Published: June 26, 2024
Last Updated: July 14, 2026
The Tax Court of Canada overturned more than $20 million in CRA income tax reassessments — demonstrating that circumstantial proximity to suspicious cash flows is not sufficient to attribute income to a taxpayer, and that the CRA bears a real evidentiary burden once a prima facie defence is established.
By David J. Rotfleisch, CPA, JD — Certified Specialist in Taxation | Rotfleisch & Samulovitch P.C.
Introduction: Disproving the CRA’s Inclusion of Income — The Burden of Proof in Tax Court
In this case, the taxpayers, Steve Paquet and his company, 4527976 Canada Inc. (“Heritage”), appealed against income tax reassessments for 2010–2013 for Paquet and 2010–2014 for Heritage. The Canada Revenue Agency (“CRA”) included over $20 million in large cash sums delivered by Garda to Heritage’s address in the appellants’ income, based on l’Agence du revenu du Québec’s (“ARQ”) investigation and tax audit findings. Mr. Paquet’s appeal challenged this inclusion of income. The case focused on whether the burden of proof had been satisfied to justify the inclusion of the income. The Tax Court concluded in this case that the taxpayers had discharged any initial burden placed on them, and that the CRA’s reassessments were inconsistent and unsubstantiated, lacking independent verification. The evidence the CRA provided was insufficient, and thus the Tax Court accepted the appeals and sent the reassessments back to the CRA to be redetermined.
Background: The ARQ and CRA Tax Audit of Cash Deliveries to a Wholesale Poultry Business
The appellants were engaged in wholesale poultry sales activities and named by the ARQ as parties to a series of transactions in which large sums of cash were delivered to Heritage. A third party, Garda, would obtain envelopes of cash addressed to Heritage’s business address from a corporation unrelated to the Appellants, Termont Inc. (“Termont”). Garda would make weekly, or sometimes multiple times a week, cash deliveries of $15,000 to $150,000. The sole shareholder of Termont, Laurent Monette, would collect the sealed envelopes from Garda. Termont’s accountant stated that Termont used the cash to pay its suppliers. The total cash delivered from 2010 to 2014 exceeded $20,000,000. There was no evidence that the cash was given directly or indirectly to either of the taxpayers.
The ARQ launched an investigation and an audit, which would later be joined by the CRA’s audit and recovery teams. The ARQ’s tax audit resulted in reassessments for the two appellants. The results of the ARQ’s investigation and audit were communicated to the CRA. The CRA reassessed Mr. Paquet, and the reassessments “mirrored” the ARQ’s reassessments. However, the CRA reassessed Heritage on an entirely different basis. Heritage’s income was reassessed to include the total amount of cash delivered to its premises by Garda. Gross negligence penalties were also imposed on both taxpayers in respect of the amounts assessed. Both appellants challenged the inclusion of the additional income in the reassessments.
The appeal coincided with criminal proceedings before the Court of Quebec where the appellants faced the possibility of criminal liability for incorrect designations of financial transactions in their financial documents. However, the Tax Court decided that no weight for the tax appeal would be given to the conclusions and evidence in the Court of Quebec.
Reassessment Summary: Paquet vs. Heritage
| Steve Paquet (Individual) | 4527976 Canada Inc. (Heritage) | |
| Taxation Years Reassessed | 2010 to 2013 | 2010 to 2014 |
| Reassessment Basis | Mirrored ARQ provincial reassessments | Total cash delivered by Garda to premises |
| Gross Negligence Penalty | Yes — s. 163(2) | Yes — s. 163(2) |
| Majority of Years Statute-Barred? | Yes | Yes |
| Income Inclusions | Vacated | Vacated |
| Penalties | Vacated | Vacated |
| Result | Appeal allowed | Appeal allowed |
Burden of Proof — Reversing the Onus from the Taxpayer to the CRA
The Tax Court, relying on the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. Canada, [1997] 2 SCR 336, found that the appellants fully discharged any initial burden placed on them. The appellants only had to demolish the CRA’s presumptions with at least a prima facie case. On examination, it is expected that the CRA would be able to produce concrete evidence rather than simple presumptions to refute the arguments of the taxpayers. The Tax Court concluded in this case that the taxpayers had discharged any initial burden placed on them.
