Docket: 2003-1661(GST)I

BETWEEN:

OLD WESTERN PIZZA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on February 23, 2004, at Vancouver, British Columbia,

By: The Honourable Justice C.H. McArthur
Appearances:
Agent for the Appellant:	Houshang Rassaf
Counsel for the Respondent:	Raj Grewal

____________________________________________________________________

JUDGMENT

          The appeal from the reassessment of goods and services tax made under the Excise Tax Act, notice of which is dated September 27, 2002, and bears number 11BU0602367 for the period January 1, 1998 to December 31, 2001, is dismissed.

Signed at Ottawa, Canada, this 22nd day of June, 2004.

"C.H. McArthur"

McArthur J.

Citation: 2004TCC452

Date:20040622

Docket: 2003-1661(GST)I

BETWEEN:

OLD WESTERN PIZZA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

McArthur J.

[1]      The Minister of National Revenue completed a net worth audit of the Appellant's records under the Excise Tax Act. Houshang Rassaf, on behalf of the Appellant, appeals the resulting assessment of $44,129 for net goods and services tax (GST), disallowance of input tax credits (ITCs), penalty of $6,105 and interest of $4,621 for the period January 1, 1998, to December 31, 2001, inclusive. Mr. Rassaf represented the Appellant at the hearing of this appeal. The audit, no doubt, was initiated because of the Appellant's aggressive GST filings. Over the period, it reported $7,411 in GST collected and claimed ITCs totalling $24,802.

[2]      The Appellant owned and operated a Greek and Italian food restaurant business in Vancouver, British Columbia. Mr. Rassaf and the Respondent's auditor, Mr. Mohammed, were the only witnesses. In response to the auditor's request for books and records, Mr. Rassaf provided him with a garbage bag full of unorganized receipts, cash register tapes, cancelled cheques and the like. The auditor painfully sorted the documents by year and attempted to reconstruct the Appellant's income and expenses to determine the ITCs and GST collectible.

[3]      Mr. Mohammed was familiar with the restaurant business having operated one himself and was sympathetic to Mr. Rassaf's situation. I state this because the Notice of Appeal contains statements which include:

CCRA has produced false information against me without conducting any audit on my information. Instead they used imaginary numbers as per Statistic Canada which is outlaw. ...

CCRA staff, auditor Munief Mohammad and his boss, team leader, Bill Burden kept harassing me on the phone and coming to my business and resident and threatening me that they can do anything they want and they told me that they do not want anybody to find out - it looked like they wanted some sort of extortion money or kick back from me. They have wilfully produced false assessment invoices to give hard times they told me that when they came to my resident which is outlaw and I want Tax Court to deal with them accordingly.

Mr. Rassaf and the Appellant sued Canada Customs and Revenue Agency (CCRA) in the Supreme Court of British Columbia and the presiding judge ordered a stay of proceedings concluding that it was a matter to be dealt with by the Tax Court of Canada. I accept the auditor's testimony that Mr. Rassaf was uncooperative throughout the audit.

[4]      Mr. Mohammed stated that when asked where his figures came from, Mr. Rassaf would reply "I just know". He took a similar approach during the hearing of this appeal. In fairness, he probably did know that the invoices and receipt tapes did not reflect an accurate picture but it was all that was provided. The Appellant had a statutory obligation to keep proper records.[1] He was given two years after the audit to provide evidence. His demeanour during the hearing was passionate and assertive. He spoke forcefully to the effect that his boxes of documents would prove his assertions but he provided no clear accounting evidence. He spoke in generalities, providing little specificity. He did enter a grocery bag of documents which were of little assistance. He stated that he could not afford a lawyer or accountant but urged me to accept on faith, that not only did the Appellant not owe tax, CCRA owed him or the Appellant over $130,000. His logic was difficult to follow and in this vein, I refer again to the Notice of Appeal:

They owe me around $139,083 for the years: 1995, 1996, 1997, 1998, 1999, 2000, 2001 at seven elevations. Total Gross revenue from my business has been $30,690/year on average since 1995 of which 1/3 is food cost which means $10,230/year and the net revenue is $20,460/year. Total cost of running the business is $43,468/year (i.e. $17,610/year labour cost and $25,858/year business operation cost) which means we are short by -$23,008/year that we have had to borrow since 1995 which means over $100,000 in debt and paying 18% compound interest on it and CCRA has earned 50% tax profit of interest charges.

I have no difficulty in believing that Mr. Rassaf made the audit difficult.

[5]      I will first deal with the ITCs. Mr. Mohammed testified that he looked at every receipt the Appellant provided and they did not add up to the amount claimed. He correctly disallowed amounts not supported by documentation. The relevant legislation is subsection 169(4) which states:

169(4) A registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed,

(a)         the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed; and

(b)         where the credit is in respect of property or a service supplied to the registrant in circumstances in which the registrant is required to report the tax payable in respect of the supply in a return filed with the Minister under this Part, the registrant has so reported the tax in a return filed under this Part.

