BETWEEN:
and
____________________________________________________________________
Appeal heard on October 14, 2005, at Montreal, Quebec.
Before: The Honourable Justice Lucie Lamarre
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act for the period from January 1, 1999, to December 31, 2002, notice of which is dated October 10, 2003, is allowed, without costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the decision in the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 5th day of July 2006.
BETWEEN:
CONCETTA PASSUCCI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The appellant was assessed under the Excise Tax Act ("Act") for unremitted goods and services tax ("GST") in the amount of $36,981.14, and for disallowed input tax credits ("ITCs") in the amount of $849.40, together with interest and penalties, for the period from January 1, 1999, to December 31, 2002. This was an assessment with respect to the operation of a restaurant known as Restaurant Bar 7ième Ciel ("restaurant") in the city of Laval in the province of Quebec.
[2] The restaurant was opened in 1998 and was sold in 2004 for $10,000. It operated at loss for the whole period − the evidence disclosed, incidentally, total losses of $119,299 from 1998 to December 31, 2002 (see Mémoire sur opposition, Exhibit R-9, 3rd page) and, more specifically, losses of $33,502 in 2000 and $24,243 in 2001 (see the income and expense statements, Exhibit R-3). The restaurant was open five days a week, from 5:00 a.m. to 2:30 p.m. It served breakfasts and lunches only.
[3] It was a mainly cash business that was registered for GST purposes. During the audit, the Minister of National Revenue ("Minister") realized that the cash sales were not all reported, that the bills were not always in numerical sequence nor dated, and that the cash register slips were not attached to the bills. The sales reported were based on the adding machine tapes. As the restaurant's accounting records were incomplete, and in order to verify the taxable supplies declared, most notably regarding beverages sold (wine, beer or soft drinks), the Minister reconstituted by an alternative method the taxable supplies made for the period at issue.
[4] For the years 1999, 2000 and 2001, the auditor, Hélène Morand, verified all the purchase invoices and determined the total number of litres of wine, beer and soft drinks purchased in each year. She then subtracted an amount equivalent to two percent of the total number of litres purchased, to take into account loss, spillage and personal consumption. Ms. Morand assumed that all beverages purchased, with the exception of the above-mentioned two percent, were resold, as ITCs were claimed for all the purchases and there was no inventory at the beginning of any of those years (this is confirmed for 2000 and 2001 by the income statements filed as Exhibit R-3).
[5] Ms. Morand then analysed the sales invoices. Using one out of five of all bills provided by the appellant, she performed a sample survey of beverages sold (converting the result into the number of litres sold) in order to estimate actual sales of beverages versus reported sales. For example, for 1999, she analysed 2,251 sales invoices, with respect to which she calculated a total of $11,419 in sales before tax for 133 litres of beverages sold. It is to be noted that not all the sales were sales that included beverages. In fact, the document entitled Échantillonage sur des ventes (Exhibit R-4) for the year 1999 shows approximately 380 beverages as having been sold on the total of 2,251 invoices. Ms. Morand then estimated the sales of the restaurant by establishing a ratio of sales per litre sold, taking the total sales for the 2,251 invoices ($11,419) and dividing by the total litres sold in the year (133 litres) to arrive at a ratio of $85 per litre sold. In other words, with the method used by the auditor, one would have to conclude that for every litre of any beverage sold (soft drink, beer or wine), the business generated $85 in sales. Ms. Morand explained that this was a base reference used to estimate total sales in the year. As the purchase invoices showed that 1,980 litres were purchased in 1999 (after subtracting two percent), she determined, by multiplying the number of litres purchased in the year (1,980) by $85, that the restaurant made $169,591 in sales that year. She said that this 85:1 ratio takes into account the beverages that would have been included in the sales price without being specifically charged to the client.
[6] The sales declared by the restaurant for that year (1999) were $56,817.27. Ms. Morand determined that the difference between her estimated sales ($169,591.68) and the declared sales ($56,817.27), that is, $112,774, represented undeclared sales on which the 7% GST should have been remitted to the government. The remittance should thus have been $7,894.21 (7% x $112,774). Ms. Morand did the same analysis for 2000 and 2001 and estimated sales to be $208,296.19 (as compared to reported sales of $56,839.00) for 2000 and $197,341.41 (as compared to reported sales of $55,567.29) for 2001. The undeclared sales for 2000 and 2001, according to Ms. Morand, amounted to $151,457.19 and $141,774.12 respectively, for which GST in the amounts of $10,602.03 and $9,924.24 respectively was not collected and remitted to the Receiver General.
