Tax Court of Canada Judgments

Date: 20020325

Docket: 2001-2038-GST-I

BETWEEN:

EDIBLE WHAT CANDY CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Sarchuk J.

[1]            This is an appeal by Edible What Candy Corporation from an assessment of tax dated October 20, 2000, by virtue of which the Minister of National Revenue (the Minister) disallowed certain input tax credits (ITCs) claimed by the Appellant in respect of the period September 30, 1994 to December 31, 1994. More specifically, the Minister did not allow the following items:

(a)            ITCs in the amount of $2,186.59 relating to expenditures made before the Appellant's date of registration, being September 30, 1994 on the basis that they are not expenditures for property or services contemplated pursuant to subsections 123(1), 171(1) and 171(2) of the Excise Tax Act (the Act); and

(b)            ITCs in the amount of $7,097.25 relating to expenditures after September 30, 1994 for which the Appellant did not have adequate documentation as required by subsection 169(4) of the Act.

The Minister also assessed late remittance penalties and interest of $4,291.10 and $3,503.99, respectively.

[2]            At the commencement of the hearing, counsel for the Appellant informed the Court that it intended to proceed only in respect of the issue whether the Respondent is statute-barred by the provisions of subsection 298(4) of the Act from reassessing the Appellant.

Background

[3]            The Appellant was incorporated on February 7, 1994. It had obtained a licence from a patent holder and licensor of a product described as a three-dimensional "holographic candy" and intended to carry on the business of manufacturing and distributing this product. Joel Hock, who testified on behalf of the Appellant, was at all relevant times its president. He and two other individuals, one charged with the management of sales and the other responsible for "overseeing" product manufacturing and quality control formed the whole of the Appellant's staff.[1] Since the Appellant's business model was to focus all of its sales in the United States, the actual production of the candy was subcontracted to an American supplier and sales in the US were to be managed and conducted through a "broker force". There were no sales whatsoever in Canada during the existence of the Appellant nor had selling the product here been contemplated at any time. Although the Appellant's first sales did not take place until November 1994, from the outset it incurred various expenses related to the organization of the new business. In addition, it was responsible for the development of the packaging, i.e. the candy wrap, the produce boxes as well as the floor display which housed the product. All of these were designed and produced in Canada and the costs so incurred formed part of the basis for the ITCs claimed.

[4]            According to Hock, from the perspective of the Appellant, all of the foregoing services related directly to the period following registration for goods and services tax purposes as the first shipments were not made by it to the American manufacturer until November 1994. The collection of GST was never an issue considered since all of its products were to be sold in the US. However, since GST had in fact been paid on all of its purchases (both prior to and subsequent to registration), the Appellant believed that it was entitled to claim ITCs. To do so, it registered for GST purposes in September 1994 and claimed ITCs in the amount of $18,655 in its return for the period September 30, 1994 to December 31, 1994. This return was filed on March 6, 1995, and the total amount of the refund claimed was received by the Appellant.

[5]            Shortly after the commencement of production in the US, it became apparent that the contractor was unable to meet the required quality standards in that barely 50% of the yield was fit for sale as a holographic candy. This created a shortfall of product and led to a failure by the Appellant to comply with the licensing requirements, which in turn, led to its licence being cancelled. The Appellant discontinued its business and closed its doors at the end of February 1995. Hock said they had taken a substantial loss on this project and were deeply disappointed with the Appellant's failure. The closing down was abrupt and all documents, papers and other material were simply boxed and placed in a back room in the office.[2] Subsequently, the premises were vacated and these boxes together with a number of other unrelated items were placed in storage where they remained until the Appellant learned of the proposed audit in late May 1999. When the Appellant learned of the concerns of Canada Customs and Revenue Agency (CCRA), concerted efforts were made to find all of the documentation that the auditor required. As a result of the proposal letter sent by CCRA on August 17, 2000, Hock said "we spent a lot of time diligently going through a lot of boxes to find any other information that wasn't supplied in the first audit" and did in fact locate some documents which substantiated a few additional ITCs.

