EMAIL RECEIVED:

Your site is so enlightening wow! I think I’m doing everything correct but to your point these malicious people are out there to destroy our lives. Do you have an office in Montreal? If they knock on my door you’ll the first person to be contacted, my God this is so scary!! We must revolt against this atrocity of treatment. I’m surprised people have not protested yet.  I thought IRS is bad but CRA is as bad, if not worse. Our taxes are higher than the US, so basically the government robs us twice and we keep taking the jabs…We need to camp in Ottawa to be heard, this abuse of power must stop.

RESPONSE:

 Thanks for your words and for taking the time to show your appreciation.

I will answer in a bit of a rant…

 It is an interesting situation we have in respect to taxation in Canada. The average Canadian never gets to see just how bad things really are.  We get about 500 real visitors a day who read our site.

What seems to escape people is that there is a reason there is a downturn in the Canadian economy. It has nothing to do with the mortgage fiasco in the USA and the spill off to other countries.

The Canadian economy is different that most of the rest of the world. The Canadian economy would boom but for one simple reason.

There is no shortage of desire or willingness to work in Canada. There is just a shortage of money.

Here is a bit of an economics rant… I could really expend on this subject… but it is a digression… and it is just my opinions.

There are two solutions to fixing a money shortage:

1.      Create more money, which the government has the constitutional right to do.

2.      Reduce taxation which would be the more appropriate conclusion.

It is the Canadian consumer who makes the economy healthy, when they have money to spend the economy thrives.

When the governments tax wealth and makes us poor, we end up with a poor economy.

There is really little need to tax corporations, as they just spend the money anyway. Of course there would need to be a tax if the money is removed from Canada. When corporations have money, they spend and they make jobs…. So let’s drop the idea that we need to impede businesses by taxing them in to demotivation.

Taxation interferes with the flow of money, taking it out of industry and redirecting it to government financial mismanagement and to buy jets and to spend millions on advertising … we can not afford.

There is no need for income tax as we know it. That could be dropped and the HST rate  could be increased if necessary… not likely necessary.  Likely the rate could be reduced.

More money exchanging hands more often would generate more income for the government services.

Retail taxes such as GST and PST, drain money from the economy… In Canada it costs on average 13 cents to use a dollar. As the dollar circulates through the economy generating 13 cents per time. Being that that dollar will change hands on average of 100 times per month, it will generate $13 per month or $156.00 per year. Think about that…. One dollar takes $156 dollars out of circulation…..

A dollar taxed as income can only generate about $.46 per year…. That leaves 54 cents to circulate in the economy until the HST drains it to Zero.

 After a dollar drains its value to zero, then the person in possession of the dollar needs to take other money to pay the 13 cents to use the dollar…. Another way to see this is;  The government mints a loony and we pay 13 cents to use it. 13 cents every time, time after time, until we no longer have any money to pay for the use of the loonys. Talk about your Loony Toons.

As I see it … the governments are not stupid….. so one assumes they know what they are doing.

Therefore the way to control the population is to control the money, keep it scarce and keep people working until they drop dead. Make sure you tax seniors and keep them working… they know too much and could cause some real problems for the government of the day.

It used to be that taxpayers could take advantage of tax loopholes. Today the taxpayer loopholes  have been replaced by loopholes that allows CRA to exploit taxpayers.

Today tax audits are a taxpayer loophole nightmare. Small business is lucky if they can survive today’s audit. If CRA finds nothing, they can do a lifestyle audit and bankrupt you with that. If you have the money to fight, you win. If you don’t have the money to fight, you go bankrupt.

The Income Tax Act and the Excise Tax Act are so complicated that many lawyers do not understand it. So to win the day, it is often necessary to get in front of a judge.

The Tax Court Judges are mostly good people who do a just service to the taxpayer.  A day in court is a day of education. There are many lessons to be learned there. Every time we go to court we get better and better at winning our game.

Fighting CRA on your own is really hard, and elf-representing in tax court is a very bad idea. You go up against a lawyer who knows the game, in front of a judge that has to follow the rules. They can only rule on what you prove to them, so if you don’t know how to play the rules, you are a small fury animal in front of a big Mac truck.

As far as I know, we are the only company that helps people keep their books in “audit ready” format. I am not aware of any software other than our owns that allow people to keep audit ready records.

So the government of the day, knows full well what they are doing.  

When the government is finished removing all wealth from the people by using Canada Revenue Agency as Revenue Collectors, then they can give incentives to the people to earn more back…

It is all a game, and we the Canadians sit back and let it happen.

Well it is election time…. We have the right to kick out the old Dictators and elect new Dictators… we should at least do that until we get an ethical government.

The government of the day informs CRA that they are the client and taxpayers are to do as they are told.

The government of the day does abuse its power and is in contempt of the Canadian people.

Our first step is to change that by considering how we vote.

The next step is to support the Society of Professional Tax Representatives, to bring the truth to the people and we need to get a political party on board.

At the moment all I can do is help one taxpayer at a time who is in trouble, and to publish useful information on my web site. We are making change, one taxpayer at a time.

I would love to see change… it would not be good for our business, but there are other ways for our company to make money than in correcting injustices to the Canadian Taxpayers.

Anyway… that is my rant of the day.

For more information on tax problems and solutions go to www.taxauditsolutions.ca  or click here.

Best Regards

Dan White

This is taken from the  Nanaimo Daily news Published: Thursday, April 07, 2011

We deal with this stuff everyday and it is hard to believe that this can happen in Canada today. I suggest the smoking gun lies with the government of the day. Think about this when you cast your federal vote.

Also see comments below, also published in the Nanaimo Daily News.

Tax fraud case is a ‘David and Goliath story’ that vindicates restaurant owners: Lawyer
Danielle Bell, Nanaimo Daily News
The owners of Nanaimo’s MGM Restaurant were found not guilty on Wednesday on allegations of tax fraud totalling more than $1 million.

Calling the Crown prosecution’s case weak, flawed and the alleged numbers “highly uncertain,” Judge Justine Saunders said the evidence against the owner and the two corporations could not sustain a conviction on any of the counts.

Tony and Helen Samaroo, their restaurant and their holding company Samaroo Holdings, were named in 21 charges of making false statements and evading payments under the Income Tax and Excise Tax Acts.

They were discharged in provincial court in Nanaimo.

“This is not just an acquittal, this is a vindication of their innocence,” said Chris Tollefson, lawyer for Helen. “This is truly a David and Goliath story.”

Afterwards at the MGM, which the Samaroos have operated for more than two decades, the couple and their lawyers celebrated with champagne.

“I’m glad this over,” said Tony, 62. “This has been very hard on my family and kids.”

The trial took 19 days to complete, most used for the Crown case. The offences allegedly took place between 2004 and 2006. The amount of unpaid taxes alleged against the Samaroos was $512, 776 each. Crown prosecutors had several theories, namely that the Samaroos misappropriated unreported cash and understated their income and the income of the MGM and Samaroo Holdings.

Allegations included a paper trail pursued by a Canada Revenue Agency accountant in the investigation pointed to nearly $1 million being deposited to their personal accounts of the Samaroos and shareholder loan accounts of the MGM and Samaroo Holdings; that Tony skimmed unreported cash from one till tape or shift per day; that the Samaroos used unreported cash to pay third-party suppliers, liquor and wages, and the net worth analysis indicated they could not have saved close to $1 million from 1980 to 2003.

A CRA investigation began in March 2006, which led to several search warrants and the seizure of numerous documents at the MGM, the nightclub owned by Samaroo Holdings, the motel owned Samaroo Motel Ltd, the Samaroo home, bank, credit union and accountant offices.

In her 23-page reasons for judgement, Saunders said the Crown theory is that the figure of $1.7 million, as alleged in the indictment, is “undoubtedly completely incorrect.”

As defence lawyer Steve Kelliher puts it, said Saunders, the Crown engaged in “voodoo accounting” to come up with the numbers to support the charges.

With the significant flaws in the net worth analysis, discrepancies between evidence regarding shareholder loan accounts, the unreliable extrapolation regarding sales at the MGM and the enormous markup calculated by the CRA accountant, deemed too hypothetical to rely on, Saunders said the Crown’s case is weak.

Saunders also said the Crown cannot rely on the calculations of the CRA accountant to prove its case.

There were 51 Crown exhibits, most of which were large binders containing hundreds of working papers.

DBell@nanaimodailynews.com 250-729-4255

The Daily News (Nanaimo) 2011
COMMENTS ON THIS STORY

t netley
Thu, Apr 7, 11 at 10:45 AM
The owners have a lot more b— than I would. Congratulations on proving these bullies wrong
Going South
Thu, Apr 7, 11 at 12:07 PM
Congratulations to the Samaroo family for fighting CRA and winning. We are also fighting RCA right now; it’s not easy or cheap and certainly doesn’t feel fair. Many innocent taxpayers are screwed by RCA each year but either dont realize it or can’t afford the legal costs to fight it. The government isn’t always right or honest, and I’ve learned that unfortunately there’s not much you can do about it.
Brian
Thu, Apr 7, 11 at 01:31 PM
Good, now turn around and counter sue them in civil court for damages and launch a private criminal prosecution for malicious prosecution against the individuals in the CRA. The CRA is out of control! Who says Government doesn’t rule with a gun?
kinikinik
Thu, Apr 7, 11 at 04:11 PM
I was thrilled to read of this victory. CRA are nothing more than thugs. I know of one lovely family who have been nothing less than hunted down and harassed beyond belief. These are hard working, honest, law abiding people who have done absolutely nothing wrong, and yet are hounded year after year. I hope the family I am thinkin of reads this and takes hope and strength that CRA CAN be beaten!
cory p
Thu, Apr 7, 11 at 06:29 PM
i plead guilty to these guys trumped up stuff a few years ago. i could not afford the fight .they were dishonest all the way through.
Jack & Mary
Fri, Apr 8, 11 at 02:40 AM
Congratulations Helen & Tony.
Kirk L. Nymann
Fri, Apr 8, 11 at 08:36 AM
Clearly, we are under the thumb of a corrupt government. Changing the seats in the dancehall will not stop the dancehall from collapsing. The very structure of government needs to change. It’s time for the People of Canada to stand up, REMOVE the old system of governance and REPLACE it with a system based on a CONSTITUTION (rather than a Constitution Act). And, surprise, surprise, there IS one available at CanadianConstitution@yahoo.ca - just e-mail for a free PDF copy today!
Concerned citizen
Sat, Apr 9, 11 at 12:57 AM
A hearty congratulations to the defence counsel — Chris Tollefson and Steve Kelliher.

This was written for information and understanding of what to expect in tax court.

INTRODUCTION

The following article is written both for professional tax representatives and for those who would consider defending themselves in tax court. This article brings out the seriousness of the things you don’t know that you don’t know about that will kill you.

For the point of understanding our company’s role in this exercise: There is a role for us in Tax Court in that we can represent our clients in informal tax court but not General Procedures. In General Procedures we still to the audit/court ready accounting, but we do it on behalf of the client who self represents or who has retained a lawyer. Our services dramatically reduce the cost of the overall exercise.

Usually hiring a lawyer for informal tax court is not cost justified, that is the primary reason we act as an agent for our clients in informal court.

When you need a lawyer, make sure you go by reference because there is a huge difference between a good tax lawyer and a dabbler in the profession.

The following case was in Informal Tax Court case that could have gone to General Procedures but was heard in Informal Tax Court as per the wishes of the client.

The bottom line financial results of this court case is that the Appellant (The Taxpayer) succeeds in his appeal and gets a reduction in his taxable income, subject to the limitations of informal procedure and is awarded costs.

It is significant that costs were awarded, because it shows how the judge saw the case in terms of how CRA handled the case.

The text in italics is what I have inserted with what Justice Webb wrote in his judgement.

Docket 2010-2625(IT)I

John Wiens and Her Majesty the Queen.

Justice Wyman W. Webb

Agent for the Appellant: Dan White

Counsel for the Respondent: Samantha Hurst.

JUDGEMENT

The Appellant, Mr. John Wiens, has his appeals allowed with Costs. The matter is referred back to the Minister for reconsideration and reassessment based on Justice Webb’s judgment on the matter.

The following is an explanation of how I interpret the judgment and what I think is noteworthy as a reference to tax knowledge. I think this is very useful information for anyone thinking of handling their own tax case, or who wants to know what is going on in court.

The judgment is a 47 page document by Justice Webb. One can only respect the judge for the care and attention he took to his decision and how useful his explanations were. He is a credit to his profession.

The issues revolved around a series of real estate transactions by the Wiens family. Was this the business of buying and selling real estate? An adventure in the nature of trade, or was it capital gains?

There was the question of who earned the money from the exercises.

There was an issue as to was one year statute barred due to CRA opening up the year based on a signed waiver by the taxpayer… The taxpayer was gravely ill at the time and does not remember signing the waiver.

There was an issue around a retail store that was closed down after various disasters including multiple robberies. Was the insurance payout income or not?

THE CASE WAS TRIED IN (IT) INFORMAL TAX COURT.
[2]    Section 18.12 of the Tax Court of Canada Act provides that:
18.12 Where, before the start of the hearing of an appeal referred to in subsection 18(1), it appears to the Court that
(a)    the aggregate of all amounts in issue exceeds $12,000, or
(b)    the amount of the loss in issue exceeds $24,000,
as the case may be, the Court shall order that sections 17.1 to 17.8 apply in respect of the appeal unless the appellant elects to limit the appeal to $12,000 or $24,000, as the case may be.
[3]    Section 2.1 of the Tax Court of Canada Act provides that:
2.1 For the purposes of this Act, “the aggregate of all amounts” means the total of all amounts assessed or determined by the Minister of National Revenue under the Income Tax Act, but does not include any amount of interest or any amount of loss determined by that Minister.
[4] Since no penalties were assessed under the Income Tax Act (the “Act”) against the Appellant, for the purposes of the Tax Court of Canada Act “the aggregate of all amounts” in this case would mean the taxes assessed under the Act. In Maier v. The Queen, [1994] T.C.J. No. 1260, Justice Garon (as he then was) held that the aggregate of all amounts in dispute means the aggregate amounts in dispute under a particular assessment (or reassessment) and not under a Notice of Appeal. When a Notice of Appeal relates to more than one assessment (or reassessment) the issue is not whether the total amounts in dispute under the Notice of Appeal exceed $12,000 but whether the total amounts in issue in relation to any particular assessment or reassessment exceeds $12,000. Therefore, if a person elects to limit an appeal to $12,000, the limitation will apply to each assessment (or reassessment) that is the subject of the appeal. In this case, the $12,000 limit will apply to the appeal from the reassessment of the Appellant’s liability for his 2002 taxation year and a separate $12,000 limit will apply to the appeal from the reassessment of the Appellant’s liability for his 2003 taxation year.

INTERPRETATIONS & COMMENTS BY DAN (in italics) In our case, the taxpayers had reasons to want to keep the matter in informal proceedings. One big factor was the cost of formal procedures of General Procedures. Their decision limited the amount of federal tax in dispute to a $12,000 limit. Being that no penalties had been assessed by CRA,  that meant the aggregate of all amounts would be exclusive of penalties or interest on those penalties. Because there were two years under appeal it meant that winning the case would result in a $24,000 reduction in tax owing on the years in question as well as all the related interest that would have accumulated after the assessment was issued by CRA.

The $24,000 loss limit allowed in informal court, was not relevant in this case, so I will not get into that here.

It is important to note that the amount in dispute is not what is in the Notice of Appeal, but rather what is in the assessment or reassessment issued to the taxpayer by CRA. The aggregate amount of $12,000 is exclusive of interest. The way it works, is the taxpayers income would be reduced by $12,000 for each year in question and then the interest would be calculated based on the reassessed lower income, from that point in time on until the present.

It is also important to note that the reduced income would also lower the provincial tax owing portion which is not included in the $12,000 limit. Therefore the total tax owing would be reduced by more than the 12k per year.

Naturally one has to reduce their taxable income by at least 12k per year otherwise it would be a lesser amount based on what the taxpayer won on.

Without agreeing to the limit the case would have had to be heard in General Court proceedings. Justice Webb was very clear in the seriousness of the limiting decision.

It is a bitter sweet victory when you get 100% of the amount you went after, but see that you possibly would have received much more in General Proceedings. Making the call to limit your win versus a dramatic increase in the cost of the case in General Proceedings is a tough call and there are no guarantees in court. For 2002 General proceedings would have been further reduction of income of around $7,400 more and for 2003 it would have been about $54,200. But that was a decision that was made and we accept that because we made the decision fully informed.

Getting costs awarded is a nice bonus and means to me that we did a good job of representing the case.

Reducing the amounts in dispute also means that there is less attention paid to certain details required. One limits their scope to going after what they are sure they can win. The issue of my pointing my attention away from certain areas was noted by Justice Webb in relation to the Agent not putting his mind to questioning and certain proofs of evidence as in the issue of the three real estate properties.

Having said that, it still leaves me with the notion that it would have been better to go for all the points as we would have if it was General Procedures. The more considerations the more work is required and the higher the related costs will be. As you get into a complicated case, you really see the benefit an experienced tax lawyer brings to the game, due to the complexity of tax law. We are not lawyers so we need to do extensive research and subscribe to the same expensive resources. With each case we get better and better, but it is a hard road.

In our company’s world, we bring professional services to an area where it is hard to justify a lawyer’s fees. That specially is that Tax Audit Solutions addresses that niche market of informal tax court. Our first objective is to prove what was or what should have been done in the accounting.

Where the amounts are above the threshold of informal court, we then support lawyers by doing the audit and tax court ready accounting.

One has to be really aware of court proceedings, I am of the strong opinion, that one only gets good in court as a result of experience. There is no school that provides the learning platform as a day in court. Tax Court is not a place for a taxpayer to defend themselves. The deck of cards is too stacked in favor of those who know the game. I would compare a day in self-represented tax court to a day in a chess tournament by a novice against a Chess Master.

In our business we see all to much of what happens when taxpayers self-represent. Earning your stripes in court is the only way to get good at it. Self-representation is a recipe for a big loss.

How we see it, is for every case we have in court, win or lose, it makes us stronger. It also makes us much more aware of how badly a really good tax lawyer who is skilled at litigation, is needed if you want to win your case in General Procedures.

Back to the Tax Case at hand:

Justice Webb in point #7 states the following.

[7] It is clear that the Appellant and his agent have received adequate notification of the limitations related to appeals under the informal procedure and that the Appellant has elected to limit the amount of taxes in dispute for each year to $12,000. As a result, the hearing continued under the Informal Procedure.
The decision to represent in informal tax court is a serious decision and Justice Webb was nailing things down so it was very clear that the agent and the taxpayer knew full well the consequences.

[8] There were only two witnesses who testified at the hearing - the Appellant and his spouse. An issue arose during the re-examination by the agent for the Appellant of his witnesses. Counsel for the Respondent objected to questions that the agent was asking of each witness during the re-examination of such witness by the agent for the Appellant on the basis that:
Re-examination is another term for re-direct. That is where the Appellant gets to re-examine the witness after the defendant is done cross examining them.

MS. HURST: In my submission, reply is directed at issues that were raised in cross that the Appellant could not have known in chief.

Ms. Hurst was attempting to prevent me from introducing new information to dispute what the defendant agent had brought up in cross examination. It would be appropriate to introduce questions around that new information, but not for me to include new additional information.

I think it was a bit gray as to was the information new or just a clarification on the matter brought up by the Appellant’s agent.

It is interesting to consider, that if allowing me to introduce new information, the judge could have also have allowed the defendants agent to get a shot at another cross examination of the plaintiff’s witness.
It is usually a one two three and you are done scenario. One “Direct Questions, by the appellant.”, Two is “Cross Examination by the defendant’s agent,” and Three is “Re-direct by the appellant’s agent.

[9] This was an informal procedure hearing and I allowed the agent to ask questions on re-examination of a witness in relation to matters that were raised during the cross-examination of that witness but which had not been addressed during the direct examination of that witness.

Informal Tax Court allows a judge greater scope in allowing the presentation of information that helps in making his decisions.

Justice Webb outlined the following case to support his decision. The case gives an excellent example of what needs to be considered in re-direct of questions to a witness by the appellant’s agent.

[10] In R. v. Evans, [1993] 2 S.C.R. 629, 104 D.L.R. (4th) 200, Justice Cory writing on behalf of a majority of the Justices of the Supreme Court of Canada, stated as follows:

Should the Question Have Been Permitted on Re-examination?

37                  Even though it has been determined that the evidence was admissible, (in the direct examination) it remains to be seen whether the question should have been permitted on re-examination.

38                  The issue is put very well by E. G. Ewaschuk in Criminal Pleadings & Practice in Canada, 2nd ed., in these words at p. 16.29, para. 16:2510:

Questions permitted as of right on re-examination must relate to matters arising out of the cross-examination which deal with new matters, or with matters raised in examination-in-chief (The questioning of your own witness under oath.) which require explanation as to questions put and answers given in cross-examination. [Emphasis added by Justice Cory.]

This is an important point to understand. So let’s explain it in other words.

1.    The agent for the Plaintiff, gets do “Direct” questions to his witness to create the story they want to tell the judge. The agent brings out all the information and evidence to build the case.

2.    The agent for the defendant gets to “cross-examine” the witness to tear the story apart. The agent tries to break the story down and introduces new information to damage the appellant’s case.

3.    The agent for the plaintiff gets to re-direct the questions to rebuild any tearing apart that was done and reinstate the appellant’s credibility. The agent must only deal with information provided in the direct or to ask questions about any new information provided by the agent for the defendant in her cross examination.

Generally speaking, the right to re-examine must be confined to matters arising from the cross-examination. As a general rule new facts cannot be introduced in re-examination. See R. v. Moore (1984), 15 C.C.C. (3d) 541 (Ont. C.A.), per Martin J.A. In this case, the cross-examination of Linda Sample referred to her statements to police about the appellant. The police interview of December 30 was specifically alluded to during the cross-examination and had not been dealt with in’ chief. It was in response to this cross examination that Linda Sample stated that, from the time of that meeting, she suspected the appellant of committing the crime. // would seem that the Crown had the right to re-examine Linda Sample as to precisely what she told the police at that time with regard to the appellant. It was a subject that had not been raised in the examination in chief but arose from the cross-examination. The trial judge erred in failing to allow re-examination on this point.

I think the judge was correct in allowing me to bring up information related to the new information provided by the agent for the defendant.

[11] It seems to me that when the witness was being examined in chief the Crown would have known (or could have known if the Crown would have asked the police) about the police interview with the witness. Not having referred the witness during the examination-in-chief to her statements that she had made to the police should not have prevented the Crown from asking that witness questions about her statements during the re-examination of that witness because the matter was raised during the cross-examination of the witness. Therefore, even though a matter was not raised during examination-in-chief of a witness, if that matter is raised during cross-examination of that witness, the witness can be re-examined in relation to that matter following cross-examination, even though the agent or counsel who called the witness would have (or could have) known about the matter prior to the cross-examination of that witness.

This is another interesting technicality… if the agent for the plaintiff knew about the information, but did not bring it up in the direct examination, then they should not be allowed to address that in re-direct. In the case at hand, the agent did not have prior knowledge about the information brought up by the agent for the defendant.

[12] In The Law of Evidence in Canada (third edition) by Justice Bryant, Justice Lederman, and Justice Fuerst all of the Superior Court of Justice for Ontario, it is stated at page 1164 as follows:
VII. RE-EXAMINATION
16.183 The purpose of re-examination is to enable the witness to explain and clarify relevant testimony which may have been weakened or obscured in cross-examination. The witness is not ordinarily allowed to supplement the examination-in-chief by introducing new facts which were not covered in cross-examination.* The general rule is that reexamination must be confined to matters which arose out of cross-examination. *

Based on the above, it indicates I was correct in my assumptions.