[7] For 2002, Ms. Morand said that she could not proceed in the same way, as many purchase invoices were missing. The reported sales were, however, similar to those for the previous years.
[8] She therefore reconstituted the sales for that year by using the average ratio between total estimated sales for 1999, 2000 and 2001 and total sales declared for those three years. The estimated sales for 1999, 2000 and 2001 were $169,591.68, $208,296.19 and $197,341.41 respectively, for a total of $575,229.28.
[9] The declared sales for 1999, 2000 and 2001 were $56,817.27, $56,839.00 and $55,567.29 respectively, for a total of $169,223.56.
[10] The total difference being $406,005.72, undeclared sales represented an average of 239.92 percent of declared sales.
[11] She therefore applied that percentage of 239.92 to the sales reported in 2002 in the financial statements ($50,972.14), to arrive at undeclared sales of $122,295.14. The unreported GST on these undeclared sales was calculated as $8,560.66 (7% x $122,295.14).
[12] As for the ITCs disallowed, the auditor disallowed those claimed in excess of the expenses stated in the income and expense statement and those claimed on personal expenditures.
[13] Antonio Passucci, the appellant's husband, testified that it is impossible for a restaurant employing only two part-time employees (two waitresses working 35 hours a week altogether) along with him and his brother, Piero Passucci, to generate that amount of sales. It would be impossible for that small a staff to serve that many clients. In 2001, total purchases, as per the income and expense statement, amounted to $12,962. It is inconceivable, according to him, that the restaurant could have generated $197,341 in total sales, as estimated by Ms. Morand. He said that although a maximum seating capacity of 175 places is allowed under the restaurant's alcohol permit, there is a capacity to seat 93 people only, and of that number of places 55 are in fact usually used.
[14] Mr. Passucci was able to demonstrate that with respect to two bills Ms. Morand did not record in her survey all the beverages sold, or made errors in reporting the amounts on the bills (see Exhibit A-1, Exhibit 2, last two pages). He also pointed out that in 2001 there were only 5,592 cans of soft drinks purchased, as compared to the 5,988 shown by Ms. Morand in her audit (Exhibit A-1, Exhibit 2, fourteenth page, and the Reply to Notice of Appeal, Annex A.3, page 5.11).
[15] Mr. Passucci estimated personal consumption to be 5,512 cans of soft drinks per year (Exhibit R-7), which figure was not accepted by the Minister. Five thousand five hundred and twelve cans represent approximately 1,956 litres (355ml per can). The total number of litres of beverages purchased was determined by the auditor to be 1,980 in 1999, 2,287 in 2000 and 2,250 in 2001. Personal consumption would thus have represented a proportion varying from 85 percent to 98 percent of total beverage purchases, which, in the Minister's view, is most improbable.
[16] Mr. Passucci also claimed that some beers were returned to the supplier. Ms. Morand testified that she verified this point and determined that all the cans or bottles returned were empty. Mr. Passucci also said that there was a seizure in 1999. This was taken into account by Ms. Morand according to her worksheet "Achats de bières selon les factures" for the year 1999, filed as Exhibit R-11.
[17] Mr. Passucci himself recognized that not all sales were declared and proposed as an alternative method reconstituting sales from the purchases of placemats used in the restaurant. This method was not accepted by the Minister at the appeal level because no invoices were presented to establish the exact number of placemats purchased and no justification was provided for the figure given for the quantity of placemats wasted (see Exhibit R-9, 4th and 5th pages).
[18] Mr. Passucci also alleged that some bills did not show beverages sold, as they were sometimes included in the menu item sold. After verifying that allegation, the appeals officer saw that the specials on the menu most often included coffee and dessert, but an extra charge of $1.25 for soft drinks appeared on the bills (Exhibit R-9, sixth page). The appeals officer however noted that the auditor had omitted to take into account some soft drinks sold. Considering those mistakes, and as it is almost impossible to establish with certainty the percentage of personal consumption of beverages, the appeals officer was willing to reduce by 25 percent the amounts of taxable income (Exhibit R-9, seventh page).
[19] In my view, this was, in the circumstances, a good settlement proposal that was made to the appellant.
