[OFFICIAL ENGLISH TRANSLATION]
2000-953(IT)I
BETWEEN:
STATION DENA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeal of Denis Nadeau 2000-954(IT)I
on July 25, 2001, at Montréal, Quebec, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the Appellant: André A. Lévesque
Counsel for the Respondent: Annick Provencher
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Station Dena's income in 1996 and 1997 was respectively $185,950 and $163,703.
Signed at Ottawa, Canada, this 13th day of December 2001.
|
"Gerald J. Rip" |
J.T.C.C.
Translation certified true
on this 6th day of March 2003
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-954(IT)I
BETWEEN:
DENIS NADEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeal of Station Dena Inc. 2000-953(IT)I on July 25, 2001, at Montréal, Quebec, by
the Honourable Judge Gerald J. Rip
Appearances
Counsel for the Appellant: André A. Lévesque
Counsel for the Respondent: Annick Provencher
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Station Dena Inc. conferred no benefit on Mr. Nadeau during the years in issue.
Signed at Ottawa, Canada, this 13th day of December 2001.
|
"Gerald J. Rip" |
J.T.C.C.
Translation certified true
on this 6th day of March 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011213
Docket: 2000-953(IT)I
BETWEEN:
STATION DENA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2000-954(IT)I
DENIS NADEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Gerald J. Rip, J.T.C.C.
[1] The appellants Denis Nadeau and Station Dena Inc. (the "Corporation"), of which Mr. Nadeau is the shareholder, dispute income tax assessments for the 1996 and 1997 taxation years. The Minister of National Revenue (the "Minister") added the amounts of $17,405 for 1996 and $36,514 for 1997 to the Corporation's income as unreported income under subsection 9(1) of the Income Tax Act (the "Act").[1] The Minister added the same amounts to Mr. Nadeau's income for the 1996 and 1997 taxation years in accordance with subsection 15(1) of the Act.
[2] The cases were heard on common evidence.
[3] Mr. Nadeau was the sole shareholder of the Corporation during the 1996 and 1997 taxation years. During those years, the Corporation operated a pizzeria in Rawdon, Quebec, which was part of a network of franchises known by the name "Pizza Barba's Limitée" ("Pizza Barba's").
[4] Pizza Barba's received all the telephone calls and forwarded the orders to the nearest franchisee for delivery. The Corporation paid Pizza Barba's monthly fees for access to its single-number telephone order system. The franchisor was paid no other royalty by the Corporation or by the other franchisees. However, the franchisees were required to make their food purchases from a sister company of the franchisor, Distribution Hellena's Inc. ("Hellena's"). The franchisor checked the franchisees' sales from a central computer to ensure they bought from Hellena's.
[5] The central computer of Pizza Barba's produced a detailed report of daily sales made by telephone and sent each franchisee the results of its day's sales.
[6] The Corporation's restaurant had no dining room. The restaurant made three types of sales: counter sales without going through the central telephone system ("walk-ins"), counter sales made by telephone ("pick-ups") and deliveries.
[7] The Minister made the assessments based on discrepancies discovered between the sales reported by the Corporation and those recorded in Pizza Barba's central computer. By adding an assumed amount of unreported counter sales to those discrepancies, the Minister thus arrived at the total amounts of assumed sales not reported by the Corporation. It was those amounts of assumed unreported sales that the Minister added to the income of the two appellants-the Corporation under section 3 and subsection 9(1) of the Act and Mr. Nadeau under section 3 and subsection 15(1) of the Act.
[8] The appellants noted that the Corporation had always compiled its actual daily sales and subsequently reported them monthly to the accountant in envelopes containing the results of daily operations.
[9] Mr. Nadeau testified that all telephone sales, both deliveries and counter sales, were recorded in the central computer of Pizza Barba's. At the end of each day, he added the amounts of the invoices produced by the central computer to arrive at total telephone sales.
[10] According to Mr. Nadeau, the invoices for orders placed directly at the counter were produced by a second Corporation computer, which was not linked to the franchisor's central computer network. That second computer recorded all walk-in sales, and each day Mr. Nadeau added the amounts of the invoices produced by that computer to obtain the total daily walk-in sales. The appellant subsequently transferred the total amount of walk-in sales to the central computer so that the franchisor be aware of all the Corporation's sales.
[11] Mr. Nadeau contends that he added the total of the invoices produced by the second computer to the total of those produced by the franchisor's central computer to arrive at the day's total sales. He emphasized that he had entered the day's total sales in daily envelopes, which also contained the day's expenses. The envelopes were then handed to the accountant once a month.
[12] The only explanation that Mr. Nadeau could provide to justify the discrepancies between the sales reported by the Corporation during the period in appeal and the sales recorded in the central computer is that those discrepancies were possibly due to errors made when the walk-in sales amounts were transferred to the central computer. He contended that the total of all walk-in sales for one day was transferred daily to the franchisor's central computer. He further argued that it was possible that he had made mistakes when transferring that total. According to Mr. Nadeau, when making the transfer, once he had entered an amount and pressed the enter key, it was too late to make a change. He believed it was impossible to see whether an error had been made or to correct it if that was the case. The appellant could have made a mistake of more than $10,000 in making a single transfer to the central computer. For example, if total walk-in sales from one day amounted to $115.50 and Mr. Nadeau forgot the decimal point when transferring that amount to the central computer, it would have recorded an amount of $11,550.00. That was his only explanation for the errors.
