Brasserie Futuriste de Laval Inc. c. La Reine

Brasserie Futuriste de Laval Inc. c. La Reine
Court (s) Database
Tax Court of Canada Judgments
Date
2006-10-19
Neutral citation
2006 TCC 503
File numbers
2001-3337(GST)G
Judges and Taxing Officers
Pierre R. Dussault
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2001-3337(GST)G
BETWEEN:
BRASSERIE FUTURISTE DE LAVAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on July 4 and 5 and December 15 and 16, 2005,
at Montréal, Quebec.
Before: The Honourable Justice Pierre R. Dussault
Appearances:
Counsel for the Appellant:
Alain Longval
Counsel for the Respondent:
Jean-Philippe Dumas and
Benoît Denis
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated April 11, 2000, and bears the number 9135003, for the period from May 1, 1994, to January 31, 1999, is allowed, without costs, and the assessment is referred back to the Minister of Revenue for reconsideration and reassessment on the basis that the Appellant's meal sales amounts must be limited to the amounts set out in the financial statements for the fiscal years from May 1, 1994, to April 30, 1998, and in the general ledger for the period from May 1, 1998, to January 31, 1999, and that the cover charge amounts must be reduced as a consequence of the reduction of the meal sales amounts, using the same formula that was used to make the assessment under appeal.
The penalties and interest must be adjusted as a consequence of the reduction of the meal sales and cover charge amounts.
The whole in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 19th day of October 2006.
"P.R. Dussault"
Dussault J.
Translation certified true
on this 19th day of February 2008.
François Brunet, Revisor
Citation: 2006TCC503
Date: 20061019
Docket: 2001-3337(GST)G
BETWEEN:
BRASSERIE FUTURISTE DE LAVAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] This is an appeal from an assessment made under Part IX of the Excise Tax Act for the period from May 1, 1994, to January 31, 1999.
[2] By this assessment, the Goods and Services Tax (GST) reported by the Appellant was increased by $325,480.30 and the input tax credit (ITC) was increased by $10,647.79, which represents a $314,832.51 adjustment to the net tax. The assessment also includes a $52,428.74 penalty, $38,818.36 in interest and a $78,708.13 penalty for gross negligence, for a total of $484,787.74.
[3] The additional ITC amount is not in dispute. Furthermore, the Appellant admits that $79,604.44 in net tax was collected but not remitted (Exhibit A‑10). In addition, Marc Bélanger, the Appellant's expert, established that the Appellant owed an additional net amount of $14,542 in GST (Exhibit A‑28, at pages 6 and 7).
[4] The Appellant operates a pub, which is also referred to as a restaurant pub, on Labelle Boulevard in Ste‑Thérèse‑de‑Blainville, Quebec. The Appellant's shareholders are Raymond and Michel Légaré.
[5] The Appellant purchased the pub in 1989. Its fiscal years begin on May 1 and end on April 30.
[6] The audit of the Appellant's business was done by Hélène Morand. It began in October 1998. From the outset, Ms. Morand noticed discrepancies between the tax that was reported, and the tax that should have been reported based on the sales stated in the financial statements (Exhibit I‑7).
[7] As far as the GST is concerned, the total discrepancy for the audited period, factoring in the additional ITCs that were allowed, is $79,604.44. As stated above, the Appellant is not challenging this discrepancy between the GST that was reported, and the GST that should have been reported having regard to the financial statements that were filed.
[8] In order to begin her audit, Ms. Morand obtained information from beer breweries and the Société des alcools du Québec (SAQ) concerning all the Appellant's alcoholic beverage purchases. I should immediately point out that the Appellant has admitted to Ms. Morand's determinations regarding both the quantities and costs of those purchases.
[9] On October 7, 1998, Ms. Morand and a colleague paid a surprise visit to the Appellant's establishment and met with Michel Légaré, one of the shareholders. Mr. Légaré gave them some explanations regarding the operation of the pub, and, in particular, the tracking of sales and the sales reports that the business produced. The Appellant did not keep any copies of bills for food sales. The Appellant used the "Squirrel" computer system and software. The only report produced by the computer was a report which each employee obtained at the end of his or her shift and which enabled the employees to keep track of their sales. The report stated the employee's overall sales and the amounts paid by credit card and in cash. The report was attached to the cash that each employee remitted in an envelope at the end of his or her shift. It provided no details regarding the items sold, the unit prices or the quantities sold. Based on the information obtained by Ms. Morand during her first visit, there were no reports based on the individual bills either.