[20] Indeed, the appellant is facing the assessment under appeal because of accounting deficiencies with respect to the restaurant's sales. It was a cash business and in such a case keeping good records is crucial to establishing the exact amount of sales. Owing to the records being incomplete, Ms. Morand had no choice but to estimate sales using an alternative method. For 1999, as an example, she observed that the bills indicated only 133 litres of beverages sold, although she was able to determine from the purchase invoices that 1,980 litres were purchased that year (after subtracting two percent for personal consumption). As there was no inventory at the beginning of the year 2000, this means that the difference between the 1,980 litres purchased and the 133 litres shown on the bills was sold without being declared.
[21] Applying a ratio varying from $85 to $91 per litre sold for the years at issue, she arrived at estimated sales varying between $169,592 and $208,296 for those years. Although at first glance these figures appear a bit high, they are not unreasonable. Indeed, $200,000 in sales in a year corresponds to approximately $4,000 in sales per week (assuming that the restaurant was open 48 weeks per year) or $800 per day (if the restaurant was open five days a week).
[22] The appellant said that the restaurant can accommodate 93 people, but that 55 more accurately represents the number of places actually used in the restaurant. If 55 people were served each day at breakfast and at lunch, it means that the restaurant made a total of $14.50 ($800 divided by 55) per place: $7.25 in the morning and $7.25 at lunchtime. Obviously, this quick calculation presupposes that the restaurant served 110 people each day, which may not have been the case.
[23] Nevertheless, the appellant did not provide better evidence. The Minister was of the opinion that the restaurant could not have operated at a loss ($119,299 in losses declared in total from 1998 to 2002) for five years. According to the Mémoire sur opposition prepared by the appeals officer (Exhibit R-9, third and fourth pages), the appellant declared gross income from other employment varying from $14,000 to $22,000 from 1999 to 2002. Piero Passucci was on welfare. As for Antonio Passucci, he received approximately $30,000 in insurance money in 2002 and another $10,000 in 2003. Two used vehicles having a total value of roughly $17,000 bought in 1999 were paid cash. With respect to the figure for personal consumption of beverages suggested by the appellant, while it is unreasonable, the Minister had no basis on which to establish it at two percent.
[24] Taking into account all these above-mentioned considerations, I find that the appeals officer's proposal to reduce the taxable amount by 25 percent is reasonable. As for the ITCs disallowed, there was no evidence put forward on this issue at trial. The assessment will therefore stand with regard to the ITCs.
Decision
[25] The appeal is accordingly allowed to the extent of reducing the amount of GST due by 25 percent, the GST due being established at 75 percent of the GST due as per the October 10, 2003, assessment and the matter is therefore referred back to the Minister for reconsideration and reassessment in accordance with the following:
|
|
1999 |
2000 |
2001 |
2002
|
|
GST due according to October 10, 2003, assessment
|
$11,871 |
$14,581 |
$13,814 |
$12,129 |
|
Revised GST due according to the present reasons for judgment (75% x GST due as per October 10, 2003, assessment)
|
$ 8,903 |
$10,936 |
$10,360 |
$ 9,097 |
|
GST reported
|
$ 3,977 |
$ 3,979 |
$ 3,890 |
$ 3,568 |
|
GST owing
|
$ 4,926 |
$ 6,957 |
$ 6,470 |
$ 5,529 |
|
Total GST owing
|
$23,882 |
|
|
|
|
Input tax credits disallowed |
$ 849 |
|
|
|
|
Total amount owing |
$24,731 |
|
|
|
[26] Taking into account the appellant's deficient accounting practices in the operation of a cash business, I find that the penalties and interest assessed in accordance with subsection 280(1) and the penalty assessed in accordance with section 285 of the Act are justified in the circumstances but will have to be recalculated in accordance with the total amount owing of $24,731.
Signed at Ottawa, Canada, this 5th day of July 2006.
"Lucie Lamarre"
Lamarre J.
COURT FILE NO.: 2005-1455(GST)I
STYLE OF CAUSE: CONCETTA PASSUCCI v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: October 14, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice Lucie Lamarre
DATE OF JUDGMENT: July 5, 2006
APPEARANCES:
|
Agent for the Appellant: |
Antonio Passucci |
|
Counsel for the Respondent: |
Gérald Danis |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada