TricomCanada Inc. v. The Queen

TricomCanada Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-01-11
Neutral citation
2016 TCC 8
File numbers
2013-4655(GST)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2013-4655(GST)G
BETWEEN:
TRICOMCANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard January 26, 27, 28 and 29, 2015,
May 11, 12, 13, 14 and 15, 2015, and
June 17, 18 and 19, 2015, at Montreal, Quebec.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Basile Angelopoulos
Virginie Paquet
Counsel for the Respondent:
Antoine Lamarre
Nicolas C. Ammerlaan
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act for the periods from April 2012 to November 2012 inclusive is dismissed in accordance with the attached Reasons for Judgment. Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 11th day of January 2016.
“Robert J. Hogan”
Hogan J.
Citation: 2016 TCC 8
Date: 20160111
Docket: 2013-4655(GST)G
BETWEEN:
TRICOMCANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Overview [1] This is an appeal from an assessment made by the Quebec Minister of Revenue (the “Minister”), acting for and on behalf of the Minister of National Revenue, under Part IX of the Excise Tax Act[1] (the “Act”) for the reporting periods from April 2012 to November 2012 inclusive (the “Relevant Period”).
[2] In its returns for the Relevant Period, the Appellant reported the goods and services tax (“GST”) it collected from its sole client, Diverse Equities Inc. (“Diverse Equities”), from the sale of used gold jewelry and impure gold bars (hereinafter referred to as “Scrap Gold”). The Minister denied the Appellant input tax credits (“ITCs”) of $994,730.97 claimed under the Act with respect to its purchases, as follows:
Reporting Period
GST Collected ($)
GST Paid ($)
Net GST ($)
April 2012
13,903.11
13,432.96
470.15
May 2012
102,696.54
99,288.10
3,408.44
June 2012
116,638.16
111,473.63
5,164.53
July 2012
149,906.33
143,609.13
6,297.20
August 2012
214,381.51
205,881.03
8,500.48
September 2012
194,767.88
185,023.61
9,744.27
October 2012
192,551.75
184,424.24
8,127.51
November 2012
53,529.52
51,598.27
1,931.25
1,038,374.80
994,730.97
43,643.83
[3] The Appellant’s claim for ITCs was denied on the grounds that the Appellant did not trade in gold or, alternatively, that it acquired gold from persons other than the alleged suppliers listed on its purchase invoices. The Minister alleges that the Appellant knowingly, or acting with willful blindness, participated in a false invoicing scheme. The Respondent now labels that scheme a sham.
[4] In support of the assessments, the Minister also contends that the purchase invoices produced as part of the Appellant’s documentary evidence do not satisfy the requirements set out in paragraph 169(4)(a) of the Act and section 3 of the Input Tax Credit Information (GST/HST) Regulations[2] because they do not identify the Appellant’s true suppliers.
[5] The Appellant claims it purchased and resold Scrap Gold in bona fide commercial transactions. The Appellant points out that its officers regularly verified the registration status of its alleged suppliers, retained copies of photo identification and photocopied the batches of gold that it purchased. If the Appellant’s alleged direct suppliers were not the owners of the gold the Appellant purchased, the Appellant had no way of knowing this.
II. Factual Assumptions made by the Minister [6] The Minister relied on the following assumptions of fact in making the assessments against the Appellant:
[TRANSLATION]
. . .