[10] As far as alcoholic beverages were concerned, each waiter or waitress produced a handwritten report setting out the quantities sold, the prices, and the total. Bottled beer and wine sales were recorded by the unit, and special meters were used to keep track of the sales of draft beer and wine on tap. The same person could produce more than one report at the end of his shift because employees had to produce a report each time the prices changed in order to take account of the many promotions. Michel Légaré submitted a blank version of one of the reports (Exhibit I‑9) to Ms. Morand. According to Mr. Légaré, none of these daily reports of alcoholic beverage sales which the employees filled out had been kept; they were all destroyed. Since Ms. Morand considered these reports to be the proof of alcoholic beverage sales, and since no bills were handed to patrons, Ms. Morand said that she asked Michel Légaré to keep them at her very first meeting with him.
[11] At the same meeting, Mr. Légaré also gave Ms. Morand a copy of a menu printed on a paper place mat, based on which Ms. Morand confirmed that the 200% markup that she used to determine the dollar amount of food sales was valid.
[12] Having obtained his name, Ms. Morand contacted Robert Richard, the Appellant's accountant, on October 21, 1998, to ask him to prepare all the documents necessary for her audit in connection with the fiscal year from May 1, 1997, to April 30, 1998, namely the general ledger, the general journal, the spreadsheet, the bank statements, the purchase invoices and the vouchers used to track sales — in short, all the relevant accounting documents along with the GST and QST returns.
[13] Ms. Morand contacted Mr. Richard again one week later to set an appointment for November 5, 1998, in order to begin her audit.
[14] On November 4, 1998, Ms. Morand returned to the pub to ensure that Michel Légaré was actually keeping the detailed reports of alcoholic beverage sales filled out by the employees, as she had requested that he do upon her first visit to the business. She says that Michel Légaré told her that his father, Raymond Légaré, had thrown them all out. Ms. Morand emphasized the importance of keeping these reports, repeated her request that they be kept, and notified Michel Légaré that she would be returning to ensure that they were indeed being kept.
[15] Thus, when Ms. Morand commenced her audit at the office of Mr. Richard, the accountant, on November 5, 1998, she had no reports concerning sales of alcoholic beverages, and no detailed reports concerning meal sales. Indeed, on December 1, 1998, letters of requirement (Exhibits I‑14 and I‑15) were sent to Raymond and Michel Légaré directing them to produce these documents.
[16] Ms. Morand explained that she began her audit at Mr. Richard's office with the accounting records for the period from May 1, 1997, to April 30, 1998, and the purchase invoices that were filed by month in envelopes. She said that she found invoices related to expenses paid by cheque and expenses paid in cash, and many — literally hundreds, in fact — of [TRANSLATION] "small papers and bits of place mats" referring to cash payments, including wage payments (Exhibits I‑11, I‑12 and I‑13). Indeed, some of these "bits of paper" bear no names or refer only to a first name or to the "DJ" or "doorman" and the amount paid. One of these documents adduced in evidence actually states very explicitly that the payment was made [TRANSLATION] "under the table" (Exhibit I‑13, at page 7.191).
[17] According to Ms. Morand, certain documents also show that the Appellant collected cover charges some nights, such as Thursdays, when there would sometimes be a singer or other entertainment, and that certain people were paid from these cover charges (Exhibit I‑11, at pages 7.162 and 7.164). These documents refer to cover charge receipts of $2,880 and $2,790, but other documents, namely weekly reports called [TRANSLATION] "deposit controls", state that these cover charges, called [TRANSLATION] "door revenues", consistently amounted to $2,000 per week over several weeks (Exhibit I‑28, at pages 35 to 38), whereas others, still, make no reference to income of this type (Exhibit I‑28, at pages 31 to 34). But these are not the only startling features of these sample reports. For example, reports concerning sales of alcoholic beverages state round figures such $1,500, $2,000, $2,500 or $3,500 (Exhibit I‑28, at pages 35 to 38). Two reports for two different one‑week periods are even more surprising; they contain exactly the same amounts for five different line items (Exhibit I‑28, at pages 33 and 34). Both of these reports were prepared by Raymond Légaré and were tendered in evidence, during his testimony, as examples of reports that he filled out and submitted to the accountant Robert Richard (Exhibits A‑3 and A‑4).