16.184 The right to re-examine, however, extends to rehabilitation of the credibility of the witness which may have been impaired in cross-examination. This includes the right to ask the witness to explain or clarify discrepancies between the witness* evidence-in-chief and cross-examination.* In addition, this may entail the introduction of a previous consistent statement to rebut the suggestion that the witness’ evidence was a recent contrivance.*
16.185 In addition to the right to re-examine, the trial judge has a discretion to permit re-examination in circumstances that do not accord with the principles stated above. It is a discretion that is to be exercised sparingly, but extends to permit re¬examination on matters not touched on in cross-examination which may, through oversight, have been omitted in chief. In such cases, the opposing party will have a further right to cross-examine the witness.*…
(* denotes a footnote reference that is in the text but which has not been included.)

[13] Therefore even if a matter has not been addressed during the examination-in-chief or during the cross-examination of a witness, it is still possible to permit the matter to be addressed during re-examination, with the opposing party having the right to a further cross-examination of the witness.

I see this as a very valuable tid bit…. because if the agent for the appellant finds that the agent for the defendant has opened up a can of worms, it may be worth asking the judge if you can introduce new information. Having said that it obviously is better to be well prepared in the first place.

[14] The Appellant’s tax liability for 2002 was originally assessed on October 14, 2003 and the Appellant’s tax liability for 2003 was originally assessed on May 25, 2004. The Appellant was reassessed to include the additional income referred to above by notices of reassessment dated August 30, 2007. The notices of reassessment were issued after the expiration of the normal reassessment period as defined in subsection 152(3.1) of the Act. Subsection 152(4) of the Act provides, in part, that:

(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if

(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act, or Page: 7
ii.    has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year;

In this case, the appellant had signed a waiver that we were challenging as being binding.

[15] A waiver in respect of “Business Income & Expenses & Real Estate Transactions” for the 2002 taxation year of the Appellant was dated October 10, 2006. The Appellant acknowledged that the signature on the form appeared to be his signature but he stated that he has no recollection of signing the waiver. No waiver was submitted in respect of the 2003 taxation year.

The following is what was covered in the direct questioning by the agent for the appellant.

[16]   The Appellant was not well in 2006. He described his condition as follows:
Q. Mr. Wiens, I was asking you: Do you recall where you were and what you were doing on October 10,2006?
A. I was either in the hospital or out for a few days or on day passes or so on. I was awaiting surgery.
Q.      Can you describe what type of surgery you were waiting to do?
A. I was going to take out my spleen. They said it was in danger of a spontaneous rupture. They wanted to diagnose it or something. I don’t understand what the doctors do.
Q.      Were you physically ill as a result of this?
A.      Yes.
Q.      Were you on medication?
A.       A lot of it.
Q.       Do you recall what that medication was?
A. Some of them were narcotics, but I know you have to get a special prescription. If I was in the hospital I would get a whole bunch of pills. My wife knew more of what I was taking at home. It would be a shot glass of a whole bunch of different stuff. I don’t know exactly what everything was.
Q. Would you say that you were your normal self and functioning mentally properly at that time?
A.      I couldn’t drive. They told me that with the drugs I was on I couldn’t operate a motor vehicle.
Q.      Were you dealing with your tax matters at that time? A.      No.
Q. In regard to taxes, to your mental and physical state, your ability to make decisions; all that stuff.
A. My wife described me as a vegetable. I remember getting a call when I was in the hospital -1 think it was in July - or it was a message from a nurse to call the auditor. I asked my wife if she could get the accountant at that time or a bookkeeper to take care of it. As days went on, I got worse and worse. I was on more and more drugs, so I didn’t know what I was doing. I couldn’t operate a car. I couldn’t even walk.
Q.      Canyon.
A. My mental condition, I was probably close to how my wife described me. I didn’t know what I was doing. I didn’t know anything.
Q. How far back do we go before you had your normal clarity of thought? If we took October 10 as a benchmark, when did you start having your memory and thinking capacity affected by your illness? That is what I’m trying to establish.
A. I know I was admitted to the hospital in late July, I think it was, of 2006, and I stayed there for a long time. While I was there I was in pretty bad shape. Previous to that when we were having all the problems with the store, I think I probably had some kind of nervous problem because I was not very well there. You can imagine the effect if someone’s house is broken into once or so or twice, three times, five times, I don’t even know how many times it was. It was a big stress. I was paranoid, I guess. I didn’t know what was going on.
Q. What would you say your capacity was to look after your own affairs - especially around the audit - during that period of time?
A.      None.
Q.      Who was looking after your affairs?
A. An accountant named Kathy Currie. I’m not sure if she is an accountant or a bookkeeper.
[17] In Nguyen v. The Queen, 2005 TCC 697, [2007] 5 C.T.C. 2654, Justice Dussault of this Court dealt with a waiver of a right to appeal that the taxpayer had signed but was subsequently challenging. Justice Dussault made the following comments:

32     The Appellant therefore accepted a settlement which he surely believed was in his favour at the time, and assessments were done based on that settlement, that is, with no penalty. He waived his right to object and appeal in respect of the expenses the deduction of which was disallowed for the years 1997, 1998 and 1999. He did not offer any compelling evidence showing that he was unable, for reasons related to his origin or language, to understand the consequences of his waiver or that tax officials tried to mislead him, threaten him or apply undue pressure in connection with the waiver. Subsections 165(1.2) and 169(2.2) of the Act sanction such waivers.

33        It is clear to me that a waiver of the right to object and appeal signed by a taxpayer cannot be set aside except on a preponderance of evidence that the taxpayer did not freely consent to the waiver or was unduly pressured. I do not believe such evidence was put forward in this instance.

[18] It seems to me that the same principles should apply to a waiver of the normal reassessment period as would apply to a waiver of the right to object and appeal. Justice Dussault referred to setting aside a waiver on “a preponderance of evidence”. As a result of the decision of the Supreme Court of Canada in F./f. v. McDougall, referred to below, it seems me that there is only one standard of proof and therefore the waiver in this case cannot be set aside unless the Appellant establishes on a balance of probabilities the he did not freely consent to the waiver1. The question of whether a person has consented would include the issue of whether the person had the capacity to consent. In Chitty on Contracts (twenty-ninth edition) at page 579, it is stated that:
Contractual incapacity. The incapacity of one or more of the contracting parties may defeat an otherwise valid contract. Prima facie, (Prima Facie is (Latin) A legal presumption which means on the face of it or at first sight. )however, the law presumes that everyone has a capacity to contract; so that, where exemption from liability to fulfill an obligation is claimed by reason of want of capacity, this feat must be strictly established on the part of the person who claims the exemption.

One needs to make sure that they have good evidence to prove the incapacity of the party to consent to the waiver.

[19] It also seems to me that these comments should apply to the waiver in this case and would also apply to any alleged incapacity arising as a result of any medication that the Appellant was taking at the time, subject to the qualification that
In this case there was no suggestion that the Appellant was unduly pressured. The reference to “strictly established” does not impose a standard of proof that is different from a balance of probabilities or impose a requirement on the trial Judge to scrutinize evidence more carefully than such trial Judge would in other civil matters. Based on the decision of the Supreme Court of Canada in F.H. v. McDougall, referred to below, since the Appellant is claiming that he is not bound by the waiver, the Appellant will need to establish on a balance of probabilities that he did not have the requisite capacity to execute the waiver on October 10, 2006.
[20] However, in this case it is not at all clear whether the Appellant was in the hospital on October 10, 2006. No records from the hospital were introduced to show the date that he was admitted to the hospital or discharged from the hospital. His recollection was that he was admitted in late July 2006 and that he “stayed there for a long time”. A long time is very subjective and of little assistance in determining whether he was still in the hospital on October 10, 2006. For some people a couple of weeks in a hospital may be a long time.

I see this issue as a stark reminder of how important it is for an agent to verify all facts and not to make assumptions. We were told the appellant was in the hospital and have no reason to think it was not so, however by the agent not verifying that the appellant was actually there on that date, there was no hard evidence to introduce to the court.

[21] It is also not clear what medication he was actually taking on October 10, 2006 or what his capacity was on that date to understand the nature of the document that he was signing. Simply not remembering that he had signed the document is not sufficient. It seems to me that testimony from medical experts would have been important in relation to the capacity of the Appellant on October 10, 2006 if the Appellant wanted to establish that he lacked the capacity to understand the nature of the document that he was signing on that particular day.

This is where we should have had the proof of the appellant being in the hospital at the time of signing the wavier of his rights.

[21] It is also not clear what medication he was actually taking on October 10, 2006 or what his capacity was on that date to understand the nature of the document that he was signing. Simply not remembering that he had signed the document is not sufficient. It seems to me that testimony from medical experts would have been important in relation to the capacity of the Appellant on October 10, 2006 if the Appellant wanted to establish that he lacked the capacity to understand the nature of the document that he was signing on that particular day.

Certainly it would have been good to have the testimony or at least a sworn affidavit of a medical expert to prove the point.

[22] In relation to the onus of proof, Justice Rothstein, writing on behalf of the Supreme Court of Canada, in F.H. v. McDougall, [2008] 3 S.C.R. 41 stated that:
(4)      The Approach Canadian Courts Should Now Adopt
40 Like the House of Lords, I think it is time to say, once and for all in Canada, that there is only one civil standard of proof at common law and that is proof on a balance of probabilities. Of course, context is all important and a judge should not be unmindful, where appropriate, of inherent probabilities or improbabilities or the seriousness of the allegations or consequences. However, these considerations do not change the standard of proof….
We often hear judges speak of “Balance of Probabilities” and the following information needs to be looked at closely to understand how this is handled in court.

44    …. As Lord Hoffmann explained in In re Bat para. 2:
If a legal rule requires a feet to be proved (a “fact in issue”), a judge or jury must decide whether or not it happened. There is no room for a finding that it might have happened. (key issue to keep in mind when providing information in court, there can be no assumptions) The law operates a binary system in which the only values are zero and one. The fact either happened or it did not If the tribunal is left in doubt, the doubt is resolved by a rule that one party or the other carries the burden of proof. If the party who bears the burden of proof fails to discharge it, a value of zero is returned and the fact is treated as not having happened. If he does discharge it, a value of one is returned and the fact is treated as having happened.

A binary system of zero and one is a good way to visualize the determination of the balance of probabilities.

I like this, it is a simple way to look at information. First determine who has the onus to prove the information and secondly ask yourself what proof is there? This underscores the importance of understanding who has the onus of proof.

In my view, the only practical way in which to reach a factual conclusion in a civil case is to decide whether it is more likely than not that the event occurred.

45        To suggest that depending upon the seriousness, the evidence in the civil case must be scrutinized with greater care implies that in less serious cases the evidence need not be scrutinized with such care. I think it is inappropriate to say that there are legally recognized different levels of scrutiny of the evidence depending upon the seriousness of the case. There is only one legal rule and that is met in all cases, evidence must be scrutinized with care by the trial judge.
Key note here is that if the judge is going to scrutinize your evidence then the evidenced needs to be scrutinized before giving it to a judge.

46           Similarly, evidence must always be sufficiently clear, convincing and cogent (persuasive) to satisfy the balance of probabilities test. But again, there is no objective standard to measure sufficiency,in serious cases, like the present, judges may be faced with evidence of events that are alleged to have occurred many years before, where there is little other evidence than that of the plaintiff and defendant. As difficult as the task may be, the judge must make a decision. If a responsible judge finds for the plaintiff, it must be accepted that the evidence was sufficiently clear, convincing and cogent to that judge that the plaintiff satisfied the balance of probabilities test.

In our case we were trying to prove that the appellant was in the hospital, the onus of proof was on us, but we did not have any visual evidence. Had the onus been on the defendant, they would have to prove that the appellant was not in the hospital and or the date of signing was not close to the date of the time in question… at the time of the signing.

46           Finally there may be cases in which there is an inherent improbability that an event occurred. Inherent improbability will always depend upon the circumstances. As Baroness Hale stated in In re B, at para. 72:
Consider the famous example of the animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure when the door is open, men it may well be more likely to be a lion than a dog.

In this case, had the appellant signed the document near the date of the stay in the hospital, on the balance of probabilities, he would not have been in a mental state to know what he was signing.

48     Some alleged events may be highly improbable. Others less so. There can be no rule as to when and to what extent inherent improbability must be taken into account by a trial judge. As Lord Hoffmann observed at para. 15 of In re B:
Common sense, not law, requires (that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.

It will be for the trial judge to decide to what extent, if any, the circumstances suggest that an allegation is inherently improbable and where appropriate, that may be taken into account in the assessment of whether the evidence establishes that it is more likely than not that the event occurred. However, there can be no rule of law imposing such a formula.

(5)             Conclusion on Standard of Proof
49 In the result, I would reaffirm that in civil cases there is only one standard of proof and that is proof on a balance of probabilities. In all civil cases, the trial judge must scrutinize the relevant evidence with care to determine whether it is more likely than not that an alleged event occurred. (Emphasis added)

[23] While the Appellant might have lacked the capacity to execute a valid waiver on October 10, 2006, this is not sufficient. The Appellant must establish that it was more likely than not that the Appellant lacked the requisite capacity on October 10, 2006 to consent to the waiver. The Appellant has failed to establish that it was more likely than not that on October 10, 2006 the Appellant lacked the requisite capacity to execute a valid waiver and therefore I find that the waiver is valid and the Respondent had the right to reassess the Appellant for 2002.

While there was no doubt the waiver was signed, there was no proof of when the appellant was in the hospital, and being that there was more time out of the hospital than in, one could take the position, that it is more likely that the appellant was not in the hospital at the time of signing.

We now go into an area where one needs to fully see the power of good evidence to demolish an argument and shift the onus to the other party.

[24] In Hickman Motors Ltd. v. Her Majesty the Queen, [1997] S.C J. No. 62, Justice L’Heureux-Dube of the Supreme Court of Canada made the following comments in relation to an Appellant’s onus of “demolishing” the Minister’s assumptions:

92           … The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. R. (1990), 90 D.T.C. 6337 (Fed. T.D.), at p. 6340.

93           This initial onus of “demolishing” the Minister’s exact assumptions is met where the Appellant makes out at least a prima facie case: (Prima Facie is (Latin) A legal presumption which means on the face of it or at first sight.) Kamin v. Minister of National Revenue (1992), 93 D.T.C. 62 (T.C.C.); Goodwin v. Minister of National Revenue (1982), 82 D.T.C. 1679 (T.R.B.).

In the case at bar, the Appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the Appellant “demolished” the following assumptions as follows: (a) the assumption of “two businesses”, by adducing clear evidence of only one business; (b) the assumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example Maclsaac v. Minister of National Revenue (1974), 74 D.T.C. 6380 (Fed. C.A.), at p. 6381; Zink v. Minister of National Revenue (1987), 87 D.T.C. 652 (T.C.C.). As stated above, all of the Appellant’s evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the Appellant.

94           Where the Minister’s assumptions have been “demolished” by the Appellant, “the onus shifts to the Minister to rebut the prima facie case” made out by the Appellant and to prove the assumptions: Magilb Development Corp. v. Minister of National Revenue (1986), 87 D.T.C. 5012 (Fed. T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”.

95           Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example Maclsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at pp. 6381-2) the “evidence was not challenged or contradicted and no objection of any kind was taken thereto”. See also Waxstein v. Minister of National Revenue (1980), 80 D.T.C. 1348 (T.R.B.); Roselam Investments Ltd. v. Minister of National Revenue (1980), 80 D.T.C. 1271 (T.R.B.). Refer also to Zink v. Minister of National Revenue, supra, at p. 653, where, even if the evidence contained “gaps in logic, chronology and substance”, the taxpayer’s appeal was allowed as the Minster failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such “gaps”. Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the Appellant is entitled to succeed.

It has been my experience that establishing credibility of both the appellant and the agent is critical. Our position is to defend what we can prove was done and not defending what was done that we cannot prove, allows us to build credibility in front of the judges.

96           In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister’s unsubstantiated and unproven assumptions into “factual findings”, thus making errors of law on the onus of proof.
My colleague Iacobucci J. defers to these so-called “concurrent findings” of the courts below, but, while I fully agree in general with the principle of deference, in this case two wrongs cannot make a right Even with “concurrent findings”, unchallenged and uncontradicted evidence positively rebuts the Minister’s assumptions: Maclsaac, supra. As Rip T.C.J., stated in Gelber v. Minister of National Revenue (1991), 91 D.T.C. 1030 (T.C.C.), at p. 1033, “[the Minister] is not the arbiter (Supreme Authority) of what is right or wrong in tax law”. As Brule* T.C.J., stated in Kamin, supra, at p. 64:
the Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions.
The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption. [Emphasis added by Justice L’Heureux Dub&]

[25] The British Columbia Court of Appeal in Northland Properties Corp. v. British Columbia, 2010 BCCA 177, 319 D.L.R. (4th) 334 commented on this decision of Justice L’Heureux Dube and stated that:

26        The use of “demolish1′ has carried through to the present: see Hickman at para. 92; or, most recently, in Norton v. Canada, 2010 TCC 62 at para. 59. The choice of word is unfortunate, because it tends to cloud the actual nature of the standard of proof. “Demolishing” does not imply a higher standard, and, in that regard, the careful statement of McQuaid J.A. in Island Telecom Inc. v. P.E.I. (Regulatory and Appeals Commission) (1999), 176 D.L.R. (4th) 356 (P.E.I.C.A.) at para. 22 is apposite:
[22]… Once … the assumptions have been “demolished” or, to express it somewhat less emphatically, once the taxpayer discharges the … burden of showing that the facts or assumptions relied upon by the assessor are incorrect,… [Emphasis added.]

So as we come back to the word “Demolish” we are reminded that demolish does not require a higher standard to prove the point. So how I would define the word would be as follows; To demolish an argument means that; on the balance of probabilities, you have to remove any doubt the argument made was wrong.

27       The standard of proof in discharging this burden is nothing more or less than the balance of probabilities. As Justice Lowry stated in Trac (at para. 30):

[30]… The act of “demolishing” a ministerial assumption entails proving on the balance of probabilities the material facts that are within the taxpayer’s knowledge if those facts do not support the assumption.

28          Additional confusion about the standard flowed from Justice L’Heureux-Dub6’s use of “prima facie case” in Hickman (at paras. 92-95):
[92] … The Minister, in making assessments, proceeds on assumptions … and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment…. The initial burden is only to “demolish” the exact assumptions made by the Minister but no more …
[93] This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.). In the case at bar, the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, die appellant “demolished” the following assumptions as follows: (a) the assumption of “two businesses”, by adducing clear evidence of only one business; (b) the assumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example Maclsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the appellant.
[94] Where the Minister’s assumptions have been “demolished” by the appellant, “the onus … shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: Magilb Development Corp. v. The Queen, 87 D.T.C. 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”.

[95] Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example Maclsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at p. 6381) the “evidence was not challenged or contradicted and no objection of any kind was taken thereto”. See also Waxstein v. M.N.R., 80 D.T.C. 1348 (T.R.B.); Roseiawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271 (T.R.B.). Refer also to Zink, supra, at p. 653, where, even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal was allowed as the Minister failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such “gaps”. Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the appellant is entitled to succeed. [Emphasis in original removed.]

29     Before us, counsel for the Crown made persuasive submissions on the issue of the so-called “prima facie” standard: L’Heureux-Dubé J.’s use of “prima facie” was made in the context of a case in which the Crown had not called any evidence whatsoever; it was relying solely on its assumptions. It is certainly possible in such circumstances that a prima facie case, or even one with “gaps”, would be sufficient to displace the Crown’s assumptions, but the prima faciestandard described by Justice L’Heureux-Dubé should not be interpreted as having altered the usual standard of proof in tax cases: see the comments in Sekhon v. Canada, [1997] T.C.J. No. 1145 at para. 37; and Hallat v. The Queen (2000), [2001] 1 C.T.C. 2626 (F.C.A.).

30     The other potentially confusing aspect of Hickman was Justice L’Heureux-Dubé’s statement (at para. 92) that the “initial burden [on the taxpayer] is only to ‘demolish’ the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.” [Emphasis in original.]

31     This statement is consonant with the taxpayer’s initial legal burden: The taxpayer’s only task is to rebut the Minister’s assumptions so that the Minister does not have the benefit of the assumption. If the Minister adduces alternate evidence to support the assessment then there is a tactical burden on the taxpayer to challenge it, but, in theory, the taxpayer need do “no more” than bring evidence to unseat the assumptions.

This is very interesting to ponder over. How I see this; is … being that during a tax audit, the Minister has the right to make assumptions in the absence of facts… when a taxpayer comes to court, the taxpayer has to bring evidence to unseat the assumption. This is different that simply proving the Minister’s assumptions wrong.

A good example of this is if the Minister assumes no income, but the taxpayer shows that the taxpayer reported income on his tax return, it does not prove there was income. It only shows that the taxpayer claimed income which would unseat the Minister’s assumption. Certainly the tax return did not prove the income as would bank deposits, but it does unseat the assumption of no income.
32     The taxpayer has a number of ways of meeting the Minister’s assumptions: Pillsbury at 5188. The taxpayer may
(a)               challenge the Minister’s allegation that he did assume those facts,
(b)               assume the onus of showing that one or more of the assumptions was wrong, or
(c)        contend that, even if the assumptions were justified, they do not of themselves support the assessment.
These points are subtle but powerful.

33     In response to the taxpayer’s submissions, the Crown may adduce its own evidence to prove either that the assumptions are correct or to show that, even without relying on the assumptions, the assessment is nevertheless valid: Pillsbury at 5188; Pollock at 6053. The Crown may also challenge the taxpayer’s evidence, either on cross-examination, or by raising serious issues of credibility. A court may draw a negative inference “from the taxpayer’s failure to adduce material evidence in the taxpayer’s possession or control” and conclude the taxpayer has not met its initial burden of disproving one or more of the assumptions: Trac at para. 31. Once all the evidence is in, the judge must weigh it and first determine whether the taxpayer has met the initial legal burden with respect to the assumptions. If the taxpayer has failed to meet its burden, then the Crown need not go on to discharge its conditional legal burden because the precondition has not been met.

How I see this, is that the taxpayer ought to provide as much proof as possible at all times.

34     If the taxpayer has successfully discharged its legal burden with regard to an assumption, the Crown may not rely on that assumption in attempting to prove the validity of the assessment. If unproven assumptions are necessary to the assessment, the taxpayer will succeed. Assumptions not disproven are deemed facts which, if sufficient to establish the Minister’s case, will cause the appeal to fail.

So we get that one must be very cognizant of all the assumptions made by the Minister and disprove all of them.
35     In summary form, the proper approach on the appeal of a tax assessment may be described thus:

i.         What are the assumptions?

ii.        Have some or all of the assumptions been disproven? (i.e., has the taxpayer discharged the initial legal burden?)

iii.      If the taxpayer has successfully discharged the initial legal burden, then has the Crown shown that the assessment is valid? (i.e., has the Crown discharged the conditional legal burden?)

This is a wonderful clarification. I have traditionally looked at a tax case as “what are the issues?”

Now I will still start with the issues, then in addition, I will outline what assumptions the Minister made and indicate my plan to disprove those assumptions. This may not sound too noteworthy, but based on what Justice Webb has written, I now have my eyes wide open about this. Previously in court I did talk about onus, but this approach is much clearer, of better process and gives the judge something to help him make decisions on.

[26]         It seems to me that the conclusion to be drawn is simply that the Appellant has the initial onus of proving on a balance of probabilities (i.e. that it is more likely than not), that any of the assumptions that were made by the Minister in assessing (or reassessing) the Appellant with which the Appellant does not agree, are not correct. This is a general rule and there are exceptions if the assumption that is made is related to a matter which is within the knowledge of the Minister. In the decision of the Federal Court of Appeal in The Queen v. Anchor Pointe Energy Ltd., 2007 FCA 188, Létourneau J.A. stated that:

[35]      It is trite law that, barring exceptions, the initial onus of proof with respect to assumptions of fact made by the Minister in assessing a taxpayer’s liability and quantum rests with the taxpayer. …

[36]      I agree with Bowman A.C.J.T.C., as he then was, that there may be instances where the pleaded assumptions of facts are exclusively or peculiarly within the Minister’s knowledge and that the rule as to the onus of proof may work so unfairly as to require a corrective measure: see Holm et al. v. The Queen, supra, at paragraph 20.**

**[20]          I mention in passing another practice that will require re-examination and that is the pleading as “assumptions” facts that are exclusively or peculiarly within the Minister’s knowledge and then, at the same time as the Minister alleges that the taxpayer has the onus of disproving those facts, he (or she) also refuses to disclose the basis of the assumptions because it is said that the information is confidential, secret or privileged. The unfairness of this practice is evident. (apparent/evident)
I am including extra data from the Holm case… as I think it is relevant. SEE *** at the end of my insertion.

