Tax Court of Canada Judgments

Docket: 2003-1495(GST)I

BETWEEN:

AWID, AHMED, MAHMOUD, MOHAMMED AMEREY,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on October 1 and 2, 2003, and August 9, 10 and 13, 2004

at Edmonton, Alberta, by

The Honourable Justice C.H. McArthur
Appearances:
Agent for the Appellants:	Mahmoud Amerey
Counsel for the Respondent:	Marta E. Burns

____________________________________________________________________

JUDGMENT

The appeal from assessment number 10122354 made under the Excise Tax Act is allowed without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellants' revenue for the period from January 1, 1996 to December 31, 2001 is $3,535,253 and the input tax credits allowed by the Minister are $218,602.

Signed at Ottawa, Canada, this 5th day of January, 2005.

"C.H. McArthur"

McArthur J.

Citation: 2005TCC20

Date: 20050105

Docket: 2003-1495(GST)I

BETWEEN:

AWID, AHMED, MAHMOUD, MOHAMMED AMEREY,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

McArthur J.

[1]      This is an appeal from an assessment by the Minister of National Revenue under the Excise Tax Act for goods and services tax (GST) for the period from January 1, 1996 to December 31, 2001 (the period). By the assessment dated February 15, 2002, the Minister assessed the Appellants net tax of $348,955.70, penalty of $71,939.21 and interest of $58,704.90.

[2]      The Appellants submit that they owe nothing to the Minister and claim input tax credits (ITCs) in the amount of $38,492.06. The outcome is determined on the facts and there are two factual issues to be established. First, what is the amount of the GST taxable revenue and second what is the amount of eligible ITCs? It has been a long and difficult struggle for both parties from when the Minister commenced its audit which led to this appeal.

[3]      On October 2, 2003, I made the following interim order:

ORDER

            After hearing an issue in this appeal, and upon hearing the agent for the Appellants and counsel for the Respondent;

It is ordered that:

1.          The Appellants and not Amerey Enterprises Inc. are the proper persons to be assessed under the Excise Tax Act as they were operating in partnership in the period January 1, 1996 to December 31, 2001;

2.          The Appellants shall have until November 3, 2003 to designate a third party location to store the books and records of the business and to notify the Respondent of such location;

3.          The Respondent shall provide an independent auditor to review the books and records of the Appellants, in the presence of the Appellants and/or their representative accountant, on or before December 3, 2003; and

4.          The hearing of this appeal is adjourned sine die.

Reasons for the Order were given at the same time. Some of the facts stated are equally relevant to the present judgment.

[5]         This hearing arises from acrimonious encounters between Canada Customs and Revenue Agency and the Appellants which included unsuccessful attempts to audit the Appellants' books and records. Before proceeding further, I must decide whether it was the Appellants or Amerey Enterprises Inc. (the "Corporation") that made the supplies in issue and carried on the business under the name West's Sports Cards during the relevant period January 1, 1996 to December 31, 2001.

[6]         The facts which are not in dispute include the following. Awid, Ahmed, Mahmoud and Mohammed Amerey are brothers and the Corporation was incorporated on November 27, 1990. It was registered for the purposes of Part IX of the Excise Tax Act on January 1, 1991 and assigned a goods and services tax registration number. Between January 1991 and April 30, 1993, the Corporation conducted business and I believe as West's Groceries.

[7]         About May 1993, the Corporation was struck off Alberta's Corporate Registry as it failed to file annual returns. Immediately prior to this, Awid, Ahmed, Mahmoud and Mohammed were all shareholders and directors of the Corporation. The business activity continued to be carried on while the Corporation was struck off Alberta's Registry. The business activity was primarily the selling of trading cards and other sports memorabilia. Also, I think there was a small convenience store business. The Minister of National Revenue assigned the Appellants a registration number for GST purposes during the relevant period.

[8]         The Corporation was revived on August 22, 2000. Its GST registration had been cancelled March 10, 1997 and reregistered on November 20, 2002, retroactive to December 31, 1995. The Respondent submits that the Corporation did not exist during the five-year period 1996 to 2001, and adds that logic and common sense leads to the conclusion that the Appellants must have made the supplies and not the Corporation during that period. The Respondent states that when the Corporation was struck from the Registry, the Appellants were the sole directors and shareholders and they continued to carry on West's Sports Cards after the Corporation was dead and gone.