[18] As far as wages are concerned, Ms. Morand explained that she asked the accountant Mr. Richard for the payroll journal, and that Raymond Légaré came to meet her at Mr. Richard's office one day and showed her the journal but did not leave it with her so that she could inspect it. Thus, she could not verify what had been entered and what had not been. As for the other expenses that were paid in cash and entered on the "bits of paper", sometimes stapled together with a descriptive sheet (Exhibit I-12, at pages 7.168 and 7.169), Ms. Morand says that she was generally unable to reconcile them with the accounting records provided. Ms. Morand also said that she found invoices for personal expenses (Exhibit I‑12, at pages 7.172 and 7.185).
[19] In November 1998, Ms. Morand continued her audit on Mr. Richard's premises. In early December, she received the first daily reports prepared by employees in connection with the sale of alcoholic beverages over the course of approximately four weeks (Exhibit I‑9). Along with these reports, she received a few printouts from the BERG metering system that was used to track sales of spirits, despite having asked for all of them (Exhibits I‑16 and I‑17).
[20] Ms. Morand decided to extend the audit period by three months — that is to say, until January 31, 1999 — so that she could obtain all of the daily beverage sales reports and audit them for this period rather than for a single month. Having commenced her work and discovered what she called [TRANSLATION] "substantial discrepancies" in relation to the reported taxes, Ms. Morand also decided that her audit would cover a period commencing May 1, 1994.
[21] Ms. Morand always contacted Mr. Richard, the accountant, to obtain the documents necessary for her audit (Exhibits I‑17 and I‑18). Although the detailed meal sales reports produced with the Squirrel software were requested in a letter of requirement dated December 1, 1998 (Exhibits I‑14 and I‑15), Ms. Morand asked for them again on December 4 and December 22, 1998 (Exhibits I‑17 and I‑18). She explained that she did so because Michel Légaré told her that he had no detailed daily computerized food or meal sales reports generated by the Squirrel software, but gave her the name of the person responsible for the system for the pub, and said that this person had told him that such reports could be generated with the software. Ms. Morand was initially thinking of asking for 30 days' worth of such documents, but since they were equivalent to detailed bills for each day, at the end of the day she decided to limit her request to 10 days chosen at random for each of the periods of April 1997 and April 1998, because the material she had initially thought of requesting would have been too voluminous.
[22] Ms. Morand said that she was never able to obtain what she needed in order to verify exactly what food had been sold, and at what price. She explained that she obtained 26 daily computerized reports in the course of her audit, namely the reports from August 6 to August 31, 1996 (Exhibit I‑19). These reports only break down the total sales for each day by general category, such as breakfasts, salads/appetizers, main dishes, pizza, table d'hôte or desserts, and state the total food sales for the day, so it is, in fact, impossible to know what items were sold, how many of each item were sold, and at what price each item was sold. The daily reports also state the total amount of alcoholic beverage sales by category: beer, wine and spirits. Ms. Morand explained that she had initially been told that the computer system was used only for meal sales.
[23] Since Ms. Morand was unable to obtain the detailed bills or reports for food sales, she decided to reconstruct the sales by marking up the food purchases by 200%, minus 5% for losses, and she validated this method using documents that she was able to obtain. By applying this method, she determined that, for the fiscal year ended April 30, 1997, the $442,044 in purchases generated $839,884 in sales, whereas the Appellant reported only $547,672 in sales for that fiscal year.
[24] Moreover, according to the 26 computerized daily reports, the food sales for the 26 days of August 1996 totalled $61,232.31. Ms. Morand explained that by extrapolating this total to 365 days, she determined that the food sales must have amounted to roughly $859,000 for the fiscal year ended April 30, 1997 (Exhibit I‑20). In fact, this amount tended to confirm that the 200% markup that she used was not [TRANSLATION] "outside the norm."
