At the CRA Roundtable at the recent CPA’s 2016 Commodity Tax Symposium, the CRA declared a current mandate to use alternative audit methods more frequently. Two recent cases are a useful reminder of what may be in store for Canadian GST registrants in that regard, namely 9103-4348 Québec Inc v The Queen (2015 TCC 220) (“The Golden Pub”), and 9091-2239 Québec Inc (2016 TCC 198) (“Hamade”)
In both cases, the Court accepted the CRA’s use of alternative audits methods, and put the responsibility on the GST registrant to ensure the reliability of its accounting procedures.
By way of background, to date, the leading case on the alternative audit method is 9100-8649 Québec Inc., 2013 TCC 16 (affirmed at 2014 FCA 20), where the Tax Court of Canada held that “Courts allow tax authorities to use alternative audit methods not only in cases where the taxpayer does not have adequate accounting records, but also when the books, registers and financial statements are “not reliable” (at para 39).
The Golden Pub and Hamade are more current examples of how alternative audit methodologies are being employed by CRA and allowed by TCC.
The Golden Pub, was a restaurant and bar in Québec. The Minister of Revenue of Quebec (the “Minister”) audited the Golden Pub beginning May 2008, and while the auditor did not find any notable discrepancies in the taxpayer’s books of account, she recommended an alternative audit method because the purchase-to-sales ratio was outside the expected norm, the percentage of input tax credits (ITCs) was too high in relation to the GST remittances, some sales data was missing or not provided, and some meal bills were missing or not consecutive.
Accordingly, the Minister used the sales-per-litre ratio method to determine the taxable supplies of alcohol and GST collectable. The amount of alcohol purchased was not in issue as it was recorded by the Sociéte des alcools du Québec The Minister relied on sales data generated by the taxpayer’s recording system for the period ending September 2007 to determine the ratio between a litre of alcohol purchased and a liter of alcohol sold. The Minister then applied the ratio to periods where data was missing, allowing a percentage for complimentary items and losses. This approach resulted in an increase of $14,189.91in GST owing.
The TCC held that the Minister was justified in its method, finding that the taxpayer did not provide any document establishing the percentage of complimentary items and losses nor any sales data for most of 2006.
In reaching this conclusion, the TCC reiterated the reliability standard from 9100-8649 Québec Inc. v The Queen. Applying this standard to the taxpayer’s accounting records, the TCC explained that “it does not suffice that books and accounting records exist and are consistent with one another: they must also be reliable”: (at para 46).
The second case concerned Mr. Hamade who owned a pizzeria which was the subject of a GST audit and assessment. While most of Hamade’s supplies were documented with invoices, he bought vegetables from mobile vendors who did not issue receipts.
During the audit, the GST auditor decided to apply the alternative audit method because the taxpayer’s reported income was low in comparison with his assets, the pizzeria’s sales figures were low considering the type and size of the pizzeria, and the utilities used were too high relative to the sales. Furthermore, the auditor went to pizzeria incognito and saw that the cash register drawer often remained open such that many sales were not recorded.
The auditor used a sales reconstruction audit method, assessing the actual sales in light of the actual supplies purchased. In order to do so the auditor relied on the pizza boxes, because they were easy to identify at both purchase and sale, there were few losses of pizza boxes and because the other types of supplies were either poorly documented –i.e. the vegetables from the mobile dealers, or frequently complimented to customers –e.g. soft drinks.
On appeal to the TCC, there was a mixed result. The TCC accepted the auditor’s decision to use the alternative audit method and to apply gross negligence penalties, but took issue with the auditor’s calculations.
The TCC found that while the alternative audit method was justified, it was unreliable, and as a result the TCC order the Minister to redo the calculation
By way of commentary, Golden Pub is a classic example of the importance of keeping reliable books, records and accounts, and the likelihood of an alternative audit method being employed whenever reliability is put into question. This is especially important in the bar business, where spillage and complimentary drinks are often the norm.
In a similar vein, Hamade, is a reminder that the onus is squarely on the taxpayer to rebut assumptions of fact made when the Minister employs these alternative audit approaches.
Robert Kreklewetz and Kathryn Walker,
Millar Kreklewetz LLP, Toronto
A version of this article appeared in the January 2017 issue of Tax for the Owner-Manager