Buday v. The Queen

Buday v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-06-04
Neutral citation
2019 TCC 128
File numbers
2013-2091(GST)I, 2014-1493(GST)I, 2016-4837(IT)G, 2016-839(GST)I
Judges and Taxing Officers
David E. Graham
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Dockets: 2013-2091(GST)I 2014-1493(GST)I
2016-839(GST)I
2016-4837(IT)G
BETWEEN:
PAUL BUDAY O/A BUDAY AUTO SALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeal of Glen Buday (2016-4831(IT)G) on May 29, 30, 31 and June 1, 2018 and May 6, 8, 9, 10, 13 and 14, 2019, at Thunder Bay, Ontario
Before: The Honourable Justice David E. Graham
Appearances:
Agent for the Appellant:
Glen Buday
Counsel for the Respondent:
Paul Klippenstein
JUDGMENT
1. The appeal of the Appellant’s reporting periods from October 1, 2006 to December 31, 2008 is allowed and the matters referred back to the Minister of National Revenue for reassessment on the basis that net tax be reduced by the following amounts in the following reporting periods:
Reporting Period
Reduction in net tax
Oct. 1 – Dec. 31, 2006
$155
Jan. 1 – Mar. 31, 2007
$171
Apr. 1 – Jun. 30, 2007
$416
Jul. 1 – Sep. 30, 2007
$416
Oct. 1 – Dec. 31, 2007
$665
Jan. 1 – Mar. 31, 2008
$496
Apr. 1 – Jun. 30, 2008
$1,157
Jul. 1 – Sep. 30, 2008
$182
Oct. 1 – Dec. 31, 2008
$328
2. The appeal of the Appellant’s reporting periods from January 1, 2009 to December 31, 2011 is allowed and the matters referred back to the Minister for reassessment on the basis that net tax be reduced by the following amounts in the following reporting periods:
Reporting Period
Reduction in net tax
Oct. 1 – Dec. 31, 2009
$2,219
Apr. 1 – Jun. 30, 2010
$194
Oct. 1 – Dec. 31, 2010
$506
Oct. 1 – Dec. 31, 2011
$2,030
3. The appeal of the Appellant’s reporting period from October 1 to December 31, 2013 is allowed and the matter referred back to the Minister for reassessment on the basis that net tax be reduced by $2,799.
4. The appeals of the Appellant’s 2006 to 2011 tax years are allowed and the matters referred back to the Minister for reassessment on the basis that:
(a) the Appellant’s only business income in 2006 was his $59,947 in income from the partnership;
(b) the Appellant’s only business income in 2007 was his $60,177 in income from the partnership;
(c) the Appellant’s only business income in 2008 was his $107,800 in income from the partnership;
(d) the Appellant’s only business income in 2009 was his $33,600 in income from the partnership;
(e) the Appellant’s only business income in 2010 was his $84,421 in income from the partnership; and
(f) the Appellant’s only business income in 2011 was his $72,711 in income from the partnership.
5. The parties shall have 30 days from the date hereof to reach an agreement on costs, failing which the parties shall have a further 30 days to serve and file written submissions on costs and the parties shall have yet a further 10 days to serve and file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing time limits, the parties shall bear their own costs.
Signed at Ottawa, Canada, this 4th day of June 2019.
“David E. Graham”
Graham J.
Docket: 2016-4831(IT)G
BETWEEN:
GLEN BUDAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of Paul Buday o/a Buday Auto Sales (2013-2091(GST)I), (2014-1493(GST)I), (2016-839(GST)I) and (2016-4837(IT)G) on May 29, 30, 31 and June 1, 2018 and May 6, 8, 9, 10, 13 and 14, 2019, at Thunder Bay, Ontario
Before: The Honourable Justice David E. Graham
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Paul Klippenstein
JUDGMENT
1. The appeals of the Appellant’s 2006 to 2011 tax years are allowed and the matters referred back to the Minister of National Revenue for reassessment on the basis that:
(a) the Appellant had no employment income in 2006, 2007, 2008, 2009, 2010 and 2011;
(b) the Appellant’s only business income in 2006 was his $59,947 in income from the partnership;
(c) the Appellant’s only business income in 2007 was his $60,177 in income from the partnership;
(d) the Appellant’s only business income in 2008 was his $107,800 in income from the partnership;
(e) the Appellant’s only business income in 2009 was his $33,600 in income from the partnership;
(f) the Appellant’s only business income in 2010 was his $84,421 in income from the partnership; and
(g) the Appellant’s only business income in 2011 was his $72,711 in income from the partnership.