[25] According to Ms. Morand, the 200% markup of food purchases was the minimum markup applied to the restaurant industry by the auditor groups specialized in restaurants (she was a member of such a group) to determine the amount of taxes due in cases where an agent did not have the requisite documents.
[26] Using the menu that Michel Légaré had given her upon her first visit to the pub, Ms. Morand also determined that the selling prices of certain easily determinable items were higher than the 200% markup on cost, and she made this determination in order not to penalize the Appellant by uniformly applying such a markup to food (Exhibits I‑10, and I‑24 to I‑28).
[27] Thus, since she was unable to obtain meal bills or other documents (computerized or otherwise) on the basis of which the items sold and the quantities and prices could be ascertained, Ms. Morand had to settle for a uniform markup rate because she was unable to determine a specific markup rate for each food item sold. Hence, the same markup of 200% minus 5% for losses was applied to the purchases for each year within the period from May 1, 1994, to January 31, 1999. This purchase amount was adjusted to take account of inventory variations. As I have stated, the total purchases for the entire period, as determined by Ms. Morand, were admitted to by the Appellant.
[28] For the last nine months, that is to say, from May 1, 1998, to January 31, 1999, Ms. Morand noticed that the meal revenues reported in the Appellant's books amounted to $764,562 (Exhibit I‑28, at page 24), while she herself had determined that those revenues amounted to $782,437.86 using the 200% markup on purchases less 5% (Exhibit I‑28, at page 1). Thus, the sales amount that resulted from the method used was close to the sales amount entered in the books for this nine-month period.
[29] The situation that Ms. Morand faced in connection with alcoholic beverage sales was different because, after making her second request to Michel Légaré, she finally obtained close to three months' worth of daily reports filled out by the employees, that is to say, the reports filled out from November 7, 1998, to January 31, 1999. As stated above, at the commencement of her audit, Ms. Morand had obtained the exact amount of the Appellant's purchases directly from breweries and the SAQ. This led to her finding that not all the Appellant's purchases from the SAQ were to be found in its financial statements. The SAQ purchases that were not entered into the statements were paid for in cash, and no ITCs were claimed in respect of them. As I also stated, additional ITCs were granted to the Appellant, who admitted that it made these additional purchases at the SAQ.
[30] In order to obtain a 14‑day sample, Ms. Morand used some 146 daily alcoholic beverage sales reports filled out by the Appellant's employees and submitted in respect of the period from November 7, 1998, to January 31, 1999. By choosing one day from each week on a rotating basis — for example, Monday the first week, Tuesday the second week, Wednesday the third week, and so on —she made sure that she chose two instances of each day of the week during this period, which was just short of three months in duration. For each of these days selected, she compiled the details regarding the sales of each item sold, as well as the price and quantity sold, in order to determine the average prices of beer sold in different forms and the average markup percentages for wine and spirits. This process made it possible to account for the frequent price variations in the course of a single day or from one day of the week to another, and thereby reflected the many promotions offered by the Appellant, such as happy hours, which was from 4:00 to 7:00 p.m. Once the average prices or markup percentages were calculated on the basis of this sampling, Ms. Morand reconstructed the sales for each fiscal year in the audit period on the basis of purchases made during each period, since she had no documents on the basis of which the average prices or markups for these periods could be determined. However, adjustments were made to take account of inflation during each fiscal year or part thereof (Exhibits I‑24 to I‑28).
[31] During her testimony, Ms. Morand provided a detailed explanation of all the calculations that were done, and said that, based on her experience, the markups that were decided upon were not too high. Thus, for example, she arrived at a weighted markup of 345.26% for liquor, but said that an "ordinary" restaurant would have a 500% markup.