The two-stage burden-of-proof framework in Canadian income tax litigation works as follows. First, the taxpayer must produce a prima facie case that one or more of the Minister’s assumptions is wrong. “Prima facie” means evidence sufficient to raise a reasonable inference — it does not require proof on a balance of probabilities at this stage. Once that threshold is met, the onus shifts entirely to the Canadian tax lawyer acting for the CRA to support those assumptions with affirmative, credible evidence. As Paquet demonstrates, when the Canadian tax lawyer acting for the CRA relies on inference rather than traced, documented evidence, that burden cannot be met.
“The burden-of-proof framework in Tax Court is frequently misunderstood — including, in my experience, by the CRA itself,” says David Rotfleisch, a Certified Specialist in Taxation and founding tax lawyer at Rotfleisch & Samulovitch P.C. “Taxpayers do not need to prove their innocence beyond any doubt. They need to raise a credible, coherent alternative account of the facts. Once they do that, the obligation falls squarely on the CRA to prove the assessment is correct — and if the CRA’s investigation was cursory, that obligation cannot be met.”
The CRA’s Inability to Meet the Evidentiary Burden in Tax Court
Witnesses included individuals involved in the operations and tax audit processes, from both the appellants’ and respondent’s sides. The appellants additionally called as witnesses Mr. Paquet, Maria D’Amico (the receptionist who usually signed for Garda deliveries in Mr. Monette’s absence), Nathalie Paquet (administrative assistant at Heritage), Daniel Dauplaise (vice-president of Garda operations in Quebec) and Rima Skaf (ARQ auditor). Whereas the respondent called as witnesses David Sawyer (CRA collection agent), Geneviève Robillard (CRA auditor at the time of the audits) and Minyu Chiu (ARQ investigator).
Initially, the ARQ had audited Termont Inc. after it did not declare any income for the 2010 to 2012 tax years. The corporation did not keep accounts or supporting documents, but, through examining bank files, the ARQ found that Termont was moving cash through Garda. And that all the sums in question were delivered in cash by Garda to Heritage’s business address, with the shipment being addressed to Termont. Garda obtained delivery instructions and authorization forms from Termont. The money was transferred to Garda from a Termont bank account. Mr. Monette would come to collect the sealed envelope. There was no evidence that the cash was handed over directly or indirectly to the appellants.
Why was the money sent to Heritage’s business address? Garda refused to make deliveries to a residence. Thus, Termont Inc. required a place of business that was considered safe for everyone involved. Mr. Monette passed away prior to the hearing, but in his affidavit, he confirmed that he recovered all the money sent to Heritage’s address. Additionally, all the money that Termont had delivered via Garda belonged to Termont and did not belong to either Mr. Paquet or Heritage.
The ARQ concluded that Termont and Desco were two of Heritage’s main clients. Termont’s accountant, Mr. Auger, explained to the ARQ that Termont used the cash sums to pay his suppliers to avoid attracting the attention of his bank.
Guy Chevalier was questioned by the tax authorities about his participation and what he knew of the operations. His company, Desco, was also involved in the poultry sector and had about 250 employees and revenues in the $30 million range. He explained that he had organized the operations to improve the financing of his poultry inventory and his receivables from his bank. The operations allowed his company to record in the books the sale of part of its inventory to one of the other parties concerned and to make it a debt, then an amount received, even if the operations continued since it bought the same inventories from the other company. He argued that these operations helped Desco manage its quota problems.
What happened to the cash after Mr. Monette collected it was unclear from the evidence before the court. The money could have continued to be circulated or put to other purposes. Employees from the ARQ and the CRA spent five years trying to shed light on the situation surrounding the Garda cash deliveries. However, the Tax Court found that while it would be useful to know what happened to the cash, it was not necessary to answer this question. The Tax Court was only concerned about answering whether the inclusions of income for the appellants were accurate.
