visiting customers, obtaining new contracts and so forth, together with similar evidence respecting the personal use activities. I had only vague references to the vehicle being used for groceries and little else in respect to personal use. I simply do not accept that personal use of this vehicle was as limited as the Appellant suggested. The vehicle had to be used to some extent for medical and dental appointments, for personal banking, for visiting friends and family or for vacations. It is reasonable to conclude that the vehicle was used more regularly for family purposes than the occasional grocery shopping activity. In addition I was not provided with a lease document or any evidence that would support its existence. Without such evidence I simply cannot ascertain in whose name the car was leased, when it was leased or at what point if any the Appellant company became involved. In the end I had only conflicting evidence from Mr. Miceli respecting the lease particulars and even respecting the year of the original purchase of the car. Mr. Khan, the accountant, simply relied on what Mr. Miceli told him concerning the vehicle. The problem is that without specific information, oral or documentary, concerning how often and how far the car was driven for business versus personal use, it is impossible to decide whether the ITCs claimed were properly allocated by the Appellant, or whether it is some point between the allocations of the Appellant and the Respondent. If I am to alter the auditor's reassessment, I must be provided either sufficient oral testimony or documentation, or a combination of both. Without that, the Appellant has simply not discharged the onus of proof.
- Item 5:
[28] Item 5 represents a component of the adjustments to tax owed in respect to the year 2000 and ITCs disallowed in the amount of $2,972.03 due to lack of supporting documentation. According to the auditor's working papers, (page 14 of Tab D) he relied on the ITCs claimed in 2000 of $6,015.21 as reported in the GST return. He was able to document ITCs of $3,043.00, leaving undocumented ITCs of $2,972.03.
[29] Mr. Khan's evidence was that one of the problems with the auditor's calculations related to the auditor's use of the "cash method" of accounting instead of the "accrual method" which Mr. Khan stated he used. Other than Mr. Khan's assertion, however, there was no independent evidence of this in the exhibits. On cross-examination, the auditor could only state that such a possible discrepancy based on accounting methods was possible but that it would be impossible to ascertain this with certainty. Mr. Khan compared the figures contained in the working papers at Tab D, to some of the general ledger figures at Tab E, but this example was inconclusive because it provided no real insight into which accounting method was used. In addition I note that Mr. Khan in giving evidence as to whether the problems could be attributed to use of the cash method by the auditor stated that he did not "... know what principle he's [the auditor] applying" (Transcript, page 44).
[30] Mr. Khan's explanation of item 5 turned on a convoluted method of obtaining the difference between his erroneous amount for claimed ITCs ($6,015.21) in the 2000 return and the equivalent amount according to his general ledger ($6,015.21 − $4,134.26 = $1,880.95) and then subtracting the result ($1,880.95) from the overpayment of $2,817.60, which he stated should result in an amount close to the general ledger GST receivables amount of $1,001.34 (which result is actually out by about $64.00) (Transcript, page 61). In essence Mr. Khan was suggesting that the corresponding debit and credit entries for the amount of $1,001.34 show that the general ledger had "internal consistency" and therefore those ledger amounts were the gospel, according to Mr. Khan. I fail to follow his line of reasoning as the final total of a column of numbers was $1,001.34 with the opposing entry simply a mirror of this amount.
[31] Mr. Khan's testimony is confusing to say the least and this confusion is illustrated by another claim that there was no substantive difference between the auditor's method and his own in the treatment of the overpayment figure of $2,817.60. I believe his argument was that the auditor's figure of $2,972.03 for undocumented ITCs is offset by a credit on the "back-end" at Tab XYZ of approximately $2,800.00 so that the difference created by the treatment of the $2,817.60 is nominal (Transcript, pages 61-63). However in Item 8 the figure of $1,001.00 appears again as a component of the disallowed refund in 2001. Mr. Khan's evidence was based on what the numbers should have been, or should be, according to his accounting method and his general ledger figures. Unfortunately his analysis remains unsupported by source documentation. Of course if the total ITCs for 2000 are actually, as he claims, an inflated or "made-up" number, then it follows that there would be no available supporting documentation.
[32] Mr. Khan also stated that, because the auditor ignored the general ledger figures which were the "correct" figures, his working papers were incorrect. However he did not substantiate this opinion because he failed to reference any of it to the exhibits or to supporting source documentation.