[32] As mentioned above, Ms. Morand discovered some evidence suggesting that not all cover charge revenue, or [TRANSLATION] "door income", had been reported. She increased this revenue by the same factor by which she had increased alcoholic beverage and meal sales in relation to the amounts reported in the financial statements for the fiscal years that ended on April 30, 1996, 1997 and 1998, and the amounts posted to the general ledger for the period from May 1, 1998, to January 31, 1999 (Exhibits I‑25 to I‑28). The Appellant did not charge a cover during the fiscal year that ended on April 30, 1995 (Exhibit I‑24).
[33] After reconstructing the total sales, Ms. Morand determined the difference between the GST actually payable on the sales and the GST payable according to the financial statements, as well as the difference between the GST payable according to the financial statements and the GST reported by the Appellant (Exhibit I‑22).
[34] The draft assessment was submitted to Michel Légaré and to Mr. Richard, the Appellant's accountant, on June 29, 1999 (Exhibit I‑21).
[35] On cross-examination, Ms. Morand said that when she submitted her draft assessment, Mr. Richard reacted by saying: [TRANSLATION] "This is beyond reason." She explained that she had told them that the Appellant's accounting records were incomplete and that she was therefore going to have to use substitute techniques. She gave them 21 days to provide any new facts. She said that Mr. Légaré and Mr. Richard responded to this offer by saying that they were prepared to provide her with the requested documents from the Squirrel software; however, she said that no new documents were provided to her during that time, nor during the additional time which Mr. Richard requested in July and which she granted on account of the summer holidays. Ms. Morand said that she would have analyzed any documents provided, instead of using those substitute methods, which disclosed that approximately $3.3 million in sales had not been reported during the period from May 1, 1994, to January 31, 1999.
[36] Ms. Morand said that she used the documents that she was given, documents that covered 26 days in August 1996, to determine that the sales of meals over a 365‑day period would have been $859,607.43, but that this amount was not actually used, except to confirm her calculations, which were based on a 200% markup on food purchases, less 5% for losses (Exhibits I‑19 and I‑20).
[37] Counsel for the Appellant tried to make Ms. Morand admit that the Appellant cannot possibly have sold certain items for 200% of cost — for example, two hot dogs for $0.25 on Mondays, chicken wings for $0.25 a piece on Thursdays, pizza for $1.99 on Tuesdays, or all-you-can-eat fondue chinoise for $9.95 on Sundays. Ms. Morand admitted that not all items were necessarily sold at 200% of cost, and that the $0.25 for two hot dogs might be an illustration, but she said that, generally, she could not answer the question because, first of all, she never obtained the documents that would have made it possible to check into this, and secondly, she was never told about these reduced prices, and therefore proceeded to audit certain items based on the menu prices that she was provided with upon her first visit (Exhibit I‑10), having received no other documents. Thus, Ms. Morand was unaware of the reduced prices stated on Exhibits A‑23 and A‑24, as confirmed by the note at the bottom of the first page of Exhibits I‑24 to I‑28. When Ms. Morand was asked the hypothetical question whether the results would have been different if she had received all the required documents, she simply answered that she did not know, but that if those documents had been available, she would surely have used them instead of applying a 200% markup less 5% for losses.
[38] When counsel for the Appellant asked Ms. Morand why she did not account for thefts of drinks or food, Ms. Morand explained that she was never told about any thefts from the Appellant's establishment, was never given a shred of evidence of such thefts (such as police reports) and was not going to create any. In her submission, the 5% reduction of the meals markup took "complimentary items", losses and promotions into account. With respect to alcoholic beverage sales, she said that the average prices that she determined took all of these factors into account. As for her 14‑day sampling to determine the average drink prices, she noted that she used each day of the week twice over a roughly 12‑week period for which the Appellant had kept the relevant documents, which represented 16%, 17% or 18% of the days during this sole period that could be checked.
[39] On the subject of cover charges, Ms. Morand reiterated that since she was given no control documents or other records, she increased the amounts posted to the financial statements by the same factor applied to the total food and beverage sales, in order to increase those amounts in relation to those entered into the financial statements.
[40] With respect to her request for detailed meal sales reports produced with the Squirrel software, Ms. Morand explained that she ultimately requested detailed reports for only two ten-day periods selected at random from two different fiscal years, because it would have been unthinkable for her to ask for a copy of an individual bill or report for each transaction during the four years since the Appellant began using the software (Exhibit I-18). However, she said that, using such sampling, these detailed bills or reports, which she never obtained, would have allowed her to ascertain exactly what was sold and at what prices.