[6]            Evidence on behalf of the Respondent was adduced from Salim Dawood, an auditor with CCRA. He explained that all taxpayers' files "end up" in Ottawa on a "mainframe system" and are subject to what appears to be a random review. In the spring of 1999, the Appellant was "selected", the computer data relating to it was forwarded to the Toronto North Tax Services Office and ultimately came to him for consideration. Between March 26 and April 21, 1999, he attempted to contact the Appellant at the telephone number listed on its registration form and on each occasion, the response was by way of unidentified voicemail. He then accessed Hock's personal income tax returns and the Appellant's corporate registration, obtained their addresses, and attended at the Appellant's former premises to find it "painted all in black, deserted, and there was no answer and it looked empty". On May 20, 1999, Dawood attended at Hock's residence and upon learning he was not at home, left his business card. Several days later, Hock called and in the course of their conversation, Dawood learned for the first time that the Appellant had been inactive for a number of years. Hock undertook to contact a chartered accountant to make arrangements with Dawood for a review. On September 27, 1999 the accountant, Mr. Miniaci, provided a number of documents to CCRA and was advised of Dawood's concern regarding the disorganized state of the material as well as the absence of financial statements. Miniaci was given an extension of time and subsequently called Dawood on three or four occasions requesting additional time to locate missing documents. On August 17, 2000, not having heard from the Appellant Dawood sent a proposal letter setting out adjustments to the Appellant's tax return. This was followed on October 20, 2000 by a notice of reassessment[3] in the amount of $84,062.98.[4] On November 14, 2000, the Appellant filed a notice of objection to the assessment.

[7]            Dawood produced a schedule prepared in the course of his review leading to the October 20, 2000 assessment.[5] It reflects his analysis of the various receipts and other material submitted on behalf of the Appellant with respect to the ITC issue. This analysis formed the basis of the Minister's initial assessment. The Appellant subsequently provided additional documentation which satisfied CCRA with respect to some further ITCs claimed.[6] It would also appear that the material provided disabused CCRA's belief that the sales had taken place in Canada.

Analysis

[8]            The issue before the Court is whether this taxpayer falls within the scope of section 298 of the Act thereby allowing the Minister to reassess it beyond the normal period of time set out in the legislation. Section 298 provides:

298(1)      Subject to subsections (3) to (6), an assessment of a person shall not be made under section 296

(a)            in the case of

(i)             an assessment of net tax of the person for a reporting period of the person,

...

more than four years after the later of the day on or before which the person was required under section 238 to file a return for the period and the day the return was filed;

298(4)      An assessment in respect of any matter may be made at any time where the person to be assessed has, in respect of that matter,

(a)            made a misrepresentation that is attributable to the person's neglect, carelessness or wilful default;

...

[9]            The basic principles with respect to the onus of proof in these circumstances are found in Venne v. The Queen,[7] where Strayer J. in considering subsection 152(4) of the Income Tax Act made the following comment:

Subparagraph (4)(a)(i) is relevant to the present case: it means that in order to reassess for more than four years counted backwards from the date of re-assessment (in this case September 3, 1980) it was necessary for the Minister to show that there has been "misrepresentation that is attributable to neglect, carelessness or wilful default" or "fraud" by the taxpayer in filing the return or in supplying information under the Act. It appeared to be common ground in this case that for the notices of re-assessment to be effective for taxation years 1972, 1973, 1974, and 1975, it is necessary for the Minister to prove misrepresentation or fraud.

Subsection 152(4) of the Income Tax Act is virtually identical to the relevant language in subsection 298(1) and (4) of the Act. Thus, it is for the Minister to establish on a balance of probabilities that he was entitled to reassess beyond the normal period of time.

[10]          According to Dawood, the factors which led to the decision to invoke subsection 298(4) of the Act and reassess the Appellant beyond the statutory limitation period were, inter alia:

(i)             ITCs were claimed in respect of certain expenses and services incurred prior to the Appellant's date of registration.

(ii)            Certain invoices did not meet the requirements of subsection 169(4) in that the suppliers were not registered for GST purposes and/or there was no registration number on the invoice; there was an absence of vouchers for certain expenses; and a number of invoices were not made out to the Appellant.

(iii)           During the September 27, 2000 meeting, the documents requested had not been provided; there was no response to his registered letter regarding CCRA's proposal and subsequently when the material was provided, it consisted of incomplete records.

(iv)           No source deductions had been made for the three employees and there was no record of filing with respect to outstanding corporate income tax returns.

[11]          The Appellant's position is that the Minister is precluded from reopening the statute-barred years to reassessment because he has failed to satisfy the burden of proof placed on him by subsection 298(4) of the Act. The Appellant contends that given the delay in reassessing, it was not possible to locate all of the documents supporting the ITCs claimed and maintains that there is no evidence before the Court to support a conclusion that the amount claimed was inflated or falsified.