No details were obtained or provided regarding Desco’s banking agreements or its bank financing. Neither the CRA nor the ARQ subjected Desco to an audit in connection to the cash deliveries. Furthermore, their audits of Heritage did not identify any purchase or sale transaction between Heritage and Desco. While poultry sales were the only link between Heritage and Termont, to the knowledge of Heritage and Mr. Paquet, these two companies had no clients in common. The tax authorities also did not check with the bank that financed Desco’s inventory whether the explanation given by Mr. Chevalier was supported by Desco’s banking records. The evidence demonstrates the little effort made by the tax authorities, informed directly by Mr. Chevalier, to try to understand how Desco’s strategy worked and who benefited from it, to confirm or rule it out.
The CRA and ARQ produced little evidence that the tax authorities diligently sought the initial source or final recipient of this cash. The Tax Court questioned why they did not exercise their full legal powers to investigate this key further information.
Neither agency conducted a net worth analysis or a full bank statement reconciliation or used any other verification method on the appellants. The CRA was only interested in bank deposits and withdrawals concerning one of Mr. Paquet’s banks, even though it knew of at least two other banks he used for his business. The CRA did not compare his overall lifestyle or standard of living to his sources of income or capital.
There was no evidence establishing that Mr. Paquet had significant assets other than the following: his half of the mortgaged middle-class family residence, a chalet worth $300,000 in Mont-Tremblant, an expensive boat, and a condo worth $500,000 in Montreal, which belonged to his company. None of the purchases were made in cash. The tax authority attempted to demonstrate that Mr. Paquet’s declared income did not explain certain purchases. However, the tax authorities had not considered that Mr. Paquet’s declared income included taxable capital gains, which meant he had a non-taxable portion of the capital gain.
Ms. Skaf carried out the verification of Termont. She confirmed that Termont had revenues of approximately $60 million. She admitted expenses of approximately $30 million. The audit did not reveal evidence that people other than Mr. Monette controlled Termont’s bank account. However, she did not examine the signed Garda receipts and did not know who signed most of the receipts, but she knew that Mr. Paquet had signed for a delivery. She found no evidence that Mr. Paquet was the beneficiary of the cash, other than the link of the cash being delivered by Garda to Heritage’s place of business. She did not ask Mr. Paquet what happened to the cash after it was delivered.
Ms. Robillard carried out the audits of Heritage and Mr. Paquet for the CRA. The Tax Court confirmed through her testimony during the hearing numerous gaps in the tax audit. For example, she did not reconcile the payments that Heritage made to Mr. Paquet; she did not determine whether Mr. Paquet deposited all his income; and she could not trace the cash. She could not say whether any cash was deposited into an account. Furthermore, she did not analyze the bank statements of Desco or anyone else to try to establish the origin of the cash, which the Tax Court noted suggests that the Respondent did not make sufficient effort to establish the provenance of the cash and to trace it. Ms. Robillard had no opinion as to whether there was any reason to doubt the testimony of any of the appellants’ witnesses in the case.
Ms. Chiu was the ARQ’s investigator, and through her testimony, the Tax Court confirmed various gaps in her knowledge and investigation. This includes the fact that she found no evidence indicating that the cash had been deposited into an account held by Mr. Paquet or one of his companies, nor did she discover any purchases paid in cash by Mr. Paquet relating to assets or investments. She had concluded that Mr. Paquet controlled Termont, and Termont’s bank account, based on incomplete emails discovered on a computer belonging to Heritage. Ms. Chiu was to examine Desco and Mr. Chevalier, but she did not indicate to the Court what conclusions, if any, the ARQ had drawn regarding their role or activities in the transactions.
The Tax Court noted that the fact that the respondent did not ask Mr. Chevalier or others associated with Desco to attend the hearing and testify allowed the Tax Court to conclude that such testimony would likely not have assisted the Respondent in meeting their evidentiary burden.
