Tax Court of Canada


Goods and Services Tax
Minister was justified in using alternative audit method to assess registrant

Registrant operated pizzeria restaurant, primarily providing pizza for takeout. Minister carried out audit into three years of quarterly reporting periods. To determine amount of unreported sales, auditor used alternative method consisting of comparing reported sales with quantity of pizza boxes purchased for year in which sales recording module was operational and then extrapolating results to prior years for which such detailed information was not available. Minister issued assessment under Excise Tax Act (Can.), claiming additional net tax amount of $23,768.85, penalties of $5,942.23 under s. 285 of Act, and interest. Registrant appealed. Appeal allowed in part. Minister was justified in using alternative audit method to assess registrant, as registrant’s books and records could not be considered reliable. Evidence clearly established that registrant did not report all its income. Auditor’s method had significant weakness in that it did not take into account 14-inch pizza boxes in calculation. According to auditor’s calculation excluding 14-inch pizza boxes, 55.69 per cent of sales were reported but, if 14-inch boxes were used, result indicated that almost 70 per cent of sales were reported. Auditor dismissed 14-inch pizza boxes because according to sales recording module, there were more sales than purchases, but calculation could not provide true reflection of reality without including 14-inch pizzas that were registrant’s best-selling pizza size. This supported conclusion that 30 per cent of registrant’s sales were unreported such that only $12,802.35 should have been added to net tax. Registrant knowingly, or under circumstances amounting to gross negligence, made false statement or omission in its tax returns for period. Factors, such as cash register drawer remaining open between sales so that sale data would not appear in sales recording module and fact that unreported sales represented 30 per cent of total sales, showed gross and not just ordinary negligence. Significant and repeated omissions in tax returns led to conclusion that registrant intentionally concealed significant portion of its sales.

9091-2239 Québec Inc. v. R. (Sep. 14, 2016, T.C.C. [General Procedure], Dominique Lafleur J., 2015-710(GST)I) 270 A.C.W.S. (3d) 664.

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