[21]          Nonetheless, I do not propose to apply any of the sanctions or remedies that might be available in other circumstances. Counsel allege that sub paragraph 5d) is an abuse of the process of this court. In some circumstances I would agree that pleading as an assumption a fact that was not made (or could not possibly have been made as in Anchor Pointe Energy Limited v. The Queen, 2002 DTC 2071) calls for a severe sanction. However I am dismissing the motion for several reasons.

(a)     To plead as an assumption a fact that was undoubtedly assumed when the assessment was confirmed but arguably not when the assessment was issued may reflect an erroneous interpretation of the words “the findings or assumptions of fact made by the Minister when making the assessment” as used in the rules of this court, but it is not an egregious or flagrant abuse of this court’s process. To conjure up “assumptions” that were never made at any time until the reply was drafted is of course a much more serious breach of the Crown’s responsibilities and calls for a more severe remedy. I agree with the observation of Rip J. in Anchor Pointe and General Motors Acceptance Corporation of Canada Limited v. The Queen, 99 DTC 975, that assessment means assessment, not confirmation. Nonetheless, there is some authority for the proposition that confirmation may be a part of the assessing process. For example, in Parsons et al. v. M.N.R., 83 DTC 5329 (reversed on a different point) at p. 5332 Cattanach J. said

Upon receipt of a notice of objection it is the duty of the Minister with all due dispatch to reconsider the amount. This has been referred to by counsel for the respondent as an “in-house” appeal.
In my opinion it is not an appeal. It continues to be part and parcel of the assessment process.
The introduction of that case of Holm vs the Queen stated:

1]            These motions were brought by the appellants for an order allowing the appellants’ appeals or, in the alternative, for an order striking out the replies to the notices of appeal in their entirety coupled with an order that the respondent not be permitted to file fresh or amended replies. In the further alternative they request an order that paragraph 5 of the replies (paragraph 7 in the appeal of Reverend Powell) be struck out. The basis of the motions is that the respondent pleaded as an “assumption” a fact that the appellants say was not assumed at the time the assessments were made.

So what we get out of this, if the Minister assesses and a taxpayer files a notice of objection (also noted as an in house appeal) which and the Minister confirms the assessment. The Minister can not assume any facts after that point in time.

If the taxpayer files an appeal to the confirmed assessment, the Minister may not introduce new assumptions in their reply to the appeal.

[27]         This is not a case “where the pleaded assumptions of facts are exclusively or peculiarly within the Minister’s knowledge and that the rule as to the onus of proof may work so unfairly as to require a corrective measure”. Therefore the Appellant in this case has the initial onus of proving that any assumptions, that were made in reassessing the Appellant for 2002 with which the Appellant does not agree, are not correct. There are two items in dispute in relation to the reassessment of the Appellant’s 2002 tax liability. One is related to the real property transactions and the other is related to the amounts paid by the insurance company in relation to claims filed by the Appellant.

[28]         The real property transactions that have resulted in the reassessment of the Appellant for 2002 are the following:

Property    22 Pembroke Road    428 Redonda Street
Date purchased:    February 15, 2002    September 11, 2002
Date sold:    August 16, 2002    December 13, 2002
Total cost:    $90,520    $81,486
Net Proceeds of sale:    $122,319    $83,725
Gain:    $31,799    $2,257.00

[29]         The first property was held for approximately six months and the second for approximately three months. It is the position of the Appellant that any gain realized on the sale of these properties is income of his daughter. If any gain is income of his daughter, then it will not matter whether the gain is a capital gain or an income gain as only the reassessment of the Appellant is in issue in this case. How his daughter should have reported such gain (if such gain should have been reported by her) is not in issue in this case.
It was the taxpayer’s position that the houses were bought and sold for the sole benefit of his daughter.

[30]         It is the position of the Respondent that the gains realized on the sales of these two properties in 2002 were income gains of the Appellant.

[31]         The Appellant and his spouse have three children. Their daughter, Jessalyn, would have been 20 years old in 2002. Their other two children would have been 17 and 13 in 2002. Jessalyn Wiens graduated from high school in 2001 and worked part time at Smitty’s restaurant and the retail store operated by the Appellant. It was assumed in the Reply that Jessalyn Wiens was paid $4,000 for working at the store in 2002 and the Appellant has not established that this assumption was not correct. She was living with the Appellant in 2002 prior to the purchase of the Pembroke Road property.

[32]         It is the position of the Appellant that the money required to purchase the property located at 22 Pembroke Road was advanced to Jessalyn Wiens from a line of credit that the Appellant and his spouse had with CIBC. It is not clear whether the amount advanced from the line of credit was the full purchase price of $90,520 (including repairs and improvements) or a down payment amount (with the balance being financed from another loan). Jessalyn Wiens graduated from high school in 2001. The property at 22 Pembroke Road was acquired on February 15, 2002 which was before she started working at the retail store operated by the Appellant. The Appellant did not start operating the retail store until July 2002. Therefore it appears that the only income that Jessalyn Wiens had from the end of June 2001 (when she graduated from high school) to mid February 2002, would have been whatever income she earned from her job at Smitty’s restaurant. It is more likely than not that Jessalyn Wiens did not have any money to apply towards the purchase of the property located at 22 Pembroke Road.

[33]         The Appellant introduced a letter from Currie Accounting Services Ltd. to the Canada Revenue Agency. Attached to this letter is a schedule that is identified as “Jessalyn Wiens Real Estate Transactions 2002 & 2003”. This schedule appears to list various amounts borrowed by and repaid by Jessalyn Wiens. However, as noted above, only two witnesses testified at the hearing. The first witness, the Appellant’s spouse, did not address this schedule. The only testimony related to this schedule was that of the Appellant. His testimony in relation to this schedule was as follows:

Q.        Mr. Wiens, if you could take a look at the last page I was about to ask you something on where it is entitled across the top “Jessalyn Wiens Real Estate Transactions 2002, 2003″. It’s the third page of the last exhibit. The bottom number on the right hand corner is 245. We had some discussion earlier, and I think we came to the agreement that this was prepared by your previous accountant. My first question to you is: Have you seen this before?

A.        No.
Q.        Can you read what “Explanations” says, and what that means to you, just to get familiar? For instance, the first line under “Explanations”, the “Borrowed from dad for down payment on first house,” what would that mean to you?
A.        There, there is $10,000 so that must have been a loan to her.
Q.        Do you see on the far right “Balance owed to dad, $10,000″? Would that seem to be about how loaning your money to your daughter was handled?
A.        Yes. I have never seen this before, but it seems to be something dealing with loans for houses.
Q.        As you read down, you see that money was paid out to various parties. As it is paid out down the right side of the page, it appears that the balance owing to dad keeps increasing. Do you see that?
A.        Yes.
Q.        If we get right down to the bottom and we look underneath the trust account and it says the trust account balance is zero, it says the total paid back is $105,907.35 and then “Final balance to dad” was $97,013.80.  That is what it says there. If you look at that and then you look at the bottom, immediately below that it says “Total borrowed $148,000 and some. Total paid back, $245,000 and some”. That would appear to take us to the last statement, “September 30, 2003, Dad holding $97,000 to purchase house in Lorette”. Did that money go to your daughter to buy the house in Lorette?

A.        I think the house in Lorette was $75,000 but there were some improvements also done there, and they didn’t have money. I think they had a new baby then when they moved in. It’s foggy. They didn’t have a lot of money. Between me and my daughter, we didn’t keep this type of accounting. It looks like somebody put a lot of work into this. They are probably missing something. Between a father and a daughter, everyone knows you are not going to strictly make her pay back everything she owes or not give her money when she needs it. It is very loose accounting between me and her; between me and my wife and her. Someone spent a lot of time going into specifics. I agree    and I’m sure Jessie would agree too    that we were even after that house.
This testimony hurt the appellant because it indicated that there was no recourse to the loan and makes it look like the daughter was less involved and really the mind and management of the buying and selling of these houses was the appellant and not the daughter.
[34]         Since the first time that the Appellant saw this schedule was during the hearing this schedule was obviously not prepared by the Appellant or reviewed by the Appellant during 2002 or at any other time prior to the hearing. As well since the Appellant stated that he and his daughter did not “keep this type of accounting” it raises questions about whether it really was the intention of the Appellant that he intended to create a debtor / creditor relationship with Jessalyn Wiens. His statement that “everyone knows you are not going to strictly make her pay back everything she owes” confirms that he did not intend to create an enforceable obligation on the part of Jessalyn Wiens to repay amounts used to purchase properties that were put in her name. If they would have intended to create an enforceable obligation, then presumably they would have maintained a schedule similar to the one submitted at the hearing.
This is an important lesson for parents who are looking to help their children in obtaining home ownership. If the agreement is too lose, the income would attribute to the parent and the equity earned would be a gift from the parent to the child.

[35]         I find that there was no intention to create an enforceable obligation for Jessalyn Wiens to repay amounts used to purchase the properties that were in her name.

[36]         During cross-examination of the Appellant, the following exchange took place:

Q.        You are saying to us today that it is Jessalyn who owns these properties. Do you agree with me so far?
A.        I’m saying it was Jessalyn?
Q.        Yes.
A.        The land title said it was Jessalyn’s.
Q.        Your evidence today is that it was Jessalyn. Would you agree with that?
A.        As far as I know, yes.

[37]         The registration of the title at the applicable registry office would simply relate to the legal title to the property. For the purposes of this appeal the issue is whether Jessalyn Wiens was the beneficial owner of the property, not whether she was the legal owner of the property.

This is a very important factor to consider as beneficial is to taxation what legal has to do with control. The appellant realized the gain, because the gains would go back to his bank account, but the daughter had legal control over the property.

[38]         Jessalyn Wiens had no money to contribute towards the purchase of the property located at 22 Pembroke Road, which was the first property that was acquired in 2002. The only evidence at the hearing was that the line of credit was used to finance the purchase of the houses in 2002. The line of credit was a personal line of credit of the Appellant and his spouse. The fact that the spouse was a joint owner of the bank account, that brings her into the beneficial owner picture. A copy of the statement for the line of credit dated July 10, 2002 was introduced at the hearing. This statement shows that as of June 8, 2002 the amount outstanding under this line of credit was $91,307 which was slightly more than the total cost of the property located at 22 Pembroke Road. This was also approximately one month before the retail store opened and approximately four months after the Pembroke property had been acquired.

To make things real, the daughter should have had the proceeds of each house sold go to her bank account and not to the account of her parents.

[39]         The Appellant also stated that the proceeds realized from the sale of the properties were deposited in the same account (which, since the only statement introduced in relation to the line of credit shows that there was a balance outstanding under the line of credit, would mean that the sale proceeds would be applied against the amount outstanding under the line of credit). Jessalyn Wiens was not liable under the line of credit with CIBC. The Appellant and his spouse were liable under this line of credit. When the amounts received from the sale of the properties were applied against the amounts outstanding under the line of credit, the Appellant and his spouse received the benefit from the sale proceeds since such proceeds reduced their indebtedness to CIBC.

This is key evidence as to who received exactly what benefit. The paying off of a loan can only be done with after tax income or you will be taxed on that amount. (Minus expenses to get net income.)

[40]         I find that Jessalyn Wiens did not acquire any beneficial interest in the property located at 22 Pembroke Road or 428 Redonda Street in 2002.

One has to agree, because the question has to be asked… “What benefit did Jessalyn receive?” The answer being that the money went to her parent’s bank account, there does not appear to be any benefit to Jessalyn upon the sale of each of the properties.

[41]         The next question is whether the Appellant was the beneficial owner or whether the Appellant and his spouse were the beneficial owners of these properties. The only source of funds that was identified in relation to the purchase of the properties in 2002 was the amount that was borrowed under the line of credit. When the amount was borrowed to purchase the property located at 22 Pembroke Road, both the Appellant and his spouse were liable to repay the amount borrowed from CIBC since both individuals are identified in the statement for the line of credit. There is no indication that the Appellant used any of his own funds.  (This is a fine detail to consider in that borrowed money is not his money, it is the banks money. Had he taken his own money to loan his daughter, then there would be no financial benefit to the appellant in having a loan paid back without interest. ) in relation to the purchase of either one of the two properties in 2002. It appears that the proceeds from the sale of the property located at 22 Pembroke Road were applied against the amount outstanding under the line of credit (which benefitted both the Appellant and his spouse now this begins to implicate his spouse, although it would be very hard for CRA to make this attack back on statute barred years.)  and that the line of credit was again used to finance the purchase of the property located at 428 Redonda Street. Again the proceeds from the sale of this house were applied against the amount outstanding under the line of credit (which again benefitted both the Appellant and his spouse).

[42]         As a result it does not seem to me that the Appellant acquired all of the beneficial interest in the properties in 2002 but rather that he acquired one-half of the beneficial interests in these properties. (Because his wife was also on the personal line of credit that was used to finance the purchase of the various houses.) Therefore, in my opinion, the Appellant should only be required to report one-half of the gain realized on the sales of these properties. It is not necessary to find that there was any partnership between the Appellant and his spouse, it is only necessary to find that he was only the beneficial owner of a one-half interest in the properties.
Hence the appellant would only be liable for half the income CRA assessed against him. However now the question comes up was this income or capital gain…

[43]         The next question is whether the gain realized should be reported as an income gain or as a capital gain. In Friesen v. The Queen, 95 DTC 5551, Justice Major writing on behalf of a majority of the Justices of the Supreme Court of Canada stated as follows:
The concept of an adventure in the nature of trade is a judicial creation designed to determine which purchase and sale transactions are of a business nature and which are of a capital nature. This question was particularly important prior to 1972 when capital transactions were completely exempt from taxation. The question was succinctly stated by Clerk, L.J. inCalifornian Copper Syndicate v. Harris (1904), 5 T.C. 159 (Ex., Scot.), at p. 166:

Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in the operation of business in carrying out a scheme for profit-making?

Now we get into what is a business and what is an adventure in trade. In this case the appellant does not meet the test of being a business, so we have to look does it qualify as an adventure in trade… an activity with an expectation of profit.

The first requirement for an adventure in the nature of trade is that it involves a ’scheme for profit-making’. The taxpayer must have a legitimate intention of gaining a profit from the transaction. Other requirements are conveniently summarized in Interpretation Bulletin IT-459 ‘Adventure or Concern in the Nature of Trade’ (September 8, 1980) which references Interpretation Bulletin IT-218 ‘Profit from the Sale of Real Estate’ (May 26, 1975) for a summary of the relevant factors when the property involved is real estate. IT-218R, which replaced IT-218 in 1986, lists a number of factors which have been used by the courts to determine whether a transaction involving real estate is an adventure in the nature of trade creating business income or a capital transaction involving the sale of an investment. Particular attention is paid to:

(i)                  The taxpayer’s intention with respect to the real estate at the time of purchase and the feasibility of that intention and the extent to which it was carried out. An intention to sell the property for a profit will make it more likely to be characterized as an adventure in the nature of trade.

This is a very important point, which demonstrates the importance of written plans, which could also be referred to as a journal. I believe that a journal is an important way to document Reasons and Rationals of decision making. This becomes a record to fall back on for a variety of reasons.

(ii)               The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer’s business or occupation is related to real estate transactions, the more likely it is that the income will be considered business income rather than capital gain.

This is another point in the case at hand. The Appellant had a history in buying and selling of homes. This took the spotlight on his experience and probabilities that this was an endeavour fr the purpose of making money. Had he not taken all the proceeds into his account before giving the money earned to his daughter, things could have looked quite differently in the eyes of the judge.

(iii)               The nature of the property and the use made of it by the taxpayer.
In this case there were times when the house was not occupied by the daughter.
(iv)              The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be adventures in the nature of trade.

In this case, the homes were financed by the line of credit over short periods of time where the houses where not held for long term uses. There were quite plausible explanations of why the turn overs were rapid, but none the less the facts are that  the turn arounds were quite frequent.

[44]         In Canada Safeway Limited v. The Queen, 2008 FCA 24, 2008 DTC 6074,[2008] 2 C.T.C. 149, Justice Nadon, writing on behalf of a majority of the Justices of the Federal Court of Appeal, stated that:

61     A number of principles emerge from these decisions which I believe can be summarized as follows. First, the boundary between income and capital gains cannot easily be drawn and, as a consequence, consideration of various factors, including the taxpayer’s intent at the time of acquiring the property at issue, becomes necessary for a proper determination. *(This is why we stress so much around indicating intent by way of business planning. )  Second, for the transaction to constitute an adventure in the nature of trade, the possibility of resale, as an operating motivation for the purchase, must have been in the mind of the taxpayer.(By nailing down intent in a business plan it demonstrates intent at time of queston.)   In order to make that determination, inferences will have to be drawn from all of the circumstances. In other words, the taxpayer’s whole course of conduct has to be assessed. Third, with respect to “secondary intention”, it also must also have existed at the time of acquisition of the property (Note that if you intend to keep and not resell at the time in question, that is in your favour. )  and it must have been an operating motivation in the acquisition of the property. Fourth, the fact that the taxpayer contemplated the possibility of resale of his or her property is not, in itself, sufficient to conclude in the existence of an adventure in the nature of trade. In Principles of Canadian Income Tax Law, supra, the learned authors, in discussing the applicable test in relation to the existence of a “secondary intention”, opine that “the secondary intention doctrine will not be satisfied unless the prospect of resale at a profit was an important consideration in the decision to acquire the property” (see page 337). I agree entirely with that proposition. Fifth, the viva voce evidence of the taxpayer with respect to his or her intention is not conclusive and has to be tested in the light of all the surrounding circumstances.

[45]         The Appellant’s stated intention in acquiring the Pembroke Road property was to provide his daughter with a place to live. He stated that she did live there for a few months. As noted, the statement of the Appellant’s intentions is not conclusive and must “be tested in the light of all the surrounding circumstances”. In this case it appears that the full amount of the purchase price of 22 Pembroke Road was financed by amounts borrowed from the line of credit of the Appellant and his spouse. It seems to me that a line of credit would be a short term form of financing and not, in general, a long term form of financing. The use of short term financing to purchase the property would support a conclusion that the sale of the property was an adventure in the nature of trade.
This brings us back to the point of seeing that this real estate endeavour because it had short term financing, makes it look like a short term money making exercise… e.g. if this was to be a long term loan… there should have been a mortgage put on the property.

[46]         The personal line of credit statement dated July 10, 2002 indicates that the previous balance was $91,307 and that this increased to $108,761 by July 10, 2002. The Appellant’s income for 2002, not including the loss related to the store, consisted of:

Employment income:                                          $32,500

Dividends                                                            $1,250

Total:                                                                  $33,750

[47]         The Pembroke Road property did not produce any income (except the income arising as a result of the sale of the property).  This property was acquired on February 15, 2002 which was approximately 4.5 to 5 months before the Appellant started to operate the retail store in July 2002. The only evidence in relation to the income of the Appellant’s spouse in 2002 is that she was not paid while she was working at the retail store. The Appellant introduced into evidence an excerpt from his tax return for 2003. The excerpt included the first page of this return but the net income amount for his spouse was redacted. Therefore the only sources of funds that were identified at the hearing that could be used to repay the amount borrowed from the line of credit to purchase this property, other than any amount realized from the sale of this property, were the employment income and dividend income of the Appellant as stated above. Since the amount owing on the line of credit was increasing during a period of time when no properties were being acquired, it appears that his income was being used for other expenditures. The Appellant would presumably have to use his income for the living expenses for himself and his spouse and his two other children who were living at home after February 15, 2002. If reselling the property was not an important consideration when the property was acquired in February 2002, how would the amount borrowed against the line of credit be repaid?

[48]         The property located at 428 Redonda Street was acquired approximately one month after the property located at 22 Pembroke Road was sold. It was acquired for $81,486. There was no indication of the balance of the line of credit on September 11, 2002 but since this was after the retail store was operating and since the Appellant indicated that he was losing money in operating this store, it seems more likely than not that there was an outstanding balance owing under the line of credit when the Redonda Street property was acquired. It would again seem that the only feasible way that the amount borrowed against the line of credit to purchase this property could be repaid would be if this property was sold.

[49]         The very short holding periods (approximately six months for the Pembroke Road property and three months for the Redonda Street property) support a finding that the purchase and sale of these properties was an adventure in the nature of trade. The use of the line of credit to finance the purchase of these properties (which would be a form of short term financing) would also support a finding that the purchase and sale of these properties was an adventure in the nature of trade.[3]

[50]         As a result I find that the gain on the properties sold in 2002 was an income gain and not a capital gain. I also find that one-half of this gain should have been included in determining the income of the Appellant for 2002 as he held one-half of the beneficial interest in these properties.

[51]         The other item in issue for 2002 is the amount paid by the insurance company in relation to claims filed in respect of break-ins at the retail store. The retail store was the target of a number of break-ins. The amount included in the Appellant’s income for 2002 (By the CRA auditor)  in relation to the insurance payments was $10,914. A copy of the fax from ING Insurance dated September 1, 2006 was introduced at the hearing. In this fax it is indicated that the amount paid was in relation to two separate claims:

Claim for Break and Enter on November 14, 2002:           $7,281

Claim for Break and Enter on November 17, 2002:           $3,633

Total:                                                                           $10,914

[52]         In a subsequent fax from ING Insurance dated September 14, 2006 it is stated that:

For the first claim of November 14, 2002; the client had claimed a loss of $4,238.99 consisting of lost property – namely 55 cartons of Cigarettes, Cash ($500.) and a Cash Register. We paid the client $3,738.99 which was the loss amount less the $500 policy deductible. The rest of the payments were to contractors for repair of the glass, door and lock. These repairs were done in December, after the time of all 3 losses. Hence, no repair expenses claimed in the next 2 losses. Part of the expense payment was an emergency call to “board-up” the broken glass until permanent repairs could be made. This was done immediately after the first loss.

For the Second Claim of November 17, 2002; the client claimed a loss of $4,133.00 which again consisted of Cigarettes, Cash ($50. - $60.) and a Cash Register. We paid the client $3,633.00 which was the loss less the $500 policy deductible.

[53]         Therefore, of the $7,281 paid in relation to the first claim, $3,739 was paid to the Appellant and the balance of $3,542 was paid by the insurance company to the contractors who did the repair work. As noted by Justice Rothstein in F.H. v. McDougall, above:

48     Some alleged events may be highly improbable. Others less so. There can be no rule as to when and to what extent inherent improbability must be taken into account by a trial judge. As Lord Hoffmann observed at para. 15 of In re B:

Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.

It will be for the trial judge to decide to what extent, if any, the circumstances suggest that an allegation is inherently improbable and where appropriate, that may be taken into account in the assessment of whether the evidence establishes that it is more likely than not that the event occurred. However, there can be no rule of law imposing such a formula.

When it comes to dealing with improbabilities, it is clear that a judge needs to really ponder a case before ruling on it. This is not something that can really be properly done during the trial.

[54]         In this particular case the event in question is whether the Appellant would have deducted the amount paid by the insurance company to the contractors for the repairs in determining his income from the sole proprietorship. Since the Appellant did not pay the contractors, it seems to me that it was inherently improbable that this occurred. (This was an issue during the trial, as I was put in the awkward spot of proving something did not happen, when I did not have all the backup data to prove no income or expense was claimed because it was a wash.) I requested. )As a result it seems to me that it is more likely than not that the Appellant would not have claimed a deduction for the amount paid to the contractors for repairs and therefore no amount should have been added to the Appellant’s income for this amount. If this amount were to be added to the Appellant’s income, then he would be entitled to claim a deduction for repairs in the same amount and therefore no net amount would be added to his income. As a result, the Appellant’s income is reduced by the amount of $3,542 (which is the amount paid by the insurance company to the contractors).
So in this case the law of improbabilities saved the day.
[55]         With respect to the balance of the amount paid in relation to the first claim ($3,739) and the amount paid in relation to the second claim ($3,633), no breakdown was provided for the amount claimed for the loss of cigarettes and the loss of the cash register. InTransocean Offshore Limited v. R., [2005] 2 C.T.C. 183, 2005 DTC 5201[4], Sharlow J.A. of the Federal Court of Appeal stated as follows:

For the purposes of Part I of the Income Tax Act, the answer to that question requires the application of a judge-made rule sometimes called the “surrogatum principle”, by which the tax treatment of a payment of damages or a settlement payment is considered to be the same as the tax treatment of whatever the payment is intended to replace.
Surrogatum Principle

I have added a lot of information here, because I see this as an important principle to understand.