The Normal Reassessment Period and Statute-Barred Years: The CRA’s Additional Hurdle Under Subsection 152(4)
A dimension of Paquet that merits particular attention is the statute of limitations. The majority of the reassessments at issue were issued after the normal reassessment period had expired under subsection 152(3.1) of the Income Tax Act. For individual taxpayers and most corporations, that period is three years from the date of the original notice of assessment.
Under subsection 152(4) of the Income Tax Act, the CRA may reassess a statute-barred year only if the taxpayer, or the person filing the return, made a misrepresentation attributable to neglect, carelessness, wilful default, or tax fraud in filing. The Canadian tax lawyer acting for the CRA bears the onus of establishing the preconditions for this extended authority. Mere suspicion, inference from proximity, or the existence of an unexplained third-party transaction at a taxpayer’s address does not constitute a misrepresentation.
In Paquet, because the Tax Court found no evidentiary foundation for any income inclusion, there was necessarily no misrepresentation. Without a misrepresentation, the CRA had no statutory authority to reassess the statute-barred years. The practical consequence is significant: a taxpayer who successfully demolishes the evidentiary basis for the CRA’s income theory automatically also defeats the CRA’s authority to reopen any statute-barred year in which that theory was the sole justification for reassessment.
For any taxpayer facing multi-year reassessments, the statute-barred year defence should be raised explicitly in the Notice of Objection and the Notice of Appeal. Raising it forces the CRA to prove misrepresentation as a separate threshold issue — one that many CRA audit files cannot satisfy when the substantive income case is already thin.
Gross Negligence Penalties Under Subsection 163(2) — The Venne Standard and Why the Penalties Were Vacated
The CRA imposed gross negligence penalties under subsection 163(2) of the Income Tax Act on both appellants. These penalties — equal to the greater of $100 and 50% of the understated federal tax — are among the most severe civil sanctions the CRA can impose in an income tax audit.
The standard for gross negligence was established in Venne v. The Queen, 84 DTC 6247 (FCTD): gross negligence requires “a high degree of negligence tantamount to intentional acting.” Honest mistakes, bookkeeping errors, and inadvertent omissions do not qualify. The Canadian tax lawyer acting for the CRA bears the burden of proving gross negligence, and the standard is strictly construed because of the penal character of the provision.
In Paquet, the penalties were vacated on the most fundamental possible ground: there was no false statement or omission in the appellants’ returns because the cash amounts could not be attributed to their income in the first place. Even if some income had been found, the Canadian tax lawyer acting for the CRA produced no evidence that either Paquet or Heritage knowingly or recklessly misrepresented their tax position.
Taxpayers should treat gross negligence penalties as a separate, independent battle in any CRA reassessment. A penalty cannot ride into court on the coattails of an income inclusion. Each subsection 163(2) penalty must be proven on its own evidentiary merits. Challenging the income assessment does not automatically resolve the penalty issue, and conversely, succeeding in defeating the penalties — even if some income is upheld — is a significant partial victory worth pursuing.
Implications for Canadian Taxpayers: CRA Tax Audit Exposure, Enforcement Trends, and Tax Risk
The “Guilt by Geography” Misconception — Income Attribution Requires Beneficial Receipt
A common and dangerous misconception in CRA enforcement — one that Paquet directly corrects — is that a taxpayer can be assessed for income that merely passed through their physical location. In cash-intensive industries such as food wholesale, construction, and retail distribution, third-party funds regularly move through a business’s premises, banking relationships, or courier systems for entirely legitimate commercial reasons that have nothing to do with the taxpayer’s own income. Attributing that cash as the taxpayer’s income based on address or proximity alone is legally insufficient. The CRA must prove beneficial receipt: that the money was actually received for the account of, or economically benefited, the taxpayer. Where that proof is absent, the assessment cannot stand.
