Tax Court of Canada Judgments

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Appeal heard on December 1, 2004 at Quebec City, Quebec

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JUDGMENT

The appeal from the assessment under the Excise Tax Act the notice of which bears the number 202603 and is dated February 7, 2003, for the period from January 1, 1998 to December 31, 2000 is dismissed, in accordance with the attached Reasons for Judgment.

Signed at Montreal, Quebec, this 4th day of May, 2005.

Lamarre Proulx J.

Certified true translation

on this 1^st day of March, 2006

Garth McLeod, Translator

REASONS FOR JUDGMENT

Lamarre Proulx J.

[1]      This appeal was heard under the informal procedure. At issue is whether undeclared income determined by the net worth method for the purposes of the Income Tax Act can be added to gross income reported for the purposes of the Excise Tax Act (the "Act").

[2]      The assessment under the Act was established for the period from January 1, 1998 to December 31, 2000. The assessment was filed as Exhibit I-1.

[3]      The Notice of Appeal gives the following as the sole grounds for appeal: "The tax does not apply as income does not exceed $30,000."

[4]      The facts on which the Minister of National Revenue (the "Minister") based his assessment are set out at paragraph 7 of the Reply to the Notice of Appeal (the AReply@) and read as follows:

(a)         during the years 1997, 1998, 1999 and 2000, the Appellant engaged in business activities in the audio-visual and mobile disco field;

(b)         the 1997, 1998 and 1999 taxation years were subjected to a tax audit by the Canada Customs and Revenue Agency (CCRA);

(c)         the auditor of the Minister, applying the net worth method, identified additional sales in the following amounts:

(d)         these additional sales were added to the turnover originally reported by the Appellant to obtain the following total business income:

e)          with regard to the GST, the Appellant made taxable supplies for considerations totalling the following amounts for the period from January 1, 1998 to December 31, 2000, namely the period at issue:

(f)          the Minister registered the Appellant with effect from January 1, 1998;

(g)         the Minister approved the use by the Appellant of the "quick method" for calculating net tax and for this purpose the amount that the Appellant should have remitted for each period was determined as follows:

(h)         the Appellant did not retain his supporting documentation and did not keep adequate books.

[5]      The Appellant is a sound technician and musician. He owns a recording studio.

[6]      The Appellant stated that he had not appealed the tax assessments by the Minister based on net worth because he did not know that this net worth would be used for purposes of the Excise Tax Act.

[7]      The calculation of the discrepancy on the basis of net worth was produced as Exhibit A-1.

[8]      The Appellant produced as Exhibit A-2 a letter signed by the General Manager of the Caisse populaire de la Chaudière, dated November 30, 2004, to the effect that he had been given a loan of $4,000 in 1999 to pay the taxes owing.

[9]      This letter reads as follows:

[TRANSLATION]

November 30, 2004

To whom it may concern,

We hereby confirm that the Caisse populaire de St-Lambert granted a loan of $4,000 in 1999 to Mr. Michel Dionne, the owner of Productions Michel Dionne, to settle the agreement reached on June 11, 1999 between him and the Department of National Revenue in order to close this file.

...

[10]     Nancy Racine was the auditor in this case. She received information from the Taxation Division that additional income had been added to the income reported by the Appellant. An audit using the net worth method had added to the income reported by the Appellant additional income of $7,987, $9,805 and $8,682 for the years 1997 to 1999, respectively.

[11]     This additional income was considered business income because the Appellant was a sole proprietor. By adding this income to the gross income reported by Appellant, the Appellant exceeded the $30,000 ceiling for a small supplier for the years 1997 to 1999.

[12]     The financial statements of the Appellant for the years 1996 to 2000 were produced as Exhibit I-2. The Appellant had reported sales for the years 1997 to 2000 of $29,817, $24,932, $26,536 and $28,954.90, respectively. The net worth method did not take the year 2000 into account. For this year, the assessment was accordingly based on the amount reported by the Appellant.

[13]     The auditor met with the Appellant at the beginning of July 2002. She explained that she would have agreed to review the statement of income and expenditures if there had been any ledgers or supporting documentation. With regard to the claim in respect of inputs, she explained to the taxpayer that there were two methods for obtaining the Input Tax Credit, namely the long form method with all the documentation, or the quick method, which was the most advantageous for him if he had no documentation to provide. The auditor determined the net tax by giving him an Input Tax Credit using the quick method as stated at paragraph (g) of the Reply. The amount of the tax for 1998 is thus not $2,432.59 but $1,558.43.

[14]     The auditor stated that, in accordance with the provisions of sections 148 and 240 of the Act, a person must register for the year that follows the year where that person exceeds $30,000 in sales. This is why the assessment begins with 1998. The assessment includes the year 2000 by virtue of the definition of a small supplier at section 148 of the Act and by virtue of subsection 242(2) of the Act. Under this latter provision, a person who qualifies as a small supplier is entitled to the cancellation of his registration, which shall take effect the day after the last day of his financial year, if he submits a request to this effect to the Minister and if on that day, he had been registered for at least one year.