2. The appeal of the Appellant’s 2012 tax year is dismissed.
3. The parties shall have 30 days from the date hereof to reach an agreement on costs, failing which the parties shall have a further 30 days to serve and file written submissions on costs and the parties shall have yet a further 10 days to serve and file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing time limits, the parties shall bear their own costs.
Signed at Ottawa, Canada, this 4th day of June 2019.
“David E. Graham”
Graham J.
Citation: 2019 TCC 128
Date: 20190604
Dockets: 2013-2091(GST)I 2014-1493(GST)I
2016-839(GST)I
2016-4837(IT)G
BETWEEN:
PAUL BUDAY O/A BUDAY AUTO SALES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2016-4831(IT)G
AND BETWEEN:
GLEN BUDAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Graham J
[1] Buday Auto Sales is a used car dealership located in Thunder Bay, Ontario. Paul Buday and his son, Glen Buday, both work in the business. The business was registered for GST/HST purposes under Paul Buday’s name. The GST/HST returns indicated that the business had approximately $1,600,000 in sales from 2006 to 2011. However, during those years neither Paul Buday nor Glen Buday reported the business’ activities in their income tax returns. The Minister of National Revenue audited the business. As the business did not follow any discernable method of bookkeeping, the Minister used a number of different alternative assessment techniques to determine the business’ income and net tax. The Minister concluded that the business had failed to collect approximately $41,000 in GST/HST, had inappropriately claimed approximately $56,000 in input tax credits and had failed to report more than $1,000,000 in income.
[2] It was unclear to the Minister who the true owner of the business was. Therefore, to be safe, the Minister assessed both Paul Buday and Glen Buday for the entire alleged unreported income. Since Paul Buday was the person registered for GST/HST, the Minister reassessed Paul Buday for the alleged discrepancy in the business’ net tax. The Minister imposed gross negligence penalties in respect of all of these adjustments.
[3] In a separate audit, the Minister also reassessed Paul Buday to deny approximately $11,000 in input tax credits for the business’ reporting period from October 1 to December 31, 2013. The Minister also reassessed Glen Buday to recharacterize his 2012 employment income as business income.
[4] The Appellants have appealed all of these reassessments.
A. Issues
[5] There are four main issues in these appeals:
(a) What was the business’ income and net tax in the years and reporting periods in question?
(b) To the extent that there was unreported income, who should have reported it?
(c) Were any of the years or reporting periods statute barred?
(d) Were the gross negligence penalties justified?
[6] There are also some minor issues regarding the unrelated HST reassessment of the October 1 to December 31, 2013 reporting period and the reassessment of Glen Buday’s 2012 tax year.
B. What was the business’ income and net tax?
[7] The Minister determined that the business had unreported income of $120,742, $129,497, $228,098, $110,432, $234,472 and $245,329 in 2006 to 2011 respectively.
[8] The Respondent called the GST/HST auditor, Ken Kemp, as a witness. I found Mr. Kemp to be credible and open minded. It was clear to me from his testimony that he had made significant efforts to determine the business’ income and net tax as accurately as possible in difficult circumstances. When I questioned him regarding possible errors in his analysis, he considered my questions and, if my analysis had merit, readily accepted that changes should be made.
[9] Mr. Kemp testified that the Appellants did not provide him with any sort of bookkeeping records by which he could verify the business’ income or net tax. He also explained that Glen Buday refused to provide certain records and was unwilling to discuss various findings and issues with him. Mr. Kemp stated that, as a result of this lack of records and assistance, he had to use various alternative assessment techniques to determine the business’ income. He used a bank deposit analysis to determine the business’ income for 2006 to 2008 and two different types of projection analysis to determine its income for 2009 to 2011.
