Registrants are required to keep adequate books and records that provide the information necessary to ensure taxes payable under the Excise Tax Act (“ETA”) can be determined. What may happen if a taxpayer has failed to file tax returns, filed patently deficient ones and/or a taxpayer’s books and records are not reliable or do not exist? Subsection 299(1) of the ETA states that the Minister is not bound by the contents of the return, but may assess by alternative means including the use of estimates or net worth approach. (Parallel provisions can be found under subsection 152(7) of the Income Tax Act.)
As described by the Federal Court of Appeal in Hsu v R (2001 FCA 240), “…a net worth assessment is an arbitrary and imprecise approximation of a taxpayer's income…Where the factual basis of the Minister's estimation is inaccurate, it should be a simple matter for the taxpayer to correct the Minister's error to the satisfaction of the Court.” In Troung v. The Queen (2017 TCC 22), the Tax Court of Canada (“TCC”) deals with net worth assessments and the case illustrates again that credible evidence from the taxpayer is the key in defeating such assessments.
In Troung, the Minister issued an assessment of unreported income and GST against the Taxpayer after analyzing the Taxpayer’s bank accounts, acquisitions of real property, acquisition of motor vehicles, gambling records, business expenses/losses and declared income. The Taxpayer appealed the net worth assessment to the Tax Court of Canada (“TCC”).
The main issues before the TCC were (1) whether the net worth assessment was flawed because certain assets or personal expenditures allocated to the Taxpayer were not hers and (2) whether the allegedly taxable income, which increased the Taxpayer net worth assessment, arose from non-taxable sources of funds.
As the Taxpayer did not produce books or records of her business activities at the hearing, the TCC made its decision based on oral evidence given by the Taxpayer’s witnesses at trial, the Minister’s documentary evidence and third party official and business records.
At the end, the TCC found that the Taxpayer failed to provide credible evidence or explanation to defeat the Minister’s alternative assessment and dismissed the Taxpayer’s appeal.
Generally speaking, a taxpayer may contest net worth assessment by (1) challenging its necessity or method chosen in the first instance; (2) challenging specific aspects of the quantum, methodology or inclusions, and/or (3) submitting evidence concerning non-taxable sources of income received by the taxpayer.
It is generally advisable to seek legal advice in order to determine the best way to “fight” a net worth assessment.