[41] Ms. Morand said that she had audited just one other pub, which was located near a university in Montréal. She said that the only difference that she noticed was that there were more parking spaces at the Appellant's pub in Ste‑Thérèse.
[42] The following people testified for the Appellant:
· Raymond Légaré, a shareholder of the Appellant,
· Robert Richard, a chartered accountant, and the Appellant's accountant until the year 2000,
· Annie Latreille, an employee of the Ministère du Revenu du Québec,
· Mario Gratton, the Appellant's accountant since the year 2000,
· Michel Légaré, a shareholder of the Appellant,
· Marc Bélanger, a chartered accountant and the Appellant's expert witness.
[43] In his testimony, Raymond Légaré discussed his experience in the tavern and pub business. Having worked weekends in taverns owned by his father and brother while employed on a permanent basis by Molson as a delivery person, he purchased his first pub in Laval through the Appellant in 1973. The pub was kept for about 15 years and then resold, and the Appellant purchased a new establishment in Dorval which was only kept for two years. The Appellant's current place of business was purchased in 1989. It was the interest shown by his son Michel that prompted Raymond Légaré to purchase the most recent pub, located on Labelle Boulevard in Ste‑Thérèse, not far from highways 13, 15 and 640. According to Raymond Légaré, the pub was patronized by businessmen from the neighbouring municipalities, as well as labourers, and students from Cégep Lionel‑Groulx, which was nearby.
[44] At the time of the purchase, beer sales were high, and the pub had roughly ten employees assigned to beer sales, and ten to fifteen other employees assigned to meal sales. Raymond Légaré explained that he had the experience needed to manage beer sales, but that, as to the two pubs he had previously purchased he had had problems and even losses involving food sales, so it was agreed that his son Michel would look after the management of that part of the business.
[45] According to Raymond Légaré, pub customers want fast and courteous service, good food and moderate prices, and he was able to offer this with competitive pricing thanks to the many promotions offered by his son Michel — promotions that attracted more customers and boosted alcoholic beverage sales. Mr. Légaré explained that in light of this, he did not expect profits on food sales, but simply asked that there be no losses on such sales. In his view, the 200% markup on food purchases which Ms. Morand used was not an option, because he had to keep his pricing competitive in view of the numerous restaurants that were opening in the area.
[46] Mr. Légaré said that as part of his management of the business, he tracked sales of the various alcoholic beverages using detailed reports submitted by the employees. He explained that he compiled the sales recorded on these reports on a daily sheet on which he also entered the expenses paid in cash, and that he submitted this compilation to Mr. Richard, the accountant. Mr. Légaré said that since all the sales were entered and accounted for, and the revenues were deposited, there was no way that the Department's allegation that some $3.5 million worth of sales[1] went unreported could be correct; in this regard, he noted that his numbers definitely were not used for such calculations. He said that even the amounts that he earned from the video poker machines installed in the pub were deposited as business income. Although he initially asserted that all the expenses were paid for by cheque, he later admitted that some purchases from the SAQ were made partly in cash, especially in the beginning, because he was not authorized to pay more than a certain amount by cheque. Thus, the remainder had to be paid in cash. This authorization limit imposed by the SAQ on cheques that it accepted was supposedly increased each year and eventually disappeared completely.
[47] Raymond Légaré also admitted that certain employees, such as students who worked when additional staff was needed — on Thursdays, for example — were also paid in cash. Mr. Légaré said that these cash payments were also entered as expenses.
[48] Counsel for the Appellant questioned Mr. Légaré about his assets and lifestyle. Counsel's reasoning behind these questions was that since the Appellant had been assessed for $3.5 million in unreported sales, some trace of these millions would have to be found somewhere. Mr. Légaré said that, apart from the pub, which actually had a $1 million liability secured by a hypothec, he had no other assets in Quebec or abroad. His family residence, which was purchased for $190,000, belonged to his spouse. Mr. Légaré said that he owns only one car, a 2002 Cadillac purchased with financing from the Royal Bank. As for travel, he testified that he normally takes a vacation in February, when he stays with his sister-in-law in Florida. He mentioned only one other trip, a promotional trip to Texas paid for by Molson.