[10] There are two primary ways in which a taxpayer can challenge an alternative assessment technique. The first is to prove that his or her records were adequate and thus that his or her income should have been determined using those records. The second, and more common method, is to challenge the determination of income made by the Minister under the alternative assessment technique.
Inadequate records
[11] I find that the business’ records were inadequate. The business’ bookkeeping consisted of little more than a single handwritten spreadsheet for each quarter showing the total revenue from vehicle sales, the total cost of the vehicles sold and the total expenses. This limited bookkeeping appears to have been done on a cash basis. There are no worksheets or other bookkeeping records showing how the totals on the quarterly spreadsheets were determined. As a result, it is not possible to determine whether a given vehicle that was sold in the quarter was reported in revenue for the quarter or not. Similarly, it is not possible to determine whether a vehicle purchased in a given quarter was expensed in that quarter or in the quarter in which it was sold. It is also impossible to know whether a given expense was claimed and, if so, when it was claimed. Mr. Kemp explained that the documents he obtained from the Appellants do not support the totals in the Appellants’ handwritten spreadsheets.
[12] The Appellants maintained two bank accounts for the business. Neither Appellant had a personal bank account. The Appellants used the business’ accounts for any personal transactions. This blending of accounts makes separating business and personal transactions difficult.
[13] The Appellants testified that they kept the documents relating to each vehicle sale in a separate file folder. However, those file folders did not always contain the documents that the Appellants said they should. Furthermore, as is particularly apparent in 2010 and 2011, there were no folders at all for a significant number of vehicles that the business appears to have sold.
[14] Based on all of the above, I am satisfied that Mr. Kemp had no choice but to use alternative assessment techniques to determine the business’ income.
[15] The Appellants argued strenuously that Mr. Kemp should have used the business’ registration identification numbers (“RINs”) to gather information from the Government of Ontario regarding the vehicles that the business had sold. Glen Buday explained that all vehicle sales in Ontario have to be recorded with the government. He stated that all sales that the business made were registered using one of the business’ RINs and thus that, using those RINs, it would have been easy to obtain a list of all of the vehicles that the business sold in the years in question. Mr. Kemp testified that he tried several times to obtain this information from the province but was unsuccessful. The Appellants submitted that, in failing to obtain these records from the province, Mr. Kemp had failed to conduct a proper audit. I disagree.
[16] Canada has a self-reporting tax system. It was the Appellants’ responsibility to maintain proper books and records from which the business’ income could be determined. They did not. If they believed that the province had information which could assist them in the audit, it was up to them to get that information from the province and provide it to Mr. Kemp. Similarly, if they believed that this information would exonerate them, they should have provided it to me. I draw an adverse inference from their failure to do so. The Appellants clearly realized how important this information was and believed that it would definitively reveal that all of the vehicles sold in the business had been reported for GST/HST purposes. I conclude that they did not provide this information to me because, had they done so, it would have shown that the business sold more vehicles than it reported.
[17] Before moving on to review the techniques used by Mr. Kemp, I would like to clarify the basis upon which I approached this analysis. If the Appellants had been represented by counsel, I would have been reluctant to delve into Mr. Kemp’s calculations on my own. I would, instead, have relied on the Appellants’ counsel to direct me to any errors that Mr. Kemp made. However, since the Appellants were unrepresented and the calculations were very complex, I felt it would be unfair if I did not review Mr. Kemp’s calculations myself. That said, in doing so I looked for any errors in Mr. Kemp’s analysis, not just errors that benefited the Appellants. While fairness forced me to take a more active role in the trial, it did not remove the requirement that I maintain my impartiality.
[18] I will now turn to an analysis of the techniques that Mr. Kemp used.
Bank deposit analysis (2006 – 2008)
[19] For 2006 to 2008, Mr. Kemp used a bank deposit analysis to determine whether the business had unreported revenue. He verified the business’ expenses using traditional audit techniques.
[20] A bank deposit analysis is an alternative method of determining revenue that is sometimes used by the Minister when the Minister believes that a taxpayer’s records are inadequate. A bank deposit analysis generally involves asking a taxpayer to explain the source of each deposit to his or her bank account. The Minister includes in revenue any deposits that the taxpayer admits were revenue and any deposits whose source the taxpayer cannot adequately explain. If the taxpayer is able to satisfy the Minister that the deposit comes from a non-taxable source or has already been reported in the taxpayer’s income, the Minister ignores the deposit.
