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Goods and Services Tax

Alternative method of valuation was not warranted in circumstances

Registrant operated restaurant with 60 seats in dining room and 66 seats on terrace, with liquor licence. Registrant’s accounting books submitted to Minister were incomplete and imprecise according to Minister, and Minister had to reconstitute total amount of supplies made by registrant using several indirect methods of verification for period in question. Analysis of various elements from registrant or its suppliers, such as bank deposits, purchases confirmed and reported, hours worker, placemats used, revealed significant deviation from sales reported in registrant’s accounting books. Minister considered sales of 3,228 meal receipts, from 50 randomly targeted days over period of 166 days. Total sales accounted from receipts amounted to $32,655.79. 1,676 of targeted foods from meal receipts generated a ratio of $19.48. Difference between declared sales and reconstructed sales was $488,631.67 for years 2007 to 2009. Minister therefore increased total amounts of targeted foods acquired by registrants by attributing $19.48 ratio for each of 2007, 2008, and 2009 fiscal years in determining reconstituted amount of taxable supplies. Registrant appealed. Appeal allowed. Alternative method of valuation was not warranted in circumstances, and was highly questionable. Despite alternative verification method, assessed amounts were reduced by 40 per cent demonstrating that glaring error were committed when checking. Penalties for gross negligence were also cancelled and no contribution for misappropriate of funds was issues by CRA against registrant. Both experts came to conclusion that valuation method led to bias and instability as assumptions that underlie ration estimation were not met. Valuation method was wrong given over-representation of Mondays and Tuesdays when only two meals rather than three meals were served on those particular days. Instead of resorting to indirect method of valuation, tax authorities should have first concluded, on reasonable grounds, that books, records, and supporting documents provided by registrant were not reliable or contained inaccuracies or significant deficiencies.
2741-2568 Québec Inc. c. R. (Sep. 22, 2016, T.C.C. [General Procedure], Réal Favreau J., 2011-3640(GST)G) 270 A.C.W.S. (3d) 891.


Goods and Services Tax

Minister was justified in using alternative audit method to assess registrant

Registrant operated pizzeria restaurant, primarily providing pizza for takeout. Minister carried out audit into three years of quarterly reporting periods. To determine amount of unreported sales, auditor used alternative method consisting of comparing reported sales with quantity of pizza boxes purchased for year in which sales recording module was operational and then extrapolating results to prior years for which such detailed information was not available. Minister issued assessment under Excise Tax Act (Can.), claiming additional net tax amount of $23,768.85, penalties of $5,942.23 under s. 285 of Act, and interest. Registrant appealed. Appeal allowed in part. Minister was justified in using alternative audit method to assess registrant, as registrant’s books and records could not be considered reliable. Evidence clearly established that registrant did not report all its income. Auditor’s method had significant weakness in that it did not take into account 14-inch pizza boxes in calculation. According to auditor’s calculation excluding 14-inch pizza boxes, 55.69 per cent of sales were reported but, if 14-inch boxes were used, result indicated that almost 70 per cent of sales were reported. Auditor dismissed 14-inch pizza boxes because according to sales recording module, there were more sales than purchases, but calculation could not provide true reflection of reality without including 14-inch pizzas that were registrant’s best-selling pizza size. This supported conclusion that 30 per cent of registrant’s sales were unreported such that only $12,802.35 should have been added to net tax. Registrant knowingly, or under circumstances amounting to gross negligence, made false statement or omission in its tax returns for period. Factors, such as cash register drawer remaining open between sales so that sale data would not appear in sales recording module and fact that unreported sales represented 30 per cent of total sales, showed gross and not just ordinary negligence. Significant and repeated omissions in tax returns led to conclusion that registrant intentionally concealed significant portion of its sales.
9091-2239 Québec Inc. v. R. (Sep. 14, 2016, T.C.C. [General Procedure], Dominique Lafleur J., 2015-710(GST)I) 270 A.C.W.S. (3d) 664.

Family Law


Father failed to engage exception in s. 118(5.1) of Income Tax Act (Can.)

