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Published: March 5, 2020

Last Updated: February 28, 2022

Introduction – The SCC Refuses to Intercede in Net-Worth Methodology

On October 18, 2018 the Supreme Court of Canada summarily dismissed an Appeal from the Federal Court of Appeal without reasons, as per its standard practice. The taxpayer had appealed from the Federal Court of Appeal’s earlier decision that the Tax Court of Canada did not err in law when it held that casino losses can be indicative of unreported income, and thus validly form the basis of a net-worth assessment against a taxpayer. The case further emphasizes the basic principle of Canada’s Tax Act that barring certain exceptions, the taxpayer always bears the burden of disproving the Canada Revenue Agency’s assumptions used to support an income tax assessment.

The Tax Court Decision – Truong v The Queen, 2017 TCC 22

The story begins at the Tax Court where the taxpayer had appealed a net-worth assessment that had been levied against her. It was explained by the CRA and accepted by the Tax Court that when the taxpayer had been selected for tax audit, she continuously attempted to stall and refused to provide information to the Tax Audit Division.

As a result of the taxpayer’s refusal to provide the requested information, the CRA tax auditor followed the standard operating procedure of approaching third-parties to obtain as much information about the taxpayer’s finances as possible in the absence of co-operation. Utilizing requirements for information under section 231.2 of the Tax Act, the CRA tax auditor compelled banking statements, credit cards, real property records and various loan documents from banks and other third-parties. In a normal net-worth tax audit, these records alone would likely form the basis for the net-worth assessment, however in this case the CRA tax auditor in the course of their review of the provided third-party information made an interesting observation – that the taxpayer appeared to be depositing an inordinate amount of funds to the various casinos in Canada. The tax auditor then took the step, which our Toronto tax law firm has seen in other similar cases, of sending requirements for information to the casinos to gain access to the internal casino records.

What the auditor discovered was the taxpayer appeared to have lost several million dollars over the course of the three year period which had been selected for tax audit. The only reason that the CRA was able to identify these amounts appears to have been that the taxpayer had been enrolled in the various “high rollers” clubs to gain perks based on the amount of time she spent gambling. In this case, it would be her undoing as the CRA proceeded to make an assumption that every dollar that had been lost at the casino was income that was unreported – the casino losses were thus added to the “personal expenditures analysis” of the net-worth method; the result was reassessments for unreported income in the multiple millions.

At the Tax Court, the taxpayer argued that the casino records were not reliable enough to form the basis for reassessment, and that she had received non-taxable gifts and loans from family and her boyfriend that explained her ability to lose millions at the casino table. The taxpayer did not provide new records or even her own analysis of the casino’s internal records to rebut the assumptions, and the only evidence that was presented was oral testimony from witnesses that the Tax Court found unreliable.

In making its decision, the Tax Court did not need to reinvent the wheel, rather the outcome was predictable for Toronto tax lawyers. The Court held that the Minister is entitled to make assumptions on reassessment and that the taxpayer had not discharged the burden to “demolish” the assumptions of the Minister. Although the casino records may not be perfectly accurate, the net-worth assessment itself is a blunt instrument appropriately used by the CRA in situations where a taxpayer attempts to hide information or refuses to provide a complete set of accurate books and records when under tax audit.

As a result of the taxpayer’s continuing refusal to provide more complete and accurate records, the Tax Court held that the CRA was within its rights to rely upon the casino documentation and that the taxpayer had provided no cogent evidence to rebut the reassessment. As a result, the net-worth assessments were reasonable and would stand.

Strangely enough, the taxpayer chose to make no submissions with respect to gross-negligence penalties which the CRA had also imposed. As GNPs are one of the exceptions wherein the burden is always on the CRA, the Court determined of its own volition that the CRA had discharged its burden properly and that the taxpayer’s apparent multiple millions of dollars of unreported income along with the refusal to provide books and records made the gross-negligence penalties justified. As such, with the exception of a small downward adjustment of a few thousand dollars the CRA’s net-worth tax reassessment stood.

The Federal Court of Appeal – Truong v The Queen, 2018 FCA 22

At the Federal Court of Appeal, the taxpayer’s argument focused primarily upon the Tax Court’s determination that casino losses could form the basis for a finding of unreported income. As the FCA is an appeal court, only questions of law are reviewable for the most part, meaning the taxpayer was stuck attempting to prove that the Tax Court had erred in its legal reasoning. The complete lack of any counter-analysis or evidence presented by the taxpayer to the Tax Court meant that the FCA could not make a finding of legal error based on the Tax Court’s interpretation of the evidence on the record.

The unanimous FCA determined that the Tax Court had made no error when it determined that internal casino documents can form the basis for a reassessment in the absence of taxpayer’s records and explanation. The FCA explained that while such an assumption may not be perfect, the CRA is forced to take drastic measures in such a manner when a taxpayer completely refuses to take part in an audit of their financial affairs, despite their legal obligation to do so. As explained in the introduction section, the Supreme Court of Canada dismissed an appeal from the FCA’s decision without providing reasons.

Commentary – The Burden of Proof, the Net-Worth Tax Assessment and CRA Assumptions

As our Toronto tax lawyers have commented numerous times, the basis of Canada’s income tax system is that it is self-reporting and thus the taxpayer is in control of the information. Accordingly, the CRA is afforded the right to make assumptions that must be rebutted when a taxpayer refuses to provide the information as required by law.

In this particular case, while we agree that the casino records are not entirely accurate, the Tax Court’s decision was correct in that the taxpayer had taken none of the steps required to avoid or rebut the net-worth method of assessment, a method that even without internal casino records is at best a rough guess at a taxpayer’s income for the year.

The lesson to be taken away from this case is that the provision of records where possible would likely have been preferable to the several millions of unreported income and gross-negligence penalties levied on top. It is also always wise to put the imposition of the penalties into question regardless of the ability to rebut the income assumption. Failure to do so results in a complete loss for the taxpayer as in this case.

Tax Tips

Truong demonstrates that if you are selected for tax audit and have unreported sources of income, an experienced Canadian tax lawyer is a must from the beginning to ensure that the CRA is unable to make unreasonable assumptions and to control the process, manage the auditor and attempt to solve the unreported income problem early, without need for appealing to the Tax Court as a last resort. In addition, those who have unreported income would be wise to consider hiring one of our experienced Toronto tax lawyers to ensure that no criminal investigation is taking place and work to create a detailed record that will make the CRA incapable of pursuing criminal charges as a result of its civil audit.

Our Toronto tax Law firm has experience with the CRA’s recent attempts to utilize internal and unreliable internal casino documents to form the basis of an income tax reassessment against a taxpayer. In a recent matter, our office performed a detailed legal analysis consisting of 21 pages, an accompanying methodology memorandum of 12 pages and detailed counter-analysis consisting of seven extensive spreadsheets that proved the CRA’s calculations were incorrect in order to rebut the assumptions made by the auditor at the proposal stage. If you have been selected for audit by the CRA, call our top tax law firm to meet with one of our knowledgeable Toronto tax lawyers as the sooner you retain experienced tax representation, the more control they can take of the process and facilitate a better outcome for you.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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