[21] I am satisfied that a bank deposit analysis was an appropriate alternative assessment technique for Mr. Kemp to use to determine the business’ revenue in 2006, 2007 and 2008. If anything, it was a conservative approach. A portion of the business’ sales were cash sales. There is a risk that such sales may not have been deposited into the business’ bank accounts. Any such sales would not have been detected by the bank deposit analysis. Thus, if anything, Mr. Kemp’s analysis may have underestimated the business’ revenue.
[22] Subject to the following, I am also satisfied with the manner in which Mr. Kemp conducted his bank deposit analysis.
[23] At the beginning of the trial, the Respondent conceded that Mr. Kemp had erroneously included Paul Buday’s pension payments as unexplained deposits in the deposit analysis. As these payments were being garnished, it was not immediately obvious that they were, in fact, pension payments. Paul Buday reported his pension income when he filed his tax returns so these deposits should not have been included in the revenue determined by the deposit analysis. This concession reduces the unexplained deposits by $2,100, $8,219 and $5,565 in 2006, 2007 and 2008 respectively.
[24] In a bank deposit analysis, after the auditor identifies an unexplained deposit, he or she needs to back out any sales tax associated with that deposit in order to determine the amount of the deposit that actually represents the revenue of the business. While Mr. Kemp realized that he needed to do this, he made several errors in doing so:
(a) First, he backed the sales tax out at the wrong step in the process. The purpose of a bank deposit analysis is to arrive at total revenue and compare it to the revenue reported by the taxpayer. Mr. Kemp took the total unexplained deposits and subtracted the reported revenue to arrive at what he believed was unreported deposits. He then backed the Ontario retail sales tax and GST out of that figure to arrive at unreported revenue. This methodology was inappropriate. Mr. Kemp should have taken the total unexplained deposits, backed the sales tax out of them to arrive at unexplained sales and then compared those to the sales that the business had reported.
(b) Second, Mr. Kemp used the wrong fraction to back out the sales tax in 2006 and 2007. [1]
(c) Third, Mr. Kemp forgot to account for sales to Status Indians. Sales of vehicles to Status Indians do not attract sales tax if the vehicles are delivered on a reserve. [2] Mr. Kemp determined based on a review of sales invoices that were provided to him that, on average, 24% of the business’ sales were to Status Indians. However, when backing out the tax, he did not account for the fact that tax would not have applied to 24% of the deposits. Similarly, when determining the GST collectible on the resulting unreported revenues, he did not account for the fact that 24% of the sales would not have attracted GST.
[25] I brought these errors to Mr. Kemp’s attention. He was quick to acknowledge the errors. I provided the parties with a spreadsheet on which I had calculated the adjustments I believed were necessary to correct the above errors and to implement the Respondent’s concession. [3] The Respondent accepts the methodology that I used to correct the errors. The Appellants did not point out any errors in my methodology.
[26] I made one other adjustment to Mr. Kemp’s calculations. The Respondent did not agree with this change. A bank deposit analysis will normally reveal unreported revenue for a given period. However, from time to time, it will also reveal that, in a given period, the taxpayer reported more revenue than was deposited to the bank. In other words, the result of the analysis for that period will be a negative number. Typically, the Minister ignores the result for these periods. In doing so the Minister often assumes that the taxpayer must have had cash sales that were not deposited to the account but were reported. While this is one possible explanation, it is equally possible that there was simply a timing difference between the deposits and the reporting. Funds earned in the period may have been deposited in a different period. A bank deposit analysis is a blunt tool. In my view, once the Minister chooses to use that tool, unless she can provide a logical explanation for why the results should be ignored for a given period, she is stuck with the results, both good and bad. Absent such an explanation, she cannot pick the results that benefit her and ignore those that do not.
[27] Once the appropriate adjustments were made to Mr. Kemp’s analysis, the results revealed that there were four quarters in which the reported revenue exceeded the bank deposits. The Minister has not satisfied me that these negative results should be ignored. Accordingly, I included them as part of my spreadsheet. While the Respondent takes the position that these quarters should not have been included, she accepts that, having made the choice to include them, my calculations are correct. The Appellants did not identify any errors in my calculations.