Taxpayer father and mother separated in 2011 and had two children under 18 years of age. Pursuant to consent order, father and mother had joint custody of children in shared parenting arrangement. Father had obligation to pay child support to mother for both children and mother had obligation to pay child support to father for both children, resulting in set-off requiring only father to make child support payments. Order specifically permitted mother to claim child tax credit for both children for first six months of year and father for last six months of year, and each of father and mother to claim one child as equivalent to spouse. Minister of National Revenue disallowed father’s claimed non-refundable tax credits relating to eligible dependant and eligible child respectively. Father appealed. Appeal dismissed. Father failed to engage exception in s. 118(5.1) of Income Tax Act (Can.). Utilization of set-off mechanism did not render, memorialize or transform each distinct value in mathematical calculation in determining final child support payment into support amount under Act. Engagement of combined effect of s. 118(5) and (5.1) of Act required mandatory and actual periodic payments by both spouses to each other in cases of shared parenting of two or more children, demonstrated by documentary and evidentiary record.
Harder v. R. (Sep. 14, 2016, T.C.C. [Informal Procedure], Randall S. Bocock J., 2014-3977(IT)I) 270 A.C.W.S. (3d) 442.

Unemployment Insurance


Minister determined that employment was not insurable

Worker worked as bricklayer and in other roles for construction company which he had incorporated and was 40 per cent shareholder. Company was incorporated to allow worker to collect employment insurance. Minister of National Revenue determined that worker’s employment was not insurable because employment relationship was not at arm’s length. Worker appealed. Appeal dismissed. Construction company was incorporated to give impression that worker was employed by independent third party. Payer was purportedly controlled by worker’s father and worker’s spouse, and employment relationship was deemed not to be at arm’s length by s. 251(1)(a) of Income Tax Act (Can.). Evidence adduced at court did not lead to conclusion that worker and person acting at arm’s length would have entered into substantially similar contract of employment Spouse’s only duty was to maintain books and records and spouse did not take on extra duties that worker claimed. Worker’s testimony was self-serving. Worker decided when he would work, his own rate of pay, quotes issued by payer construction company, contracts which company would accept, days and hours he would work, and casual laborers who would be hired. Worker decided direction of payer construction company’s business.
Stuckless v. Minister of National Revenue (Sep. 8, 2016, T.C.C. [Employment Insurance], Valerie A. Miller J., 2016-1392(EI)) 270 A.C.W.S. (3d) 222.


Goods and Services Tax

Nominee of corporation was ordered to answer certain questions in discovery

Parties were involved in proceedings in Tax Court regarding tax treatment of proceeds of sale retirement residence, as business income or as capital gain in 2008 taxation year and disallowance of tax treatment of numbered corporation’s newer retirement residence as replacement property under s. 44 of Income Tax Act (Can.). Numbered corporation claimed it correctly reported capital gain on sale of retirement residence in its 2008 taxation year, while Minister of National Revenue maintained numbered corporation was in business of building and selling retirement residences at profit and that Minister correctly reassessed numbered corporation to include sale of residence as income from business. Nominee of numbered corporation refused to answer certain questions in discovery Minister brought motion for order that questions be answered. Motion granted in part. Numbered corporation was not the alter ego of shareholder L, but this was not end of matter as his trading history was relevant to issue of whether amount in question was capital gain. Even if shareholder L was not party to appeal, he was shareholder and president of numbered corporation. In trading cases, in order to determine intention of corporation, trading history of controlling shareholder will be taken into account. Questions relating to shareholder L’s trading history were relevant. Numbered corporation’s representative required to answer particular question only insofar as it related to part of statement regarding banking transactions. Whether particular accountant was accountant of shareholder L in 2003, related to personal affairs of L and has nothing to do with issues under appeal. Question regarding purpose of certain company was relevant, as corporation was wholly owned corporation of shareholder L that held shares in numbered corporation. Funds from disposition of another retirement residence were used to acquire land on which particular retirement residence was subsequently built, and related question might be relevant. Questions regarding sale transactions regarding other retirement residences related to trading pattern of shareholder and president of numbered corporation, and were relevant Question regarding whether shareholder L held minority interest in number of retirement residences with spouse was not relevant and did not need to be answered. Question regarding whether shareholder L was dealing with certain others at arm’s length did not need to be answered. Question regarding incorporation of companies to act as holding and operating companies was relevant and should be answered. Question regarding corporate structure should be answered in part. Question regarding controlling mind of corporation was too vague to be answered Questions regarding corporate structure and corporate searches needed only be answered to extent of addressing trading patterns of shareholder L. Questions related to mistress were of personal nature and not required to be answered.
1716790 Ontario Inc. v. R. (Aug. 31, 2016, T.C.C. [General Procedure], Johanne D’Auray J., 2014-2383(GST)G, 2014-2385(IT)G) 270 A.C.W.S. (3d) 215.