Taxpayers and their advisors should resist the instinct to accept a CRA income inclusion that rests on circumstantial association rather than traced economic benefit. The appropriate response is to challenge the assumption in the Notice of Objection — not to negotiate down from an inflated starting point.
“One of the most damaging things a taxpayer can do is treat an inflated CRA assessment as the opening position in a negotiation,” says David Rotfleisch, an experienced Canadian tax litigation lawyer and Certified Specialist in Taxation. “In cases like Paquet, the correct response is not to settle for a reduced number — it is to put the CRA to the proof of every dollar. The evidence was never there to support the assessment, and the Tax Court confirmed that. Accepting even a fraction of an unsubstantiated reassessment is giving away money the CRA was never entitled to.”
CRA Enforcement Trends: Underground Economy, Food Wholesale, and the Post-Paquet Landscape
The underground economy and third-party payment flows in food and agricultural distribution remain elevated CRA audit priorities. Paquet will be cited by taxpayers in analogous circumstances to challenge income inclusions based on third-party cash at their premises — but the decision also telegraphs exactly what the CRA must do to sustain such an assessment going forward. Specifically, the Tax Court identified these steps the auditors failed to take: a net worth analysis; a full bank statement reconciliation across all known banking relationships; a lifestyle review against declared income; a third-party audit of Desco; and a verification of Chevalier’s banking arrangements with Desco’s financial institution.
Post-Paquet, auditors in underground economy files are likely to conduct more thorough investigations using the full suite of tools under sections 231 and 237 of the Income Tax Act before issuing reassessments — specifically to avoid the evidentiary gaps the Tax Court catalogued in this case. Taxpayers under audit in cash-intensive sectors should therefore expect more aggressive use of formal information demands, third-party document requirements, and bank verification requests. Retaining an experienced Canadian tax litigation lawyer at the audit stage — before documents are produced and statements are made — is more important now, not less.
Parallel Civil and Criminal Proceedings: Strategic Coordination Is Essential
The Tax Court’s refusal in Paquet to assign any weight to conclusions from the parallel Court of Quebec criminal proceedings confirms a critical principle: civil income tax appeals and criminal proceedings operate under different standards of proof and must be managed independently. However, they interact in ways that require careful coordination. Statements made during a civil audit may be available in criminal proceedings. Evidence presented in one forum may be used in the other. Favourable findings in the Tax Court do not necessarily resolve the criminal proceedings, and vice versa. Taxpayers facing simultaneous CRA civil reassessments and criminal investigations should retain coordinated counsel for each forum without delay, and should understand that the Jarvis threshold — when the CRA’s dominant purpose shifts from audit to prosecution — is the pivotal moment at which constitutional protections attach.
Takeaways: Practical Strategy for Defending a CRA Income Reassessment Based on Third-Party Cash
Document Commercial Arrangements at Your Business Address at the Time They Arise
If your business address is used by another party for courier, mail, or delivery purposes — even informally and temporarily — document the arrangement in writing at the outset. A brief email confirmation or letter identifying the authorized party, the purpose of the arrangement, and the absence of any financial benefit to your business can be decisive evidence years later. Mr. Monette’s affidavit served this function in Paquet. That evidence was available only because it was created at or near the time of the relevant events.
Challenge Every CRA Assumption in the Notice of Objection — Not Just in the Notice of Appeal
The Hickman Motors burden-shift happens at the level of the pleadings, not at trial. An experienced Canadian tax litigation lawyer will identify each assumption the CRA has made in reassessing, and marshal targeted evidence to demolish each one in the Notice of Objection. Starting the challenge early — before the appeal stage — often produces a resolution at objection without the cost and time of a Tax Court proceeding. At minimum, it builds the factual record on which a successful appeal depends.
Raise the Statute-Barred Year Defence Early and Explicitly
If the majority of reassessed years fall outside the normal reassessment period, the subsection 152(4) misrepresentation defence is a powerful standalone argument that can eliminate most of the exposure before the substantive income question is fully litigated. This defence must be raised explicitly — in the Notice of Objection and in the Notice of Appeal — to preserve it. Failing to raise it does not waive the right entirely, but raising it at the outset frames the CRA’s burden correctly and maximizes the value of the limitation period as a strategic tool.