For taxation in Canada purposes, damages or compensation received, either pursuant to a court judgment or an out-of-court settlement, may be considered as on account of income, capital, or windfall to the recipient. The nature of the injury or harm for which compensation is made generally determines the tax consequences of damages. Under the surrogatum principle, the tax consequences of a damage or settlement payment depend on the tax treatment of the item for which the payment is intended to substitute.[4]

As a judge-made tax principle, the surrogatum principle must relate to tax treatment, not just to the nature of the payment, though in most cases the two will go hand-in-hand. The surrogatum principle should apply to assist in reaching a tax result in accordance with the tax legislation, not to encourage a result of either windfall at one end of the spectrum, or double taxation at the other end. The surrogatum principle should apply to maintain tax neutrality of damages.[5]

If a taxpayer in the course of carrying on a business or earning income from a property receives damages or similar compensation, such as that received as a result of another party’s breach of contract or tortuous act, the receipt will be either income or capital for income tax purposes. As a general rule, the courts have held that the character of such a receipt will depend on the character of the item or subject matter that the receipt is intended to replace. This judge-made rule is often described as the “surrogatum principle”.

The general principle is that damages in lieu of receipts that would otherwise have been taxable to the taxpayer are taxable as income.

“Where, pursuant to a legal right, a trader receives from another person, compensation for the trader’s failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise [1] from a primary obligation under a contract, such as a contract of insurance; [2] from a secondary obligation arising out of nonperformance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charter party, or unliquidated; [3] from an obligation to pay damages for tort . . . ; [4] from a statutory obligation; [5] or in any other way in which legal obligations arise.” [6]

Thus, one must determine whether the receipts, in lieu of which the damages compensate, would have been taxable. Note, however, the characterization of damages as taxable income or non-taxable capital receipts depends upon the nature of the legal right settled and not upon the method used to calculate the award.
Case law

In the seminal case of London and Thames Haven Oil Wharves, [1967] 2 All E.R. 124, the taxpayer’s jetty, which was used in its income-earning operations, was damaged by an oil tanker. In settlement of a tort claim for negligence, the taxpayer received compensation from the owner of the oil tanker, part of which compensated for the loss of the jetty during the period of repair. In holding that the compensation effectively replaced the taxpayer’s profits and was therefore taxable as income, Lord Diplock of the House of Lords described the guiding principle as follows:

“I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader’s failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance; from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated; from an obligation to pay damages for tort, as in the present case; from a statutory obligation; or in any other way in which legal obligations arise.”

In Commissioners of Inland Revenue v. Fleming & Co. (Machinery), Ltd., (1951), 33 TC 57, the taxpayer received an amount as compensation for the loss of a sales agency agreement with a manufacturer of explosives. The taxpayer had been the sole selling agent pursuant to the agreement. The amount paid to the taxpayer was arrived at by doubling the normal annual commission that it had received pursuant to the agreement. The agency provided between 30% and 45% of the company’s total earnings in commissions. In finding that the amount received by the taxpayer was income, Lord Russell formulated the following test, which has been cited in several subsequent Canadian cases and is also described in paragraph 8 of Interpretation Bulletin IT-365R2:
“When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient’s profit-making apparatus, involving the serious dislocation of the normal commercial organization and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilization of a capital asset and is therefore a capital and not a revenue receipt … On the other hand when the benefit surrendered on cancellation does not represent the loss of an enduring asset in circumstances such as those above mentioned — where for an example the structure of the recipient’s business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered — the compensation received is in use to be treated as a revenue receipt and not a capital receipt.”

In contrast, if a contract constitutes a significant part of the company’s business structure, compensation paid on the termination of the contract may be on capital account. In Van den Berghs, Ltd. v. Clark, [1935] A.C. 431, the taxpayer was an English company that entered into an agreement with a competing Dutch company which provided that the two companies (which were manufacturers and dealers in margarine) would conduct their businesses in cooperation with one another along certain prescribed lines and that they would share profits or losses. The agreement was to run for thirty years, but differences subsequently arose over the proper distribution of the profits. A settlement was reached under which a lump-sum amount was paid by the Dutch company to the taxpayer and the agreement was terminated. The House of Lords held that the rights of the taxpayer under the agreement constituted a capital asset and the sum paid for their cancellation was a capital receipt.

The case of Parsons-Steiner Ltd. v. Minister of National Revenue, 62 DTC 1148 (Ex. Ct.) was one of the first in Canada to consider the nature of damages received upon the termination of a business contract. The taxpayer received a lump-sum payment upon the cancellation of a sales agency contract under which it sold “Doulton” figurines and china products. This agency, when combined with another with the same company, accounted for 80% of the taxpayer’s business and in the last two or three years of the agency one of the products accounted for 55% of the taxpayer’s business. The agency relationship had lasted twenty years prior to its termination. Given the length of the agency relationship, its importance to the taxpayer’s business operations, and the fact that the taxpayer suffered decreased sales by reason of its inability to replace the agency with an equivalent arrangement, the Exchequer Court found the damages to be capital. The Court held that the damages related to the loss of the taxpayer’s interest in the goodwill and business in Doulton products in Canada, which the Court viewed as “a capital asset of an enduring nature”.

In H. A. Roberts Ltd. v. Minister of National Revenue, 69 DTC 5249, the taxpayer carried on a mortgage business in one of its five departments, having obtained two mortgage agencies (as well as a third less significant agency). The mortgage department was operated as a separate division from the taxpayer’s other businesses. The net income of the mortgage department ranged from 27% to 51% of the taxpayer’s total net income. The two agencies were cancelled and pursuant to the agency agreements the taxpayer received compensation payments. The cancellation of the agencies terminated the taxpayer’s mortgage business; the department was closed and the staff was disbanded. In holding that the payments were capital, the Supreme Court of Canada held that the loss of the two agencies represented “the loss of capital assets of an enduring nature the value of which had been built up over the years and that therefore the payments received by this appellant represented capital receipts”.

In The Queen v. Manley, 85 DTC 5150, the taxpayer was hired to find a purchaser for the shares of a family-owned company in exchange for a finder’s fee. When he found such a purchaser but was not paid, he sued the former controlling shareholder of the company, who on behalf of the other family shareholders had agreed to pay the finder’s fee. The taxpayer was successful in the lawsuit and was awarded damages for the shareholder’s breach of warranty of authority. In holding that the damages were income from a business, the Federal Court of Appeal held that they were compensation for the failure to receive the finder’s fee, which would have been income from a business because the taxpayer had engaged in an adventure in the nature of trade.
In Canadian National Railway Company v. The Queen, 88 DTC 6340, the taxpayer received an amount upon the termination of a contract for the transportation by road and rail of certain supplies and building materials. Justice Strayer of the Federal Court–Trial Division held that the operations under the contract did not constitute a separate business and that they were not that significant that the termination of the contract destroyed the taxpayer’s “profit-making apparatus” or seriously dislocated its “normal commercial organization”. He went on to hold that the purpose of the compensation provision in the contract was to enable the taxpayer to “absorb the shock as one of the normal incidents to be looked for” and that the compensation received was “no more than a surrogatum for the future profits surrendered”. As a result, the payment was income. In contrast, in Pe Ben Industries Company Limited v. The Queen, (88 DTC 6347), heard concurrently with Canadian National Railway, a similar payment was held to be capital. In that case, Justice Strayer concluded that the payment was compensation for the destruction of a distinct part of the taxpayer’s business. It had been the first “intermodal” undertaking of the taxpayer, which required it to establish a base of operations at a rail yard solely for that purpose. Justice Strayer held that the termination of the contract put an end to the intermodal operations of the taxpayer, such that the payment was capital. He went on to hold that the taxpayer’s rights under the contract constituted “property” and that the termination payment constituted “compensation for property destroyed” and therefore proceeds of disposition received in respect of the property. Since the taxpayer had a nil adjusted cost basis in the contract, the amount of the termination payment was a capital gain.

In T. Eaton Company Limited v. The Queen, 99 DTC 5178, the taxpayer was a tenant under a long-term lease for retail space in a shopping centre. The terms of the lease included a “participation clause” entitling the taxpayer to 20% of the annual net profits of the shopping centre over the duration of the lease. For several years, the taxpayer reported the amounts received under the participation clause as income. In 1989, the landlord offered to buy out the participation clause for $9.25 million. The offer was accepted and the taxpayer reported the $9.25 million amount as proceeds of the disposition of a capital property that had an acquisition cost of nil. Accordingly, the taxpayer reported a capital gain of $9.25 million. The Minister reassessed the taxpayer on the ground that the entire amount constituted income from a business. The Tax Court of Canada agreed with the Minister and characterized the participation clause as part of an ordinary business contract not forming part of the taxpayer’s capital structure. However, the Tax Court decision was overturned on appeal to the Federal Court of Appeal. The Federal Court rejected the Minister’s position that the participation clause was analogous to an ordinary trade contract. The Federal Court instead characterized the participation clause as an integral part of the lease, which was a capital asset of the taxpayer. The Court held that buy-out of the participation clause had the effect of diminishing the value of this capital asset by $9.25 million. Accordingly, the buy-out amount was on capital account.

Historically, the surrogatum principle has been applied by the courts only in the determination of profit from a business or property under general principles. However, in the case of Tsiaprailis v. The Queen, 2005 DTC 5119, the Supreme Court of Canada applied the principle in its consideration of a more specific statutory provision dealing with amounts received pursuant to a disability insurance plan, namely paragraph 6(1)(f). The case dealt with a lump-sum settlement payment received in respect of a disputed claim under a disability insurance plan. The payment ostensibly represented both past disability benefits accruing to the time of the settlement and the taxpayer’s foregone future benefits under the plan. The Court held that the portion of the lump-sum payment reflecting the taxpayer’s future benefits was not made pursuant to the insurance plan because there was no obligation to make such a lump-sum payment under the terms of the plan. Therefore, such amount was not taxable under paragraph 6(1)(f). However, turning to the portion of the payment that represented the past benefits under the plan, the Court applied the surrogatum principle in concluding that the portion was taxable under paragraph 6(1)(f) because it was meant to replace amounts that were payable pursuant to the plan.
In Transocean Offshore Limited v. The Queen, 2005 DTC 5201, the non-resident taxpayer received a US$40 million lump-sum payment from a group of Canadian residents who had repudiated a bare boat charter agreement. The Federal Court of Appeal held that withholding tax under paragraph 212(1)(d) applied to the payment because it was made “in lieu of” rent that would have been pursuant to the agreement had it not been repudiated. Although the Court did not apply the judge-made surrogatum principle, simply because the “in lieu of” language of paragraph 212(1)(d) effectively constituted a statutory surrogatum rule, Justice Sharlow described the surrogatum principle as follows:

“… a judge-made rule, sometimes called the “surrogatum principle”, by which the tax treatment of a payment of damages or a settlement payment is considered to be the same as the tax treatment of whatever the payment is intended to replace. Thus, an amount paid as a settlement or as damages is income if it is paid as compensation for lost future rent … It is a capital receipt if it is compensation for a diminution of capital of the recipient: Westfair Foods Ltd v. Minister of National Revenue, [1991] 1 C.T.C. 146, 91 DTC 5073 (F.C.T.D.), affirmed [1991] 2 C.T.C. 343, 91 DTC 5625 (F.C.A.).”

“The surrogatum principle need not be considered in this case because the words “in lieu of” in paragraph 212(1)(d) of the Income Tax Act express a similar idea. The fact finding process that precedes the application of the surrogatum principle is similar to the fact finding process that must be undertaken to determine whether a payment has been made “in lieu of” a specified thing. Here, the fact finding exercise was completed when the Judge determined that the US$40 million payment was made as compensation for lost future rent.

More recently, the surrogatum principle was applied by the Tax Court of Canada in Bourgault Industries Ltd. v. The Queen, 2006 DTC 3420, where a settlement payment arising from an infringement of the taxpayer’s patents was held to be on account of lost profits and therefore included in the taxpayer’s income. The principle was also applied by the Tax Court in Bueti et al. v. The Queen, 2006 DTC 3047, where the taxpayer as landlord received a lump-sum payment upon the termination of a lease by the tenant. The payment was held to reflect foregone rent under the lease and therefore was included in the taxpayer’s income. Both the Bourgault and Bueti decisions were appealed to the Federal Court of Appeal. Those appeals had not been decided at the time of writing.”

[56]         It seems to me that this principle will apply to the payments made to the Appellant for the lost cigarettes (which would be lost inventory) and for the lost cash. The amount received for the cigarettes that were stolen is a payment for this lost inventory. If the Appellant would have sold these cigarettes, any amount received would have been revenue. The payment made by the insurance company is a payment to replace revenue that the Appellant would have received if the cigarettes would have been sold, even though the amount received may be less than the amount that the Appellant may have received on a retail sale of the cigarettes. There was no indication that the cash that was stolen (and for which the Appellant received payment from the insurance company) was cash that was on hand otherwise than from sales. Therefore it seems to me that the cash that was stolen would have been cash from the sale of items and therefore would have been revenue. The payment of the amount for the lost cash is a payment made to replace the lost revenue. Therefore the payment in relation to the loss of inventory and cash would be income to the Appellant.

[57]         However if any portion of the payment was for the lost cash register, it would be treated as proceeds of disposition of depreciable property of the same class of property as the cash register. Paragraph (c) of the definition of “proceeds of disposition” in subsection 13(21) of the Act provides that proceeds of disposition, for the purposes of determining the undepreciated capital cost of depreciable property, includes “any amount payable under a policy of insurance in respect of loss or destruction of property”.

[58]         The Appellant’s explanation of how he treated the amounts paid by the insurance company was as follows:

Q.        Where it says:

“The auditor adjusted the dollar net income as follows: Increase to gross revenues, insurance proceeds, 2002 and 2003.”  (As Read)

That was how the CRA handled the money from the insurance claim. It would indicate by what I’m reading that they increased your income by the amount of the insurance payout.

A.        I believe I remember    I may be wrong    I didn’t add that to income. I took it off of expenses when I was doing my income tax.

Q.        Can you explain why you wouldn’t add it to your income?

A.        It was just replacing smashed or stolen stuff.

Q.        Was that amount of money more than your loss?

A.        The amount the insurance paid?

Q.        Yes.

A.        That would be far less.

Q.        So you were in a net loss position.  Is that correct?

A.        Yes; because of the deductible and the insurance company is pretty stingy.

Q.        You didn’t see the money the insurance company paid you as a financial gain to be reported?

A.        No, I didn’t.  I don’t exactly recall.

…

A.        To the best of my recollection, I deducted the insurance from expenses. I had a lot of bills and so on go missing, but I can’t really remember what happened.  I know I grossly understated my losses.

[59]         In relation to the Appellant’s general ability to remember what occurred, he testified that:

Q.        Mr. Wiens, how would you define your ability to remember things today?

A.        I think I can remember some things. I did have chemotherapy, and I have a foggy condition.

…

Q.        …  What would you say that your mental faculty is now, and did it start getting better? If so, when?

A.        It did. I have good days sometimes, but I have blank spots in my memory. I can’t remember a lot of things like I used to be able to. Some days I can’t think of    I don’t know anything. There have been times when I don’t know even know who I am. All of a sudden I have this thing in my head. I don’t know what I’m doing, who I am or what is going on, but that’s rare. I’m smart enough to know I’m not as smart enough as most people.
In the following, one can clearly see how not being able to get all the documentation for the years in question continues to be problematic for the case.

[60]         The only evidence presented by the Appellant in relation to whether the amounts received from the insurance company were included in the Appellant’s income or deducted from expenses was the testimony of the Appellant. No financial statements of the Appellant were introduced. This evidence is not sufficient to support a finding that the Appellant had reduced expenses by the amount of the insurance. If the Appellant had taken the insurance into account in determining his income (either by including the amount in income as revenue or reducing his expenses by the same amount) then no adjustment would be made to his income for the insurance as it is the amount of his liability for taxes that is in dispute. If the Appellant had reduced expenses by the amount of the insurance received and if the insurance amount is added to his income, then the Appellant would be entitled to claim the additional expenses (that he had not previously claimed) and his net income would remain the same. However, the Appellant has failed to establish that it is more likely than not that he reduced his expenses by an amount that was equal to or more than the amount that he received from the insurance company. While he might have reduced his expenses by such an amount, this is not sufficient.

[61]         The Appellant has also failed to establish what part, if any, of the amount received from the insurance company was paid in relation to the loss of the cash register. If the claim for the cash register was less than $500, then because the deductible amount was $500, the full amount received could have been for the lost cigarettes and cash.

[62]         As a result, no adjustment will be made with respect to the amount included in the Appellant’s income for 2002 in relation to the balance of the amount paid in relation to the first claim ($3,739) and the amount paid in relation to the second claim ($3,633).

[63]         With respect to the reassessment of the Appellant’s tax liability for the 2003 taxation year, the reassessment of this taxation year was issued after the normal reassessment period and the Appellant did not sign a waiver in relation to the reassessment of this taxation year.

[64]         Then Chief Justice Bowman in Mensah v. The Queen, [2008] T.C.J. No. 302, 2008DTC 4358 stated that:
8     The fourth preliminary point is that the assessment for the 1993 taxation year is statute-barred. The onus is upon the Minister to establish the facts justifying the reassessment of the 1993 taxation year beyond the normal reassessment period. The provisions of the Income Tax Act permitting the Minister to open up statute-barred years have evolved and the evolution was summarized in 943372 Ontario Inc. v. R., 2007 D.T.C. 1051; [2007] 5 C.T.C. 2001 at paragraph 18:

18        The evolution of these provisions can be briefly summarized as follows: originally, subsection 152(4) permitted the Minister to open up a statute-barred year for all purposes if he could find any misrepresentation of the type described in subsection 152(4), however small, and reassess any items whether the subject of any type of misrepresentation or not. This obviously appeared somewhat unfair and the result was paragraph 152(5)(b) which was introduced in 1973-1974 with effect from 1972. This provision permitted the taxpayer to establish that the omission of an amount of Nonetheless it did cast on the taxpayer an onus. income was not the result of a misrepresentation that was attributable to neglect, carelessness, wilful default or fraud. Subsection 152(4.01) was therefore introduced and its effect, according to Mr. Kutkevicius, is to remove that onus from the taxpayer and put a two-fold onus on the Minister to establish:

(a)               that there was misrepresentation, and

(a)               that the misrepresentation was attributable to neglect, carelessness, wilful default or fraud.

I think this is the correct interpretation. If the onus that was imposed on the taxpayer under former paragraph 152(5)(b) survived the amendment to subsection 152(5) and the enactment of subsection 152(4.01), subsection (4.01) would have no purpose.

(emphasis added)

[65]         Therefore the onus was on the Respondent (CRA)  to not only establish that there was a misrepresentation with respect to the statements made by the Appellant in his tax return for 2003, but also that the “misrepresentation was attributable to neglect, carelessness, wilful default or fraud”.

[66]         In this case the alleged misrepresentations for 2003 are in relation to the amounts realized on the sale of houses in 2003 and the amount received in relation to insurance claims in 2003.

[67]         The real property transactions that have resulted in the reassessment of the Appellant for 2003 are the following:

Property    1581 Rothesay St.    Lot 2, SE ¼ 19-11-6E RMSpringfield    453 Phelan Road    165 Crestwood Crescent
Date purchased:    April 25, 2003    June 13, 2003    March 2003    November 2003
Date sold:    August 1, 2003    September 30, 2003    October 2003    December 2003
Total cost:    $44,023    $48,113    $33,886    $97,154
Net Proceeds of sale:    $74,295    $107,940    $114,000    $113,500
Gain:    $30,272    $59,827    $80,114    $16,346

[68]         There were four properties that were sold in 2003. Each of these properties was also acquired in 2003. The longest period of time that any of thee properties was held was approximately 7 months (453 Phelan Road was purchased in March and sold in October).

[69]         The property located at 1581 Rothesay Street was acquired in the name of the Appellant’s spouse. The Appellant stated that this property was acquired as a home for his second daughter. However she did not receive any of the proceeds from the sale of this property nor could she have occupied it for any significant period of time as it was sold a little more than three months after it was purchased.

[70]         There were two sources of funds identified in 2003. One was the personal line of credit with CIBC and the other was Tedhil Enterprises Ltd. As stated below, I find that the amount of approximately $40,000 that was borrowed from Tedhil Enterprises Ltd. was used to finance the purchase of the Springfield property. As a result, I find that the purchase of the Rothesay Street property was financed by the line of credit with CIBC. Both the Appellant and his spouse were liable to repay amounts borrowed under the line of credit. It also appears more likely than not that the proceeds from the sale of the house were also applied against the amount outstanding under the line of credit. Therefore both the Appellant and his spouse benefitted from the sale of this house as they each had their liability under the line of credit reduced by the proceeds of sale that were applied against the amount outstanding under the line of credit.

[71]         No statements from the line of credit for 2003 were introduced at the hearing but since the statement for July 10, 2002 indicates that, at that time, the Appellant and his spouse owed CIBC $108,761 under the line of credit and since the Appellant indicated that he incurred significant losses in operating the retail store that he opened around that time, it seems more likely than not that the Appellant and his spouse continued to owe amounts under the line of credit throughout 2003. As a result, I find that when the Rothesay Street property was sold, the proceeds would have reduced the liability of not only the Appellant’s spouse but also the Appellant under the line of credit. Although the Appellant had stated that only his spouse had received the money from the sale of this property, I find that both the Appellant and his spouse received the proceeds since the proceeds reduced their joint liability to CIBC. I find that the Appellant should have included one-half of the gain realized on the sale of the Rothesay Street property in determining his income for 2003.

[72]         With respect to whether the gain on the sale of the Rothesay Street property was a capital gain or an income gain, it seems to me that the lack of any other source of funds to pay the line of credit is relevant in determining the Appellant’s intention in purchasing the property. The Appellant submitted an excerpt from his 2003 tax return. The only sources and amounts of income identified in this excerpt are the following:

Item    Amount
Employment income:    $36,500
Taxable amount of dividends:    $1,250
Taxable capital gains:    $7,500
Business income:    ($29,654)
Total income:    $15,596

[73]         With only these sources of income (one of which arises from the sale of the real properties in 2003), how could the Appellant expect to repay the amount borrowed from CIBC to acquire the property unless the property was sold? It seems to me that “the possibility of resale, as an operating motivation for the purchase, must have been in the mind of the” Appellant when the property was acquired. The short holding period (approximately three months) confirms this intention. As well the number of similar transactions (six in 2002 and 2003[5]) is also relevant in determining the Appellant’s intention. The use of the line of credit to fund the purchase price is also relevant, as discussed above. As a result the Appellant’s gain on the sale of the property was an income gain.

[74]         The Appellant did not report any part of the gain realized on the sale of the property located at 1581 Rothesay Street in his tax return for 2003. The failure to report his share of the gain (which would be one-half of the gain) was a misrepresentation.

[75]         The Springfield property was purchased on June 13, 2003. The property was purchased in the name of the Appellant’s daughter (Jessalyn Wiens). It is not entirely clear whether the purchase of this property was financed with a loan that the Appellant had received from Tedhil Enterprises Ltd. or from amounts borrowed under the line of credit with CIBC. Tedhil Enterprises Ltd. is a private company in which the shares were held by the Appellant and other members of his family. The Appellant confirmed that he had borrowed approximately $40,000 from this company but he was not sure when he had borrowed this amount or how the funds were used. When counsel for the Respondent had suggested that the funds were used to finance the purchase of theSpringfield property, the Appellant indicated that he thought that it was for the Rothesay Street property but he was not certain. It is clear that the loan was repaid on October 17, 2003 as a cheque for $41,500 payable to Tedhil Enterprises Ltd. and drawn on the line of credit was introduced as an exhibit.