There is no need to review the invoice requirement details because the invoices provided were of little assistance. Without at least rudimentary accounting, it is not possible to discern the relevant invoices from the irrelevant ones. It is not sufficient to leave it to the auditor or the Court to do the accounting. Subsections 286(1) and (2) read as follows:

286(1) Every person who carries on a business or is engaged in a commercial activity in Canada, every person who is required under this Part to file a return and every person who makes an application for a rebate or refund shall keep records in English or in French in Canada, or at such other place and on such terms and conditions as the Minister may specify in writing, in such form and containing such information as will enable the determination of the person's liabilities and obligations under this Part or the amount of any rebate or refund to which the person is entitled.

286(2) Where a person fails to keep adequate records for the purposes of this Part, the Minister may require the person to keep such records as the Minister may specify and the person shall thereafter keep the records so specified.

[6]      Judge Bowman's following comment in Helsi Construction Management Inc. v. R., with regard to subsection 169(4) applies equally to the present case.[2]

13         We are dealing with one of the technical requirements under a statute that is somewhat unique for its specificity. Moreover, it is the foundation of a self-assessing system that operates in the commercial world. Unfortunate as it may seem to the appellant, rules are rules. I can do nothing to help the appellant on this point. The problem is to some extent the appellant's own doing. Mr. Familamiri has made great efforts to correct the situation created by the original chaotic state of the records and he has succeeded to some extent. However there is only so much that one can do to correct years of disarray.

[7]      Focusing on the collection of GST, as stated, the auditor found the Appellant's records incomplete and chaotic. He stated that Mr. Rassaf's figures seemed to come out of the air.

[8]      I reviewed a small sample of the documents contained in the bag (Exhibit A-12) for the month of October 1998. The receipts provided are undocumented, but have been separated by the auditor for the month of October 1998. Many are from London Drugs, one from Rogers Cablevision, several from gas stations, many from supermarkets in the $15 range for products and amounts no different from what a small family would incur. There are four or five receipts from Costco and Saputo Fords Ltd. for October 1998 totalling approximately $900. This amount could well be purchases for the restaurant. There were bank statements, credit card statements and cancelled cheques. Most, if not all, are in Mr. Rassaf's name alone. They were of little assistance in my attempting to determine the Appellant's business income and expenses. It was obviously a Herculean task for the auditor to sort out the hundreds if not thousands of documents in some chronological order.

[9]      The only way these documents could possibly assist the Appellant is by it having an accountant present a review and opinion of the Appellant's situation after a careful review of the documents. The records were not only unorganized but completely lacking in required detail. Mr. Rassaf mingled his personal expenditures, business receipts and expenditures all together as one. As stated all these receipts, statements, cheques, etc. he put in a garbage bag with complete disregard for any order or organization. It is not the Court's position to perform an audit or accounting on the Appellant's behalf.

[10]     Faced with this situation the Minister had little choice but to conduct a net worth audit. Mr. Rassaf aggressively presented that using Statistics Canada and whatever method the Minister used to determine his personal expenses was ridiculous although he presented no better solution. He stated what the Minister should have done was consider the evidence that his gas utility expenditures averaged about $60 per month and any pizza-maker knows that on this basis his (the Appellant's) business income was far less than that arrived at by the auditor. Mr. Rassaf stated:

... I did my job. And I gave you the evidence, the basic evidence, without looking at everything, the gas bill. You look at the gas bill; it's $60 a month. You contact couple of pizza shops, everybody with $60 a month, how many pizza can you sell? They will tell you. That's the basic thing without even looking at everything.

(Transcript page 15 lines 10 to 16)

            ...

            Here, as I said, there are two elements, essential element in this case. One is the gas bill. If they can present to me the gas bill that is more than $60 a month then I will say they're right. Or if they present me with $40,000 -- $44,000 worth of raw food bought, like mozzarella cheese, tomato paste, blah, blah to make pizza, then I said they are right. They don't have any of those and they are making allegation. Anybody can make allegation, Your Honour. It's easy to make allegations but it's not easy to prove the case, you know. They don't have anything to prove their case. They're just hallucinating and they think they can do this to me.

(Transcript page 27 lines 7 to 19)

In addition, he added that because he was deeply in debt to several banks and credit card companies, this was evidence that the Appellant could not be making any money. In this regard there is no evidence as to when and how the indebtedness arose. He also stated that the auditor should have checked with his suppliers to determine how many pizzas he could produce with the products he purchased. Again, this is not the responsibility of the Minister's auditor. If the Appellant wanted to advance this argument, it had the burden of presenting it properly.

[11]     I do not accept the Appellant's position with respect to the conduct of the auditor. He did the best he could with the information provided. Other than Rassaf's general statements, there was no evidence of bribery, extortion or bullying.