(c) the appellant has been a registrant for the purposes of Part IX of the ETA since April 23, 2012, which is the alleged date on which its business began operating;
(d) the appellant operates or claims to operate a gold-trading business consisting essentially in acquiring scrap gold for resale to a refiner in Alberta;
(e) during the relevant period, the appellant’s net tax returns were filed on a calendar monthly basis;
(f) the appellant acquired, or allegedly acquired, during the relevant period, taxable supplies of goods and services for consumption, use or supply in the operation of its business—a commercial activity—for which supplies GST was paid or payable by the appellant to the suppliers;
(g) the appellant entered as an ITC in its books and accounting records an amount of $994,853.70 in GST so paid or payable and, in calculating the net tax reported by it to Revenu Québec for the relevant period, claimed—and subsequently received—the said ITC amount;
(h) of the total ITC of $994,853.70 claimed—and subsequently received—in the computation of its net tax reported to Revenu Québec for one or another of the monthly reporting periods in the relevant period, the appellant claimed a total amount of $994,730.97 in respect of purported supplies of goods (scrap gold) that it claims to have received during the said relevant period from four different alleged suppliers, namely:
6650261 Canada inc. (Bijouterie Tiara)
$45,463.98
9103-2045 Québec inc. (Liz [sic] Trading)
$9,670.07
Bijouterie Palo inc. and
9261-1201 Québec inc. [combined]
$939,596.92
TOTAL
$994,730.97
(i) this ITC amount of $994,730.97 corresponds to a consideration of some $19,894,619.42 for such supplies, which the appellant claims to have acquired during the relevant period from those four alleged suppliers, namely:
6650261 Canada inc. (Bijouterie Tiara)
$909,279.62
9103-2045 Québec inc. (Liz [sic] Trading)
$193,401.30
Bijouterie Palo inc. and
9261-1201 Québec inc. [combined]
$18,791,938.50
TOTAL
$19,894,619.42
(j) the appellant did not provide to Revenu Québec when required to do so sufficient information, including prescribed information, to establish the aforementioned $994,730.97 ITC amount claimed by it—and subsequently received—in calculating its net tax for the relevant period;
(k) more particularly, to establish the said ITC amount the appellant provided supporting documents that did not meet the requirements of the ETA and the regulations thereunder;
(l) essentially, the supporting documents (invoices) provided to Revenu Québec in support of the ITC claim and relating to supplies of scrap gold that the appellant allegedly acquired during the relevant period are false in that the appellant did not acquire the supplies of scrap gold it claims to have acquired or acquired them from a supplier other than the suppliers indicated on the supporting documents, and these supporting documents constitute “accommodation” invoices;
(m) the object of the scheme at issue is to enable the appellant, through the use of so-called “accommodation” invoices, to make, in the computation of its net tax for the relevant period, ITC claims that are unjustified in light of the requirements set out in the ETA;
(n) in the present case, the appellant—the “accommodated” party—resorted to the services of third parties—the “accommodation” parties—that is, the four alleged suppliers in question, regardless of whether they were carrying on real businesses or not; these third parties issued invoices to the appellant for supplies of scrap gold that they did not make to the appellant and which the appellant did not acquire from any of them;
(o) as regards any or all of the four suppliers in question, they do not have the knowledge, the personnel or the equipment to make the supplies of scrap gold that they allegedly undertook to make to the appellant;
(p) as regards any or all of the four suppliers in question, the appellant is unable to adequately identify the individual it dealt with despite the numerous meetings that took place;
(q) as regards any or all of the four suppliers in question, according to the records of the Société de l’assurance automobile du Québec, during the relevant period they did not own, nor did they possess under long-term leases from third parties, road vehicles that would have enabled them to make the purported supplies of scrap gold that they allegedly undertook to make to the appellant;
(r) immediately following its registration for the purposes of Part IX of the ETA and despite its lack of expertise in the area of activity in question, the appellant began operating its business with an impressive quantity of scrap gold supplies, which it received uninterruptedly and without having done any advertising at the very beginning of that business’s operation and without having done much newspaper advertising thereafter;
(s) as regards one of the four suppliers in question, namely, 9103‑2045 Québec inc. (Liz Trading), that supplier was delinquent in its dealings with Revenu Québec with respect to Part IX of the ETA and with respect to the AQST in that it failed to produce any net tax return;
(t) the cheques drawn, or the bank drafts used, by the appellant to pay for the purported supplies it allegedly acquired from any or all of the four alleged suppliers in question were in almost all instances presented to be cashed at a cheque-cashing centre by those suppliers;
(u) there are anomalies in the chronological sequence of the invoices issued by any or all of the four alleged suppliers in question;
(v) the appellant, knowingly or under circumstances amounting to gross negligence in the carrying out of a duty or an obligation imposed by or under Part IX of the ETA, made a false statement or omission in its returns of net tax in claiming as an ITC, in computing the net tax it reported during the relevant period, an amount of $994,730.97 in respect of the purported supplies acquired from the four alleged suppliers in question;
(w) the appellant is accordingly liable to Revenu Québec for the amount of the adjustments made to its reported net tax for the relevant period, plus interest and penalties.[3]
[Emphasis added.]
[7] The structure under which the Appellant allegedly acquired Scrap Gold is illustrated in Schedule A of my Reasons for Judgment.