Treat Gross Negligence Penalties as a Separate Battle With a Separate Evidentiary Threshold
Many taxpayers make the mistake of negotiating away their penalty defence as part of a global settlement of the income reassessment. The gross negligence penalty under subsection 163(2) requires the CRA to prove a high degree of negligence tantamount to intentional conduct — a threshold that is entirely independent of whether the underlying income reassessment is sustained. An experienced Canadian tax litigation lawyer will insist on keeping the penalty issue open until the CRA has demonstrated it can meet the Venne standard, not merely assumed it can.
Post-Decision Developments: Costs Award and Finality of the Tax Court’s Decision
The Tax Court of Canada issued its judgment in Paquet c. Le Roi, 2024 TCC 61, on May 16, 2024, allowing the appeals of both Steve Paquet and 4527976 Canada Inc. in full. The neutral citation 2024 TCC 61 is the authoritative reference for this decision.
Following the judgment, the Tax Court issued a costs award in November 2025 in favour of both appellants. Costs of $7,974 were awarded to each appellant — Steve Paquet and 4527976 Canada Inc. — through their counsel, Starnino Mostovac LLP. The issuance of a formal costs order confirms that the Tax Court’s judgment was finalized and implemented.
Significantly, the CRA did not appeal the Tax Court’s decision to the Federal Court of Appeal. Under section 27 of the Federal Courts Act and section 27.1 of the Tax Court of Canada Act, the CRA had the right to appeal the decision on a question of law or mixed fact and law. The absence of any Federal Court of Appeal proceeding — confirmed by a review of the Federal Court of Appeal’s published decisions through June 2026 — means the Tax Court’s findings on burden of proof, the statute-barred years, and the gross negligence penalties are final and binding between these parties.
The CRA’s decision not to appeal is itself notable. It suggests that the Canadian tax lawyer acting for the CRA assessed the evidentiary record and concluded that the Tax Court’s findings of fact — particularly the credibility of Guy Chevalier’s explanation and the absence of any traced benefit to the appellants — could not be successfully challenged on appeal. Findings of fact are entitled to deference at the Federal Court of Appeal under the Housen v. Nikolaisen, 2002 SCC 33 standard, and are reversible only for palpable and overriding error. With no such error apparent on the record, the CRA’s acceptance of the result was the correct and realistic assessment.
For taxpayers and their advisors, the finality of 2024 TCC 61 strengthens its value as precedent. The decision stands as confirmed authority for the propositions that: physical delivery of cash to a business address does not constitute income; the CRA cannot sustain a multi-year reassessment without traced, documented evidence of beneficial receipt; statute-barred years cannot be reopened without proven misrepresentation; and gross negligence penalties require independent proof of knowing or reckless conduct that the Canadian tax lawyer acting for the CRA must establish on its own merits.
Conclusion: The CRA and ARQ Did Not Meet the Burden of Proof
The Tax Court concluded that the evidence relating to the financial strategy of Mr. Chevalier and Desco involving the cash deliveries, according to the explanations given by Mr. Chevalier and Mr. Auger, could just as easily explain the cash deliveries as the CRA’s and ARQ’s explanation. The Tax Court found that the evidence and statements of Mr. Monette were compatible with Mr. Chevalier’s explanation. Furthermore, the evidence did not indicate that one or both of the appellants profited for personal gain from all or any of the cash delivered by Garda. The Tax Court concluded that Mr. Chevalier, and other witnesses, all gave versions of the facts that would run counter to such a conclusion. The information produced during the hearing implicated people other than Termont, Mr. Monette, Heritage and Mr. Paquet. Thus, on the balance of probabilities, the Tax Court could not conclude that the assessments in dispute were supported by the facts in evidence.
