Tax Court of Canada


Taxation

Goods and Services Tax
Alternative method of valuation was not warranted in circumstances

Registrant operated restaurant with 60 seats in dining room and 66 seats on terrace, with liquor licence. Registrant’s accounting books submitted to Minister were incomplete and imprecise according to Minister, and Minister had to reconstitute total amount of supplies made by registrant using several indirect methods of verification for period in question. Analysis of various elements from registrant or its suppliers, such as bank deposits, purchases confirmed and reported, hours worker, placemats used, revealed significant deviation from sales reported in registrant’s accounting books. Minister considered sales of 3,228 meal receipts, from 50 randomly targeted days over period of 166 days. Total sales accounted from receipts amounted to $32,655.79. 1,676 of targeted foods from meal receipts generated a ratio of $19.48. Difference between declared sales and reconstructed sales was $488,631.67 for years 2007 to 2009. Minister therefore increased total amounts of targeted foods acquired by registrants by attributing $19.48 ratio for each of 2007, 2008, and 2009 fiscal years in determining reconstituted amount of taxable supplies. Registrant appealed. Appeal allowed. Alternative method of valuation was not warranted in circumstances, and was highly questionable. Despite alternative verification method, assessed amounts were reduced by 40 per cent demonstrating that glaring error were committed when checking. Penalties for gross negligence were also cancelled and no contribution for misappropriate of funds was issues by CRA against registrant. Both experts came to conclusion that valuation method led to bias and instability as assumptions that underlie ration estimation were not met. Valuation method was wrong given over-representation of Mondays and Tuesdays when only two meals rather than three meals were served on those particular days. Instead of resorting to indirect method of valuation, tax authorities should have first concluded, on reasonable grounds, that books, records, and supporting documents provided by registrant were not reliable or contained inaccuracies or significant deficiencies.

2741-2568 Québec Inc. c. R. (Sep. 22, 2016, T.C.C. [General Procedure], Réal Favreau J., 2011-3640(GST)G) 270 A.C.W.S. (3d) 891.

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