III. Respondent’s position [8] The Respondent argues that the Appellant knowingly participated in a false invoicing scheme that allowed clandestine suppliers of gold to sell their gold for cash. To incentivize the participants in the false invoicing scheme, GST and QST was not remitted by the Appellant’s alleged indirect suppliers. Significant input tax credits were claimed by the Appellant for the purpose of generating tax refunds. As a consequence of this false invoicing scheme, both levels of government were asked to refund tax that they had not received. This additional cash flow was shared among the participants in the arrangement allowing the Appellant to purchase gold from persons willing to sell their gold for cash in untraceable transactions. This afforded the Appellant the opportunity to purchase its gold at a substantial discount in relation to its market value.
[9] The Respondent observes that the gross margins earned by Diverse Equities, the Appellant, and the other intermediaries in the chain were unusually high, as demonstrated by the following table:
Party
Spot‑rate purchase
Spot‑rate sale
Margin
Diverse Equities
(purchaser
and reseller)
93%
98.5% - 99.0%
5.5% - 6.0%
Tricomcanada
(Appellant)
(purchaser
and reseller)
90.5%
93.0%
2.5% - 4.75%[4]
Tricom alleged
suppliers (purchaser
and reseller)
n/a
90.5%
Approximately
2.5%[5]
Chèque Express
(financial intermediary)
2.25% for cheque
cashing services
[10] According to the Respondent, the aggregate gross profit margin of all of the participants in the chain was approximately equal to the unremitted GST and Quebec sales tax (“QST”), which was only partially refunded in connection with the transactions at issue in this appeal. The combined federal-provincial sales tax rate in the province of Quebec in 2012 was 14.975%.[6]
[11] The Respondent argues that the inflated profit earned by the Appellant, locked in by virtue of a significant discount from the spot price, is a disguised portion of the unremitted sales tax that the Appellant sought to recover as refunds through its ITC claims. The Respondent reasons that the false invoicing scheme orchestrated by the Appellant allowed the Appellant’s true suppliers of gold to sell their gold at the same price as that available to them in an open‑market transaction. The amounts purported to have been collected as QST and GST by the Appellant’s alleged direct or indirect suppliers were diverted with the knowledge of the Appellant. The funds were then put to a different use. Because the tax was not remitted, the Appellant’s alleged direct and indirect suppliers had sufficient funds to pay their transaction costs, subtract their commissions, and pay the true suppliers roughly the same price as that which they would have received in a fully disclosed transaction. The QST and GST paid by the Appellant was not an expense for it, because the Appellant expected a full refund of the QST and GST allegedly paid under the arrangement.[7] The expected refund was intended to secure a profit for the Appellant under the arrangement. Under this arrangement the Appellant’s true suppliers ended up ahead because they avoided income tax on their profit from the sales.
IV. Appellant’s position [12] The Appellant notes that its shareholders, Marc (“Mr. Bishara”) and Carl Bishara, are businessmen who are adept at pursuing new business opportunities. The Scrap Gold business was just the latest instalment in a series of business ventures pursued by the cousins. The timing of the cousins’ involvement with the gold business coincided with a period which saw world gold prices rise rapidly.
[13] The Appellant also claims that it acted with reasonable care and took all precautionary measures to ensure that it conducted its affairs in a prudent and diligent manner, above and beyond what is required by law. Mr. Bishara conducted extensive due diligence. In particular, he had several conversations with Stan Wright, an experienced precious metals wholesaler. Mr. Bishara also collected a large quantity of documentation on each of the Appellant’s alleged suppliers, including photo identification, articles of incorporation, and proof of sales tax remittances. If the Appellant’s alleged suppliers were not the true suppliers of the Scrap Gold, the Appellant claims it had no way of discovering for whom its alleged suppliers were acting. The Appellant contends that it is unfair to hold it accountable for the alleged fraudulent activities of its alleged indirect suppliers. Only the Minister has the power to conduct audits and investigations to ferret out complex tax frauds.
[14] The Appellant also contends that the significant economic risk it bore during the Relevant Period runs contrary to what is normally observed in sham transactions. Although the Appellant’s gross profit margin was between 2.5% and 4.75%, depending on whether it paid in cash or by bank draft, it suffered negative cash flow because it paid out almost 15% in combined GST and QST, which was only partially offset by the taxes it collected from Diverse Equities.[8]
V. Issues in dispute [15] In her written representations, the Respondent frames the issues in dispute as follows[9]:
a. Did the Appellant acquire scrap gold?
b. Was the Appellant carrying on a business?
c. Did the Appellant acquire the scrap gold from the suppliers indicated on the invoices?
d. Did the Appellant knowingly participate in a scheme intended to deceive the Minister?
i. Does the documentary formalism detract from the substance of the transactions such that the transactions constitute a sham?
ii. Did the Appellant knowingly participate in a scheme?
iii. Was the Appellant willfully blind to the fact that he participated in a scheme?
[16] I agree with the Respondent’s summary of the issues.
VI. Summary of Evidence and Credibility Findings A. Tricom [17] Mr. Bishara testified on behalf of the company at trial. Carl Bishara, the co‑shareholder of the Appellant, was not called as a witness.
[18] Mr. Bishara observed that he and his cousin Carl Bishara are entrepreneurs. They are prepared to consider, and where the opportunity is interesting, quickly commit time, effort and capital to, new ventures. In 2004 they purchased an interest in three pharmacies from the estate of their fathers, and have since sold one of them. Through a pharmaceutical holding company the cousins also operate a wholesale business which sells medication to hospitals, clinics, and doctors worldwide.
[19] In 2008, Mr. Bishara, Carl Bishara, and another family member purchased two dry cleaners. Mr. Bishara explained that he and his cousin Carl Bishara have also been involved in real estate for most of their lives.
[20] Mr. Bishara alleged that, prior to concluding the Appellant’s first Scrap Gold transaction on April 24, 2012, he conducted extensive research on the gold trade. He did some Internet research, but most of the information he gathered came from conversations he had with knowledgeable individuals with experience in the business. One such individual was Stan Wright, with whom Mr. Bishara came into contact through a mutual friend. Mr. Wright is the president and joint shareholder of Diverse Equities, a large precious metals dealer that has been operating in Alberta since 1992. He has over forty years of experience in the coin, jewelry, and precious metals trade.
[21] Mr. Wright corroborated Mr. Bishara’s testimony on this point. He testified that Mr. Bishara had called him several times to inquire about the Scrap Gold business. Mr. Bishara testified that counterfeit product was one of his biggest concerns at the outset.
[22] The witness alleges that he also consulted with Hercules Nikolopoulos, whose company 6650261 Canada Inc., operating under the name Bijouterie Tiara (“Bijouterie Tiara”), would eventually become the Appellant’s first alleged supplier. Mr. Bishara testified that he was introduced to Mr. Nikolopoulos by Mr. Nikolopoulos’ brother‑in‑law, Peter Mentzelos, who is a good friend. Mr. Nikolopoulos testified that his brother‑in‑law introduced him to Mr. Bishara around August 2011.
[23] The evidence shows that Mr. Nikolopoulos became active in the gold business in the spring of 2011, acting through Bijouterie Tiara. Mr. Bishara testified that he had asked Mr. Nikolopoulos many questions relating to the gold business and was impressed with his prudent business practices. When asked about those practices, Mr. Bishara explained that Mr. Nikolopoulos would take pictures of the gold he purchased. Mr. Bishara would later do the same when carrying out transactions on behalf of the Appellant.
[24] Before settling on Diverse Equities as a purchaser for the Appellant’s gold, Mr. Bishara claims, he contacted Québec Fonte Inc. (“Quebec Fonte”), a wholesale purchaser and smelter of gold and other precious metals, located in St‑Eustache, Quebec, to obtain certain information, including pricing, volume requirements, and general terms and conditions.
[25] The evidence shows that Bijouterie Tiara supplied gold to Quebec Fonte before Mr. Nikolopoulos decided to do business with the Appellant. Mr. Bishara claims he decided not to do business with Quebec Fonte because of pricing, security and travel concerns. Mr. Nikolopoulos also claims that he stopped doing business with Quebec Fonte for similar reasons. However, the evidence suggests that Mr. Nikolopoulos had a different motive for abandoning his activities with Quebec Fonte. He and his company, Bijouterie Tiara, and Quebec Fonte were already, or on the verge of being, under audit by Revenu Québec with respect to their gold transactions when Mr. Bishara and Mr. Nikolopoulos first discussed doing business together.
[26] The evidence shows that Mr. Nikolopoulos was informed of Bijouterie Tiara’s audit on October 13, 2011.[10] I infer that Quebec Fonte was already under audit by that date, as Bijouterie Tiara’s audit report states that Mr. Nikolopoulos’ company, which was a supplier of gold to Quebec Fonte, was selected for audit on the basis that it had a relationship with several businesses which were believed to have participated in a false invoicing scheme.[11] The audit report also indicates that Quebec Fonte was under audit as at the date of the report.[12] These events preceded the first transaction between the Appellant and Bijouterie Tiara by many months.
[27] The Appellant was incorporated on March 19, 2012. On April 23, 2012, it obtained registration certificates for GST and QST. It began operating the following day.
[28] Mr. Bishara testified that he placed ads in several newspapers beginning on May 11, 2012 to recruit suppliers of Scrap Gold. Ads were also placed online. After initially telling the auditor assigned to audit the Appellant that all of the Appellant’s alleged suppliers were recruited through those ads, Mr. Bishara changed his answer at trial after hearing Mr. Nikolopoulos testify that he introduced Mr. Al‑Romhein to the Appellant. Mr. Al‑Romhein was the sole shareholder of 9261‑1201 Québec Inc. (“9261 Quebec”), which became the Appellant’s largest alleged supplier of Scrap Gold.
[29] Mr. Bishara testified that the Appellant’s alleged suppliers were asked to satisfy certain criteria before the Appellant would agree to do business with them. For example, he told prospective suppliers that he insisted on receiving an invoice for all purchases. Mr. Bishara also required that the alleged suppliers provide a copy of their “incorporation documents”, proof of GST and QST remittances, and a copy of photo identification. Mr. Bishara would also obtain a copy of the alleged supplier’s information from the website of the Registraire des entreprises du Québec (“REQ”) and regularly validate their GST and QST numbers with the tax authorities. If an alleged supplier’s sales tax number was shown as inactive, Mr. Bishara claimed, the Appellant would not do business with that supplier.
[30] According to Mr. Bishara, the Appellant would purchase Scrap Gold as follows. Mr. Bishara would receive a phone call or text message from one of the Appellant’s alleged suppliers indicating how much Scrap Gold the supplier had available to sell. The amount of gold was expressed in dollar value, not units of weight. Mr. Bishara explained that, before agreeing to purchase the gold, he would confirm and reserve a spot price using a mobile application called Gold Tracker. To protect the Appellant from fluctuations in the price of gold, Mr. Bishara would hedge by confirming a spot price with Diverse Equities immediately after booking a price with the alleged supplier. Mr. Bishara testified that the spot price he quoted to Diverse Equities would virtually always be accepted. Once the spot price was agreed upon with Diverse Equities, Mr. Bishara explained, the Appellant’s alleged supplier had a commitment to deliver the gold and the Appellant in turn had an obligation to deliver the gold to Diverse Equities.[13]
[31] According to Mr. Bishara, later that day, the alleged supplier would present itself at the Appellant’s place of business with the agreed amount of Scrap Gold. The gold would generally be delivered by all of the alleged suppliers in plastic Ziploc bags separated by carat, with the weight of the contents indicated on each bag. When the gold arrived, Mr. Bishara would check the contents of the bags and make a photocopy of them. The Appellant produced photocopies of substantially all of the bags of Scrap Gold that it purchased during the relevant period.
[32] On most occasions, Mr. Bishara or his cousin Carl Bishara signed the ostensible supplier invoices and took possession of the gold.
[33] Mr. Bishara would package the Scrap Gold in a FedEx box that would be picked up and delivered to Diverse Equities on the following business day. Mr. Bishara would include a copy of the Appellant’s invoice in the box, and would email a copy to Mr. Wright so that he knew what he was getting in advance. Diverse Equities would pay Mr. Bishara by wire transfer the day it received the gold.
[34] The Appellant earned a profit by purchasing Scrap Gold at a significant discount from the spot price of gold, which was used to determine the purchase price of the Scrap Gold according to its gold content (10 carat, 14 carat, etc.). It resold the gold to Diverse Equities at a pre‑agreed price per unit of weight, which generally reflected a discount of approximately 7% on the spot price of gold. Mr. Bishara testified that the discount received by the Appellant from its alleged suppliers was agreed upon with each of the alleged suppliers individually.[14]
[35] Mr. Bishara’s explanation is inconsistent with the evidence. The evidence shows that the Appellant consistently bought Scrap Gold at the same discounted value, regardless who supplied the gold.[15] This suggests that the discount was dictated to the alleged suppliers rather than the other way around. The Appellant received a further discount from its alleged suppliers depending on the method of payment it used. The evidence shows that the Appellant was granted a discount of 0.75% when it paid by bank draft or 2.25%[16] when it paid cash, on top of the 9.5% discount it received as a base discount.