[49] Counsel for the Appellant also questioned Raymond Légaré briefly about the Squirrel software which his son Michel brought into the pub in May 1996 to do accounting in relation to meal sales. Raymond Légaré simply said that each food item sold at the pub was recorded in the computer system.
[50] Counsel for the Appellant also dealt with the question of the search and seizure that occurred on April 12, 2000, the day after the assessment in issue. Mr. Légaré said that he was not on the premises at the time of the search, but that he was told that there were 15‑20 police officers there; they seized everything in the filing cabinet and the Squirrel system, and the Appellant was suspected of "zapping" (erasing data).
[51] On cross-examination, Mr. Légaré, who had said that he was at the pub 15‑16 hours a day, corrected his statements and said that this was the case in the beginning, but that, from 1994 to 1999, he arrived around noon every day, and stayed much less time than he had done in the beginning.
[52] Mr. Légaré explained again the system that was implemented to track sales of alcoholic beverages: the number of beer bottles in the refrigerator allocated to each employee who sold alcoholic beverages was counted, and each such employee used special meters for draft beer, wine on tap, and spirits, and had to submit a detailed sales report at the end of his shift or whenever the price changed in the course of his shift. The report stated the quantities of each item sold, the price, the total, and the cash remitted in an envelope. The report took any promotions into account.
[53] Mr. Légaré explained that, after checking the employee reports, he entered the totals of each item sold in a daily sheet that was later remitted to Mr. Richard, the accountant. He said that the employee reports were simply destroyed after being used.
[54] Raymond Légaré then explained the mechanism for tracking food sales. First of all, the employees assigned to food service only looked after food sales, since other employees were assigned solely to the sale of alcoholic beverages. Each employee assigned to food sales had to remit an envelope bearing the total sold and the cash payments, with a copy of each numbered bill that contained the customer's order and was given to the kitchen. My understanding is that this was a duplicate of the bill handed to the customer. Mr. Légaré said that it was these bills that enabled him to track food sales, and that he did the daily compilations of all sales. He explained that he had kept all these bills in boxes and remitted them to the auditor, Ms. Morand. According to Mr. Légaré, this was the control system in place until the Squirrel computer system, which he was not involved with, was introduced. In fact, the computer system was introduced in May 1996. Mr. Légaré said that he had actually stopped looking after the tracking of food sales shortly before that.
[55] Raymond Légaré's testimony on his involvement in the management of the pub during the period covered by the audit is rather confusing. Given his frequently imprecise or even contradictory statements, it is very difficult to know exactly to what extent he was involved, what controls he did, and what documents he filled out in relation to the tasks carried out by his son Michel in this regard.
[56] Raymond Légaré offered no meal bills, employee reports, or daily or weekly meal compilations in evidence. He offered only two drink compilations, which turned out to be weekly, not daily ones (Exhibits A‑3 and A‑4). These documents were also offered in evidence by the Respondent, and I have already referred to them at paragraph 17 of these Reasons for Judgment. (Both documents are shown as part of Exhibits I‑25 to I‑28). Although these documents cover two different one‑week periods, that is to say, May 19 to May 25, 1996, and May 26 to June 1, 1996, it can be seen, as I have noted earlier, that the amounts entered for five different line items are exactly identical for both weeks. The details are as follows:
Draft sales
Bottle sales
Liquor sales
Wine sales
Wine sales
$19,618.75
$5,688.50
$1,342.00
$297.25
$2,911.25
[57] Since the amounts for the other line items are different, it is rather difficult to believe that this was a mistake. In addition, these documents contain no compilation concerning meal sales. Mr. Légaré explained that this is probably because the Squirrel system was already in place at that time.
[58] With respect to cover charges, Raymond Légaré simply stated that there were none in the beginning and that his son Michel introduced them and looked after that aspect of the business.