[28] Based on all of the foregoing, I determined that the business’ income should be reduced by $848 in 2006, $9,144 in 2007 and $12,498 in 2008 and that its net tax should be reduced by the following amounts in the following reporting periods:
Reporting Period
Reduction in net tax
Oct. 1 – Dec. 31, 2006
$155
Jan. 1 – Mar. 31, 2007
$171
Apr. 1 – Jun. 30, 2007
$416
Jul. 1 – Sep. 30, 2007
$416
Oct. 1 – Dec. 31, 2007
$665
Jan. 1 – Mar. 31, 2008
$233
Apr. 1 – Jun. 30, 2008
$1,157
Jul. 1 – Sep. 30, 2008
$182
Oct. 1 – Dec. 31, 2008
$328
[29] I should also discuss an adjustment that I have not made. Mr. Kemp treated all unexplained deposits to the business’ bank accounts as revenue from consignment sales. The Appellants objected to this treatment. Glen Buday testified that very few of the business’ sales were consignment sales. I am prepared to accept that the sales were consignment sales for two reasons. First, as set out in detail below, I did not find Glen Buday credible. Second, treating the unreported deposits as revenue from consignment sales was a generous approach that benefited the Appellants. If the Respondent is happy with the approach, I see no reason to change it. When a dealer sells a vehicle on consignment, he or she collects GST on the entire sales price but only pays income tax on the commission that he or she earns on the sale. In keeping with this treatment, Mr. Kemp assessed GST on the full amount of the unexplained deposits but only included a portion of the sale price of the vehicle in income. Mr. Kemp did not know how much commission would have been made on these unidentified vehicles. As a result, he made an assumption that it would have been 25% of the sales price. Thus, for every $100 of selling price, Mr. Kemp included $25 in the business’ revenue. Had Mr. Kemp treated the unreported sales as normal sales, I find that he would instead have included $71 in the business’ income. [4] At the same time, changing the sales to normal sales would have had no effect on the business’ net tax. The GST collectible would have remained the same and, without invoices supporting any GST paid on the purchase of the vehicles, no input tax credits would have been allowed. [5]
[30] Glen Buday was also adamant that the commission rate of 25% that Mr. Kemp assumed was inappropriate. He explained that there was no standard percentage commission on a consignment sale. He explained that he and the vendor agreed what the vendor would receive if the business were able to sell the vehicle. He testified that if the business sold the vehicle for more than that, then the business kept the excess. However, he emphasized that there were always expenses associated with preparing and selling the vehicle that had to be paid out of that commission. Glen Buday argued that because the price negotiated with the vendor, the price the vehicle was sold for and the costs of selling the vehicle were all variable, it was impossible to state a standard percentage that his commission represented. He submitted that the only way to accurately determine the profit on each consignment sale was to calculate it based on the facts of the specific sale. I agree. There is no doubt that the most accurate way of determining the business’ profits would have been to properly track and account for each sale and all expenses. The Appellants did not do that and their inadequate records did not allow Mr. Kemp to do so. In essence, the Appellants are arguing that they should not have to pay tax on their consignment profits because, due to their poor record keeping, it is too difficult to determine what those profits were. This is not how a self-reporting tax system works. In the circumstances, I am satisfied that the 25% commission used by Mr. Kemp in his calculations was appropriate. I am also satisfied that the method that Mr. Kemp used to determine expenses ensured that the business has received appropriate credit for the expenses that it incurred in making those consignment sales.
[31] Finally, I will turn to the expenses and input tax credits for 2006 to 2008. Mr. Kemp directed me to working papers in which he had identified the input tax credits that he had allowed for the reporting periods from October 1, 2006 to December 31, 2008. He explained that any expenses that he had allowed for input tax credit purposes had also been allowed for income tax purposes.
[32] A transposition error occurred in one of the working papers for the reporting period from January 1 to March 31, 2008. [6] I will adjust the error by allowing an additional $263 in input tax credits in that reporting period.