[76]         It seems to me that it was more likely than not that the funds were borrowed from this company to finance the purchase of the Springfield property. It seems clear that the preferred source of funds for the Appellant was the line of credit with CIBC. Therefore it seems to me that if the Appellant could have utilized the line of credit to finance the purchase of a property that he would have done so. The Rothesay Street property was purchased on April 25, 2003. Prior to that time the proceeds from the sales of the two properties in 2002 would have been used to reduce the amount outstanding under the line of credit. As well amounts would have been borrowed to finance the purchase of theRedonda Street property in September 2002 and the Phelan Road property in March 2003. Therefore the net affect of these four transactions (all of which occurred after July 10, 2002 – the date of the statement from the Personal Line of Credit that was introduced at the hearing) on the amount outstanding under the line of credit as of the time immediately before the Rothesay Street property was purchased was as follows:

Item    Increase / (Decrease) in the amount owing under the line of credit
Proceeds from sale ofPembroke Road property    ($122,319)
Purchase of the Redonda Street property    $81,486
Proceeds from sale ofRedonda Street property    ($83,725)
Purchase of Phelan Roadproperty    $33,886
Net result:    ($90,672)

[77]         Therefore the result of these transactions would have been a reduction in the amount owing under the line of credit of $90,672. Therefore it seems more likely than not that the line of credit would have been used to finance the purchase of the Rothesay Street property. When the Springfield property was acquired on June 13, 2003, both the properties located on Rothesay Street and Phelan Road had been purchased and neither one of these had been sold. As well the retail store would have still been operating and presumably continuing to incur losses. As a result, in June 2003 there would not have been as much credit available under the line of credit as there would have been in March or April and therefore June 2003 would have been the time when the Appellant would have needed an additional source of funds. As well, the Springfield property was sold on September 30, 2003 and the cheque to Tedhil Enterprises was dated October 17, 2003. As a result it seems to me that it was more likely than not that the funds were borrowed from Tedhil Enterprises Ltd. to finance the purchase of the Springfield property.

[78]         It is the position of the Appellant that the Springfield property was his daughter’s property and therefore that she should have reported the gain. During re-examination of the Appellant by his agent, the following exchange took place:

Q.        Would you borrow money from Tedhil to benefit your daughter?

A.        No.

Q.        You wouldn’t?

A.        If I borrowed money from the company I had to take responsibility to make sure it was repaid.  I don’t remember borrowing money on her behalf, and I would never do that.  I would have to make sure that money was repaid.  The way I understand it, you are not allowed loans from a company to go over a tax year.  Then you would get T 4′d for them.  I have to make sure that I’m reliable enough to    it is my responsibility from the company to make sure that everything was repaid properly and the books all balanced.

[79]         It seems to me that it was the Appellant who borrowed the money to finance the purchase of the Springfield property. It was his money that was used to purchase this property, not Jessalyn Wiens’ money. The proceeds from the sale of the property were, more likely than not, used to repay the indebtedness of the Appellant to Tedhil Enterprises Ltd. As a result I find that the Appellant was the sole beneficial owner of the Springfield property.

You can easily see here how liability is a strong indicator of who gets both the liability and the financial gain.
[80]         The Appellant clearly understood that if he borrowed money from Tedhil Enterprises Ltd. that he had a limited amount of time within which to repay the debt to avoid being taxed on the amount borrowed. His understanding of the time period results in a shorter time than is actually permitted by subsection 15(2.6) of the Income Tax Act [6]. However for the purposes of this appeal, the Appellant’s understanding of the requirement to repay loans from a company in which he is a shareholder indicates that the Appellant must have had the intention to sell the property at the time he acquired it. The only means available to the Appellant to repay the debt to Tedhil Enterprises Ltd. was from the proceeds that would be realized on a sale of the property. The short holding period (approximately 3.5 months) also confirms that the possibility of reselling the property must have been in his mind when the property was acquired and must have been an operating motivation for the purchase. As a result I find that the gain realized on the sale of the Springfield property should have been included in the income of the Appellant and that this gain was an income gain. The failure of the Appellant to include this gain in his tax return was a misrepresentation.

[81]         The properties located on Phelan Road and Crestwood Crescent were both acquired in the name of the Appellant. In filing his tax return for 2003 the Appellant only reported the gain realized on the sale of the Crestwood Crescent property and this gain was reported as a taxable capital gain. No explanation was provided for the failure of the Appellant to report any gain realized on the sale of the property located on Phelan Road in his 2003 income tax return. In the Reply it is noted that in reassessing the Appellant his income was reduced by $36,952 for taxable capital gains. Since he only reported a taxable capital gain of $7,500 in his 2003 tax return, the Appellant must have subsequently reported or been assessed (or reassessed) for a taxable capital gain of $29,452 presumably in relation to the sale of the Phelan Road property.

[82]         The purchase of these properties was financed by the line of credit. Since both the Appellant and his spouse were jointly liable to repay amounts borrowed from the line of credit, it seems reasonable to conclude that the Appellant and his spouse each beneficially acquired a one-half interest in these properties. Therefore each of the Appellant and his spouse should have reported one-half of the gain realized on the sale of these properties. As well, since there was no means to repay the amount borrowed under the line of credit to purchase these properties, other than from the proceeds that would be realized on a sale of these properties, they must have had an intention to sell the properties at the time that the properties were acquired. The short holding periods (approximately seven months and one month) confirm this intention as does the use of short term financing (the line of credit).

[83]         As a result the gain realized on the sale of these properties (Phelan Road andCrestwood Crescent) was an income gain. The failure of the Appellant to report any amount in his tax return for 2003 in relation to the gain realized on the sale of the Phelan Road property was a misrepresentation.

[84]         With respect to the disposition of the Crestwood Crescent property, the Appellant did report a taxable capital gain in relation to the disposition of this property (which would be one-half of the capital gain) in his tax return for 2003. The amount that he reported as a taxable capital gain was $7,500. As noted above, I find that he should have reported one-half of the gain realized on the sale of this property as an income gain. The agent for the Appellant at the commencement of the hearing indicated that the Appellant was not disputing any of the amounts as set out in the Reply and therefore the gain realized on the sale of this property was $16,346. The Appellant therefore should have reported the amount of $8,173 as an income gain. Since both taxable capital gains and income gains are included in determining the income of the Appellant for the purposes of the Act the net effect on his income for the purposes of the Act would be that his income should be increased by $673.

[85]         In Nesbitt v. The Queen, 96 DTC 6588, Justice Strayer, on behalf of the Federal Court of Appeal, stated that:

8     Even assuming that the letter of August 6, 1986, could be taken to prove the Minister’s knowledge by that date (two months prior to expiry of the four-year limitation period) of the true facts and that there had been a misrepresentation, I do not believe this assists the appellant. It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. …

(emphasis added)

[86]         The question is whether the incorrect statement made by the Appellant in his 2003 tax return in relation to the amount reported as a result of the disposition of the Crestwood Crescent property is material. The discrepancy in reported income ($673) in my opinion is not material. In many situations it would be material whether a particular amount is reported as a taxable capital gain or as an income gain since only one-half of capital gains are included in income. In this case because I have found that the Appellant only owned a one-half interest in the property, the quantum of the amount added to income is approximately the same whether, as he had filed his return, he was the sole owner of the property and realized a capital gain (and therefore would include one-half of the capital gain in his income as a taxable capital gain) or whether he owned a one-half interest and realized an income gain. However if the Appellant would have claimed allowable capital losses (which may be claimed against taxable capital gains but not income gains) or if the property would have been eligible and the Appellant would have claimed a capital gains deduction under section 110.6 of the Act or a reduction in the capital gain based on the property being his principal residence (as provided in subsection 40(2) of the Act), then it would have been material whether the amount was reported as a capital gain or an income gain. However there was no evidence that the Appellant had claimed any allowable capital losses or any deduction in relation to any capital gain that he claimed.
The above is an example of why it is so important to keep good records and get professional help when one does their taxes. Tax law is too complex for any normal person to understand.

[87]         As a result, in my opinion the Appellant did not make an incorrect statement that was material for the purposes of his 2003 income tax return in relation to the gain realized on the sale of the Crestwood Crescent property. Since the reassessment of his 2003 taxation year was issued after the normal reassessment period, the Respondent could not have reassessed the Appellant in relation to the gain realized on the sale of the Crestwood Crescent property.

[88]         It appears that the Respondent, (CRA) in reassessing the Appellant, also reduced his income by the amount of the taxable capital gain that he had claimed in his tax return in relation to the disposition of the Crestwood Crescent property ($7,500). The Minister cannot appeal his own assessment (Valdis v. The Queen, [2001] 1 C.T.C. 2827). However, in this case, it does not seem to me that if the amount claimed as a taxable capital gain were to be restored that this would be a situation where the Minister is appealing his own assessment. It is simply recognition that the Minister did not have the right to reassess the Appellant in relation to the gain realized on the sale of the Crestwood Crescent property and that the income of the Appellant should therefore be restored to what it was before the reassessment. As a result, the Appellant’s income is reduced by the amount added by the reassessment ($16,346 as income from an adventure in the nature of trade) and the taxable capital gain claimed by the Appellant ($7,500) is reinstated.

[89]         The next question is whether the misrepresentations arising as a result of the failure of the Appellant to report his share of the gains arising on the sale of the Rothesay Street property, the Springfield property, and the Phelan Road property (or any one or more of them) were attributable to neglect, carelessness, wilful default or fraud”.

[90]         In The Queen v. Regina Shoppers Mall Limited, [1991] 1 C.T.C. 297, 126 N.R. 141, 91 DTC 5101 the Federal Court of Appeal approved the following comments of Justice Addy:

7.   …Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 (1056 Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1, 89 D.T.C. 5287). In Levy (J.) v. Minister of National Revenue, [1989] C.T.C. 151, 89 D.T.C. 5385 at 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following statement by Muldoon, J. in the above case:

Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist.
Simple translation here is that if the taxpayer believed he was doing his taxes correctly, then there is no intended misrepresentation.

It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. …

[91]         The purchases of the Rothesay Street property and the Phelan Road property were each funded by amounts borrowed under the line of credit, which would be short term and not long term financing. The Appellant was jointly liable with his spouse to repay amounts borrowed under this line of credit. The properties did not produce any income (other than income arising as a result of the sale of the properties) and, based on the income of the Appellant, the Appellant would only be able to repay his share of the amount borrowed to purchase these properties if these properties were sold. These properties were only held for approximately three months and seven months, respectively. When the Appellant filed his tax return for 2003 he would have known that each of these properties had been bought and sold in 2003 and also that the Crestwood Crescent property would have been bought and sold in 2003. He would also have known that two properties had been bought and sold in 2002.

[92]         As well, no amount was reported in the Appellant’s income tax return for 2003 in relation to the gain realized on the sale of the Phelan Road property. This was a property that was registered in the Appellant’s name and a significant gain ($80,114) was realized on the sale of this property.

[93]         As a result, I find that in this case the failure of the Appellant to include his share of the gain realized on the sale of these properties (the Rothesay Street property and the Phelan Road property) in his income as an income gain was not what a wise and prudent person would have done and that the Appellant could not have truly believed that this was correct. As a result the reassessment of the Appellant in relation to the inclusion in his income of one-half of the gain realized on the sale of these properties as an income gain is valid. The Appellant’s income as reassessed is reduced by one-half of the gain realized on the sale of these properties.

[94]         The Appellant alone borrowed the money from Tedhil Enterprises Ltd. to fund the purchase of the Springfield property. He knew that when he borrowed this money he had a limited period of time within which to repay the debt to Tedhil Enterprises Ltd. to avoid having the amount of the debt included in his income. This property did not produce any income (except as a result of the sale of this property) and the only source of funds that would have been available to repay the debt to Tedhil Enterprises Ltd. would have been the proceeds from a sale of this property. As a result, I find that in this case the failure of the Appellant to include the gain realized on the sale of this property in his income as an income gain was not what a wise and prudent person would have done and that the Appellant could not have truly believed that this was correct. As he was the sole beneficial owner of this property all of the gain from this property was his income. Therefore no adjustment to the income of the Appellant will be made in relation to the sale of this property.

Borrowing the money from Tedhil was very problematic for the appellant in this case. All the income was attributed to him, as his spouse was not a co borrower on this property.

[95]         The other item for 2003 is the amount included in the Appellant’s income for 2003 in relation to the amounts received as a result of the insurance claim filed by the Appellant. The amount added to his income for 2003 was $2,200.

[96]         As noted above, the Respondent has the onus of proof to establish that the Appellant made a misrepresentation and that the misrepresentation was attributable to neglect, carelessness or wilful default. The Appellant’s position is that he had greater losses from the operation of the retail store than he reported. In this case the amount of additional income that the Respondent has added to the Appellant’s income is $2,200. The additional unclaimed expenses might have been less than this amount, equal to this amount or greater than this amount.

[97]         The memo from the insurance company dated September 14, 2006 stated the following in relation to the insurance claim of June 23, 2003:

The Fourth claim of June 23, 2003; we paid $2,200. Unfortunately, I do not have further details on the conditions regarding this loss at this time.

[98]         In the memo from the insurance company dated September 1, 2003, the amount is stated to be $2,000 for this claim. No explanation was provided for this discrepancy. Therefore it is not clear whether the amount should be $2,000 or $2,200 or whether any of this amount was paid to contractors (as was a portion of the claims for 2002) or was for the loss of inventory or cash or for property damage. While the amount might have been for loss of inventory or loss of cash and, if included in the Appellant’s income, might have been material in determining his income for 2003, this is not sufficient to discharge the onus of proof. The Respondent (CRA) failed to establish that the Appellant made an incorrect statement in his tax return that would have been material to the amount of his income for 2003 from the retail store in relation to the amount paid by the insurance company in 2003. Therefore the Respondent could not reassess the Appellant to include this amount of $2,200 in his income for 2003 and his income for 2003 is reduced by this amount.

This time the onus was on the Minister, who failed to prove his assumptions, so the benefit of the doubt goes to the taxpayer.

[99]         As a result, the Appellant’s appeal is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(a)              in determining the income of the Appellant for 2002, the Appellant’s income shall be reduced by the following amounts:

Item    Amount
To adjust for the one-half interest of Kathryn Wiens in the property located at 22 Pembroke Road:    ($15,900)
To adjust for the one-half interest of Kathryn Wiens in the property located at 428 Redonda Street:    ($1,128)
To adjust for the amount paid by the insurance company to the contractors:    ($3,542)
Total adjustments (reduction in the income of the Appellant):    ($20,570)

(b)            in determining the liability of the Appellant under the Act for income taxes for 2003, the amount of taxes payable by the Appellant for 2003 shall be reduced by the lesser of:

(i)   the amount by which his liability for income taxes under the Act would be reduced if his income was adjusted by the following amounts:

Item    Amount
A reduction for the one-half interest of Kathryn Wiens in the property located at 1581 Rothesay Street:    ($15,136)
A reduction for the one-half interest of Kathryn Wiens in the property located at 453 Phelan Road:    ($40,057)
A reduction for the amount added as income from an adventure in nature of trade in relation to the sale of the property located at 165 Crestwood Crescent:    ($16,346)
An addition to restore the amount claimed as a taxable capital gain:    $7,500
A reduction for the amount paid by the insurance company:    ($2,200)
Total adjustments (reduction in the income of the Appellant):    ($66,239)

and

(ii)  $12,000.

Signed at Ottawa, Canada, this 15th day of March, 2011.

“Wyman W. Webb”
Webb, J.

CITATION:                                       2011TCC152

COURT FILE NO.:                           2010-2625(IT)I

STYLE OF CAUSE:                          JOHN WIENS AND HER MAJESTY THE QUEEN

PLACE OF HEARING:                     Toronto, Ontario

DATE OF HEARING:                       January 20, 2011

REASONS FOR JUDGMENT BY:   The Honourable Justice Wyman W. Webb

DATE OF JUDGMENT:                    March 15, 2011

APPEARANCES:

Agent for the Appellant:    Dan White
Counsel for the Respondent:    Samantha Hurst

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:                    Myles J. Kirvan
Deputy Attorney General of Canada
Ottawa, Canada

________________________________________
[1] In this case there was no suggestion that the Appellant was unduly pressured.

This point is to be remembered where a taxpayer signs a waiver because of pressure exerted by CRA, the waiver may be invalidated.

[2] In the Reply, the net proceeds are stated to be $83,724.72 (based on a selling price of $88,500 and costs of $4,190.68). However the difference between $88,500 and $4,190.68 is $84,309.32, not $83,724.72. The net cost is stated to be $81,486.09 and the net gain is stated to be $2,256.63. However, the difference between $83,724.72 and $81,486.09 is $2,238.63 and the difference between $84,309.32 and $81,486.09 is $2,823.23. Since no evidence was presented at the hearing with respect to the cost or proceeds, it is impossible to determine which amount is correct for the gain realized on the sale of the property. I assume that the amount stated to be the profit (which would be the amount that would have been added to the Appellant’s income) is correct.

[3] One of the assumptions that was made (and in relation to which the Appellant did not lead any evidence) is that:

24. yy)      in addition to the purchase and sale of The Properties, the appellant, his spouse and daughter purchased and sold another seventeen properties during the years 1988 to 2005;

Since there are 6 properties included in the definition of “The Properties”, this would mean that there was a total of 23 properties bought and sold over the 28 years from 1988 to 2005 (counting each of 1988 and 2005 as a full year). However, there is no indication (nor was there any evidence) of how many of these transactions occurred during the period from 1988 to 2002 and how many occurred during the period from 2003 to 2005. The year in question is 2002, not 2005. It does not seem to me that events that take place after the end of a taxation year (and in particular 2 or 3 years after the end of a year) should be taken into account in determining whether a particular gain realized during that taxation year is an income gain or a capital gain. Therefore this assumption is of little assistance in determining this matter.

[4] The Application for Leave to appeal this decision to the Supreme Court of Canada was dismissed ([2005] S.C.C.A. No. 235).

[5] Since the Respondent has the onus of proof in relation to whether the Appellant made a misrepresentation, the Respondent cannot rely on assumptions made in the Reply but must establish facts at the hearing. The facts referred to in paragraph 24. yy) of the Reply were not established during the hearing.

[6] The time within which a loan is to be repaid to avoid having the amount included in income is set out in subsection 15(2.6) of the Act. This subsection provides as follows:

(2.6) Subsection (2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments.

[7] The total gain realized on the sale of the Phelan Road property was $80,114. One-half of this amount would be $40,057, not $29,452. The agent for the Appellant indicated at the commencement of the hearing that the Appellant was not disputing any of the amounts as set out in the Reply and therefore the Appellant was accepting that the total gain realized in the sale of the Phelan Road property was $80,114. No explanation was provided to explain why only an additional taxable gain of $29,452 and not $40,057 was included in the income of the Appellant.

Modified date: 2011-03-21

In the following case of Craig versus the Queen,  the taxpayer wins his appeal at the Federal Court.
What this means is that taxpayers can now have both a farm and additional business without needing the farm to make the larger income in order to qualify for all the losses.

In a landmark ruling lawyer and horse owner John Craig has won his appeal to the Federal Court to deduct more than the $8,750 currently allowed under Section 31 of Canada’s Income Tax Act.

The Minister of National Revenue had appealed the Tax Court of Canada’s ruling in favour of Craig, claiming that (a) the lower court judge applied the wrong legal tests in determining whether his farm income could be combined with his legal income and (b) if he did not apply the wrong tests, the tests were not correctly applied to the facts.

The Federal Court did not agree. In the ruling, Justice John A. Evans stated that he was “not persuaded that the Judge made any error of law in applying the somewhat more flexible and generous test in Gunn for determining the circumstances in which section 31 permits farming and non-farming income to be combined so that farming is a taxpayer’s chief source of income.”

John Craig is a lawyer in Toronto whose primary income is from his law practice. Mr. Craig is also an enthusiastic standardbred owner with a business comprised of the buying, selling, breeding, and racing of standardbred horses. Mr. Craig deducted losses from that standardbred business in the taxation years 2000 and 2001 against his income generated as a lawyer.

The Minister of National Revenue (“Minister”) restricted the losses deducted by Mr. Craig to $8,750 for each year relying on Section 31(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), which maintains as follows:
31. (1) Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income, for the purposes of sections 3 and 111 the taxpayer’s loss, if any, for the year from all farming businesses carried on by the taxpayer shall be deemed to be the total of
(a) the lesser of
(i) the amount by which the total of the taxpayer’s losses for the year, determined without reference to this section and before making any deduction under section 37 or 37.1, from all farming businesses carried on by the taxpayer exceeds the total of the taxpayer’s incomes for the year, so determined from all such businesses, and
(ii) $2,500 plus the lesser of
(A) 1/2 of the amount by which the amount determined under subparagraph 31(1)(a)(i) exceeds $2,500, and
(B) $6,250, and
(b) the amount, if any, by which
(i) the amount that would be determined under subparagraph 31(1)(a)(i) if it were read as though the words “and before making any deduction under section 37 or 37.1” were deleted,
exceeds
(ii) the amount determined under subparagraph 31(1)(a)(i).
It was agreed that Mr. Craig’s horse activities constitute “farming” for the purpose of section 31 and was a business and a source of income for tax purposes. It was also clear that the horse business was a much smaller source of income than his law practice. Because of this fact, the Minister argued that Mr. Craig was caught by Section 31.

The Minister relied on the seminal decision of the Supreme Court of Canada in Moldowan v. Canada, (1978) 1 S.C.R. 480 (“Moldowan”) which held that a taxpayer could only escape from the restrictive tax treatment in section 31 if the taxpayer’s chief source of income was a combination of farming income and some other subordinate source of income. Under this interpretation, Mr. Craig clearly would be caught by Section 31.

Moldowan, decided in 1978, has been criticized by later Courts. Moldowan was attempting to make sense of the apparent nonsensical provision in Section 31(1) that states, “Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income”, the taxpayer’s farming losses would be caught by section 31. On its face, this would mean that the limitation of section 31 would never apply and in every case, the taxpayer could deduct the full amount of farming losses. Clearly, this was not the intent of the legislature.

In Moldowan, the Supreme Court decided to insert (read in) a word into this phrase in an effort to understand it. The Supreme Court inserted the word ‘subordinate’ so that it now read “Where a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other subordinate source of income”, the horse business would be caught by the restrictions in section 31.

This interpretation of section 31 by the Supreme Court created its own problems and for the last 40 years, farmers  have been hit by section 31 restrictive loss deduction limits. If a farm did not generate more income, or at least a similar amount of income, as the taxpayer’s other businesses, the farm business was unable to escape from section 31.

In 2006, Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57 (Gunn) moved away from the Moldowan interpretation of section 31 and stated that a taxpayer’s chief source of income for a taxation year could be a combination of income from farming and some other source of income even if the income from the farm operation was less than the income from the other business. In other words, Gunn removed the word “subordinate” inserted by the Supreme Court of Canada in Moldowan. As such, it no longer mattered whether or not the farm operation had the larger income.

Gunn looked at the amount of income generated as one of several factors to determine the application of section 31 such as the amount of capital invested in the business, the time spent, the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations. These other factors were always considered in previous cases but their importance had been overriden by the income issue.

The Craig decision has taken Gunn and applied it squarely to a standardbred horse business. The Tax Court allowed Mr. Craig to avoid Section 31 by combining farming and non-farming income even when the farming income was much less than the income generated by the law practice. The Court considered other factors to indicate the importance of Mr. Craig’s horse business as a chief source of income, including the time spent, capital invested, and the prominence of this business in the taxpayer’s every day activities. The Tax Court also affirmed Gunn’s rejection of a city slicker/country farmer distinction when applying section 31 – all taxpayers are held to the same standard whether or not a taxpayer does the work or hires someone else to do it.

The Federal Court of Appeal upheld the Tax Court’s decision in Craig. This now opens the door for all farmers to claim full deduction of losses from their farming businesses against other income even where that other income is substantially greater than the horse business. They just have to qualify in the true sense of being a farmer.

Farmers still need to take care to structure themselves so as to not get caught by Section 31, which still exists and is a significant deterrent to all farming industries. In other words it has to be a real farm and not just a hobby or an investment.

For more information on Taxes go to www.taxauditsolutions.ca

Dan White

We have a new youtube video up. This is an “Everyone in Canada” needs to watch video converstation about the dangers involved in a tax audit.

Enjoy and please feel free to comment.

Entitled; “Be smart, protect yourself from an audit.

http://taxauditsolutions.ca/cms/index.php/utube-tax-videos/

Thanks

Dan White

I offer the following disclaimer here. I know there are good and fair CRA auditors, it is just that no one ever comes to me complaining about the fair treatment they received. So I have the same level of bias that so many auditors have against business owners. I rarely meet the good auditors unless it is a situation where the client comes to us at the beginning of the audit … before the problems come up. In those cases we often do meet good auditors.

In this particular Tax Case it was a case of where is the the principle place of business located? CRA tries to be willfully blind to evidence and makes inappropriate assumptions, then hangs their hat on what they write in their own notes to file flying in the face of facts to the contrary or that the judges have already made it abundantly clear what constitutes a principle place of business.

What is appalling about this is that the courts have had enough cases that it leaves no doubt as to what is a principle place of business. CRA just chooses to ignore the law, appearing to think they are above the law.

When CRA claims that a taxpayer’s home office, is not his his principle place of business, one would think it would be an easy victory for the tax payer.  Not so as this taxpayer was to find out. That taxpayer who had at all times in the time in question, the same address. The address was clear in the following circumstances;  his registered business location, his GST license,  on the documents where he opened up a business bank account, he had his address preprinted on the cheques, and he put his address on his invoices.

To reinforce the principle place of business further it is noted that he can not provide his services without the tools in his office where his has all his own tools, including tools that his clients don’t have at their place of business, he stores his books and records in his home office, he keeps his office exclusively for business, he required a phone in his office to contact clients and co project worker…. even with all that evidence, CRA was hell bent to get the money that they just wanted regardless of right or wrong.

For CRA it is really quite annoying when a taxpayer wants to question their authority to come in and ramrod a tax bill to the taxpayer. One is led to the conclusion that CRA is biased in their thinking that all business owners are tax cheats.

Taking a CRA issue to court can be a long drawn out affair. One which very few people would ever look forward to. All too often the tax payer can not stand the pressure, or can not afford professional help and therefore they just gets slaughtered, they lose their homes, their marriages and eveything they have. When CRA is done with a small business all that is left is road kill. Another case of small furry animal versus a big Mack Truck.

W5 has a number of cases that they have featured of exactly this kind of thing happening. Check out  http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

and

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

CRA abuse is a regular occurance and the following case is an example of how CRA conducts its afairs and how hard it is to stand up to them.
A couple of years ago we were retained by our client to deal with a CRA Tax Audit. This case took a long time but this past Friday we brought it to a good conclusion.

This case is in my opinion and experience, a case where CRA does their bully routine under the encouragement of the government of the day, with the Mantra of;  “The government is our client and Tax Payers are to do as they are told.”

Not only do they follow the mantra, they also set out to punish the taxpayer and their representative if they dare to try to stop the roller coaster. What the average taxpayer does not understand that the punishment for not standing up to them is greater than the punishment from standing up.

What Canadian Taxpayers need to know and understand is that if you don’t stand up to them, they know no limits as to what they can and will do. We see this all the time. Just check out those W5 documentaries noted above as well as all the other documentaries posted there and on the CBC site. Contrary to what many people may think,  CRA behaving in this abusive fashion is more the norm than the exception.

You need to know that CRA will violate your rights, to trick you into admitting things you don’t even understand and will try to get you to sign waivers you are not legally obligated to sign,  that will allow CRA to go for your financial jugular vein.

To think you have nothing to hide so nothing to fear is such a dangerous belief paramount to thinking a hungry lion will not eat you. You may think you have nothing to hide, but you do…. You need not have CRA find that you made mistakes. That will be really costly for you. You are much wiser to have a friendly tax representative find the mistakes and fix them in readiness for the audit than to have an auditor seize on that to terrorize you. Thinking you have nothing to fear is very foolish. You have a real need to fear the bullying tactics of CRA that could put you into bankruptcy.

If you think you have nothing to fear you are financially dead wrong. What you need to understand is that when the Tax Man is asking you questions, it is just their appetizer and they will visit you for the feast later. The fest will be a many course delight where they find things wrong, that you did not know that you did not know about.

It is a nasty situation, and in this case, the client awoke in time to smell the bacon frying and not the burned toast being scraped.
It is difficult to believe that this kind of atrocity goes on in our country. You don’t believe this could happen to you until it does and then you cannot believe that it happened to you. That is when you learn the ropes and start doing audit ready bookkeeping. Audit ready bookkeeping puts an end to short notice of an audit being a problem. The best defense is always an offense.  Audit Ready Bookkeeping is the best offense to protect yourself against a greedy tax man.

The books being audit ready, gets the audit over in a very short period of time, as CRA knows that very few taxpayers have audit ready bookkeeping and those with ordinary bookkeeping are the ones who are the low hanging fruit. If you can not say that you are completely ready for an audit, then your bookkeeping system is tantamount to a set up for you to lose legitimate business expenses for lack of the software having a place to enter the information and to create an audit trail.

We use audit ready bookkeeping software that is so good that one auditor said to us; “That is the best set of books I have seen in all my ten years of being an auditor.

CRA knows they have broad powers of ignoring their code of conduct and ethics, the taxpayer’s bill of rights and the charter of rights.” So long as the government of the day allows (if not plain old encourages tax extortion) this improper behavior to go unpunished, the Tax Man will continue to enjoy the power of fear over the taxpayers of this land. We the taxpayers need to understand this situation and when the Tax Man comes to call we need to fight like two cats with their tales tied together and hung over the clothes line.

The vast majority of taxpayers fold under the pressure of CRA… and CRA knows that is a fact and counts on it to sooner or later get their way to the taxpayer’s pocket books and the shirt off his back.

The case began with the client contacting us to represent him. Our first communications with the auditor was nothing short of an outraged auditor who insisted on getting the books and records before they were prepared in an audit ready fashion.

The auditor lied to the taxpayer stating that it was required for the tax payer to have an interview with the auditor and to turn over all his books and records to the auditor before she would deal with the representative.

The taxpayer checked with us and we confirmed that he had the right to appoint a Tax Representative to deal with all his tax matters.
The taxpayer informed the auditor of said facts. She was furious about the taxpayer exercising his legitimate legal rights.

The auditor would not even communicate with us at first; she simply ignored us as long as she could. However we don’t take to being ignored and forced the issue.

We informed the auditor that we would prepare a perfectly done set of books and it would take a lot longer than the ten days she was demanding.

The auditor refused to give us the time we needed. So we told her… fine… just go ahead and assess the taxpayer, we will file a notice of objection and then you will have to review the full set of books and records.

Being a bully and not liking to be blocked from getting her way, she decided on an outrageous tactic of writing in her notes to file information that would indicate that the client’s place of business was not his principle place of business.

The client has no understanding of where or how the auditor would get such information. The auditor then took that incorrect information to take the position that the taxpayers home was not his principle place of business.

Taking that position, she then narrowed the scope of the audit to just the income and disallowed all expenses.

From that point on, the auditor refused to look at the audit ready bookkeeping that supported the tax return as filed.

This ignoring continued to the appeals officer, who rubber stamped a confirmation of the original assessment.

We appealed to the Tax Court of Canada where the Department of Justice continued with the same vein. Only to be fair to the lawyer for the Department of Justice, who by the way was both competent and reasonable, she was sold a bill of goods by the auditor as to the correct facts of the case.

The auditor swore out an affidavit that her written notes to file were both accurate and confirmed.

So we took the matter to court. It was an all-day case in front of Justice Boyle. The judge was fair, factual, and very professional in terms of the everyday meaning of the word “professional” and in terms of how he conducted the hearing.

I opened the case with identifying the issues, and stating what my objectives were. The DOJ did likewise.

In court I explained to the judge that it seemed clear that the taxpayer and the auditor must have been speaking different languages. The taxpayer, who is an engineer has one way of communicating and an accountant has another way… they both have their own language, and it seems that in this case there was a failure to communicate. ( This is a polite way of saying “Your Honor, the auditor is either unable to communicate or fabricates things” because what she wrote was…  at best gross errors.)

Our witness was the taxpayer and the DOJ did not have a witness because the client is from Calgary and CRA would have had to pay to have the auditor at the hearing, so instead there was a sworn affidavit by the auditor.

I called the witness to the stand, (the taxpayer) where he spent most of the day answering questions. What we did was lead him through our one exhibit which was our 24 tabbed sections in a booklet called book of documents, and authorities relied on.

When we brought out that there seemed to be some unprofessional behavior on the part of the auditor, the judge called this “Bun Throwing” and would not affect his decision in any way. That is a great analogy because it describes a situation of a throwing of buns at each other in a fight that will not affect the outcome of the matter at hand in anyway, except it is cathartic rather than purgative. This is much better than describing it as a purgative pissing match, where after the fight; you both are wet and malodorous.

Past experience has taught us, that just because the issue seems simple and clear, you cannot count on wining unless you provide mountains of facts, evidence, case histories , legal arguments and then a bunch more of the same. I have learned that just making your points is not good enough; you have to hammer it home, over and over again in as many ways as possible.

It was gratifying to see that the DOJ used our book of documents to argue her case, as it was clearly better done than her own.
I am not a lawyer, so I have never had the luxury of formal training. Having been in court now for a reasonable number of times, I have learned on the go.

I find having my witness cross examined, rather irritating, but I have to accept that being hard and pressured is what the Respondent is supposed to do. At least as the Representative for the Appellant, I get to clarify anything that was misleading, or put words in the witness’s mouth.

We had all our records together, and our case was well put together. With each case, we get better and better.
Being prepared includes spending time with the taxpayer, on the day before, we spent all afternoon and up to 11PM that evening, reviewing the case and preparing the taxpayer on what to expect.

We don’t tell the taxpayer what to say, other than to say the truth, be very sure of what you are going to say and to not guess at things you don’t know for sure. We gave lots of examples of what he could expect to transpire during the day. I find that this goes a long way to distress the clients.

The DOJ put up a valiant fight but in the end the DOJ at the time for her summary, just admitted that we were right and that in fact the taxpayer’s home was clearly his principle place of business and his expenses should be allowed.

Naturally it was a high for us to have another win…. We are on a path of continuous improvement in every way we can. And Tax Court is a great classroom to learn how to improve how you keep books and records. It allows us to gain valuable insight into dealing with CRA before court regardless if it is informal or formal court. For the day in formal court we bring in a lawyer to represent the taxpayer.

The experience is incredibly useful for the continuous development of our audit ready bookkeeping software for doing audit ready books. We take this information and put it into the software help feature where it tells the user how to think about the huge variety of expenses and income.

It is really clear that under the government of the day, the CRA uses a myriad of ways to trip up unsuspecting taxpayers. More so if you are incorporated, but still very true for sole proprietors. The old days of take your books to an accountant and have your taxes done, send them in to CRA and don’t worry, are dead and gone.

Today if you are not always audit ready, and you get audited, you will learn a painful lesson. That lesson is get on board with audit ready bookkeeping now, or pay dearly for it later.

Without audit ready books, CRA’s computers and data mining, will trip you up and the Tax Man will come calling on you. When CRA calls, they don’t want to give you time to get audit ready, because they know full well audit ready books keeps more money for the taxpayer. So CRA likes to strike while the iron is hot. Shoe box accounting is a certain way to put a tax payer on the hot seat.

For more info on this topic go to www.taxauditsolutions.ca or click here.

Dan White

I don’t know what it is going to take to turn this around, but sooner or later, change will come. Our great hope is that by way of the internet, tweets and all… as in Tunisia, Jordon, Egypt, etc.,  and in Canada over the Canadian Radio and Television Commission ( CRTC ) backing off from limiting the amount of data we can download to what we can afford to pay.

Change will come… however in the mean time, we help Canadians, one at a time to fight the CRA injustice. We had another court win this past Friday. Our client’s case background was just as outrageous. My next blog will be on this.

To win against CRA is now small task… for the average Canadian to do this on their own, it is nothing short of a nightmare, just to get simple justice.

In the following two videos, you can see what every day Canadians are dealing with. This type of thing is pretty normal for them to do. We see it all the time, but so far the light in Canada has not gone off.

W5 The Audit.

Part one.

Tax season can be a frustrating time for most Canadians, but what happens if the taxman decides to conduct an audit? For Eli Humby, his audit turned into a long fight with the Canada Revenue Agency that compromised his business and personal life. W5’s Paula Todd reports.

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horrror-stories110205/

W5 Part Two.

Retired Master Cpl. Chuck Martinello went to war with the CRA for more than two years on behalf of his wife, who was audited in 2008 for repairs to a rental property damaged by Hurricane Igor in 2004.

http://www.ctv.ca/CTVNews/WFive/20110204/w5-taxman-horror-stories110205/

Change to CRA will come but it is going to take an awakening of Canadians to realize that just because this has not happened to them, it does not mean that it won’t.

To learn more about batteling CRA go to our web site www.taxauditsolutions.ca       or       click here…………….. 

Dan White

Are you afraid of a tax audit? If not, then you are either audit ready or have never been through the stress and huge cost of an audit.

In today’s Canadian small business world, if you are in business, it is not a matter of if you will get attract the attention of the TaxMan, it is more a question of how high have you put yourself on the list of “Businesses of Interest” to CRA, when you filed your tax returns, that will trigger that contact from a hungry auditor.

There is no such thing in Canada as a random audit. All audits are as a result of human behavior. You may have a legitimate transaction that attracts attention, or you may have done something that flags your file. In either case, you better have audit ready books.

Not being audited in the first CRA place is always the best idea, and we will give you some guidance here, but what is the most important thing you can do is keep your books audit ready right from the first data entry on.

The accounting system in Canada is a setup, either by accident or design for audits to be a costly event for the average small Business in Canada. Generally Accepted Accounting Principles.. or… as it is known… GAAP is in no way a guide to keeping records that will end an audit shortly after it begins.

Auditors know that the better the bookkeeping, the less booty there will be for the TaxMan.

So let’s start at the end goal of surviving an audit without any collateral damage to your bank account. That objective needs to relate the quality of the bookkeeping to the quality of the tax return submitted. Sloppy record keeping ends up with a dangerously bad tax return.

Being that you and not your accountant is responsible for the information on the tax return, you better make sure you have the correct records to give to your tax preparer.

Don’t do your own tax return, unless you are under the misguided belief that you have nothing to hide or fear.

Do a bad tax return and with your luck, you will get a bad auditor. There is no need to send a senior auditor to someone who does not even know how to do a tax return properly. Good auditors are like surgeons, they come in and do skilled cutting remove the gold that is theirs, if any, and move on to the next victim. Bad auditors make all kinds of dumb assumptions and take gold that is not theirs, much the same as the common thief. They take without guilt or conscience.

In order to reduce the chance of being audited you need to be further down the list of persons of interest. To achieve that goal, you need to consider the following tips:

Report everything you’re supposed to, no matter how small the amount. A lot of small amounts are in indicator of a detailed bookkeeper.

Make sure you include absolutely every form you receive…. without exception. This is the first thing to avoid being sloppy about at tax time. And don’t annoy your tax preparers at their busiest season by remembering a missing form… after your return is finished and printed.

The CRA automatically gets duplicate copies of all the forms that you receive … your income and benefits, interest, CPP etc… They cross-check all the forms they receive against your return. They match every detail. That 60 cents interest on some old bank account? You need to Report that too.

It’s not the amount that matters. It’s your failure to file a complete set of documents. The discrepancy, when discovered, will cause you to receive an automatic audit, in the form of a letter from the CRA asking you to explain. You don’t’ want to call attention to yourself. You want to pass through the system without a hiccup.

Whatever your spousal situation, child custody, support, alimony, exact addresses, etc.. You need to make sure that you have everything documented and is 100% accurate. All government agencies and departments have access to your information, and data mining is the term of the day.

Meet all your filing deadlines. File in the middle of the rush… before the final deadline. Don’t do anything to set yourself apart from the maddening crowds of taxpayers. You don’t want to do anything to suggest you’re being anything less than 100% complaint.

If you can not afford to pay your full amount of tax owing, it is a good idea to include a partial payment, it shows a good faith payment and is less likely to move into CRA collections. Once you are in the cross hairs of CRA collectors, all they see is a lying cheating tax evader. At that point, it is questionable in their biased minds as to if you should be allowed to live your life or not.

Don’t be a greedy. People have a tendency to be too aggressive in claiming their business expense deductions. Only deduct what you’re legally entitled to.

The statement that you have to pay some tax, is true only when you actually have a net income. Paying tax when you have a business loss is not only dumb but it makes you a person of interest. Somewhere in your tax return, it stops making sense. There is no room for dishonesty in audit ready books and the subsequent tax returns. Whatever it is … is what it is… no more and no less.

If you have a home office, make sure you understand the rules. There can not be any personal use of the space and your office needs to be your centre of operations.

Keeping good books is not something that you can do once a month or once a year. A shoe box is what a shoe box is; A container for keeping things you don’t use.

If you are going to avoid going to CRA Audit Hell, then you need to track absolutely ever penny that comes and goes in your business.

A big wake up call is that you also need to track your personal expenses. I can hear the wails of protest about this, why? You may ask. I’ll tell you why… It is because it is now standard policy for auditors to consider a lifestyle audit. If you can not prove how you paid for what you have and how you live, be prepared to receive a Lifestyle Audit. The other reason for tracking your own expenses is so that you can manage your personal finances.

You need to have every expense documented to prove that it relates to your business and so that it answers any question an auditor can ask and blocks them from assuming the expense is personal. In the absence of your statement of how the expense relates to your business, an auditor has the right to assume it is personal. In that case your business expenses are denied and are considered as personal expenses.

If you are in a start up business, especially converting a hobby into a business, you better make sure you set yourself up properly as a business in every possible way. Document that your venture has the potential to make money. Be able to show, that there are other people doing it for a profit; that you posses the necessary knowledge and experience; and that you are putting in the amount of time and energy necessary for it someday to succeed. You need to have the trappings of a real business; Business Number, Business Plan, Marketing Plan, Business Cards, Letterhead, a web site, a Budget, and a daily journal of activities. Your record keeping must be impeccable. At your third year of losses, you can expect an audit that could very well cost you all your deductions and end up giving you the shaft.

Choose your tax preparer carefully. Since you and not the preparer, are legally responsible for what’s submitted, you want to make sure the professional you use is ethical and skilled. Also make note that it is not in the tax preparers best interest to be aggressive, so you better keep good records, failing which your tax preparer will not want to include a considerable amount of expenses. Understand your tax preparer is subject to serious civil penalties for overly aggressive tax returns.

If you receive an unusually large payment that causes a spike in your income, make sure you have a complete audit trail to track the income and expenses related to it. Understand that just having this unusual payment is going to attract the attention of CRA. It is very important to have your paper ducks in order. Avoid anything that looks questionable or shaky.

In today’s world a business getting a cheque from a HST input tax credit, is paramount to asking for an audit. CRA will question any ITCs you request. If you want to avoid an audit, treat HST as a consumer tax and don’t ask for a refund. In this case pay some tax. Unless of course you have audit ready records and no secrets you don’t want the TaxMan to discover, in which case claim what is real for your input tax credits.

Avoid large Charitable donations that are out of sync with your ability to afford that amount of money.

Absolutely stay away from all tax shelters. They are such a cash cow for the TaxMan and you don’t need the bother. This is for sure a case of too good to be true is really too bad to be real. Getting a refund for more than you pay… loans or not…. is going to get you on the hot seat…. a very hot seat.

Don’t buy into the old husbands tale, of thinking that you have nothing to hide when it comes to an audit and if you have nothing to hide that you have nothing to fear. This is just plain uninformed head in the sand behavior. You owe it to yourself to do some research. The internet is full of horror stories. Check out the CBC documentaries and the news paper stories on how Canadians have been in the right but financially ruined anyway.

There are a number of red flags that may trigger CRA interest in your tax returns.

In general, the more complex the return and the more income from non-withholding, non-reporting sources, the higher the probability of an audit,

There are two categories that generate the highest probability of CRA interest: those who are self-employed, file a Business Activities Form and claim high deductions, and those who earn over a million dollars. Both cases will arouse the suspicion of the CRA.

To avoid an audit, stay within the industry standards. “The CRA has a table of national standards for every deduction based on income,”

Realize that CRA looks at your numbers, they use Bedford’s laws. Avoid rounding numbers when taking deductions. Don’t over inflate red flag deductions like automobile expense, meals, entertainment, travel and charitable contributions. Take your valid deduction and make sure you have plenty of substantiation in case of audit.

A great strategy to help avoid an audit is to essentially become “audit proof.” Consider having your Tax Representative conduct a “friendly audit.” Have them put on their TaxMan hat and act as if they actually are an auditor. They need to visit your place of business where they get the guide tour of the operations, conduct a review of your financial activities, bookkeeping and record keeping procedures, and accounting practices to uncover and correct sensitive areas before they are discovered in an CRA audit.

Whether the CRA interest is for a desk audit or a field audit, realize that just because they have contacted you does not mean you have done anything wrong. “Audit selections are generally made according to a computer model that selects returns based on how dissimilar they are from a national norm.

In cases of a desk audit, CRA is generally fishing to see if there should be a full blown field audit. If the documentation and explanation is exactly correct as per your tax returns, then often CRA is satisfied and the file is then closed.

If in the desk audit process it turns out that more information is needed, make sure you inquire about and understand the nature of the CRA inquiry and take notes during this process. Then immediately tell the agent that you’d like them to put their questions in writing and that you will to seek the advice from your tax representative, because bookkeeping and taxes is over your head. That you want to make sure that you both understand the question properly and answer the questions accurately. That you don’t think you should guess about anything. Once you make this request, you are under no obligation to answer any further questions and make sure you don’t get intimidated by anything the auditor says, they can be very intimidating.

In summary the glory days of hap hazard bookkeeping and aggressive tax returns is completely over. In today’s world, you need to be on top of your record keeping on a daily basis and you need to understand audit ready bookkeeping.

To find out more about CRA and tax problems requiring solutions, go to Tax Audit Solutions www.taxauditsolutions.ca or click here.

ATIP does not stipulate that you can withhold any information… so I am going to protest. Withholding information on a matter that could go to court as according to the law – is an obstruction of justice.- and this current matter just may be going to court. …

This morning I read the following article, (included herein and below) which … while under a different act, shows that this kind of behavior is not seen as OK by the courts.

The following court ruling will also be very useful in dealing with CRA auditors who go to third parties and give out information damaging to the taxpayer.

Some days I do have hope for meaningful justice in this land, this is one of those days.

Yesterday I was in court, and experienced another form of justice from a tax judge and a different kind of justice for a lawyer representing CRA via the Department of Justice.

The behavior of the said lawyer who was so outrageous that his associate Lesley was visibly embarrassed. His verbal diatribe did little to leave a shred of respect to him. Our client was so angry at him that I am sure she had some unspeakable thoughts on the matter. The justice of the situation, was that I was right in my position in that the facts of the matter were confused and that the lawyer did not know what he was talking about, and had not read the file. His threat of going for costs… was shall we say … out of the mouths of idiots comes idiotic words, and it showed him as to what he really is. As Forest Gump said, “Stupid is as stupid does. It was a cool sort of natural justice to see that he made a fool of himself… I doubt that his client (CRA) would have been impressed.

On the other hand, the Judge was fair reasonable and honest. He gave us what we wanted in spite of the Department of Justice wanting Sine Die … (having the matter postponed indefinitely.) We get our access to justice in spite of the Department of Justice wanting to avoid it…. Interesting eh?

