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Onus of Proof: Derivative Assessments

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As a general rule in tax litigation, the initial onus is on the appellant-taxpayer to “demolish” the Minister’s assumptions that form the basis of the disputed assessment. This initial onus is met where the appellant makes out at least a prima facie case. If this is done, the burden then shifts to the Minister to prove, on a balance of probabilities, that the assumptions were correct.  The primary reason for this rule is that the taxpayer generally has the best knowledge of his/her own affairs in a self-reporting tax system.

However, the TCC has held that the initial onus may not be on the taxpayer in the context of so-called “derivative assessments” such as assessments against directors pursuant to director’s liability provisions for underlying corporate assessments (ss. 323 ETA and 227.1 ITA) and against transferees pursuant to non-arm’s length transfer rules for underlying assessments against the transferor (ss. 325 ETA and 160(1) ITA).  

By way of background, the concept of reversing the initial onus to the Minister was largely established by Justice Archambault in Gestion Yvan Drouin Inc. ([2000] T.C.J. No. 872) where it was held that the onus of proving prima facie evidence of the underlying tax liability arising out of a s. 160(1) ITA assessment generally falls on the Minister, unless the amount established by the Minister in the assessment corresponds to that indicated by the tax debtor in his tax return.  In Simon ([2002] 4 CTC 2358), Justice Archambault followed the same approach in the context of an assessment under section 227.1 ITA with respect to source deductions, where the Minister’s failure to call the auditor of the underlying assessment resulted in the court being unable to confirm the underlying corporate assessment that the appellant-director disputed.  A similar approach was adopted by Justice Lamarre in Lavie (2006 TCC 655) and Cappadoro (2012 TCC 267), which involved an assessment of GST in respect of alleged cocaine sales and a non-arm’s length transfer under section 325 ETA, respectively.

In Mignardi (2013 TCC 67), Justice Paris placed the onus of proof on the Minister to prove the underlying GST assessment where a past director appealed a s. 323 ETA assessment.  However, in doing so, it was noted that this reversal of onus to the Minister is only available where the facts concerning the underlying tax debt are “exclusively or peculiarly” within the knowledge of the Minister.  In that case, the appellant had not been involved with the company for some time at the time of the assessment, had not been a director for some time, and his multiple requests for particulars to the Crown were not responded to.

This issue was most recently analyzed by Justice Paris in Andrew (2015 TCC 1).  Here, the Appellant was the director and sole shareholder of two corporations, each of which were assessed for failing to remit GST and payroll source deductions.  Derivative assessments were raised against the Appellant pursuant to section 323 of the ETA, to which the Appellant objected.  The Appellant took the position that the Minister bore the onus of establishing the correctness of the underlying tax assessments against the corporations. 

The TCC rejected the Appellant’s argument while summarizing the current state of the law on the issue.  It noted that when the derivative assessment is based on the taxpayer’s own filings, the initial onus would not shift from the taxpayer to the Minister.  It cited the “exclusively/peculiarly” test from Mignardi outlined above and noted that that test might be satisfied where the taxpayer does not have and cannot obtain information required to verify the existence or amount of the underlying tax liability. 

Applying these concepts to the facts, the TCC noted that the assessments against the corporations were simply the amounts of net tax reported by the corporations in their own returns.  Furthermore, the Appellant was personally involved in the filing of all GST returns; accordingly, putting him in the best position to determine what errors, if any, the underlying assessments contained.  With regard to source deductions, although employees of the corporations handled same, this was done under the Appellant’s authority and all information regarding source deductions was available to him.  The Appellant was considered to have been in a position to retain possession of all the files and records of both corporations after they ceased operations.  Accordingly, the TCC held that the initial onus remained on the Appellant to “demolish” the Minister’s assumptions.

The “exclusively or peculiarly” test places a very high bar on an appellant to establish the need for an onus reversal.  A more appropriate test would focus exclusively on the extent to which the appellant has knowledge or access to information regarding the underlying assessment, rather than simply what is exclusively within the Minister’s knowledge.

In any event – based on the current state of the law according to the TCC – in the context of derivative assessments against sole, managing directors of a corporation, it would be rare for the onus to be reversed.  In the context of directors with limited knowledge of and involvement with the corporation and of non-arm’s length transferees, there is a better chance that the initial onus could be placed on the Minister.  Those facing derivative assessments ought to immediately exhaust all possible avenues (including requesting information from CRA and the taxpayer assessed in the underlying assessment) as these efforts are likely to become relevant in determining whether the initial onus of proof should be placed on the Minister or the appellant. 

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