In the recent case of Bousfield v. The King, the Tax Court of Canada set out five methods that taxpayers can use to successfully dispute net worth assessments and other “alternative assessment techniques”.
Click here to read the full judgement
1. Taxpayers can show that their income can more accurately be calculated by using their own books and records.
2. Taxpayers can attack components of the Minister’s alternative assessment techniques to reduce the calculations of their income.
3. If the taxation year is statute barred, taxpayers can show that the alternative assessment technique is fundamentally flawed.
4. Taxpayers can present a different alternative assessment technique that more accurately calculates their income.
5. Taxpayers can show that the income calculated under the technique was, in fact, from a non-taxable source, such as a gift.
In the above case, the taxpayer operated a taxi and transportation business. He personally drove the taxi sometimes and at other times, he hired other drivers and split the fare revenue with them. Most of his fares were paid in cash. A small amount of his revenues were paid electronically by the dispatch company he worked with.
He failed to file income tax returns for the 2006 and 2007 years. CRA issued arbitrary assessments to estimate his revenues and he subsequently filed returns. The CRA then used four different “alternative assessment techniques” and used the average of those four techniques to re-assess him for the tax years 2006, 2007 and 2008.
The Court found that none of the assessment techniques that the CRA used accurately calculated his income. In coming to that conclusion the Court held that the Minister did not specifically plead the assumptions of fact necessary to support the techniques that the CRA used, in their Reply to the Notice of Appeal. This meant that the Minister would have to call evidence to prove the underlying facts that the CRA relied on. I pause here to explain how the concept of “assumptions” works in Tax Court. In filing their Reply, the CRA is entitled to plead the assumptions of fact that they relied on when assessing the taxpayer. Those assumptions of fact are presumed to be true unless the taxpayer leads evidence to demolish those assumptions. The term “demolish” in Tax Court proceedings means that the taxpayer has to establish a prime facie case that the assumptions are wrong.
In this case, one of the techniques that the CRA used was to base their assessment on the average income for other taxi drivers in the city. But they failed to state that assumption in their Reply. So, that meant that they had to prove by evidence what the average income for other taxi drivers was and they were unable to do so.
The Court also found that the taxpayer’s records were incomplete and unreliable. The judge therefore used his own alternative assessment technique, based on evidence that had been accepted, to calculate the taxpayer’s income.
Although the judge was not satisfied with the taxpayer’s evidence, he did, nevertheless, substantially reduce the assessments, essentially resulting in a “win” for the taxpayer. Had he kept proper records, the taxpayer might have succeeded entirely.
This case emphasizes the importance of two things in challenging tax assessments. The first, is the necessity for taxpayers to keep proper records. The second, is that when it gets to Tax Court, taxpayers and / or their representatives should carefully review the assumptions of fact stated in the Reply for any errors or omissions. If the assumptions are not properly set out in the Reply, then the CRA must adduce evidence to prove the relevant facts.