[59] Robert Richard is a chartered accountant. He did the Appellant's bookkeeping and prepared its financial statements from 1980 to 2000. He had no auditing mandate. The Appellant's financial statements for the fiscal years that ended on April 30, 1995, 1996, 1997 and 1998, were offered in evidence (Exhibits A‑6 to A‑9). Mr. Richard also prepared Raymond and Michel Légaré's income tax returns.
[60] Mr. Richard explained that he would receive two separate compilations to account for the Appellant's receipts: one concerning alcohol sales, and the other concerning meal sales. He said that the meal sales compilations were primarily weekly summaries of the total daily sales (Exhibit A‑5). From 1996 onward, they were computer printouts. With respect to alcohol sales, Mr. Richard said that the compilation that he was given corresponded to the documents that have just been mentioned, and that were offered in evidence by Raymond Légaré (Exhibits A‑3 and A‑4). Mr. Richard acknowledged that there were discrepancies between the taxes reported quarterly and the taxes payable according to the financial statements. He said that he knew about the discrepancies, which were actually entered in the books, and that he would have given Ms. Morand all the explanations that she would have needed if she had raised this question at the beginning of her audit, which she did not.
[61] According to Mr. Richard, the Appellant simply cannot have failed to report $3.5 million in sales during the period covered by the audit because there was no trace of this money among the assets of the directors or elsewhere. His comment was [TRANSLATION] "This is beyond reason."
[62] Noting that he had been the business's accountant for 20 years, he placed particular emphasis on the fact that a 200% markup on the food purchases was completely unreasonable for a pub in which Raymond Légaré always tried to maintain the lowest prices possible by means of numerous promotions and without really being concerned about controlling costs. He said that although the pub was profitable from the moment it was purchased and became more profitable thanks to expansions, advertising and promotions, its gross profit was in the 48‑50% range. He said that he has never seen a pub make a gross profit of 70% or 75%.
[63] In addition, Mr. Richard acknowledged that some cash purchases might not have been accounted for, but he said that the sales were accounted for, which meant that the only impact was on the ITCs. He also discussed errors in attributing lottery earnings and "complimentary items" amounts to line items in the general ledger, and said that he made adjusting entries each year in order to prepare the financial statements, in particular because all the revenues, except food, were lumped together and were only broken down at the end of the year by Raymond Légaré, who was primarily responsible for the financial aspects of the business. Another problem stemmed from the fact that the bank deposit totals exceeded the sales amounts entered in the books, thereby necessitating year‑end adjusting entries.
[64] With regard to Ms. Morand's audit, Mr. Richard said that he tried, despite some confusion, to comply with all her requests for documents, which he passed along to Michel Légaré. He said that the requests were primarily for computerized documents from the Squirrel system and that Ms. Morand did not ask for bills issued prior to the installation of that system in the pub.
[65] On cross-examination, Mr. Richard admitted that despite the adjusting entries in the accounting books and the notes in the financial statements, a significant amount of unreported and unremitted taxes accumulated year after year during the period covered by the audit. As to the GST alone, $79,604.44, the amount of has already been noted, and the Appellant admits to it. This amount is included in the total assessment of $314.832.51.
[66] Mr. Richard said that he discussed this issue of unreported and unremitted taxes that accumulated year after year with Raymond Légaré, but that Mr. Légaré did not issue cheques in payment. However, Mr. Richard acknowledged that he should have personally corrected the situation involving the tax returns and notified the Department of the situation.
[67] Mr. Richard specified that the reports that Ms. Morand requested were reports generated by the Squirrel system for a sampling period, and that they were provided. He explained that he was somewhat confused because he did not really know or understand what she was looking for, because she simply told him that she was doing a [TRANSLATION] "statutory audit."
[68] On cross-examination, Mr. Richard stated that the only things he had at his disposal to account for drink sales and then prepare the financial statements were the weekly reports prepared by Raymond Légaré (Exhibits A‑3 and A‑4) and certain "complimentary" item slips that Raymond Légaré would give him. He was unable to specify how the year-end reconciliation was done. He admitted that he had never verified the employees' daily reports, which Mr. Légaré purportedly used to prepare his weekly reports. He added that he only worked with the documents that he was given. Although the weekly reports offered in evidence as Exhibits A‑3 and A‑4 also