[12]          I am unable to agree. The fact remains that there is overwhelming evidence that the Appellant did not maintain adequate books and records for the period in issue. It did not have the resources to retain an accountant and availed itself of a part-time bookkeeper who looked after the disbursements and cash receipts. Hock testified that the bookkeeping was done manually and at this stage of the business was rather basic in that the bookkeeper did not even keep an accounts payable or accounts receivable ledger. In fact, Hock was uncertain whether he even kept a general ledger but did say there were 'ongoing' records and invoices and receipts for the purchases. With specific reference to the ITC return he "believed" the bookkeeper calculated the amount based on all of the disbursements that were paid and all of the receipts that the Appellant had at that time. The Appellant's staff at that time consisted of Hock and two other individuals all of whom had "some kind of shareholding in the company". Hock was the president and project manager. According to him, any advice or direction the bookkeeper needed came from one of the other two whose background and experience was not put before the Court thus it is not surprising, given the cavalier approach which appears to have been taken by the Appellant's management, that substantial misrepresentations were uncovered by Dawood in his analysis. In this context, it should be noted that the Appellant claimed ITCs totalling $18,655 of which $9,283.84, almost 50%, was disallowed by the Minister.[8] No acceptable explanation for the misrepresentations has been presented to the Court.

[13]          The Appellant also contends that its claim for ITCs in the amount $2,186.59 relating to expenditures incurred before its date of registration should not be considered a misrepresentation because the Appellant did not understand how section 171 of the Act worked but did not misrepresent the facts when "while putting in an accurate figure of the GST that he had paid, didn't realize and understand that in law some of that was ineligible".

[14]          It cannot be disputed that the language of section 171 of the Act is convoluted and difficult. If the Appellant was aware of the relevant provision, and on the facts it was, but was uncertain as to its application, some reasonable steps should have been taken to clarify its position. In Can-Am Realty Limited et al v. The Queen,[9] Rouleau J. of the Federal Court - Trial Division, made the following observations with respect to the obligation of a taxpayer:

Furthermore, as pointed out in the Venne decision, it is the taxpayer himself who carries the ultimate responsibility for ensuring his tax returns contain accurate data. That obligation is not altered by the fact the taxpayer has engaged the professional services of an accountant or other agent to prepare and complete his returns. In Howell v. Minister of National Revenue (1981), 81 DTC 230, the Tax Review Board made the following observations concerning this principle at pp. 233 and 234:

There are certainly income tax situations in which only a comprehensive review and specific explanations by professional help would make the income tax return intelligible to even a knowledgeable and interested taxpayer. Those situations are the exception, not the rule, when a personal income tax return is at issue.

I am in agreement with counsel for the respondent — there is a bottom limit to the responsibility which must be accepted by even the most inexperienced or trusting taxpayer. The bottom limit is not simply to read the last relevant line of the return (a balance owing or a refund). It must demonstrate a reasonable effort on his part in the circumstances and within his own framework of comprehension and competence to understand the component elements of that final result.... (emphasis added)                                                        [my emphasis added]

Surely in the present circumstances, if there was any question regarding the eligibility of these expenses for ITC purposes, some effort should have been made to resolve that concern either by enlisting the assistance of a competent accountant or by communication with Revenue Canada. That was not done.

[15]          In Venne, supra, Strayer J. observed:

I am satisfied that it is sufficient for the Minister, in order to invoke the power under subparagraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the word "misrepresentation that is attributable to neglect" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term "neglect" involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.

Adopting the comments of Strayer J. above, I have no hesitation in concluding that the Appellant did not exercise reasonable care in filing its return for the period in issue and "has made a representation that is attributable to neglect" thereby entitling the Minister to reassess pursuant to the provisions of subsection 298(4) of the Act.

[16]          The appeal is dismissed.

Signed at Ottawa, Canada, this 25th day of March, 2002.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 2001-2038(GST)I

STYLE OF CAUSE:                                               Edible What Candy Corporation and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           February 5, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       March 25, 2002

APPEARANCES:

Counsel for the Appellant: Douglas Langley

Counsel for the Respondent:              Scott Simser

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Douglas Langley

Firm:                  Wilson Vukelich

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2038(GST)I

BETWEEN:

EDIBLE WHAT CANDY CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on February 5, 2002, at Toronto, Ontario, by

the Honourable Judge A.A. Sarchuk

Appearances

Counsel for the Appellant:                    Douglas Langley

Counsel for the Respondent:                Scott Simser

JUDGMENT

          The appeal from the assessment made under the Excise Tax Act (for goods and services tax), notice of which is dated October 20, 2000 and bears number 00000100102, for the period September 30, 1994 to December 31, 1994 is dismissed.

Signed at Ottawa, Canada, this 25th day of March, 2002

"A.A. Sarchuk"

J.T.C.C.

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