- Item 8:
[33] The auditor determined that this item ($1,643.03) was an excess refund to the Appellant and tied the item to the problem of the erroneous reporting of GST in 2001. Again, according to Mr. Khan, the 2001 GST return contained an incorrect amount in respect to GST collected. He stated that it should be $4,949.43 and not $7,946.89 as reported in the return. In addition the ITCs contained in the return in the amount of $9,589.92 should actually be $5,591.12. Again there was no documentary evidence to support Mr. Khan's contention that these figures, which he intentionally inflated and included in the GST returns, should be replaced with his "correct" general ledger figures. Referring to general ledger excerpts, without any other evidence, is simply insufficient. If Mr. Khan had provided me with a series of entries, supported with underlying source documents that clearly demonstrated the actual GST collected for each year together with ITCs, I believe it could have satisfied me and met the Appellant's onus. Even if I decided to give the Appellant the benefit of the doubt and allow the "incorrect" figures on the returns to be replaced with the general ledger figures, I would require a sound evidentiary basis for replacing the numbers on the original filed returns. However no such evidence was adduced.
- Item 9:
[34] This item ($2,280.21) relates to ITCs disallowed again because of lack of supporting documentation. The problem is similar to that discussed under Item 5.
[35] The auditor obtained this figure by taking the total ITCs ($6,294.36) from the accountant's summary and records, subtracting disallowed ITCs ($627.68) from the Analysis of the summary to provide allowable ITCs ($5,666.68). The auditor then subtracted the total ITC amount ($9,589.92) as per the return, which the accountant falsified in that return, to provide a figure of $3,923.24 for unsupported ITCs. A GST refund of $1,643.03 was subtracted from the unsupported ITC amount of $3,923.24 to yield the adjusted net tax owing of $2,280.21 (Tab G).
[36] Mr. Khan has provided his evidence as to why he created false entries on the returns and the auditor knew during the audit that he generated those false amounts. The Appellant's argument is that the auditor should never have used these figures in his reassessment. Again I have inconsistencies in Mr. Khan's testimony. Contrary to his evidence on examination-in-chief, he stated on cross-examination that he did not realize the amounts in the returns were incorrectly reported until the auditor informed him (Transcript, page 113). It is highly suspect that Mr. Khan would pull numbers out of thin air to make the Appellant's GST returns "audit proof" while having no knowledge that the amounts were incorrectly reported. I believe the more likely version, as he stated elsewhere in his evidence, is that he did in fact know they were incorrect but simply inflated some amounts to avoid an audit and to ensure these amounts coincided with his general ledger amounts for which he provided no source documentation.
[37] The auditor's evidence was that he took many factors into account in his audit including the general ledger. His position was that there were unexplained discrepancies in the Appellant's records and that he proceeded by using the information available to him including the GST returns. Although it is not essential to my conclusions in respect to the foregoing issues to address what the Appellant believed were the more complex issues, a few comments are warranted. I believe the auditor in reassessing the Appellant was entitled to rely on the Appellant's GST returns as filed. The extent of the Minister's inquiry in a reassessment is discretionary and the Minister may rely on a return or go beyond it as deemed suitable. What must be remembered is that in tax appeals the Minister's assessment is presumed to be valid with the onus on the Appellant to bring forward sufficient evidence to show that the assessment is incorrect. Since the Minister can rely on the return, it follows that the taxpayer has the burden of proving to the satisfaction of the Court that the return is erroneous and cannot be relied upon. An accountant's statement that returns are erroneous, is insufficient to overcome that burden unless those statements are supported by acceptable documentary evidence. Otherwise such statements are simply self-serving. The Appellant has failed to satisfy this burden in respect to Items, 5, 8 and 9 and therefore cannot complain that he is now bound by the incorrect information in returns that were created and filed by the Appellant's accountant.
[38] The primary basis for the Appellant's argument was that the GST returns for 2000 and 2001 were substantially false but that they were purposively based on erroneous numbers. This is an unusual way to extricate oneself from tax liability. The correct method should have involved the production of real documentary evidence, together with other credible testimony, to support the allegations made in respect to the general ledger figures and to prove that the reassessment was incorrect. The Appellant did not do this. The accountant's insistence that the cash method of accounting was incorrectly used by the auditor was not supported by the evidence. The accountant's argument that the general ledger is an accountant's "bible" and the key source of authoritative financial information for the Appellant company is not only unacceptable but incorrect. A general ledger is created by accountants and bookkeepers and that is why a series of their entries must be supported by underlying source documents. In this appeal if those source documents had been produced to support the general ledger entries so that it was clear that the actual GST collected and the ITCs claimed were correct, the Appellant's onus may have been discharged. This is not to say that a general ledger may not be a reliable tool but in the end it is merely the accountant's transcription of details from underlying source documentation. This can give rise to errors which may be corrected. However there may be no source documents to support other entries. Depending on an accountant's approach, books and records can potentially present a very different picture than the commercial reality which they are supposed to represent. In view of my remarks therefore I do not think it assists the Appellant to argue that the auditor did not reference the figures from the general ledger. Without appropriate source documentation I am unable to rely on the accountant's "much more accurate" general ledger which he generated while freely admitting he also generated false returns year after year. Except for the accountant's assurances, I have no independent evidence that the GST returns in fact were incorrect.
- Penalties:
[39] The facts clearly support the imposition of penalties in this appeal. The imposition of penalties is susceptible to a defence of due diligence but I have received no evidence that would justify suspending the penalties. I do not need to quote from the case law. Both the Respondent and Appellant referred me to the leading cases, including Pillar Oilfield Projects Ltd. v. Canada, [1993] T.C.J. No. 764 and Canada(Attorney General) v. Consolidated Canadian Contractors Inc., 165 D.L.R. (4th) 433.
[40] It was suggested by the Appellant that, even if accounting errors occurred, the Appellant cannot be at fault because Mr. Miceli was a truck driver with no accounting skills. However Chief Justice Bowman in Roberts v. Canada, [1997] T.C.J. No. 771, in considering the due diligence defence with respect to the taxpayer's use of accountants, held that such mistakes by accountants, acting as agent of the taxpayer, do not exonerate the taxpayer from penalties. Dussault J. in Prévot v. Canada, [2000] T.C.J. No. 931 stated at paragraph 8:
...It must be kept in mind that an accountant is above all a mandatary -- that the mandator is still responsible for the mandatary, for the mandatary's acts, such that, from the moment one realizes that something is wrong, it must be changed and changed quickly because it can have fairly disastrous consequences.
[41] The Appellant also raised an argument regarding purposive interpretation versus mechanical interpretation. The Appellant asked that I look to the real purpose of the Act in considering why penalties under this Act are automatic. However counsel did not develop this argument and provided no potential response to the question he posed. With nothing further from counsel I reject this point that he raised. I believe that the real purpose of penalties is to motivate taxpayers to file returns which contain the correct information and to inhibit careless, negligent or fraudulent behaviour which is probably not what counsel intended to argue if he had pursued his purposive interpretation analysis.
[42] It is extremely difficult to rely on a due diligence defence while at the same time admitting that your accountant filed returns with the knowledge that they were wrong because he was busy and wanted to avoid an audit. To admit that the numbers were tampered with to avoid attracting the attention of the CRA and then to try to place reliance on a due diligence defence to avoid penalties is self-serving. The admission, respecting the intentional erroneous filings, was presented after the fact in an effort to show the reassessment was too high. The admission of fault was not spontaneous but was simply to reduce tax liability. The Appellant co-operated in the audit and made those admissions of the filing of falsified GST returns in an effort to correct its own mistakes and reduce its tax liability. The due diligence test required to avoid penalties under this section has not been met. The actions here cannot qualify, as Chief Justice Bowman stated in 620247 Ontario Ltd. v. Canada, [1995] T.C.J. No. 340, at paragraph 13, as:
...a sincere and demonstrable attempt that a reasonable person in similar circumstances could be expected to make in order to comply with the requirements of the law.
[43] The appeal is allowed, without costs, in respect to Item 7 on the Statement of Audit Adjustments, the GST owing on unidentified bank deposits in the amount of $1,956.93 and in respect to Item 3 on the Statement of Audit Adjustments to reduce that amount by $560.00. In all other respects the appeal is dismissed.
Signed at Ottawa, Canada, this 24th day of February 2006.
|
"Diane Campbell" |
Campbell J.
|
CITATION: |
2006TCC118 |
|
COURT FILE NO.: |
2004-4731(GST)I |
|
STYLE OF CAUSE: |
1277302 Ontario Ltd. and
Her Majesty the Queen |
|
PLACE OF HEARING |
Hamilton, Ontario |
|
DATE OF HEARING |
October 20, 2005 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Diane Campbell |
|
DATE OF JUDGMENT |
February 24, 2006 |
|
APPEARANCES: |
|
Agent for the Appellant: |
Omar S. Khan |
|
Counsel for the Respondent: |
Stacey Sloan |
|
COUNSEL OF RECORD: |
|
For the Appellant: |
|
Name: |
|
|
For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |