Every week the Tax Court of Canada (TCC) hands down decisions in tax cases. Often you will hear that “you can’t win at tax court” from a lot of people. Statistically they are right – the taxpayer loses most tax cases. But the reality is that the majority of TCC cases never stood a chance to begin with because of the limitations of the tax court and the nature of tax law in general. If your case consists of complaining about the way the Canada Revenue Agency (CRA) auditor treated you and how mean and rude they were to you, then you are going to lose because the TCC does not have jurisdiction to hear such complaint. If you are a tax protester (and there a lot of these loons) who think that the Income Tax Act (the Act) does not apply to individuals or because they are aliens from space and therefore not subject to earthly jurisdiction or whatever; guess what, you are going to lose. If you are a poor single mother who sends the kids off to live with Grandma because you have to work all the time; guess what, you are not the proper person to be claiming child tax benefits under the Act, so you will lose. If you have a problem or an illness, either personally or in your family, and it does not fit perfectly in the definition of those problems or illnesses for which certain tax benefits are provided under the Act, then you will lose. All of the above may not be right, or fair, or even just, but none of those concepts matter in tax. The legal maxim that applies is “there is no equity in tax”, meaning that tax law is purely an intellectual exercise of applying the law to the facts, as presented in court. And by the way, in tax the onus is always on the taxpayer to prove that s/he does not owe what the CRA says he owes. That’s right, in tax you are guilty until proven innocent. Again, any concept of what is fair is not relevant in tax. As Yoda would say, “Tax is or is not owed, there is no ‘fair’”.
However, taxpayers can and do win in tax court on a regular basis. They win when they can prove in court that the CRA has made false or untenable assumptions or misconstrued the facts. In order to do this, the taxpayer usually has to come into court and tell the truth. TCC judges, in my opinion, have very good ‘BS-detectors” because people come into court and try to “shine them on” all the time. If you lie to them, they will crucify you, but if TCC judge hears a coherent plausible explanation of the facts delivered in a forthright and honest manner, they will listen.
This is a very long introduction to two rather small cases that came down this week, but the preceding rant made me feel a lot better, and I hope you enjoyed it.
These two cases involved effectively “net worth assessments.” A net worth assessment is when the CRA discovers that you have more assets, including money in the bank, than is consistent with your reported income on your tax returns. It happens all the time, and usually the CRA wins these cases as well, because the fact is that people often do no report all of their income. But people with unreported income then go out and spend the money or keep it in the bank and will eventually get caught. There was a famous case in the 1980s about a restaurant owner who failed to report his full income, and then tried to say that his significant assets were accrued despite is meager income because he was very cheap. Specifically, the taxpayer testified that he only fed his wife & children “scraps” from the restaurant. However, he showed up to testify in a silk suit worth thousands, and wearing a diamond pinky ring the size of a bird’s egg. The judge was not amused, and the taxpayer was slammed with the maximum penalties on top of the tax.
However in the two cases this week the taxpayer won because they could rationally explain why they had more money and assets than the CRA thought was consistent with their income. The first case, Swarbrick v. HMQ, 2010 TCC 605. (2009-2837(IT)I), involved the taxpayer having approximately $32k in cash than what the CRA thought made sense. However, the taxpayer and his brother came into court and testified in a manner that the court found to be “direct and persuasive”. They testified and were able to prove that he had received an inheritance and that the taxpayer had access to a line of credit, and that he had received cash from the sale of a principal residence (a non-taxable event), so it made sense that he would have that much cash. The tax court judge believed them and vacated the tax assessment and the penalties for gross negligence.
In the second case, Medvedev v. HMQ. 2010 TCC 629 (2007-4705(IT)G), the taxpayer operated a business exporting cars and parts to Russia. The CRA audited his bank accounts and found more money flowing through them than was consistent with his income tax returns for the three tax years in question. The taxpayer provided evidence that some of the extra deposits were loans from his father-in-law to help get the business going, and other excess deposits in one year were also gifts/loans from his father-in-law to assist him in making a down payment on a home. The judge believed the taxpayer that some of the amounts were business loans from his father-in-law, but did not think that the amounts attributed as loans/gifts to enable him to buy a house were sufficiently documented to prove that they had come from his father-in-law. As a result the taxpayer won outright in two of the three years, but lost in one year because he could not overturn the burden of proof that the CRA’s position was wrong, even though the judge seemed to want to believe him.
What these two cases show is that the TCC is all about the evidence you can put on. The onus is on the taxpayer, but the burden of proof is not insurmountable if you actually have truth on your side, as well as sufficient credible evidence you can present in court. Credible evidence usually requires that the taxpayer testify on their own behalf in a manner that makes the judge want to believe. In both of these cases, what the taxpayer said made a lot of sense, and seemed to be consistent with the facts. So the taxpayers won. The lesson here is that it is possible to win at the TCC, but it is not easy. Without qualified and experienced counsel to assist you in focusing your case on your key documents and other evidence, you will likely have a lot harder time winning at the TCC. Oh, and just a suggestion, leave the Armani suit and pinky ring at home…