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On October 28^th, 2021, the Honourable Justice Cameron of the Court of Quebec rendered a decision with respect to six related proceedings, under the heading Bakar c. Agence du revenu du Québec, 2021 QCCQ 12589 (CanLII) (available here). 

The files involved reassessments issued for years 2009 to 2014 against a Quebec corporation (the “Corporation”) and its sole shareholder and administrator, Mr. Bakar. The reassessments followed two audits conducted by the Quebec Revenue Agency (the “QRA”). 

The first audit resulted in corporate tax reassessments for undeclared income. These reassessments gave rise to reassessments against M. Bakar on the basis that the undeclared income was appropriated by same. Save for the year 2014, the reassessments were issued beyond the normal reassessment period. The QRA lifted prescription on the basis of a misrepresentation of the facts attributable to negligence, wilful default or fraud under subsection 1010(2)(b)(i) of the Taxation Act.

The second audit gave rise to deductions at source reassessments on the basis that employees must have worked undeclared hours for the Corporation to earn the undeclared income. 

The Corporation, doing business as Supermarché BK, operated two locations in Montreal. One of the issues to be decided was the qualification of the activities of the Corporation. Because the QRA used an alternative audit method based on average gross profit margins from Statistics Canada, the qualification of the activities of the stores had a major impact with respect to which margins would be used as a reference point.

In its analysis, the Court provided reminders regarding prescription and the burden of proof in tax disputes:

1. a fundamental distinction between reassessments issued within the normal reassessment period and reassessments issued beyond said period is that no initial presumption of validity attaches to the latter;
2. the initial burden to demonstrate a misrepresentation of the facts lies with the QRA;
3. once this initial burden is met, otherwise statute-barred reassessments enjoy the same presumption of validity as any other reassessment; and
4. at that point a taxpayer bears the onus of submitting a prima facie case against the facts and assumptions underpinning the reassessments.

The Court then notes that case law requires an analysis of the grounds invoked to justify the use of an alternative audit method, citing notably Brasserie Futuriste de Laval Inc. c. La Reine, 2006 TCC 503 (CanLII). The Court further states that:

[42] …The justifications given by the QRA for resorting to an alternative means are, therefore, part of the written defences. We treat these allegations and the evidence of these allegations as necessary if the evidence on the application is effective as prima facie evidence to rebut the presumption of validity. In doing so, we do not overrule the case law that expects the QRA to justify the use of an indirect method of verification. In our view, a prima facie case is required for all factual assumptions underlying an assessment, failing which the presumption of validity of the assessment remains intact. This being the case, one of the assumptions of the indirect method assessment is the need to use such method for factual reasons that the auditor has retained during the audit. If a review of these grounds shows that they are unfounded, the presumption is undermined. (translation and underlining by the undersigned)

 

Accordingly, a prima facie case can be made against the reasons invoked for the use of an alternative audit method even before a prima facie case is made against the substance of same, namely the method itself or the reasonableness of its results.     

Another interesting comment from the Court deals with the failure by a taxpayer to properly maintain books and records to demonstrate the validity of the income declared by said taxpayer for a given period. In the Court’s opinion, such failure does not necessarily entail that there was a misrepresentation of the facts when the income was declared:

[55] … The fact that Mr. Bakar could not, in 2015, find the entirety of the documents … does not demonstrate a "false representation" as to the amount of sales in a given period that would allow a new assessment outside the statutory period of three years. Nor can it, in and of itself, constitute a false statement or omission in a statement made knowingly or under circumstances amounting to gross negligence. (translation by the undersigned)

 

The Court goes on to review the facts invoked by the QRA to justify the use of an alternative audit method, including that many transactions, both sales and purchases, were made in cash. The Court rejects most of these facts and nuances the balance.  

Based on the above, one would have expected that the Court would not need to examine the substance of the reassessments at it rejected the facts invoked to justify the use of an alternative audit method.

Nevertheless, the ultimate ratio decidendi deals with the statistics retained by the QRA auditor to arrive at the so-called undeclared income.  The salient observations of the Court deal not only with the qualification of the activities of the stores to determine the appropriate average gross profit margins to use as a reference point, but also the failure by the QRA to confirm the reasonableness of the results obtained in light of the actual circumstances of the Corporation.

Indeed, the QRA failed to refer back to the same body of data to determine if the results obtained made sense in light of other statistics available:

[141] … reviewing the company's pre-tax profits ("PTP") highlights the arbitrary and unfounded nature of the audit leading to the assessment.

[152] … the auditor's figures for gross margins result in PTP well above the industry average and even significantly above the industry leader.

[158] For example, for 2009, while the statistics give, for supermarkets in the middle of the range, a PTP of 0.9% and, at the top of the range, 2.6%, the ARQ's hypothesis gives, for the taxpayer, 15.6%. This is about 17 times the PTP of an average company, and even 6 times the PTP of a high profit company.

[164] According to the expertise provided by the taxpayer and common sense, the figures of the QRA auditor are not plausible. They are the result of a simplistic and incomplete analysis. A more rigorous and complete use of the relevant elements of the same compilation of data would have shown that the gross margin figures chosen by the auditor give a result of a PTP that is out of line with the norms for this type of business and therefore implausible, whereas the income actually declared is plausible. (translation by the undersigned author)

 

In conclusion, the present decision is interesting for two notable reasons:

• it offers a nice reminder of the principles applicable to prescription, burden of proof, and the use of an alternative audit method, including that a prima facie standard of proof applies to the justifications invoked for the use of such a method;
• the use of statistics is delicate, as the results obtained via their use must not inconsistent and disproportionate in relation to other statistics available.