[36] All of the bank drafts used for payment were cashed by the Appellant’s alleged suppliers at the same Chèque Express (“Cheque Express”) cheque‑cashing branch located in Laval, Quebec. Cheque Express charged the Appellant’s alleged suppliers 2.25% to cash the Appellant’s bank draft. According to Mr. Bishara, this is why they were willing to offer the Appellant a 2.25% discount when it paid the purchase price for the gold in cash instead of by bank draft. Approximately 50% of the Appellant’s Scrap Gold purchases were paid in cash.
[37] Mr. Bishara claims he negotiated a higher discount for cash payments after he had learned that the Appellant’s alleged suppliers were paying Cheque Express a 2.25% transaction fee for its cheque‑cashing services. I note that Mr. Bishara’s oral evidence appears to be inconsistent with the documentary evidence. The documentary evidence shows that the Appellant initially purchased gold from Bijouterie Tiara for cash. All purchases from April 24, when the parties completed their first transaction, to May 3 were paid for in cash. The Appellant received a cash payment discount on each of those transactions. It was only on May 4 that the Appellant paid Tiara by bank draft for the first time. Therefore, Mr. Bishara must have known in advance of Bijouterie Tiara’s preference for cash.
[38] Mr. Bishara testified that the Appellant changed its practice of cash payments when the Appellant’s bank manager indicated that he was uncomfortable with the Appellant’s large cash withdrawals. Apparently he informed Mr. Bishara that he should opt for a safer method of payment. Mr. Bishara testified that this advice made him reflect on the wisdom of making large cash withdrawals without proper security arrangements. These events led Mr. Bishara to set up an account with Brinks for secure delivery of cash.
[39] The Appellant paid an amount shown as GST and QST on all of its purchases from its alleged suppliers and claimed ITCs for the GST and QST that it paid. The Appellant’s only client, Diverse Equities, was located in Calgary, Alberta. Initially Mr. Bishara was told that the Appellant did not have to collect QST from Diverse Equities because the gold was being exported to Alberta, where Diverse Equities was located. Mr. Bishara testified that in July 2012 Revenu Québec advised him that the Appellant should collect QST from Diverse Equities because Diverse Equities took possession of the gold in Quebec.
[40] After Mr. Bishara informed Mr. Wright that the Appellant would now be collecting QST from Diverse Equities, Mr. Wright arrived in Montreal to discuss how that would affect Diverse Equities’ business. It was the first time the two had met face‑to‑face. Mr. Bishara explained that at the time of their meeting the Appellant still had not received the QST refund it was counting on. Charging QST to Diverse Equities worked out to the Appellant’s advantage because it improved its cash flow. The Appellant would be able to offset the QST it paid to its alleged suppliers against the QST it collected from Diverse Equities. It would then be up to Diverse Equities to obtain a refund from Revenu Québec because the Scrap Gold it acquired was exported from Quebec to Alberta. Mr. Wright agreed to this new arrangement.
[41] Thereafter, the Appellant began charging QST to Diverse Equities on all of its sales. This continued until October 2012, at which point Revenu Québec once again changed its advice. Nathalie Bouchard, who was auditing the Appellant, informed Mr. Bishara that the Appellant should stop collecting QST from Diverse Equities. No explanation was given as to why Revenu Québec changed its advice. I suspect that by July 2012 Revenu Québec had reason to believe that the Appellant had a role in the diversion of the funds allegedly collected as QST. I surmise that Revenu Québec preferred dealing with a taxpayer that resided in Quebec for the purpose of deciding a QST refund claim. Revenu Québec did however refuse Diverse Equities’ claim for the refund of the QST it had paid. Soon thereafter, the Appellant returned to its initial practice of collecting only the GST from Diverse Equities.
[42] During their meeting in Montreal, Mr. Bishara and Mr. Wright also discussed credit terms. In July 2012, as noted above, the Appellant was waiting on a refund from Revenu Québec. It did not have sufficient funds to continue its business. In order to maintain their prior level of business, Mr. Wright agreed to provide the Appellant with a revolving credit facility of up to $600,000 in exchange for a promissory note secured by a building owned in part by Mr. Bishara.
[43] Despite this access to a credit facility, the Appellant’s cash flow continued to deteriorate, in large part because Revenu Québec refused to process the Appellant’s refund claim. Given its lack of funds, the Appellant suspended its activities in November 2012.