I don’t profess to be a lawyer, I am a Tax Representative who is interested in seeing that truth and justice applies for my clients. So when some lawyers drop their standards, it does little for the image of lawyers and creates images of charlatans. There are a lot of really good lawyers out there and I am sure they would not appreciate the discredit to their profession by the few really bad ones.

I confess, that I have my frustrations with CRA bureaucrats… and I am steamed over the obstruction of Justice in the matter of not giving us all the required documentation under the Access To Information Act.

Seeing the article today gives me renewed hope for change.

You can read more in the blog here and gain more insight from or on our web site… just click here.

Dan White

The price of inaccuracy: Federal Court awards first damages for PIPEDA breach

This week, the Federal Court of Canada made its first damage award ever under the 10 year old Personal Information Protection and Electronic Documents Act (PIPEDA), awarding damages to a businessman in connection with the provision of inaccurate credit information by a credit reporting agency — despite a failure to prove actual losses arising from the breach.

While the quantum of the damages awarded in Nammo v. Transunion of Canada Inc., was a modest $5,000 plus costs, the case establishes several important principles respecting the interpretation of PIPEDA and the availability of damages for humiliation stemming from a violation of the Act.

The case concerned a businessman who sought a bank loan in order to launch a trucking business with a partner. The loan was rejected by the bank based on an inaccurate credit profile for the applicant, which subsequently was discovered to include the credit history of another individual with a different name, date of birth, Social Insurance Number and address history.

The case marks the Court’s first consideration of Clause 4.6 of Schedule 1 to the legislation, which requires that personal information held by an organization must be “as accurate, complete and up-to-date as is necessary for the purposes for which it is to be used.” Justice Zinn rejected the respondent’s argument that there is no breach of “the Accuracy Principle” where an organization responds adequately to correct inaccurate information after it is brought to its attention, finding that while such rectification may be a factor to consider in determining an appropriate remedy, it cannot be used as “an escape hatch” to avoid a finding of a breach of the principle itself. Justice Zinn similarly found that neither prior notification of inaccuracy, nor industry standard practices, nor commercial efficiency were relevant to assessing whether the Accuracy Principle had been breached.

In the first Federal Court damage award under s. 16 of PIPEDA, Justice Zinn awarded damages for humiliation for violation of the Accuracy Principle of the Act, finding “a serious breach involving financial information of high personal and professional importance.” It is noteworthy that damages were awarded despite little apparent evidence in this regard, with the judge finding that a reasonable person would have been humiliated by having their loan application turned down, having to convey to their business partner that their credit was “bad” and living with the taint of uncreditworthiness before their bank, in addition to undergoing the process to have the error corrected.

On the question of jurisdiction, Justice Zinn found that, while the Federal Court, on conducting a hearing de novo pursuant to s. 14 of PIPEDA, does not have jurisdiction to consider matters that were not complained of to the Privacy Commissioner of Canada in the complaint on which the rehearing is based, the Court’s jurisdiction is constrained only by the factual issues raised before the Privacy Commissioner, not by the particular clauses of the legislation considered by the Commissioner or her legal characterization of the factual issues raised.

CRA is sending out another 29,000 letters to Canadians in the next two months. One would want to wonder why would they be doing so. The information below is provided by CRA from their web site. However one needs to look at this behaviour as part of the bigger tax picture.

The first thing that comes to mind is that most of the letters will be for information purposes and promotes the Voluntary Disclosure Program (VDP). I can see where this makes sense for scaring those in the underground economy to come forward. And the letters of intent to audit does affect he ability to file a VDP.

I think the scaring is more about short term cash than long term tax collected. CRA has become so sophisticated that they are going to catch everyone sooner or later.

So the message to Canadians really reads: Pay me now or pay me later. CRA will get more later, but they need the money now, hence the scare letters.

Make no bones about this situation, it is serious. The days of being a tax evader are over. Yes… there will be some people who get away with it, either because they know how, or simply the luck of the draw on who CRA has time to go after.

CRA writes on their site in response to the question of why me?:     ” Letter recipients were chosen at random within your industry segment.” Frankly that is pretty hard to believe… why would they do random audits when their computers will tell them exactly who to target? My guess is that random is scarier than targeted audits.

The claim by CRA is that Canada’s tax system is based on self-assessment, which means that individuals are responsible for accurately completing and filing their tax returns on time. The Canada Revenue Agency (CRA) provides Canadians with the information they need to meet their income tax obligations. Mostly they just audit and use that as a means to teach taxpayers and of course to get more money that way.

In 2010, the CRA began a letter campaign which involved sending 37,000 letters to Canadians. These letters purportidly served two purposes: to educate taxpayers on specific claims they made on their income tax and benefit returns and to provide notice of the CRA’s intent to audit some taxpayers. It is well advised to note… that the letter of intent removes your possibility to file a VDP.

As part of the second year of its campaign, the CRA will send 29,000 letters similar to those described above to taxpayers in January and February 2011.

Educational letters and intent to audit letters will be mailed to those sectors where taxpayers or industry segments are at risk of misunderstanding their tax obligations or willfully avoiding paying their taxes.

If you are one of the Canadians who recently received a letter providing you with information about expenses that you deducted on your income tax and benefit returns, the following information may interest you.

Readers beware; the taxman will come to your door. The answer is found in being prepared ahead of time.

Dan White

*

Frequently asked questions
*

Forms and publications
*

Related links

Frequently asked questions **** see answers by number below.

1.

I just received a letter from you. What is it all about? Did I do something wrong?
2.

I paid a professional tax preparer to do my tax returns. Did he or she do something wrong?
3.

What am I supposed to do as a result of this letter?
4.

Do I have to send any documents to the CRA? If so, when do I send them and where?
5.

What do I do if I find errors on my tax returns?
6.

How much tax will I have to pay if I file this adjustment? What happens if I cannot afford to pay the resulting tax liability right away?
7.

Your letter mentions that the CRA is considering conducting an audit of my business, rental, or professional activities. What are the chances that I will be audited, and when will the audit take place? What tax years will the CRA audit?
8.

Why is the CRA targeting specific sectors of activity? What is the rationale behind its selection criteria? Is this not discrimination?
9.

Is the CRA trying to intimidate taxpayers?
10.

Why have you sent me a letter and not my associates/partners?
11.

I received (or my associate or my spouse received) the same kind of letter from the CRA last year. Why is the CRA sending me another letter?
12.

How does the CRA define “potential risk” within the scope of this compliance letter campaign?
13.

Your letter mentions that there is a Voluntary Disclosures Program (VDP). What is the difference between a voluntary disclosure and a request for adjustment using Form T1-ADJ? Where can I find more information about the VDP?
14.

I would like more information on business, professional, or rental activities. Where can I find it?

1. I just received a letter from you. What is it all about? Did I do something wrong?

The CRA has sent you this letter to educate you about certain claims you made on your recent income tax and benefit returns. This letter also gives you the opportunity to request an adjustment if you find that you claimed some items incorrectly on past tax returns. Some of the letters that the CRA is sending will also notify taxpayers that the CRA may conduct audits in their industry sector.

This letter does not mean that the tax returns you filed in the past were incorrect. Like 90% of Canadians, you probably filed an error-free return and paid your taxes on time. You do not need to respond to this letter if your past tax return filings are correct.

The information in this letter will also be useful to you when you prepare to file your 2010 income tax and benefit return.
2. I paid a professional tax preparer to do my tax returns. Did he or she do something wrong?

Although a professional tax preparer completed your return, the CRA has sent this letter to you because you are most likely the person responsible for carrying on your rental and/or business activities. In most cases, tax preparers use information provided by taxpayers to prepare the taxpayers’ returns.

The CRA regularly identifies the most common errors on income tax and benefit returns in an effort to determine areas that require clarification. You have claimed deductions that often lead to common errors. This letter provides you with information about these errors.

This information will make it easier for you and your tax preparer to comply with Canada’s tax laws. It will also help you and your tax preparer to verify your most recent tax returns to ensure they were correct when you filed them.
3. What am I supposed to do as a result of this letter?

Please review your income tax and benefit returns and ensure that your income and deductions have been reported correctly. If you find any errors, you can correct your return(s) by requesting an adjustment.

If you determine that the claims you made on your return(s) are accurate, you do not need to take any action.
4. Do I have to send any documents to the CRA? If so, when do I send them and where?

If you determine that the claims you made on your income tax and benefit returns are accurate, you do not need to send any documents to the CRA.

If you would like to adjust one or more tax returns because you have found errors, you will need to submit a request for an adjustment. We recommend submitting your request within 30 days from the date of this letter to minimize the interest charged on any outstanding amounts.

If the CRA decides to audit you, we will not take any audit action before the 30 days have elapsed. If the CRA starts an audit before you file your adjustment, you will be invited to give the auditor all relevant information regarding the adjustment.

To request an adjustment, complete Form T1-ADJ. You can also request this form by calling 1-800-959-2221 or by ordering it online.

Instructions on how to complete Form T1-ADJ are on page 2 of the form, along with the CRA return mailing address. To access our electronic services and make changes to your return online, login to My Account and follow the steps given.

Do not send a completed Form T1-ADJ, or any other documents, to the author of the letter.
5. What do I do if I find errors on my tax returns?

Do I also have to correct my provincial return? (Quebec residents only)

If you would like to adjust your tax return because you have found errors, you will need to submit a request for an adjustment. You may want to submit your request within 30 days from the date of this letter to reduce the interest charges on any outstanding amounts. If the CRA decides to audit you, we will not take any audit action before the 30 days have elapsed.

If the CRA starts an audit before you file your adjustment, you will be invited to give the auditor all relevant information regarding the adjustment.

To request an adjustment, complete Form T1-ADJ. You can also request this form by calling 1-800-959-2221 or by ordering it online.

Instructions on how to complete Form T1-ADJ are on page 2 of the form, along with the CRA’s return mailing address. To access our electronic services and make changes to your return online, login to My Account and follow the steps given. Do not send a completed Form T1-ADJ, or any other documents, to the author of the letter.

Do not send a completed Form T1-ADJ, or any other documents, to the author of the letter.

If you are a resident of Quebec and you have questions related to your provincial tax return, please contact Revenu Québec directly.
6. How much tax will I have to pay if I file this adjustment? What happens if I cannot afford to pay the resulting tax liability right away?

The CRA cannot accurately estimate the amount of tax that you may have to pay as a result of your request for an adjustment. You will receive a notice of reassessment or a statement of account/remittance showing any amount owing as a result of your adjustment.

Any amount you owe must be paid in full once you receive your notice of assessment or reassessment to avoid paying additional interest.

If you cannot pay the total amount owing immediately, please call the telephone number on your notice of assessment or reassessment to discuss your options.

For information about payment options, go to Making payments or call the telephone number on your notice of assessment or reassessment.
7. Your letter mentions that the CRA is considering conducting an audit of my business, rental, or professional activities. What are the chances that I will be audited, and when will the audit take place? What tax years will the CRA audit?

Receiving this letter does not necessarily mean that you will be selected for an audit. The CRA is not in a position to indicate the likelihood of being selected for audit for a number of reasons. The CRA considers risk from a number of criteria before selecting files for audit.

If it is determined that an audit is required, it will commence only after the upcoming filing season, to give you an opportunity to self-assess your returns using the information provided in the letter.

However, the Income Tax Act allows the CRA to adjust tax returns:

1.

in the three years following the date on your notice of assessment

For example, if your 2009 tax return was filed on April 15, 2010, and your 2009 notice of assessment is dated May 28, 2010, the CRA can reassess your 2009 tax return until May 28, 2013 (May 28, 2010 + 3 years).
2.

for any years that the taxpayer or person filing the return has made any misrepresentation that is attributable to neglect, carelessness, or wilful default or has committed any fraud in filing a return or in supplying information under the Income Tax Act.

8. Why is the CRA targeting specific sectors of activity? What is the rationale behind its selection criteria? Is this not discrimination?

The CRA reviews groups of taxpayers to determine how many of them are paying their taxes in full and on time. If the review shows that there are many who are not compliant, the CRA may audit taxpayers within this segment.
9. Is the CRA trying to intimidate taxpayers?

The CRA wants to give you the opportunity to request an adjustment, which you can do if you find that, in any past tax return filings, items were incorrectly claimed.
10. Why have you sent me a letter and not my associates/partners?

Letter recipients were chosen at random within your industry segment.
11. I received (or my associate or my spouse received) the same kind of letter from the CRA last year. Why is the CRA sending me another letter?

Letter recipients were chosen at random within your industry segment.
12. How does the CRA define “potential risk” within the scope of this compliance letter campaign?

To direct letters to the taxpayer groups potentially at risk of non compliance, the CRA relies on risk-assessment systems to determine which taxpayers or industry sectors are at risk of misunderstanding their tax obligations or wilfully evading paying their taxes. This includes research to identify current and emerging risks to the tax base.
13. Your letter mentions that there is a Voluntary Disclosures Program (VDP). What is the difference between a voluntary disclosure and a request for adjustment using Form T1-ADJ? Where can I find more information about the VDP?

Generally, taxpayers make adjustments to previously filed tax returns using Form T1-ADJ, T1 Adjustment Request. This form allows you to modify any amounts claimed or income reported on any line of your tax return or schedules, and the modifications may result in either a refund or an amount owing.

To request an adjustment, complete Form T1-ADJ. You can also request this form by calling 1-800-959-2221 or by ordering it online.

You can use the VDP to correct inaccurate or incomplete tax information and/or to disclose information that was not previously reported to the CRA.

You will not be penalized or prosecuted if you make a valid disclosure before you become aware of any compliance action taken against you by the CRA. If you make a valid voluntary disclosure, you will only have to pay the taxes owing, plus interest. You will not be subject to prosecution or penalties. For more information about the VDP, or to find the appropriate tax services office, go to Voluntary Disclosures Program.
14. I would like more information on business, professional, or rental activities. Where can I find it?

If you need additional information, call the author of the letter. You can also call our Individual income tax inquiries line at 1-800-959-8281.

To learn more about how CRA operates, go to Canada’s definitive source of the behind the scenes scoop on CRA activity. Click Here

To learn more about how CRA operates, go to Canada’s definitive source of the behind the scenes scoop on CRA activity. Click Here

Apparently Manitoba understands the principles of reduced tax rates generates more total taxes, by way of increased employment. The ration is simple. More corporations going to Manitoba for tax breaks, means more jobs, more jobs means more employees, more employees means more income tax paid out in payroll.

I wonder if Ontario will wake up and try to keep as much business at home as possible.?

for more information on tax issues click here.

The following article written by Carol Sanders, is a reprint from the Winnipeg Free Press print edition January 3, 2011 A4

Starting Jan. 1, Manitoba has totally wiped out its general corporation capital tax.

The tax was eliminated July 1, 2008 for manufacturers and processors and, starting this year, other corporations don’t have to pay it, either. The change will save Manitoba businesses more than $119 million annually starting next year, Finance Minister Rosann Wowchuk said in a press release Friday.
The Manitoba Chambers of Commerce said the province jumped at a federal incentive to eliminate the tax and deserves credit for acting on it quickly.
“Each province had until 2011 to accommodate that removal,” president Graham Starmer said Friday. “The province was very proactive a couple of years ago in 2008 removing it from manufacturers and processors,” he said. Now it is following through and totally removing it. “I give the province credit for following through with their commitment,” Starmer said. “If only they could do that with the payroll tax, we’d be very happy.”
On Dec. 1, Manitoba became the first province in Canada to permanently eliminate the small business income tax rate.
But Manitoba is one of three provinces — including Ontario and Quebec — that still collect the payroll tax, he said. And Manitoba charges the largest percentage, taking $370 million a year from employers, said Starmer.
“It deters companies from expanding because it expands the tax they have to pay on payroll. That’s probably why some corporate head offices have moved to other locations.”
carol.sanders@freepress.mb.ca
Republished from the Winnipeg Free Press print edition January 3, 2011 A4

CRA has new training programs and videos teaching collections officers how to collect the maximum amount of money possible.

CRA’s mandate is The governments are our clients. Taxpayers do as they are told.

Our inside sources tell us the stressed out collections officers question is “what do we collect next? Parking Tickets?

This overly aggressive behaviour comes directly from the government of the day. Our governments drive for money is has turned CRA into a collections machine never seen before in Canada.

It does not matter who has their life ruined or who dies of stress. Money has no feeling, no concience and has no friends. CRA is under huge pressure from above to collect and collect quickly.

So make sure that you keep audit ready books or you just may find yourself looking down the double barrel shot gun and if you don’t have great records you are dead.

Our new Audit Ready Bookkeeping software version 1 will launch in January 2011.

To learn more about audit ready bookkeeping go to www.taxauditsolutions.ca or click here.

Regarding CRA Collections: What are they really like? A realistic view.

Firstly I need to acknowledge that there are lots of good people who work for CRA collections, but no one ever complains about the good guys and girls. It is the hard asses that make life horrible for the average taxpayer who gets in default of paying their taxes.

When someone is having financial problems, and they are in arrears with CRA, That is when trouble really begins. If is imporant to deal with tax debt in a proactive mode. It is a lot less problematic before CRA Collections comes calling. Even worse is if your account goes to Collections.

If CRA first line collections is not paid to their satisfaction the account goes to Aged Collections. That is where things get nasty. Very nasty! Once someone is in aged collections, that means the gloves are off and it is a case of Big Mack Truck versus a small furry animal. At this point CRA senses that you are in financial trouble and comes in for the kill.

This is where life gets simple. One either has the assets to pay and you better liquidate them and get CRA Collections satisfied or have your life ruined. It is as simple as that. Kevin Oleary from the TV show “Dragon’s Den says money has no feelings and no emotion. People care about money, but money does not care about people. CRA Collections is the same as money, they don’t care about people. It is a matter of “Show Me The Money!”

If the tax bill cannot be paid, then it is a simple case of taxpayer insolvency. In which case this needs to be acted on promptly.

Someone in this position needs to get good consulting and quickly. We recommend talking to us before meeting a Trustee. We work with Trustees and we can make this process a lot less intimidating and stressful.

In aged collections, CRA sometimes even puts in writing; “There are no restrictions under the ITA or ETA as to what they can do.

What they are legally allowed to do and what they sometimes do is quite different. An additional CRA collections bonus, so to speak.

CRA knows full well most people cannot defend themselves when they are already in financial trouble. Therefore there are lots of times people pay up or go bankrupt when they really did not owe any money to CRA.

Here are some examples of what CRA can to when the gloves come off and they go for the kill.

The Requirement To Pay on any sources of income.

Freezing any and all bank accounts.

Go after spouses corporation using relatedness arguments.

Harassment phone calls and visits,

Sending brown letters with… a bunch of “sometimes known as;s”

Embarrassment at the banks

Do hard credit cheques at the credit boroughs.

Send legal warning letters.

Stop spouses tax credits.

Do home drop ins… two collections officers in black leather jackets.

Harassment of spouse.

Talking to neighbors, suppliers and tenants.

Issuing of Requirements to pay to taxpayers customers.

Drop in for a visit at work.

Ruin his health.

Kill him from Stress.

Once CRA has certified the debt, they can harass an estate even after the death of the taxpayer.

 Just be aware: CRA Collections is worse than anyone realizes. It is where things get very dirty and terrifying….. that is why fixing tax problems is more expensive once the debt goes to collections. Unless you get a decent collections officer, you are going to be in one hell of a fight.

 For those of us who go to battle with CRA to get what is right, we fight a very hard battle. There is no way one can deal with CRA and not take a whole load of stress home at the end of the day.

The tax business services offered to clients by some accounting and legal firms is a joke… There are other top guns out there, and you need to make sure that you hire a seasoned professional with a track record of success. Most professionals are afraid for themselves and with good cause, therefore they often won’t take the fight far enough to get what is right.

To learn more about CRA and CRA collections go to www.taxauditsolutions.ca or click here.

It was not to hard to figure out that if Canadians are going to have to fight CRA just because they want to help the needy and benefit from a tax credit to offset the amount donated, then the obvious answer is that they just don’t donate. With CRA out to disallow your tax credits, why set yourself up for abuse?

CRA is sucking and blowing at the same time. They say donate, but then they look to disallow the tax benefits that rightfully apply.

I am not saying this from hearsay, my business is helping abused taxpayers. As a result of what I see first hand, I have a very negative attitude towards CRA and their approach to taxpayers. To them unless you are a T4 salaried employee than you are assumed to be a tax cheat. CRA gets to be the way they are because Canadians have a distorted concept of the true CRA reality. The majority of Canadians are salaried, so most of them don’t get to see the dark side of CRA. Ask anyone who has been audited and you start to get the picture.

As far as I can see, CRA has put the nail in the coffin. I for one will now only help the needy by dealing directly with them, and I sure as hell won’t be submitting any charitable donations slips. I don’t need the aggravation, if CRA wants to disallow my donations, then they can have it… If I do happen to donate, I won’t use a charitable donation receipt for any tax savings.

To learn more about tax problems and tax audit solutions, go to www.taxauditsolutions.ca or click here.

 Dan White

………..

Charities see alarming trends as donors become older, fewer
PAUL WALDIE
From Friday’s Globe and Mail
Published Thursday, Dec. 02, 2010 8:13PM EST
Last updated Friday, Dec. 03, 2010 7:12AM EST
391 comments
Email

Canada’s long tradition of supporting charities is showing signs of erosion.
The number of Canadians making charitable donations is falling sharply and the total amount donated has dropped by nearly $1-billion over the last two years. Meanwhile, the average age of donors has risen to 53, leaving many charities wondering where future funding will come from.

The trend is “troubling,” said Cathy Barr, vice-president of operations at Imagine Canada, an umbrella group for Canadian charities. She added that there is real concern that “the donor base is shrinking and that’s very worrisome.”

Figures released by Statistics Canada last week highlight a disconcerting trend for charities. The report showed that 5.6 million people donated money last year. That was down from 5.8 million in 2008 and was the lowest number of donors since 2002, when 5.5 million people gave money. In dollar terms, total donations dropped to $7.75-billion in 2009 from $8.19-billion in 2008 and $8.65-billion in 2007.

The participation rate – a measure of the percentage of tax filers reporting a donation – is even more troubling. Last year, 23.1 per cent of taxpayers claimed a deduction for making a charitable donation. That was down from 24.1 per cent in 2008 and marks a 30-year low. Not that long ago, nearly one-third of taxpayers reported a donation; now the percentage is less than one-quarter.

The recession and a crackdown on illegal tax shelters by the Canada Revenue Agency accounts for some of the downturn, but not all of it. In fact, the number of donors increased between 2007 and 2008 for the first time in years, an indication that Canadians are prepared to dig into their pockets during times of financial distress. And Imagine Canada estimates that even when the CRA’s move to revoke several tax shelters is taken into account, donations are still down.

“You begin to worry at a certain point, is this the hollowing out of the middle class? Is this the lack of social connection?” asked Malcolm Burrows, who heads philanthropic advisory services at the Bank of Nova Scotia. “It’s one thing for dollars to go up and down with the economy. It’s another thing for this long-term trend of donors disappearing. That is worrying.”

He and others say the trend indicates a growing gap between wealthy Canadians, who have largely continued to make donations, and the middle class, which has found giving difficult during tough times. Statistics Canada figures show that over the last decade the number of donors has fallen, but the median gift has increased from $190 to $250. That means fewer people are giving more money.

The average age of donors has also slowly moved upward, rising from 51 earlier this decade to 53 last year. Ms. Barr said that likely reflects tougher economic times for young people, many of whom are still struggling with the recession and the high cost of essentials like housing. But a bigger concern is that young people don’t seem to be getting into the habit of donating. “That is particularly troubling,” Ms. Barr said.

Targeting younger donors has been critical for charities like United Way Toronto, the largest United Way in Canada. The organization launched a GenNext campaign about four years ago aimed at people between the ages of 20 and 30. Julia Gorman, vice-president of resource development at the charity, said young people volunteer more and also want more information about where their donations go. This year the organization has held more than 1,000 presentations with donors and agencies supported by United Way to explain how donations are spent. “We’ve never done that before,” she said.

Ms. Gorman said the overall fundraising climate is difficult and United Way Toronto’s annual campaign is about one-third short of its $113-million goal with less than a month remaining.