[15]     Through Marc Robitaille, a Revenue Quebec collections officer, the Appellant produced as Exhibit A-3 an agreement between Les productions Michel Dionne de St-Jean Inc. and Revenue Quebec (Collections Division) for the purposes of a final settlement in the amount of $4,000. Mr. Robitaille stated that this document applies only to the corporation, which ceased to exist in 1997. It was in that year, 1997, that the Appellant began to do business as an individual.

Arguments

[16]     With regard to the additional income determined by the net worth method, the Appellant claims that the situation was not that his gross income had increased, but that his deductions had been reduced. He maintained that there was no evidence of additional sales.

[17]     Counsel for the Respondent based his argument on the decision by the Federal Court of Appeal in Pal v. Canada, [2003] F.C.J. no 726 (Q.L.), which concerns an assessment made under the Act, albeit one based on net worth calculated for tax purposes. He accordingly asserted that there was no reason to prevent the use of the results of a net worth assessment for the purposes of the Act.

Analysis and conclusion

[18]     The Appellant was within his rights, with regard to the assessment being appealed, to dispute the calculation of income by net worth, as is done for the Income Tax Act. He was not within his rights to do so for the purposes of an appeal under the Income Tax Act, since the time limits had expired, but there was nothing to prevent him doing so with respect to the Act.

[19]     The only challenge based on documentation was made using a document issued the day before the hearing, as reported in paragraphs 8 and 9 of these Reasons for Decision. The signatory of the letter was not present to testify. No documents accompanied this letter. This document cannot be accepted as evidence of indebtedness at the end of 1999, since in the net worth method, an amount is recorded as a liability if it is owed at the end of the year.

[20]     The disputes by the Appellant otherwise consisted of oral statements. The Appellant claims that the increase in revenue established on the basis of net worth was not due to an increase in his sales, but to the fact that the expenses claimed against the total gross sales shown on his balance sheet were perhaps too high. In this respect, I have to say that the burden of proof was on the Appellant in respect of his claims and the amount by which the expenditures should be reduced. Ledgers or invoices are obviously necessary for this purpose. Such documentation, furthermore, should be made available to the Respondent party before the hearing.

[21]     If I take the year 1997, the Appellant reported in his statements of results a turnover of $29,817. The net profit is shown as $4,440. This is his declared income. His total income based on net worth is $12,427. If the expenditures had been inflated, it was up to the Appellant to show what the amount thereof should have been.

[22]     The Appellant also stated that he had sold several pieces of equipment, which would have increased his income based on a net worth calculation. There again, one cannot remain simply at the assertion stage. Papers need to have been prepared showing the amounts and what the impact is on income by book value.

[23]     A court cannot pass judgement on the basis of suggestions or mere claims. The Notice of Appeal, which is as laconic as it could be, indicates the extent to which the Appellant failed to provide adequate information on a timely basis. This makes me think that he was not able to provide it.

[24]     For the year 2000, I refer to memorandum 2.7, which is entitled: "Cancellation of Registration", dated May 1999, and specifically to paragraphs 6 and 7:

Request for cancellation by a registrant (subsection 242(2))

6.          The Minister shall cancel the registration of a person who is not carrying on a taxi business, effective after the last day of the fiscal year of the person, where:

(a)         the person is a small supplier (see GST/HST memorandum 2.2, Small Suppliers, for the definition of small supplier);

(b)         the person has been registered for a period of not less than one year ending on that day.

7.          Under such circumstances, the cancellation generally takes effect on the day after the last day of the fiscal year of the person, provided they have been registered for a period of not less than one year. However, for administrative purposes, the date of the entry into force of the cancellation can be another date established in consultation with the person, provided the conditions set out above are met.

[25]     Section 240 of the Act stipulates that every person who makes a taxable supply is required to be registered for the purposes of the Act.

[26]     Subsection 242(2) of the Act reads as follows:

Request for cancellation

242(2) The Minister shall cancel the registration of a person who is not carrying on a taxi business, effective after the last day of a fiscal year of the person, where:

(a)         the person is a small supplier and has filed with the Minister in prescribed manner a request, in prescribed form, containing prescribed information, to do so; and

(b)         the person has been registered for a period of not less than one year ending on that day.

[27]     The person who qualifies as a small supplier is entitled to the cancellation of his registration. Such a person must nonetheless submit an application in prescribed manner containing the information prescribed by the Minister. Such a request was not made.

[28]     I must conclude that the Appellant has not proved that he was a small supplier during the years at issue within the meaning of section 148 of the Act.

[29]     The appeal is accordingly dismissed.

Signed at Montreal, Quebec, this 4th day of May 2005.

Lamarre Proulx J.

Translation certified true

on this 1^st day of March, 2006.