[44] Several weeks later, towards the end of November 2012, Mr. Bishara learned that the Appellant’s tax numbers had been revoked by Revenu Québec. This prompted Mr. Bishara to hire counsel with a view to having the Appellant’s tax numbers reinstated. On April 5, 2013, the Quebec Superior Court ordered Revenu Québec to reissue the Appellant’s QST registration certificate. The Federal Court issued a similar order on April 15, 2013 in respect of the Appellant’s GST certificate. Both courts held that there was prima facie evidence that the Appellant was carrying on a “commercial activity” as defined in the Act.
[45] The evidence shows that Ms. Bouchard, a Revenu Québec auditor, began her audit of the Appellant on August 23, 2012 following receipt from her manager, Serge St‑Laurent, of an internal Revenu Québec document drafted by Véronique Roy. The document mentioned that the Appellant was suspected of receiving and/or providing so‑called “accommodation invoices” and called for a more thorough review of its activities. Ms. Bouchard testified that Ms. Roy suggested that an audit be conducted because several of the Appellant’s alleged suppliers had not filed tax returns or remittances in several years, had no financial statements, or had had their sales tax numbers revoked.
[46] On August 28, 2012, Ms. Bouchard made a surprise visit to the Appellant’s place of business to conduct her initial audit interview. She was accompanied by Karine Giroux, the auditor who was responsible for the audit of 9261 Quebec, the Appellant’s largest alleged supplier. Ms. Bouchard testified that surprise visits are generally recommended for audits in the gold industry and whenever “accommodation invoices” are suspected. It permits the tax authorities to uncover situations where products and services are not actually supplied, but exist only on paper.
[47] Ms. Bouchard and Ms. Giroux were greeted by the Appellant’s bookkeeper, who led the auditors to an administrative office adjacent to one of Mr. Bishara’s pharmacies. Mr. Bishara arrived approximately fifteen minutes later and provided them with a room to work in. Ms. Bouchard asked Mr. Bishara to provide purchase invoices, sales invoices, and bank statements for the period from April 23 to July 31, 2012 that she and Ms. Giroux had reviewed.
[48] During Ms. Bouchard’s surprise visit, 9261 Quebec’s representative, Mr. Al‑Romhein, arrived to sell Scrap Gold. Mr. Bishara introduced Mr. Al‑Romhein to Ms. Bouchard and explained that she was an auditor with Revenu Québec. Mr. Bishara testified that Mr. Al‑Romhein had brought bags of gold with an invoice, as he usually would. Mr. Bishara weighed the gold and compared that weight to the weight on the invoice. Mr. Bishara paid Mr. Al‑Romhein, packaged the gold in a FedEx box, and placed it on a counter until it was picked up by a FedEx driver. Ms. Bouchard witnessed the delivery of the gold and the Appellant’s payment.
[49] On September 18, Ms. Bouchard called Mr. Bishara to schedule a follow‑up visit, which took place a week later on September 25, 2012. The purpose of the visit was, among other things, to obtain information on the Appellant's alleged suppliers. At this meeting Ms. Bouchard was once again accompanied by Ms. Giroux. Ms. Bouchard asked Mr. Bishara how he had met the Appellant's four alleged suppliers. She claims that she was told that they were all recruited through newspaper ads.[17] Ms. Bouchard testified that she and Ms. Giroux questioned how the Appellant's four alleged suppliers could have been recruited through newspaper ads when such ads only began appearing on May 11, 2012, several weeks after the Appellant had started its operations with Bijouterie Tiara. At that time, while Ms. Bouchard had good reason to believe that Bijouterie Tiara was not recruited as a supplier through advertisements, she did not know that, in addition, Mr. Nikolopoulos had introduced Mr. Al‑Romhein to the Appellant. At best, only two of the Appellant’s alleged suppliers could have responded to the Appellant’s ads, contrary to what she testified Mr. Bishara claimed to be the case.
[50] During the course of the meeting, Ms. Bouchard asked Mr. Bishara to let her witness another transaction if during her audit visit an alleged supplier happened to come to sell Scrap Gold. Mr. Bishara advised her that an alleged supplier had just completed a transaction with the Appellant. Mr. Bishara offered to replay for Ms. Bouchard the video footage from a security camera that had captured images of the individual acting on behalf of the alleged supplier. Ms. Bouchard declined Mr. Bishara’s offer. She testified that witnessing the transaction would not have changed the results of her audit.