The Canadian tax lawyer acting for the CRA did not produce sufficient evidence to demonstrate that the assessments were accurate, nor did the CRA succeed in dismantling the credibility of the testimonies of the appellants’ witnesses. Therefore, the tax appeals were allowed.
Pro Tax Tips: The CRA’s Investigatory Powers — and How to Protect Yourself When They Fall Short
“As a Certified Specialist in Taxation with more than 35 years of experience in Canadian income tax litigation, I can say that Paquet is one of the clearest illustrations I have seen of what happens when the CRA builds an assessment on inference rather than evidence,” says David Rotfleisch of Rotfleisch & Samulovitch P.C. “The Tax Court does not reward investigative shortcuts. If the CRA cannot trace the money to your pocket, it cannot put the money in your income.”
The Tax Court highlighted during this case that the CRA did not make use of the investigatory powers that it is provided under the Income Tax Act. For instance, sections 231 and 237 of the Income Tax Act provide broad powers for the CRA to demand documents and information, including the ability to dictate in what form the information is provided. Had those powers been used against Desco and its banking relationships, the Tax Court observed, this case might have turned out very differently — or the investigation might have confirmed the appellants’ version. Either way, the failure to use those tools hurt the CRA’s case.
However, the powers the CRA has are not limitless. The constitutional framework established in R. v. Jarvis, [2002] 3 SCR 757, draws a critical line: once the CRA’s investigation shifts from a regulatory audit to a criminal investigation, the ordinary tax audit powers under section 231 can no longer be used to compel the production of self-incriminating documents or statements. Taxpayers who suspect their audit has crossed that threshold should retain an experienced Canadian tax litigation lawyer before providing further materials or attending interviews with CRA investigators.
For any taxpayer facing a similar situation — particularly one involving third-party cash flows, unexplained deposits at a business address, or a CRA audit that mirrors a provincial reassessment without independent verification — the following are the core defensive principles drawn from Paquet:
- Document every commercial arrangement involving your business address. If another party legitimately uses your address for deliveries, confirm it in writing at the time — a brief email or letter agreement can be decisive evidence years later.
- Challenge the assumptions underlying the reassessment in your Notice of Objection, not just at the appeal stage. An experienced Canadian tax litigation lawyer drafts objections with the Hickman Motors burden-shift explicitly in mind.
- If the majority of reassessed years are statute-barred, raise the subsection 152(4) misrepresentation defence early. It can eliminate most of the exposure before the substantive income question is ever litigated.
- Treat gross negligence penalties under subsection 163(2) as a separate battle requiring separate proof by the CRA under the Venne Never concede penalties as a condition of resolving the underlying income dispute without legal advice.
- If your file involves both a CRA civil audit and a criminal investigation, coordinate counsel for both forums. Statements made during a civil audit may have consequences in criminal proceedings.
An experienced Canadian tax litigation lawyer at Rotfleisch & Samulovitch P.C. can advise on how to navigate a CRA tax audit and develop the right litigation strategy from the earliest stage of an assessment.
Related Reading on the Rotfleisch & Samulovitch Website Network
- How CRA Conducts Net Worth Audits and Penalty Assessments — taxpage.com
- Gross Negligence Penalties: Federal Court of Appeal Analysis — taxlawcanada.com
- A Primer on Tax Evasion and Voluntary Disclosure — canadiantaxamnesty.ca
- GST/HST Registration Requirements — goodservicetax.com
- Canadian Tax Lawyer’s Guide for Digital Nomads — taxlawyer.com
- Short-Term Rental Tax Deductions — taxpage.com
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Frequently Asked Questions: CRA Burden of Proof, Statute-Barred Reassessments, and Gross Negligence Penalties
If I face a similar situation with wrong assumptions by the CRA, how can I meet the initial burden of proof?