[33] Glen Buday complained that it was unfair that the Appellants were not provided with a list of the input tax credits that Mr. Kemp had denied. He stated that without such a list he did not know what he needed to attack. His complaints are baseless. The Appellants did not keep records. Mr. Kemp did not provide the Appellants with a list of the input tax credits he denied because Mr. Kemp does not know which input tax credits the business claimed and thus cannot possibly know which ones he denied.
[34] The Appellants did not provide me with any means by which I could determine whether the business was entitled to claim additional input tax credits or expenses. While they may not have had proper books and records when they were audited, they have had ample opportunity since then to review the documents that they had and prepare a properly supported list of input tax credits and expenses for the business. They have not done so. Glen Buday simply directed me to review all of the documents contained in the 19 volumes of documents that the Respondent had entered into evidence. That is not my role. I am neither the business’ bookkeeper nor its accountant. The Appellants know what documents they gave to Mr. Kemp. They know what input tax credits he allowed. If they thought that they should have been allowed an input tax credit in respect of some other documented expense, it would have been easy for them to provide me with that evidence. They did not. They clearly believed that someone – Mr. Kemp, the appeals officer, counsel for the Respondent, me, anyone but themselves – should do the work for them. They were repeatedly warned that this was not the case but they stubbornly persisted in their belief. In the absence of any evidence from the Appellants on this point, I find that the business was not entitled to any input tax credits or expenses beyond those already allowed. If this means that the business owes more tax than it otherwise would, the Appellants have no one to blame but themselves.
[35] Mr. Kemp’s audit was primarily focused on GST. As a result, when reviewing expenses for 2006 to 2008, he was not concerned with expenses such as wages, interest or insurance that do not attract GST. As a result, he did not make any adjustments for these types of expenses when calculating the business’ expenses for income tax purposes. I pointed this fact out to the Appellants and directed them to the working papers where Mr. Kemp had made adjustments for these types of expenses in 2010 and 2011. I suggested that they may want to consider whether similar expenses were incurred in 2006, 2007 and 2008 and, if so, point me to evidence supporting those expenses. They did not do so. I cannot understand why. It appears to me that it would have been relatively easy to do so and would likely have resulted in savings that would have justified the effort. Whatever the reason, I will not be making any adjustments in respect of these types of expenses in these years.
[36] Given the focus that the Appellants put on this issue in their oral testimony, I feel that I should address the issue of Paul Buday’s rent. Paul Buday rented an apartment in Scarborough, Ontario. The apartment was Paul Buday’s primary residence. Nonetheless, he claimed that the apartment was used purely for business purposes, that it contained an office and storage area where he stored parts and paperwork and that he should be entitled to deduct his entire rent. The vast majority of Paul Buday’s rent expense was clearly a personal expense and thus not deductible. Subsection 18(12) of the Income Tax Act sets out specific conditions that must be met for an individual to deduct a portion of his or her home workspace. Paul Buday’s use of the office and storage area do not meet these conditions. Thus, no part of his rent is a deductible expense.
Projection Analysis (2009)
[37] Mr. Kemp testified that he did not think that a bank deposit analysis was a reliable audit technique to use for the 2009 to 2011 tax years. He explained that he had begun his audit of the 2006 to 2008 tax years in early 2009. Thus, he felt that the Appellants had been forewarned and may have taken steps to hide income in a manner that a bank deposit analysis would not reveal. I understand Mr. Kemp’s concerns and accept his decision to use a different technique to determine the business’ income for 2009 to 2011.
[38] That said, I am not satisfied that the technique Mr. Kemp used in 2009 was appropriate. It appears to me that, when auditing 2009, Mr. Kemp had not yet fully developed the projection analysis method that he would ultimately use in 2010 and 2011. I am not satisfied that the approach he used in 2009 represents a fair estimate of the business’ revenue. I am particularly concerned that the technique was not able to properly account for year-end inventory.
[39] At the beginning of the trial, the Respondent made a concession regarding Mr. Kemp’s calculations for 2009. As I have not accepted Mr. Kemp’s methodology, I have ignored that concession.
[40] The fact that I do not accept the alternative assessment technique employed by Mr. Kemp in 2009 does not, however, mean that the 2009 reassessments should be reversed. It remains the case that there was a business and that neither of the Appellants reported that business’ income. While neither the Appellants nor the Respondent has presented me with a viable means of determining the income from the business, there is nonetheless ample evidence before me to allow me to do so.