[13] Mr. Nadeau filed in evidence his personal balance sheet dated July 24, 2001, which was prepared by Multi-Services Pierre Lambert Inc. from information he had provided. The Corporation's annual financial report for the period ending December 31, 2000, was attached to the balance sheet. According to the personal balance sheet, Mr. Nadeau's net worth was $7,319 on July 24, 2001. According to Mr. Nadeau's counsel, the amount the Minister alleges that his client appropriated corresponds to seven times his net worth.
[14] In making the assessments in appeal, the Minister assumed inter alia that the Corporation had not recorded counter sales in the central computer of Pizza Barba's during the years in issue. The Minister alleges that the appellant controlled his sales recording system.
[15] Gabriel Lavoie, an auditor with the Canada Customs and Revenue Agency, testified for the respondent. Mr. Lavoie was the auditor in the appellants' case. The Minister claims that sales during the years in issue were entered in the ledger by Les Multi-Services Pierre Lambert Inc. from daily envelopes filled manually by Mr. Nadeau. Unfortunately, neither the Corporation nor Mr. Nadeau retained the daily sales reports produced by the central computer of Pizza Barba's or the cash register tapes recording the sales.
[16] The Minister also asserts that the amount of sales recorded by the central computer of Pizza Barba's is reliable. Hellena's uses the same central computer to do its billing and record its sales. The amount appearing on the Corporation's purchase invoices corresponds to Hellena's monthly sales reports produced by the central computer.
[17] When Mr. Lavoie audited the appellants' accounting, he compared the sales recorded in the Corporation's ledger with the sales entered in the central computer and carried over to the annual summary of Pizza Barba's sales. In the Minister's view, this reconciliation of accounting records showed that there was a discrepancy, which resulted in the assessments in issue. In his calculation of counter sales, Mr. Lavoie estimated that an average of six customers per day purchased the least expensive menu, calculated at $6.50 for each of the 363 days of activity a year.
[18] Both counsel agreed that Mr. Nadeau's credibility would determine the appeal and I agree with them.
[19] Mr. Lavoie testified that it was not until the trial that Mr. Nadeau explained that he had entered walk-in sales in the central computer, despite a thorough audit. Counsel for the respondent thus contended that, if Mr. Nadeau was entering all the amounts in the central computer, he was doing the work twice because he was reporting the same amounts in the cash register and in his own computer.
[20] Counsel for the respondent also contended that the Corporation was the only franchisee that reported less sales in its income tax return than appeared on the information sheets provided by Pizza Barba's. According to counsel, it appears that all the other franchisees reported greater sales than those recorded by Pizza Barba's. Counsel contends that this situation undermines Mr. Nadeau's credibility. However, as counsel for the appellant emphasized, no evidence was brought to my attention of the sales that the other franchisees had reported. I cannot consider uncorroborated allegations by the Crown; I can only take into account actual evidence. It is not advised, and indeed is even considered wrong, to make allegations such as those of counsel for the respondent.
[21] In preparing these reasons, I had some reservations about the appellant's credibility, particularly because of his testimony that, once an amount was entered in the central computer, that amount, even if entered by mistake, could not be corrected. I believe I may take judicial notice of the fact that there is always someone who can enter corrections, if not Mr. Nadeau then perhaps an employee or a representative of Pizza Barba's who has access to the computer. On second thought, it is highly possible that Mr. Nadeau did not have the power or skill required to perform that task. In my view, Mr. Nadeau did not give an implausible description of the manner in which he recorded walk-in sales and counter sales.
[22] According to the information entered and appearing in the central computer, the Corporation's gross sales were $189,197 for 1996 and $186,061 for 1997.[2] The original sales of all franchisees fell from 1996 to 1997 along with those entered in the Corporation's central computer. The sales of all the franchisees were $946,572 in 1996 and $791,424 in 1997, a decline of approximately 16.5 percent. After subtracting the Corporation's gross sales from those of all franchisees, the gross sales of the five other franchisees were $757,364 in 1996 and $605,363 in 1997, a drop in gross sales of nearly 20 percent. The Corporation's gross sales according to the central computer fell by approximately 1.5 percent.[3]
[23] The Corporation reported sales of $185,950 in 1996 and $163,703 in 1997, a decline of nearly 12 percent corresponding more to the decline of Pizza Barba's other franchisees. It was not proved in the instant case that similar sales of the other franchisees were greater than those recorded in the central computer.
[24] To allow the amounts of income that the respondent claims the Corporation did not report in its income for 1996 and 1997, I would have to rely on evidence that does not exist. In the audit of the appellants' accounting, the Minister's officials may well have had knowledge of evidence that would support the assessments, but that evidence was not put before me. I am not at all convinced that the income reported by the Corporation is correct-errors were made. However, in view of the facts brought to my knowledge, the Corporation's figures are likely closer to reality than the Minister suspects.
[25] Consequently, in view of the circumstances, the appeals are allowed with costs.
Signed at Ottawa, Canada, this 13th day of December 2001.
|
"Gerald J. Rip" |
J.T.C.C.
Translation certified true
on this 6 thday of March 2003.
Sophie Debbané, Revisor
[1] The amounts were determined as follows:
1996 1997
Sales according to Pizza Barba's computer $189,198 $186,060
Estimated counter sales $ 14,157 $ 14,157
Total sales $203,355 $200,217
less:
Reported sales $185,950 $163,703
Unreported sales $ 17,405 $ 36,514
[2] Exhibit I-1.
[3] The Minister would increase sales by $14,157 per year in issue (estimated counter sales) for a total of $203,355 in 1996 and $200,217 in 1997.