The Canada Revenue Agency (“CRA”) has many tools available to it for assessing taxpayers with what the CRA believes is unreported income. One of those is the Net Worth Assessment after it has conducted a Net Worth Audit.
In a nutshell, a Net Worth Assessment is where a CRA auditor compares the taxpayer’s assets and liabilities at the beginning of the audit period with the assets and liabilities at the end of the audit period. Any increase in the assets at the end of the audit period, plus any personal expenditures, is treated as income. If the amount of income reported on the taxpayer’s income tax return is lower, then CRA assumes that the difference is unreported income and re-assesses the taxpayer for those tax years.
Usually the re-assessment includes interest and gross negligence penalties for the unreported income. If it is a business that is being audited, then the CRA will also issue increased GST / HST re-assessments, again with interest and gross negligence penalties.
The CRA targets industries where cash transactions are common such as taxi businesses, restaurants, the construction industry, and small businesses that use contractors or subcontractors.
Because Net Worth Assessments are often based on incomplete information, there are usually errors in the assessment. Unfortunately, these assessments are deemed valid and binding unless and until the taxpayer can rebut the CRA’s assumptions made in the audit and prove what his or her income was. Don’t try to rebut the CRA’s assumptions on your own. You will need the help of an experienced tax lawyer and / or other tax professionals.