Hickman Motors Ltd. v. Canada, [1997] 2 SCR 336, which was relied on in this case, is the leading authority. In that case, the Supreme Court of Canada found that the appellant had produced “clear, uncontradicted evidence, while the respondent did not adduce any evidence.” The Supreme Court clearly identified the assumptions made by the CRA, and held that the appellant had produced evidence to the contrary of those assumptions. A similar method should be taken in other situations. Other appellants should determine the assumptions of the CRA, and then assess the evidence they have for refuting them. An experienced Canadian tax litigation lawyer will be knowledgeable on the type and extent of evidence needed.
Do I need to disprove all of the CRA’s assumptions?
Not necessarily. In certain situations, even if some assumptions are demolished, the remaining assumptions could be sufficient to support the CRA’s assessment. Success hinges on the ability of the taxpayer to identify and demolish the assumptions that are necessary for the assessment to stand. To accomplish this, the experienced Canadian tax litigation lawyer representing taxpayers needs to draft a well-written legal pleading that defines the facts and issues in dispute and the remedies sought by the taxpayer.
What is the normal reassessment period, and when can the CRA reassess a statute-barred year?
For most individual taxpayers and corporations, the normal reassessment period is three years from the date of the original notice of assessment. Once that period expires, a taxation year is statute-barred. Under subsection 152(4) of the Income Tax Act, the CRA may reopen a statute-barred year only if the taxpayer made a misrepresentation attributable to neglect, carelessness, wilful default, or fraud. The Canadian tax lawyer acting for the CRA bears the burden of proving that misrepresentation. In Paquet, because no income inclusion could be established, no misrepresentation existed, and the CRA had no authority to reassess the statute-barred years.
What is the gross negligence penalty and what standard must the CRA meet to impose it?
The gross negligence penalty under subsection 163(2) of the Income Tax Act applies where a taxpayer knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission in a return. It equals the greater of $100 and 50% of the understated federal tax. The standard — established in Venne v. The Queen, 84 DTC 6247 — requires “a high degree of negligence tantamount to intentional acting.” The Canadian tax lawyer acting for the CRA bears this burden entirely, and the standard is strictly applied. In Paquet, the penalties were vacated because there was no false statement to begin with.
Can the CRA include cash in my income if the cash was physically delivered to my address but belonged to someone else?
No. Paquet confirms that physical delivery to a taxpayer’s address does not establish that the funds are income of that taxpayer. The CRA must prove beneficial receipt — that the money was actually received for the account of, or for the benefit of, the taxpayer. The theory that Heritage’s address equated to Heritage’s income was specifically rejected on the evidence.
What should I do if the CRA is investigating cash transactions at my business?
Retain an experienced Canadian tax litigation lawyer before responding to any CRA demands, information requirements, or audit requests. Do not provide documents or make statements without legal advice. Your counsel can assess the scope of your obligations under sections 231 and 237 of the Income Tax Act, identify where the CRA’s investigatory powers begin and end under R. v. Jarvis, [2002] 3 SCR 757, and design a response strategy that protects your legal position.
How do the CRA’s civil audit powers interact with a criminal investigation?
The civil tax audit powers in Part XV of the Income Tax Act — including compelled document production under sections 231.1 to 231.7 — cannot be used for the dominant purpose of a criminal investigation. The Supreme Court of Canada established this boundary in R. v. Jarvis, [2002] 3 SCR 757. When the CRA’s purpose shifts from regulatory compliance verification to the prosecution of a taxpayer for a criminal offence, constitutional protections attach and the audit powers can no longer be used compulsorily. Taxpayers who believe they are under criminal investigation should retain experienced legal counsel immediately — the right to retain and instruct counsel is precisely what Jarvis protects.
Should I be concerned about the ARQ and CRA reaching different conclusions about the same transactions?
Yes — and Paquet is an instructive example. The CRA assessed Heritage on an entirely different basis than the ARQ, using a different legal theory applied to the same set of facts. When federal and provincial reassessments diverge in their underlying rationale, that divergence is itself evidence of evidentiary weakness. An experienced Canadian tax litigation lawyer can use the inconsistency between the two agencies’ positions to undermine the credibility of both.
Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in this article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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