[51] During her visit, Ms. Bouchard noticed that four bags of gold were stored in a filing cabinet. Mr. Bishara informed Ms. Bouchard that they were bags of Scrap Gold that he had forgotten about. He said that it would happen on occasion, especially when someone showed up unexpectedly.
[52] During a meeting held on February 4, 2013 with the Appellant’s counsel, Mr. Bishara informed Ms. Bouchard that the gold in the bags found in the cabinet had been purchased from the public. Ms. Bouchard testified that this was the first time Mr. Bishara had mentioned that the Appellant bought gold from the general public. On the two previous occasions they had met, Mr. Bishara allegedly told Ms. Bouchard that the Appellant did not deal with the general public. Ms. Bouchard later traced the gold that was found in the cabinet to a gold purchase by the Appellant from Bijouterie Palo on August 23, 2012. Ms. Bouchard’s testimony on this point was not challenged by the Appellant.
[53] Before conducting her audit, Ms. Bouchard spoke with her audit team and solicited advice from others at Revenu Québec. The auditors responsible for auditing the Appellant’s alleged suppliers all arrived at the same conclusion. The individuals behind the Appellant’s alleged suppliers did not have the financial resources, experience and infrastructure to supply large quantities of gold to the Appellant.
[54] Ms. Bouchard testified that her concern did not lie as much with the Appellant’s client as with its alleged suppliers. She explained that, while she could not be certain that the gold sold by the Appellant to Diverse Equities was eventually melted at the Royal Canadian Mint, her priority was determining whether or not the Appellant’s alleged suppliers were the true suppliers of the Scrap Gold. She concluded that they were not.
B. Tricom and Diverse Equities [55] Mr. Giuseppe Santella, a driver with FedEx, was called as a witness by the Appellant. He testified that he would initially receive requests once or twice a week for pick‑ups at the Appellant’s place of business. Mr. Santella informed the Court that the Appellant would ship packages in small or medium‑sized FedEx boxes weighing several kilos each, and that sometimes more than one box was shipped per day. He explained that the boxes were always for shipment to an address in Calgary, Alberta. Although he did not know it initially, Mr. Santella testified that the boxes he picked up contained used jewelry in plastic bags. I attach significant weight to Mr. Santella’s evidence and accept that Scrap Gold was indeed shipped from the Appellant to Diverse Equities as the Appellant claims. I found him to be a credible and reliable witness. He is an independent third party who has no interest in the outcome of this matter.
[56] Mr. Wright testified that Diverse Equities regularly received shipments of FedEx boxes from the Appellant. This was corroborated by Alexander Cook, a Diverse Equities employee who also testified at trial. Mr. Wright explained that he or one of his employees would inspect the boxes upon receipt. Mr. Wright explained that the boxes received from the Appellant contained bags of Scrap Gold separated by carat. The bags would be weighed to verify the weight indicated on the bags and on the Appellant’s invoice. The gold would then be inspected for fake jewelry through visual analysis and by performing acid tests. Mr. Wright would only make adjustments to amounts paid to the Appellant if there was a significant discrepancy in weight or if fake pieces of gold were spotted. According to Mr. Wright, this rarely occurred.
[57] After being examined, the Scrap Gold would be re-bagged and sent to Albern Coins using the Appellant’s invoice number for tracking purposes. Each lot of gold sent to Albern Coins would be identified using the corresponding invoice number from the Appellant.
[58] Mr. Wright testified that Diverse Equities would book spot prices and ship Scrap Gold in increments of 50 ounces. For example, if the Appellant sold 85 ounces of Scrap Gold to Diverse Equities on a given day, the latter would lock in a price for 100 ounces of gold with Albern Coins and wait for a subsequent shipment from the Appellant to complete the order. Ian Laing, the president of Albern Coins and its parent company, Gatewest Coin Ltd. (“Gatewest”), testified that Diverse Equities sold Scrap Gold to Albern Coins throughout 2012 but that there was a noticeable increase in volume from April to October, which corresponds to the period during which the Appellant carried on its activities.
[59] The Scrap Gold received by Albern Coins would subsequently be sent to the Royal Canadian Mint for refining under Gatewest’s account. Albern Coins would pay Diverse Equities prior to receiving the assay report from the Mint. After the completion of the refining process, Albern Coins would forward the assay report to Diverse Equities and hold the latter responsible for any shortages in the net amount of pure gold.
[60] Mr. Laing corroborated all of Mr. Wright’s evidence on the circumstances surrounding their business dealings with