[9]         The Appellants stated that the Corporation was revived August 22, 2000 retroactive to December 31, 1995, and the business activity continued after the dissolution, leading to the conclusion that it was the Corporation carrying on the activity and not the Appellants personally. Subsection 208(4) of the Business Corporations Act of Alberta reads,

208(4) A corporation is revived on the date shown in their Certificate of Revival and subject to any reasonable terms that the Registrar may impose, and to rights acquired by any person prior to the revival the Corporation is deemed to have continued in existence as if it had not been dissolved.

[10]       I will set out some of the items during the relevant period in favour of each position. The Respondent states that a partnership and not a Corporation carried on the activity from 1996 to the end of 2001. There was no Corporation since it had been stricken from the Albertacorporate records. The Appellants, being the former shareholders and directors, commenced the new entity. The business was audited for a two-year period, 1993 to 1995, as being carried on by the Appellants in partnership. The results were favourable to the Appellants to the extent of a $20,000 credit, although the Appellants never received it. They accepted the results as a partnership and they cannot have it both ways. And that in effect is the estoppel argument by the Respondent.

[11]       The facts lead to a conclusion that the Appellants were carrying on a business as partners. The acceptance by the Appellants of a partnership situation for two years, 1993 to 1995, indicates their intentions for the following years. The Appellants fall squarely within the definition of partners in the Partnership Act and Alberta's Business Corporations Act cannot change the way the Appellants in fact acted. For example, sample invoices viewed refer to West's Sports Cards, Jim and Moe Amerey. I believe that is a reference to the more active partners, Awid and Mohammed. They had an obligation to register for GST purposes and not having done so, GST officers registered for them in their personal names. And finally, the Appellants did not counter the assumptions of fact in paragraph 24 of the Reply to the Notice of Appeal referring to them acting in partnership.

[4]      Bryant Town conducted an audit for the Minister as did Tariq Deeb for the Appellants. The Minister's position is that the total revenue subject to GST is $3,973,334, and the GST payable is $278,133 less allowed ITCs of $218,602 for the period, netting a GST liability of $59,531. This amount was increased to $107,182 plus interest and penalties to reflect disallowed ITCs.

[5]      The Appellants, through Deeb, conceded that they had made some errors in their original returns, taking the position that their revenue for the period was $3,154,639, with GST payable in the amount of $186,575. The Appellants argued that they are eligible for ITCs of $225,000, resulting in the business being in a net refund position of $38,182.08. The Appellants' case was presented primarily by Mahmoud Amerey. During the hearing, he made an interim motion to the effect that the Canada Revenue Agency (CRA) auditors performed an unreasonable search and seizure in breach of section 8 of the Canadian Charter of Rights and Freedoms. He alleged that the Minister's auditors attended the designated location and made photocopies without the Appellants' knowledge or consent. This motion was dismissed. They had relied on the trial decision in Norwoodv. The Queen not realizing that the remedy granted by the trial judge was reversed by the Federal Court of Appeal.[1] Their Charter argument was not pursued.

[6]      The Appellants' only witness was their accountant Tariq Deeb. He has been a partner in an accounting practice since 1996. He does not have an accounting designation, but he does hold a Bachelor of Commerce and an MBA and has 17 years' business experience. Deeb was first retained by the Appellants in October 2003 for the purpose of examining the correctness of the GST returns. He subsequently reviewed CRA's audit report in June 2004. At trial, the Appellants submitted Deeb's report comparing his findings to those of the CRA auditors. The Appellants also submitted a number of source documents as evidence of non-revenue bank deposits.

[7]      The Respondent relies on the working papers prepared by its auditor, Bryant Town, who testified. Bill Poon, who did not testify, assisted as a technical advisor in the preparation of the working papers. Counsel for the Respondent states that, strictly speaking, the documents submitted into evidence are not an audit report, but merely working papers, however for convenience, I will refer to them collectively as the "audit" or the "audit report". Town does not have an accounting designation, but he does have a Bachelor of Commerce degree and has been employed by CRA for 12 years. I do not ascribe any weight to Deeb's and Town's respective credentials or lack thereof for the purpose of preferring the evidence of one over that of the other. Both accountants are well qualified.