[41] In the circumstances, I chose to use a very rough alternative assessment technique. To calculate the income from the business in 2009, I took the sales reported for GST purposes. I then backed out the amount that Mr. Kemp had determined had been paid out to vendors in consignment sales to arrive at total reported revenue. Mr. Kemp identified a number of vehicle sales that he believed were not reported in 2009. I am satisfied that three of those vehicles were unreported. Mr. Kemp determined an average sale price for reported vehicles sold by the business in 2009. I multiplied that price by the number of unreported vehicles and added the result to the total reported revenue. I compared that amount to the additional revenue assessed by Mr. Kemp and determined that a reduction was necessary. I determined the purchase price for the three unreported vehicles using calculations made by Mr. Kemp regarding 2010 and 2011. [7] I added these additional expenses to the reduction that I had already calculated to determine an overall income reduction of $43,233. I then made appropriate adjustments to net tax factoring in sales to Status Indians. I did not allow input tax credits on the three unreported vehicle purchases as I had not seen evidence that GST was paid on those purchases. [8] The resulting reduction in net tax was $2,129. I provided the parties with copies of my calculations. [9] During argument, I pointed out a small error that I had made. While the Respondent takes the position that Mr. Kemp’s technique was suitable, once the error in my calculations is fixed, the Respondent accepts that I have done my calculations correctly. The Appellants did not identify any additional errors in my calculations.
[42] The unreported income calculated using my technique is significantly lower than the unreported income for any of the other years. This is because my technique relies on the accuracy of the business’ GST returns and, as set out above and in the analysis of 2010 and 2011, the GST/HST returns for the other reporting periods understated supplies and overstated input tax credits. However, in the circumstances, short of trying to create books and records for the business, it is the best calculation that I can make with the evidence available to me.
[43] Finally, I will turn to the input tax credits and expenses for 2009. My comments from my analysis of 2006 to 2008 are equally applicable to 2009. I will not be making any adjustments to those amounts.
[44] Glen Buday testified that, starting in 2009, he rented a house near Thunder Bay. The house was his primary residence. He explained that it had a two car garage where he repaired vehicles. He claimed to have worked on four vehicles a week in the garage. He also testified that he had an office in the home and that he stored some inventory on the property. The Appellants submit that the business should be entitled to deduct all of Glen Buday’s rent. Clearly that is not the case. A significant portion of it is a personal expense. Furthermore, just as subsection 18(12) of the Income Tax Act prevented the deduction of any portion of Paul Buday’s rent, it also prevents the deduction of any portion of Glen Buday’s rent.
Projection Analysis (2010 – 2011)
[45] Mr. Kemp used a projection analysis to determine the business’ income and net tax in 2010 and 2011. In essence, he went through every document that he could locate for the business and noted every vehicle that was referred to in those documents. He looked at purchase documents, sales invoices, repair invoices, Kijiji ads, AutoTrader ads, car wash receipts, shipping receipts, parts receipts and many other documents. He then compiled a comprehensive list of all of the vehicles and documents in a spreadsheet. He sorted the list by vehicle type and then went about the painstaking exercise of trying to determine whether the documents for a given vehicle type were for one vehicle or multiple vehicles. Where the information was noted on the documents, he used the vehicle identification number, colour, trim level and number of doors to sort the vehicles. Where Kijiji ads were placed, he distinguished the vehicles using the ad reference numbers. If he was able to determine the purchase or sale date of a particular vehicle, he used that information in the sorting as well.
[46] An example will help clarify Mr. Kemp’s methodology. If Mr. Kemp reviewed a receipt for a Kijiji ad that showed that the business had advertised a blue 2000 Dodge Caravan for sale, he would add a 2000 Caravan to the spreadsheet and note its colour. If a repair receipt indicated that the business had repaired a 2000 Caravan, it would be added to the list as well. If the repair receipt described the Caravan as blue, Mr. Kemp would assume it was the same Caravan as the one that appeared in the Kijiji ad. If it described it as white, he would assume that it was a different vehicle.