[12]     I am sure there are capable restaurateurs who rely on the amount of product and utilities purchased over a given period to arrive at the value of sales of a restaurant business. This is not a satisfactory method in any situation. The Appellant did not keep records in such form or containing such information to enable the Minister to determine its liabilities and obligations as is required by section 286.

[13]     I accept the Minister's method over that of the Appellant's. CCRA routinely uses Statistics Canada's figures in similar circumstances. This has been accepted by this Court many times as being the better of two inaccurate systems. In Cox v. The Queen,[3] Bowman J. stated:

The net worth statement proceeds on the assumption that the appellant's personal living expenditures are as set out in Schedule B to the net worth statement. This schedule is over three pages of figures consisting of an attempt to determine the appellant's personal living expenses.[4] A very large part of these expenses are based on Statistics Canada's ("StatsCan") estimates of what it costs two people to live, reduced by 1/2. These figures suffer from the same unreliability as those in Bigayan, where I said

	I am faced here with two sets of unreliable numbers. The Department of National Revenue in many instances used figures taken from Statistics Canada ("StatsCan") for the expenditures made by a family consisting of a husband and wife ...

[14]     Mr. Mohammed used the same methodology as referred to in Cox. It may not be accurate and perhaps is not reasonable but, it is the best I have under the circumstances.

[15]     In determining Mr. Rassaf's personal cost of living, for the most part, the auditor used Mr. Rassaf's own figures. He concluded that Mr. Rassaf's personal expenditures were $31,000 annually and therefore the Appellant had to generate a minimum profit of $31,000 for him to survive. While the Minister's rationale was not presented in detail, I had no other amounts to consider

[16]     To establish the value of the Appellant's taxable supplies, the auditor obtained a figure for profit margin that he obtained from Statistics Canada. In Ramey v. The Queen,[5] Bowman J. made the following often-quoted statement that applies to this appeal:

I am not unappreciative of the enormous, indeed virtually insuperable, difficulties facing the appellant and his counsel in seeking to challenge net worth assessments of a deceased taxpayer. The net worth method of estimating income is an unsatisfactory and imprecise way of determining a taxpayer's income for the year. It is a blunt instrument of which the Minister must avail himself as a last resort. A net worth assessment involves a comparison of a taxpayer's net worth, i.e. the cost of his assets less his liabilities, at the beginning of a year, with his net worth at the end of the year. To the difference so determined there are added his expenditures in the year. The resulting figure is assumed to be his income unless the taxpayer establishes the contrary. Such assessments may be inaccurate within a range of indeterminate magnitude but unless they are shown to be wrong they stand. It is almost impossible to challenge such assessments piecemeal. The only truly effective way of disputing them is by means of a complete reconstruction of a taxpayer's income for a year. A taxpayer whose business records and method of reporting income are in such a state of disarray that a net worth assessment is required is frequently the author of his or her own misfortunes. Mr. Boudreau stated that Mr. Allan Ramey's records were inadequate, that he had a history for years prior to 1981 of being assessed on a net worth basis and that his business, that of owning coin operated machines, such as pinball machines and slot machines of various types, was cash based and was therefore difficult to audit. The Minister had no alternative but to proceed as he did. While I have sympathy for someone in the position of the appellant whose liability for his father's tax is secondary, I can see no basis for adjusting the assessments made against his father to any greater degree than that to which the respondent has already agreed.

These remarks apply equally to Mr. Rassaf and the Appellant.

[17]     The Appellant had the burden of proof and should have come prepared to completely reconstruct its income for the years in issue. It cannot turn over hundreds of undocumented receipts, cheques, statements and the like to the auditor with the attitude that its income be determined from the gas utility bills. To be successful, the Appellant must address the auditor's methodology line by line with clear and specific evidence and not general global statements. While the results may be unfortunate, the Appellant has only itself to blame, not the auditor. Commenting on the assumptions of fact contained in the Reply to the Notice of Appeal, paragraphs 6(e)(f)(g)(h) and (i), Mr. Rassaf simply stated that these statements were a lie. That is not sufficient. Again the Appellant had the burden of proving his assertions.

[18]     In conclusion (i) the Appellant is not entitled to ITCs in excess of the amounts allowed by the Minister during the assessment period because the Appellant has not provided sufficient documentation to support further ITCs, as required by subsection 169(4) of the Act and the ITC Regulations; and (ii) the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances. The appeal is dismissed.

Signed at Ottawa, Canada, this 22nd day of June, 2004.

"C.H. McArthur"

McArthur J.

CITATION:

2004TCC452

COURT FILE NO.:

2003-1661(GST)I

STYLE OF CAUSE:

Old Western Pizza Inc. v. Her Majesty The Queen

PLACE OF HEARING:

Vancouver, B.C.

DATE OF HEARING:

February 23, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice C.H. McArthur

DATE OF JUDGMENT:

June 22, 2004

APPEARANCES:

Agent for the Appellant:

Houshang Rassaf

Counsel for the Respondent:

Raj Grewal

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

---