[8]      The Minister had difficulty obtaining the material required to make a thorough investigation. The Appellants were very distrustful of CRA's auditors and revealed documents piecemeal and upon request. It was not an easy audit. The animosity between the two parties was evident in the courtroom particularly during cross-examination. This tainted the evidence on both sides. The Minister's auditors were not aware of income expenses from trade shows until after their audit was complete. Trade shows consisted of setting up a card sales kiosk with other dealers in a shopping mall primarily in Edmonton and Calgary. The Appellants believed it was in their best interest not to make a complete disclosure of their operations. They trusted Deeb, a long-time friend, and were more forthcoming with him. Deeb's evidence was summarized in a relatively brief undated report, probably prepared in January 2004. His efforts are best described in his words:

The first thing that I wanted to verify was revenue. I started by gathering all bank accounts and line of credit statements which I reviewed in detail. I also spot checked personal bank accounts to see if any irregular deposits were made and was not made aware of any safe on the premises. I questioned the brothers about store revenue, on-line sales, and show sales. To that end I was provided all information that I deemed relevant. My overall findings are in my backup as provided. I created two charts:

1.          Compare sales revenue to deposits (Appendix A); and

In 1996 the Amerey brothers did a very poor bookkeeping job but did rectify it in the subsequent years

2.          Compares the auditor's report to my findings (Appendix B);

                        I tried to understand where and how the auditor arrived at his figures but could not. There seemed to be inconsistencies in assumptions and in calculations so I gave up (e.g. GST included in sales figures, U.S. conversions not consistently done, lines of credits and loans not accounted for, and transfers between accounts counted twice). Therefore this is just a comparison between the two. As you can see there is a wide variance but as I said above I was unable to understand how the auditor's figures were arrived at. I have included the entire backup in this report.

The next step was to look at expenses. To that end I asked for invoices of all sorts (I did not look at every invoice) and tried to verify the consistency of the bank statements against the invoices. I also looked at what kind of inventory they carry and what dollar amount it was. I was shocked to find that a lot of their inventory is old stock which probably will never be recovered. I looked at the nature of the expense (i.e. business or personal) and what if any impact it had on GST. On the expense side I used the auditor's report as the basis for discussion. I found that they were personal expenses paid through the company and backed those out for GST purposes. On a dollar amount it was minimal. I take issue with the fact that the auditor disallowed some expenses. These will be discussed below:

Vehicle Expenses (as related to business) I asked that a mileage log be provided.

A list by year of vehicle expenses follows:

Travel Expenses

My understanding of the file is that because no revenue was allocated to the shows that expenses were denied. In my review I was able to verify the show revenue by receipts therefore I believe that the travel expenses that were denied during the audit should be reinstated.

I have two conclusions:

1.          With regards to the business I found that West's Sports Cards is not anywhere near a lucrative business and that they survive solely on cash flow, lines of credits, and loans from family members. In my opinion they stay in the business for two reasons: they love it and to get out now would mean that they would lose a lot of money.

2.          With regards to the audit my findings are that West's Sports Cards are owed $38,492.06 in GST (Appendix I) and that the audit findings are inconsistent and unreasonable for a business of this nature.

[9]      Town presented hundreds of pages of working papers including a detailed summary of his audit days which concentrated on the difficulties he and his colleagues encountered from October 28, 2003 to December 2, 2003 in their attempts to complete their audit. His general remarks read as follows:

Findings:            Revenue reported was significantly understated during audit period. The revenue assessed was over $1,150,000. The ITCs were the same as the amounts submitted except for the quarter ending 1999/03/31 was $18,926 higher than the amount documented.

The revenue numbers submitted by the partnership is $520,000 less than the business expenses for the same period. In addition, the company paid the personal expenses of the partners.

The revenue submitted omitted all card shows, mall sales and amounts not invoiced. The shows were done because they were extremely profitable but the revenue has not been included as their revenue reports were calculated from the till tapes and invoices (card shows had no till or invoices).

Jim Amerey provided details of how they price their sales. This was used to establish sales numbers. In 2001, the deposits were $429,000 higher than the revenue reported. This amount was assessed as revenue as there is no other source of funds for the business.

Jim Amerey refused to verify the pricing when we requested to verify the amount. The pricing method was used for 1996-1999 and deposits were used in the last two years as receipts far exceed revenue. No alternative source of funds. The auditor verified gross margin for a period in 1999 and found that the gross margin was substantially higher.

Assessment:                   187,534.79                   GST not remitted

                                    -80,352.64                    ITCs assessed

                                    107,182.15                   Total assessment

Conditions:        Collections report submitted

[10]     Mahmoud Amerey, a school teacher by profession, presented his and his brothers case with dogged determination. Through the direct evidence of Deeb and lengthy cross-examination of Town, the Appellants raised matters that question the reliability of the Minister's audit. This is understandable given the reluctance of the Appellants to make a complete disclosure. In any event the actual revenue reported on the Appellants' 1996 GST return differs significantly from the revenue shown on the Minister's working page. On page 501 of the Respondent's Exhibit R-2, the "Revenue reported" for 1996 is shown to be $372,884, yet the actual "Revenue reported" reflected $316,603. There was no explanation offered for the discrepancy.

[11]     In what appears to be a transcribing error on a worksheet reconciling deposits to revenue, mail order sales are shown as being the identical amount of $6,554 for two consecutive months[2] when in fact the Appellants' sales journal shows the sales as being $3,984 and $6,584 for the two respective months.[3] The Minister's auditor included zero-rated grocery items in calculating GST liability, although the amounts do not appear to be substantial. The cost of shipping the goods to customers was included in the selling price for GST purposes, though Town stated that the reason for this was because the auditors were told by one of the Appellants that this was the proper method of calculation. The audit report stated, and Town testified, that they had requested but did not receive from the Appellants, Sportsnet sales (which are a certain type of mail order sales).[4] However, another working paper in the audit report clearly refers to "sportsnet" sales for the months in respect of which such sales numbers were requested and allegedly not provided.[5]

[12]     In attempting to verify the gross margin, the auditors mistakenly relied upon purchase and sales invoices from two different types of products. That is, the cost of Upper Deck Hard Core 1998-1999 Basketball was subtracted from the selling price of Upper Deck Basketball Series II, and the difference was used to calculate the gross margin. The significance of the gross margin in the context of this audit is that it was the foundation used to estimate taxable sales.

[13]     In attempting to verify the gross margin, the auditors used a sample size of, in effect, five items for a period of six years.[6] The gross margin of profit is important in the overall calculations. While no alternative method was presented, a sample of five items per year over the six years would give a more reliable conclusion.

[14]     There are other inconsistencies, but it is not necessary to review them all. Deeb, during oral testimony and in his report, admitted that the Appellants' bookkeeping was inadequate during 1996, though in his opinion, the problem was rectified in subsequent years. There were no invoices for sales conducted at the mall shows leaving this income very difficult to determine.

[15]     I do not adopt either audit in its entirety. Neither Deeb's nor Town's audits can be considered independent. With the obvious mutual distrust both audits are coloured to favour their respective clients.

[16]     Although the Appellants have succeeded in refuting some of the Respondent's evidence, they have fallen somewhat short of establishing, through their own direct evidence, the accuracy of their own revenue numbers. With respect to their accounting system, the audit report categorically states that the Appellants have no books of original entry. This is not correct. The audit report itself attaches copies of computer spreadsheet printouts of purchases and sales journals and detailed accounts of expenses. These are "books of original entry". However, the audit report correctly states that there is no record of inventory.