Income tax

Taxpayer’s appeal regarding redetermination of returns was granted

Taxpayer mother had primary custody of son and daughter after separation from children’s father. Pursuant to temporary order in October 2012, father obtained access to both children every other weekend, and two overnight visits per week for son and one overnight visit per week for daughter. Pursuant to second temporary order in February 2014, father obtained expanded access to daughter. Final order in September 2014 provided that parties would have joint custody of children, that father would continue to have access largely according to February 2014 order, and that parties had consented to roughly equal sharing of children’s care. Minister of National Revenue concluded that taxpayer and father met definition of shared-custody parents of son since January 2013 and of daughter since March 2014, and redetermined taxpayer’s returns for 2011 through 2013 on basis that she was only entitled to 50 per cent of Canada Child Tax Benefit and Goods and Services Tax Credit after those dates. Taxpayer appealed. Appeal allowed. Taxpayer and father had been shared-custody parents of both children since March 2014. Both parents fulfilled responsibility for upbringing of children when they resided with them. Prior to March 2014, conflict between taxpayer and father was such that taxpayer assumed more than her share of responsibility for picking-up children at daycare and that, for weekdays, father’s access was only for overnight period and not full 24-hour day. Children were in care of taxpayer for time periods exceeding 60 per cent up to March 2014, but after that date, taxpayer and father shared parenting responsibilities on equal basis.
Rubinov-Liberman v. R. (Aug. 29, 2016, T.C.C. [Informal Procedure], Guy Smith J., 2015-3461(IT)I) 269 A.C.W.S. (3d) 797.

Aboriginal Peoples

Exemption from taxation

Taxpayer did not qualify for exemption with respect to bonuses

Taxpayer and her spouse owned and operated construction company. During relevant period, taxpayer was status Indian and was entitled to tax exemption under Indian Act (Can.) in respect of personal property situation on reserve. Her spouse was not, and was not entitled to tax exemption. Construction company employed up to 50 individuals on various construction sites, and almost none of sites were located on reserves. Spouse worked on construction sites and taxpayer worked in company office which was located on reserve. Company paid regular remuneration to taxpayer and spouse and paid balance of its annual income to taxpayer in form of year end bonuses. For income purposes, company claimed deductions for regular pay and bonuses and these deductions were allowed by Minister. Taxpayer claimed tax exemptions with respect to her regular pay and bonuses and Minister allowed exemption with respect to regular pay and disallowed exemption with respect to bonuses. Taxpayer appealed. Taxpayer did not qualify for exemption with respect to bonuses. Appeal allowed only with respect to issues agreed between parties. For purposes of appeal property at issue was remuneration from employment. Taxpayer already received adequate compensation for her employment in form of biweekly pay. Bonuses were not entitlement from reserve land by virtue of taxpayer’s employment because there was no substantive connection between land and bonuses. It was abusive of exemption to allow taxpayer to receive bonuses exceeding reasonable remuneration. Company undertook transaction having appearance of strong connection between bonuses and employment. In reality, there was no substantive connection. There was no evidence to support that bonuses were reasonable remuneration or that bonuses were intended by parties to reasonably compensate taxpayer for her duties of employment. Taxpayer received remuneration through her bi-weekly pay that was roughly equivalent to spouse’s remuneration except for 2008 when her pay exceeded that of her spouse. In order for bonuses to be reasonable, taxpayer should have made greater contribution to company than her spouse but evidence did not support this. Taxpayer played administrative role with respect to construction contracts with limited exceptions. Taxpayer’s employment was not strong connecting factor for bonuses. It was not abusive to move company’s office to reserve. Office was substantial and Minister’s argument in this regard attempted to read business purpose test into Act exemption.
Bell v. R. (July 27, 2016, T.C.C. [General Procedure], Judith Woods J., 2013-1806(IT)G) 268 A.C.W.S. (3d) 701.

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