[47] Ultimately, Mr. Kemp came up with two very large spreadsheets identifying 158 vehicles that he believed the business had been involved with in 2010 and 173 that he believed the business had been involved with in 2011. From these lists, Mr. Kemp identified 87 vehicles that he believed the business had not reported for GST purposes in 2010 and 90 vehicles that he believed the business had not reported for GST purposes in 2011. Mr. Kemp made an assumption that the business had 20 vehicles in inventory at year end and reduced the unreported vehicle figures in each year accordingly. Mr. Kemp then multiplied the reduced unreported vehicle figures by the average sale price of reported vehicles for the years to arrive at unreported revenue. For GST/HST purposes, he adjusted that unreported revenue to account for assumed sales to Status Indians and arrived at a figure for unreported taxable supplies. He then applied the applicable GST/HST rate to those supplies. Since HST was not introduced in Ontario until July 1, 2010, he assumed that half of the unreported taxable supplies for 2010 occurred in the first half of 2010. On the expense side, Mr. Kemp multiplied the number of unreported vehicles by the average purchase price of reported vehicles for the year. He made the generous assumption that GST/HST had been paid on those purchase expenses. [10]
[48] I find that the system used by Mr. Kemp was a reasonable way to calculate the business’ unreported income and net tax. The spreadsheets prepared by Mr. Kemp were both helpful and informative. In essence, Mr. Kemp’s analysis is based on the assumption that the business would not have washed, repaired or advertised a vehicle if that vehicle was not part of the business’ inventory. This was a reasonable assumption to make. Glen Buday confirmed as much numerous times in his testimony.
[49] The Appellants did not directly challenge Mr. Kemp’s methodology. Instead, they focused on challenging whether specific vehicles that Mr. Kemp had identified were, in fact, vehicles that had been sold by the business.
[50] At the beginning of the trial, the Respondent conceded that the number of unreported vehicles in 2010 and 2011 should be reduced by 14 and 18 respectively. However, as part of the 2010 concession, the Respondent argued that four vehicles that had appeared in Mr. Kemp’s list for 2009 should be moved to 2010. Thus, the net concession for 2010 was 10 vehicles.
[51] During the course of Glen Buday’s testimony, the Respondent conceded that an additional vehicle should be removed from the list in 2010. [11]
[52] During the course of Glen Buday’s testimony, he identified two occasions that a vehicle that Mr. Kemp had identified was actually two vehicles. As a result an additional two vehicles should be added to the list in 2010. [12]
[53] I have reduced the number of 2011 vehicles by one to account for a sale that the documents indicate resulted in a $315 loss. [13] Furthermore, as that loss was not otherwise accounted for by Mr. Kemp, I have allowed it.
[54] Glen Buday repeatedly complained that Mr. Kemp’s spreadsheets did not contain enough information for the Appellants to accurately identify what vehicles Mr. Kemp was referring to. He stated that Mr. Kemp should have indicated the vehicles’ colour, trim level, number of doors and vehicle identification number on his spreadsheets. I find these complaints to be baseless. I am satisfied that Mr. Kemp’s spreadsheets reflect the data that was available to him on the documents that he reviewed. If data is missing, it is because it was not on the documents. While there were some errors in the data on the spreadsheets, they were relatively minor and do not affect my overall view of the classifications.
[55] In his direct testimony, Glen Buday went through the spreadsheets in great detail. He spent almost a day and a half doing so. He identified many different vehicles that he said were duplicates of other vehicles or that had not been sold. All or substantially all of Glen Buday’s explanations were not supported by documentary evidence. Thus, for me to accept them, I must have found his evidence to be credible and reliable. I did not.
[56] The spreadsheets were not something that was sprung on the Appellants. They were entered into evidence during the first half of the trial. Glen Buday had almost a year to review them and compare them to the supporting documents. When the trial resumed and it became apparent that the Appellants had not properly reviewed the spreadsheets, I gave the parties a day off to allow the Appellants a final chance to properly prepare their evidence. Yet, despite being given all of these chances, Glen Buday still gave conflicting and shifting testimony regarding the vehicles. On a number of occasions, his testimony was directly contradicted by the information in the spreadsheets. Cross-examination de