[17]     While I do not find the CRA audit report to be completely reliable, I also cannot take all of the evidence in Deeb's report at face value to the extent that there is little or no corroborating evidence. I am faced with having to choose between two unreliable evidential accounts of the facts. Often this would result in a dismissal of the appeal because the Minister's assumptions of facts are accepted unless demolished by the Appellant. In this instance, the Minister's conclusions are questioned as well as the Appellants. The best conclusion I can reach from this unsatisfactory situation is to find that the revenue amount is somewhere between the figures presented by the parties. I apply the reasoning of Walsh J. in the Bibby Estate v. The Queen,[7] which reads:

While it has frequently been held that a Court should not, after considering all the expert and other evidence merely adopt a figure somewhere between the figure sought by the contending parties, it has also been held that the Court may, when it does not find the evidence of any expert completely satisfying or conclusive, nor any comparable especially apt, form its own opinion of valuation, provided this is always based on the careful consideration of all the conflicting evidence. The figure so arrived at need not be that suggested by any expert or contended for by the parties.

Taxable Revenue

[18]     Deeb stated in examination that his report is a re-creation of revenue "from scratch". Under cross-examination, he stated that the Appellants recorded their revenue via till tapes, sales journals and deposit books. According to Deeb, the taxable revenue was somewhat higher than the amount that the Appellants had originally reported, but was significantly lower than the CRA auditor's estimate.

	1996	1997	1998	1999	2000	2001
Revenue, per CRA	538,218	517,079	785,246	725,777	546,315	803,235
Revenue, per Deeb	336,792	410,277	603,160	627,537	470,677	706,193

[19]     The methodology used by the Minister's auditor in arriving at the estimated revenue was to take the dollar amount of purchases for the period and divide it by 0.8, which supposedly represented a gross margin calculation. This calculation would presume that the gross margin is 25%. Town confirmed under cross-examination that during the audit the Appellants had told him that the gross margins were 20% for single boxes or packages of cards that are sold to individual consumers, 10% for cases that are normally sold to wholesalers, and 5% for sales to dealers. During the audit, it appears that Town was not able to confirm with the Appellants the proportion of sales that were sold to dealers and wholesalers versus sales to retail consumers. The Appellants suggested during the cross-examination of Town that wholesalers are likely to account for a greater proportion of revenues than individual retail consumers. That is certainly possible, but without a breakdown of the types of sales, I cannot assign any weight to this submission. That being said, it is clear that the Minister's auditors took an aggressive approach to estimating the revenue by choosing a gross margin higher than that stated by the Appellants and applying it globally.

[20]     The result of this gross margin calculation was the initial estimate in the Minister's audit report. The resulting number was adjusted upward for the 2000 and 2001 taxation years. The reason for this adjustment was that, in the auditor's opinion, a comparison of the bank deposits to the revenue estimate showed deposits that exceeded the auditor's initial revenue estimate. The auditor's initial estimate was therefore adjusted upward. On the other hand, as the Appellants pointed out, no downward adjustment was made in 1996 where the CRA revenue estimate exceeded bank deposits by over $222,000.

[21]     I have undertaken the tedious task of examining in detail the audit report, the report of Deeb, and other documentary evidence submitted with respect to non-revenue deposits. The Appellants stated that these were various loans and lines of credit and not revenue. Deeb stated that these non-revenue deposits were not taken into account by the CRA auditor when deposits were compared to reported revenue in order to determine the reasonability of the latter. Deeb also testified that the non-revenue deposits came from the individual partners' lines of credit. The result, the Appellants submitted, is that the audit report includes in revenue amounts that were in fact loans from the individual partners, capital injections, and other non-revenue items such as reversals of bank errors. If Deeb is correct, the revenue estimate made by the CRA auditor exceeds the bank deposits of the business for several of the taxation years in issue.

[22]     Counsel for the Respondent stated during closing argument that this evidence of non-revenue deposits should be given no weight because the documents were not entered as exhibits through a reliable source such as one of the parties to the transactions. The Respondent did not have the opportunity to cross-examine the lenders. Clearly the documents are hearsay and may not be admissible under the strict rules of evidence. However, in this informal procedure appeal, this Court is not bound by the rules of evidence: Tax Court of Canada Act.

[23]     Some of the documentary evidence with respect to non-revenue deposits is reliable. For example, an appendix to Deeb's report indicates a non-revenue deposit of $6,000 dated November 5, 1999. The documentary evidence to support this transaction is a statement from Ahmed Amerey's TD Bank line of credit, which shows a cheque drawn on November 6. There is a photocopy of a duplicate cheque of the same date for the same amount, the payee being West's and the memo section marked "Loan". The business bank account shows a deposit on the same day for the same amount. I accept this as evidence of a loan to the business by Ahmed Amerey.

[24]     On the other hand, some of the transactions are unclear. Counsel for the Respondent alluded to some of these during cross-examination. Some of the evidence for these transactions simply takes the form of bare statements in Deeb's report with no documentary evidence offered in support.

[25]     On the whole, there are over 200 alleged non-revenue deposits, of which I find about half to have some measure of reliability in that there is corroborating documentary evidence. I also find this evidence to be of some probative value in this particular case. However, being cognizant of the lack of opportunity on the part of the Respondent to cross-examine the parties to the transactions, balanced with the somewhat limited probative value of the documents, I accord this evidence little weight.

[26]     In conclusion, I find the revenue to be as follows:

1996	1997	1998	1999	2000	2001	Total
$437,505	$463,678	$694,203	$676,657	$508,496	$754,714	3,535253

This is calculated by taking one-half of the difference between the Minister's assessed revenue and the Appellant's revenue as set out by Deeb and adding that amount to the Appellant's amount.

Input Tax Credits

[27]     Turning to the issue of the ITCs, most of them were allowed by the Minister except those that the auditor believed were not business expenses. Many of the amounts in dispute were not significant. For example, an ITC claimed in respect of cat food was disallowed on the grounds that it constituted a personal expense. Deeb under cross-examination testified that his clients told him that they had a mouse problem in the store, the implication being that feeding the cat was a necessary business expense.

[28]     The more contentious point relates to ITCs in respect of vehicle expenses. The auditor disallowed the vehicle expenses in their entirety. The Appellants did not provide him with a mileage log at the time of the audit. The Appellants did provide a mileage log at trial as an appendix to Deeb's report. During cross-examination, counsel for the Respondent referred to trips from Edmonton to Calgary that the Appellants had said were made for the purpose of selling their products at trade shows. Deeb testified that the distance between the two cities is approximately 300 kilometres, which would make a return trip 600 kilometres not including any mileage accumulating while driving in the city. The mileage log, however, shows those trips to amount to distances of as much as 1,042, 1,114 and 1,236 kilometres. There is no evidence before the Court as to the duration and authenticity of these particular trips. Taking the totality of the evidence into consideration, I do not allow any ITCs in excess of the $218,602 allowed by the Minister. The Appellant's evidence in this regard was unsatisfactory and I do not allow the Appellants any mileage.

[29]     In summary, I find as a fact that the revenue subject to GST is $3,535,253 for the period in issue. In light of all of the evidence, the Minister's taxable sales as assessed stretch the bounds of reasonableness. In 1996, for example, the revenue suggested by the Minister exceeds bank deposits by over $222,000. Town suggested under cross-examination that there were substantial cash sales and implied that the partners purchased vehicles with cash rather than depositing proceeds from sales into the bank account. In my view, this theory of events is not very likely. Under cross-examination, Deeb stated that he performed due diligence by, among other things, examining the business premises and finding no safe to keep cash. The evidence shows that in 1996, the brothers owned two used vehicles. I have no doubt that the Appellants had a modest standard of living.

[30]     The appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the Appellants' gross revenue for the six-year period is $3,535,253 and the ITCs are in the amount of $218,602 allowed by the Minister. The penalties and interest are to be reduced in accordance with the revised assessments.

Signed at Ottawa, Canada, this 5th day of January, 2005.

"C.H. McArthur"

McArthur J.

CITATION:

2005TCC20

COURT FILE NO.:

2003-1495(GST)I

STYLE OF CAUSE:

Awid, Ahmed, Mahmoud, Mohammed Amerey and Her Majesty The Queen

PLACE OF HEARING:

Edmonton, Alberta

DATE OF HEARING:

October 1 and 2, 2003 and August 9, 10 and 13, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice C.H. McArthur

DATE OF JUDGMENT:

January 5, 2005

APPEARANCES:

Agent for the Appellant:

Mahmoud Amerey

Counsel for the Respondent:

Marta E. Burns

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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