Marvi Ricker, managing director of philanthropic services at Bank of Montreal, said the financial squeeze on the middle class is hurting many smaller charities. “I think that’s where the donations to smaller organizations, more grassroots types, are really going down,” she said.

But she remains optimistic, citing a recent study by the bank that indicates aging Canadians plan to give well into their retirement. And she takes heart from various efforts by teachers to get students interested in philanthropy. “More people are taking a different approach to giving,” she said. “They are doing philanthropy not just writing cheques.”

What this means is that by exercising your options, you will need to come up with the cash to pay  the tax liability on your phantom income.

So if you have an existing stock option, you should do some serious tax planing before January 1, 2011.

For more information on tax challenges, go to www.taxauditsolutions.ca or click here. 

Dan White

______

Phantom Income Strikes Again on Exercising Stock Options.
Tax withholding on stock option benefits: will you be ready on January 1, 2011?
Stikeman Elliott LLP
Andrea Boctor and Ramandeep K. Grewal
Canada
November 23 2010
Beginning January 1, 2011, virtually every stock option exercise by an employee or director will trigger employer tax withholding and remittance requirements. Stemming from the March 2010 Federal Budget, new rules were introduced into the Canadian Income Tax Act earlier this fall which “clarify” that, effective as of the new year, source deduction requirements apply to stock option benefits. These and other proposed amendments relating to taxation of stock options are summarized in detail in our related Tax Update. The change in policy in respect of withholding and remittance for stock options brings the Canadian tax regime essentially in line with the regimes of other countries, including the U.S. and U.K.
These developments impact both employers and those receiving stock options or similar compensation. Every corporation and every mutual fund trust that sponsors stock option plans to which these rules apply should review the existing terms of its plans, and related administrative procedures, to determine whether tax withholding and remittance can be accommodated in accordance with Canada Revenue Agency (CRA) rules. For public companies, existing stock option plans and agreements should also be carefully reviewed to determine whether shareholder approval is required for any necessary amendments.
The following series of questions and answers reviews these and other common issues that employers may face in dealing with these changes.
Do the new rules apply to our company?
The new rules generally apply to all Canadian employers, including non-Canadian employers who make stock options available to Canadian employees, subject to specified exceptions.The main exception covers Canadian-controlled private corporations (CCPCs) as defined in the Canadian Income Tax Act.
When will the new rules apply?
Withholding will be generally required for non-CCPC options exercised in 2011 or after, regardless of when the option was granted.
Are there any exceptions?
There is an exception for options granted before March 4, 2010 at 4:00 PM EST, where the options included a written condition to the effect that the optioned shares must be retained by the optionee for a period of time after exercise. Another exception also exists where the optionee donates the optioned shares to a registered charity within a short period of time after exercise.
What are the withholding rates applicable to stock option benefits?
The tax rates applicable to withholding on stock option benefits are the same as for regular employment income. Where an option is eligible for the one-half income deduction on the option spread on exercise, only one-half of the spread will be considered for purposes of determining the amount to be withheld.
Our stock option plan does not currently specifically address withholding or sale of shares on the employees’ behalf. What should we do?
Stock option plans or agreements may include general terms that permit withholding and remittance as required by law or may include specific terms governing how withholding and remittance requirements may be satisfied. Such specific terms may, among other things, either permit the sale by the employer on the employee’s behalf of a sufficient number of issued shares to satisfy the tax liability or require that the employee pay an amount to the employer equal to the withholding obligation as a condition of exercise. The viability of available alternatives depends on a number of factors, including implementation from an administrative perspective (as discussed below) and the ability of optionees to fund their portion of the withholding obligation. Plan or agreement provisions should be carefully reviewed to determine if the appropriate alternatives are sufficiently covered, otherwise an amendment may be necessary. For public companies, such amendments would generally trigger shareholder approval requirements under stock exchange rules if not permitted under the existing amendment provisions of the company’s plan or agreement. In this regard, the TSX has confirmed in its Staff Notice 2010-0002, dated November 12, 2010, that it will generally consider amendments to option plans and agreements resulting from these rules to be of a “housekeeping” nature. This acknowledgement means tax-related amendments, where necessary, may generally be made under existing provisions that allow the board or a board committee to make amendments to plans or agreements of a “housekeeping” nature without shareholder approval. The Staff Notice further clarifies that if the plan does not contain such amendment provisions, the TSX will still allow companies to amend their plans and option agreements to comply with these rules provided that: (i) the amendments are limited to compliance with the Income Tax Act, (ii) the company adopts proper amendment procedures in its plan; and (iii) the amendments are submitted for security holder approval at the company’s next meeting. Public companies are also reminded that in either case, option amendments will still be subject Section 613 of the TSX Manual, which includes pre-clearance by the TSX and disclosure in proxy circulars.
How do we arrange for shares to be sold in the market to cover the optionee’s tax liability
Depending on your particular circumstances, the alternatives include arranging with a broker to sell the shares on the employee’s behalf or arranging with a third party service provider (such as a trustee or transfer agent) to administer the plan. Implementation of necessary procedures will need to be tailored to meet your specific needs and those of your optionees. In any case, discussions with all third parties should be initiated in advance to prepare for the January 1, 2011 deadline.
Instead of issuing all of the shares under option and then selling a sufficient number to raise cash to remit to Canada Revenue Agency in respect of the withholding obligation, can the corporation simply issue fewer shares to the employee and remit cash to CRA?
Satisfying the withholding obligation in this fashion may jeopardize the tax characterization of the option award, including the timing of taxation of the option award and the availability of the one-half income deduction on the option spread on exercise. We do not generally recommend this as a method of satisfying the withholding obligation. If the more common alternatives discussed above are not viable for your company you should speak with a tax advisor to consider other alternatives.
Do the new rules apply to directors of Canadian corporations who are not resident in Canada?
Although an individual’s tax situation will depend on a number of factors and can turn on specific facts, generally, the new rules will apply to non-Canadian resident directors who rendered services to the corporation in Canada at any time during the period from the date of grant to the date of exercise. The withholding amount will generally be determined based on the portion of the option benefit that is taxable in Canada.

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Antle v. The Queen - Appeal Dismissed by the Federal Court of Appeal
Antle v. The Queen - Appeal Dismissed by the Federal Court of Appeal
Posted on November 26, 2010 by Hull and Hull LLP
The case of Antle v The Queen, 2009 TCC 465, 2010 FCA 280 (Can LII) (“Antle”) has been a much talked about decision. The appeal to the Federal Court of Appeal was dismissed just recently, on October 21, 2010.

Antle deals with the legality of a “capital property step-up strategy” whereby capital property with an accumulated gain (shares in a company) was shifted from the husband to a Barbados spousal trust. The trust sold the property to the beneficiary wife in exchange for a promissory note. The wife then sold the property to a third party purchaser and used the proceeds to pay off the promissory note. The trust distributed the funds to the wife as beneficiary, after which the trust was dissolved.

This scheme was apparently designed to result in no tax because there was no capital gain taxable in Canada, as there would have been had the husband sold the capital property directly to the third party. The capital gain arose in the trust in Barbados where there was no tax on capital gains.

While one might say that the case deals with the residency of the trust, the penultimate issue was whether a trust was created at all in the circumstances.

In order for a trust to be valid, there must be three certainties, namely, certainty of intention to create a trust, certainty in the subject matter of the trust, and certainty in the objects of the trust.

In this case, the Minister focused on the lack of certainty of intention to create the trust and the lack of certainty in the subject matter of the trust. The decision of the Minister was appealed to the Tax Court of Canada (“Tax Court Judge”). The decision of the Tax Court Judge was then appealed to the Federal Court of Appeal.

The Tax Court Judge found that there was no certainty of intention. The husband never intended to lose control of the shares or the money resulting from the sale and never intended to create a trust. The Tax Court Judge found that the husband’s actions and the surrounding circumstances could not support a conclusion that signing the Trust Deed reflected any true intention to settle shares in a discretionary trust, no matter how clear the language in the Trust Deed itself.  It simply did not reflect his intentions.

The Tax Court Judge also found that there was no certainty of subject matter. The shares purportedly settled on the trust were in the possession of an unrelated party who claimed a beneficial interest in them. The unrelated party was paid out an amount of money on the final sale to the third party purchaser. The husband later successfully sued the unrelated party and recouped $1.38 million. The husband thereby retained an interest in the shares purportedly settled on the trust. If the husband transferred anything to the trustee, the Court found that it was not his full interest in the shares because there was an element of his ownership in the shares that did not pass. This created a lack of certainty of subject matter.

The Tax Court Judge also found that the trust was never constituted. It never came into existence because the shares were never transferred to the trust and were never in possession of the trustee. The shares remained in Canada throughout and no money ever reached the trustee. The timing and execution were such that the intended steps were not carried out sequentially so as to properly constitute the trust.

Notwithstanding the above findings, the Tax Court Judge determined that the above circumstance was not a sham, as also alleged by the Minister, as the transactions themselves were not disguised.

In an interesting twist, the Federal Court of Appeal concluded “that the Tax Court judge was bound to hold that the Trust was a sham based on the findings that he made”, and dismissed the appeal.

Enjoy the weekend,

Craig
Tags: Estate & Trust, Trusts, blogs, estates

Trust Residency – Garron Judgment Upheld
By: John Sorensen of Gowlings Law Firm
On November 17, 2010, the Federal Court of Appeal (”FCA”) released its reasons for judgment in the St. Michael Trust Corp.1 appeal, upholding the judgment of Woods J. of the Tax Court of Canada (”TCC”) in the Garron Family Trust2 case.  For ease of reference, the trial and appeal judgments will be referred to as “Garron”.  The Garron case is highly significant as it has established new principles for determining trust residency for Canadian income tax purposes.
Prior to the TCC judgment in Garron, the leading case dealing with trust residency was Thibodeau Family Trust v. The Queen.3 Thibodeau had previously been viewed as authority for the proposition that a trust is resident in the jurisdiction where the majority of its trustees reside.  In Garron, the TCC rejected that notion, holding instead that the test for trust residence should turn on the location of a trust’s central management and control.
The essential facts in Garron are as follows:
prior to a reorganization in 1998, the shares of PMPL Holdings Inc. were held by Andrew Dunin and another holding company owned by Myron and Berna Garron and the Garron Family Trust;
in 1998, pursuant to a reorganization of PMPL, two trusts with Canadian beneficiaries were settled by a friend of the Garrons who resided in St. Vincent, with the sole trustee being a Barbadian corporation, namely, St. Michael Trust Corp. (”St. Michael”);
the owners of the common shares of PMPL converted their shares to fixed value preference shares;
the trusts subscribed for shares of newly incorporated Canadian corporations who in turn subscribed for shares of PMPL, all of which took place for nominal consideration;
in 2000, the trusts sold the majority of their shares pursuant to the sale of PMPL, and realized capital gains of over $450,000,000;
tax was withheld and remitted pursuant to s. 116 of the Income Tax Act (Canada) (”Act”); and
the trusts sought a return of the withholdings pursuant to an exemption under the Canada-Barbados Tax Treaty on the basis that the trusts were resident in Barbados.
The Minister of National Revenue (”Minister”) took the position that the treaty exemption was inapplicable, leading to the taxpayer’s appeal to the TCC.  The Minister’s primary argument was that the treaty exemption did not apply because although the corporate trustee was resident in Barbados, the trusts were resident in Canada because their central management and control was exercised in Canada.  As noted, Woods J. accepted the Minister’s argument, and held that the central management and control of the trusts was exercised in Canada and consequently, the trusts were resident in Canada.
In her reasons for judgment, Woods J. considered evidence which established that:  the trustee’s powers were more limited than provided for in the trust instruments; the trustee exercised limited powers; the trustee may not have had the necessary expertise to manage trust assets; and the beneficiaries of the trusts were able to control and direct the trust’s investment activities, tax planning and distributions.  Ultimately, Woods J. held that the management and control of the trusts was exercised by persons residing in Canada, namely, controlling shareholders and principals of PMPL and not by St. Michael.
On appeal, the issue before the FCA was whether Woods J. erred by applying a central management and control test. The FCA agreed with Woods J. that the case law does not establish a single test for trust residence and held that Woods J. was correct to conclude that “the judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate”.  In confirming and upholding Woods J.’s reasoning, the FCA stated that although a trust is a “legal relationship” without a separate personality as a matter of law, the Act treats trusts as through they were persons.  Consequently, it is consistent with that “statutory fiction” to conclude that a trust’s residence may not always be determined by the residence of its trustees.
Alternative arguments which were not determinative at trial were also raised on appeal and for the most part the FCA agreed with Woods J.’s reasoning.  However, on the potential application of the deeming provision in ss. 94(1) of the Act, the FCA disagreed with the trial judgment and stated that the necessary test had been met and that the provision would apply to deem the trusts to be resident in Canada even if the central management and control test was not determinative.
As a result of Garron, it is clear that Canadians may not rely on passive and compliant foreign trustees to structure offshore trusts with a high degree of certainty or comfort.  Consequently, it is strongly advised that trustees be invested with, and actually exercise real decision making power, in order to help ensure that the trust’s residency status would not be redetermined pursuant to the central management and control test.
It is worth noting that throughout its judgment, the FCA states that a trust is resident in the country where the central management and control is exercised.  This is distinguishable from a test based on where the “managers and controllers” reside.  Consequently, it may be advisable for anyone who is being consulted on trust decisions to have their meetings in the jurisdiction where the trustees reside.  This “belt and suspenders” approach may further ensure that the trust is not held to be resident in Canada by virtue of a finding that management and control powers have been exercised in Canada.
It is not yet known if the appellants will appeal further to the Supreme Court of Canada, so the final chapter of Garron may not yet be written.

Dan White

Facebook Profiles Now Being Subpoenaed In Court Cases

• Monday Nov 15,2010 07:00 PM
• By admin

Facebook postings continue to get subpoenaed in ever more novel ways. Now a very humorous legal precedent came down, of all places, in the Tax Court of Canada.

Someone got nailed for underpayment of taxes after lying in court about whether he posted the truth on Facebook.

Like many tax-related lawsuits, the details get pretty complex, so we’ll quote judiciously. The Honorable Judge Patrick J. Boyle might have stifled at least one chuckle while writing his judgment on an appeal called Shonn’s Makeovers & Spa, Appellant, versus the Minister of National Revenue, Respondent:

Both surprisingly, and perhaps as a true sign of our times, this ends up turning on his Facebook status. Unfortunately, such is the sad state of affairs of this file as presented by all parties and witnesses.

Lie to tax authorities at your own peril, especially when you lack documentation, because computers compare everybody’s tax filings to one another. If you say you’re employed by a company that says you’re a contractor, the computer cranks out letters to both parties, asking you for proof.

Once Ottawa hairdresser William Hall received the first such letter from Canada’s tax authority — it usually takes a series of communiques before a dispute like this gets into a court room — that should have been his clue to do at least one, but preferably all, of the following:

1. Show the letter to an accountant and ask for advice.

2. Have a chat with the proprietors of the salon he worked at, and if that conversation doesn’t go smoothly start looking for vacant seats at other beauty parlors.

3. Re-evaluate the content of his Facebook profile, and self-censor accordingly.

4. Adjust the privacy settings on his Facebook profile so that the salon owners, tax authorities and other members of the legal community couldn’t see the description of his employment.

5. Get wise to the fact that courts and law enforcement can subpoena the right to access even those things that we designate as privacy protected.

This lawsuit would never have happened if he did item one. Two could have minimized the damage, and motivated him to do number three. Four and five are things I wish everyone on Facebook would do. Like Judge Boyle states:

The appellant included a printout dated April 2009 of Mr. Hall’s Facebook info page.

Hall’s Facebook profile contained honest and accurate information about himself, including the nature of his employment. Then he told the court room that the bit being self-employed was a lie. You don’t need a law degree to red flag that!

Then Hall said that people lie on Facebook all the time. Unfortunately, there’s some truth to that. But the kinds of lies that show up on profiles tend to follow certain patterns. Like a singleton’s photo might not have a caption saying that the picture isn’t current. Or a player might not have filled out the relationship status field. Or someone might exaggerate about his own brawn, brains or bucks.

Hall’s lame excuse was that he lied about self-employment out of concern for his privacy. He should have just clicked on the upper right-hand corner of his Facebook screen.

If people don’t learn to use the privacy settings responsibly, will there come a day when all lawsuits include Facebook postings as evidence? What can the social network do to make privacy settings more user friendly and get everyone to use them?

It amazes me that our government agency, CRA, that is supposed to be part of a government of the people, for the people, has become so outrageously evil and there is not a public outcry of rage. Why is it that our population is not waking up to the reality that bad things happen to good people and anyone could become the next victim of a government agency completely ruining their lives?

How does it make sense for CRA to take a situation where someone can not pay the taxes they owe and charge criminal interest rates that ensure one thing. That one thing is INSOLVENCY and it is happening to an ever increasing number of Canadians.

How is it that a self appointed credit agency that proclaims they are not a lender, charges such a rate of interest and yet will not give Canadians a reasonable rate of interest.

If there was any iota of compassion in the CRA, they would consider common sense and reason when a taxpayer cannot pay their taxes. Common sense would be if a taxpayer can not pay and cannot borrow the money, the taxpayer would apply for a payment plan based on what they can afford. Then there would be a reasonable rate of interest such as 1 percent more than a bank would charge a good customer.

Applying common sense would allow CRA to get paid and the taxpayer to avoid going bankrupt and as a result having the taxpayer base getting nothing. To force someone into bankruptcy with criminal rates of interest and collection tactics that are terrifying to the taxpayer in trouble.

CRA is out of control and as a result, marriages are breaking up, people develop stress related health problems,  and taxpayers are losing everything they own.

Since when is it that making a bad decision or through no fault of your own, should cost you a lifetime of work, or even your life? It is a sad shame for our country that in proven circumstances, CRA thinks they are above the law, common sense, reason,  compassion and fairness. What is even worse…. many Canadians feel good about what CRA is doing. They assume as CRA does that all small business are tax cheats and deserve whatever cruel and harsh treatment CRA dishes out.

We deal the results of this kind of goings on every day, as more and more taxpayers find out that they can obtain help. Check out www.taxauditsolutions.ca for more information on getting protection from CRA abuse.

Click here.

 D Cayo of the Vancouver Sun hits the nail on the head.

CRA includes usury in its bag of abusive tricks

Two car loan companies I wrote about last month threaten interest rates of up to one per cent a day in agreements with poor schmucks who borrow from them, but both say they don’t actually try to collect that much.

By The Vancouver Sun November 5, 2008

Two car loan companies I wrote about last month threaten interest rates of up to one per cent a day in agreements with poor schmucks who borrow from them, but both say they don’t actually try to collect that much.

Indeed, one company admits the contract isn’t enforceable (although, as I have noted, the Criminal Code forbids not only collecting interest over 60 per cent a year, but also putting it in a contract).

So if even high-cost lending companies don’t have the gall to try to gouge customers this badly, guess who does? Who actually squeezes one per cent a day — more than six times the Criminal Code maximum — out of unfortunate debtors?

None other than Canada Revenue Agency. It is thumbing its nose at fairness and the law by nailing any employer who is late remitting tax money withheld from employee pay with interest so high the rest of us would land in jail if we tried to impose it on people who owe us.

The CRA isn’t usurious across-the-board, but it’s website states explicitly that for these late remittances the charge will be “3% if the amount is one to three days late, 5% if it is four or five days late, 7% if it is six or seven days late, and 10% if it is more than seven days late.”

CRA is also on thin ice with assessments for late income tax filers. If they owe money, late filers must pay five per cent initially, plus one per cent for each month until the return is filed. According to my math, this adds up to a usurious interest rate on filings that are one to 30 days late, although the rate falls below the legal maximum for filings that are more than a month late.

Most governments assess hefty levies — and so they should — for chicanery or playing deliberate games with the taxman. But these usurious rates aren’t aimed at law-breakers or game-players – just people who pay late.

Indeed, the reader who told me about the issue was hit with one-per-cent-a-day interest when, unbeknownst to him, CRA changed the due date for his remittances. In a normal business relationship, this would result in a quiet word, not punishment.

And if CRA wants these usurious rates to punish, then they aren’t just ethically appalling, they’re also dumb. It works out to three per cent a day for people who are just one day late, and just one per cent a day for people who are three days late. And it’s capped at 10 per cent — as I read CRA’s information, if you’re 100 days late it costs only 10 per cent, or 0.1 per cent a day. So the incentive to pay promptly diminishes the longer you’re late.

This latest example of the kind of taxpayer abuse I’ve been writing about for more than a year is right up there with the preposterous assumptions, the arbitrary demands, the habit of penalizing taxpayers for CRA’s own mistakes, and more.

It reflects the uncaring mindset that produced a 10-per-cent fine — now rescinded since it drew scornful media attention — for paying bills at a CRA office rather than at a bank. The attitude seems to be that if people inconvenience the bureaucracy, no matter how innocently or trivially, they’ll be hit with a bazooka.

But the point is that parliamentarians who enacted the Criminal Code thought charging such high rates is an act so vile that people who do it belong in jail. And now a branch of government is defying the spirit, if not the letter, of that law.

As they say in Parliament, too often with cause: Shame, shame!

dcayo@vancouversun.com

Visit my blogs, one on taxation and one on globablization, at www.vancouversun.com/blogs

]]> http://blog.danwhite.ca/2010/11/25/cra-includes-usury-in-its-bag-of-abusive-tricks/feed/ http://blog.danwhite.ca/2010/11/11/cra-gets-fined-200000-for-inappropriate-demand-for-information/ http://blog.danwhite.ca/2010/11/11/cra-gets-fined-200000-for-inappropriate-demand-for-information/#comments Thu, 11 Nov 2010 19:17:12 +0000 Dan White http://blog.danwhite.ca/2010/11/11/cra-gets-fined-200000-for-inappropriate-demand-for-information/ As time goes on, more and more judges are slamming CRA for bad behaviour.Looks good to me.

I don’t think much of gangs, but I suppose you could call CRA a gang?

For more information on CRA,,, click here.

Dan White

Taxman ordered to pay UN gang $200,000

Canada Revenue Agency fined for probing gang members’ earnings

Kim Bolan, Vancouver Sun: Thursday, August 12, 2010

The Canada Revenue Agency has been ordered to pay more than $200,000 to the United Nations gang after a judge scolded the taxman for demanding information about the earnings of some UN members and associates.

VANCOUVER — The Canada Revenue Agency has been ordered to pay more than $200,000 to the United Nations gang after a judge scolded the taxman for demanding information about the earnings of some UN members and associates.

Federal Court Judge Michael Phelan awarded $200,000 for legal fees to a group of 15 people linked to the notorious B.C. gang and an additional $17,486.92 for other court costs.

The motion seeking the cash was heard by Phelan in April, but the ruling was posted just this week on the Federal Court’s website.

Phelan said the size of the award corresponded to the misconduct of CRA officials who worked closely with police in sending out letters called RFIS or “requirements for information” demanding details of assets and incomes of those targeted.

“There was an air of disregard for the citizen’s legal rights, including confidentiality obligations imposed on CRA officials, which elevate the unlawful conduct to one deserving of some reprobation,” Phelan said in his latest ruling.

The UN associates asked for more than $250,000 in costs, while the CRA had offered to settle for about $102,000.

Last December, Phelan sided with the UN in its legal challenge of the letters and general conduct of CRA investigators who teamed up with Gang Task Force members to deliver the letters to gang members’ homes.

“Police presence was clear and visible and highly obtrusive. The service of the documents was generally carried out late at night, with multiple police cruisers present, lights on and with all the paraphernalia of a police raid,” Phelan said, adding that the actions were “obtrusive, invasive and unjustified.”

Phelan also said that the CRA treated the UN members differently than other citizens and outside the mandate of the agency.

“It is a central tenet of the rule of law that everyone is required to obey the law and all are entitled to the protections of the law, even those litigants who may be deserving of little sympathy. In that latter category would be members of gangs reputed to be engaged in some of the most serious of illegal misconduct in the Lower Mainland of British Columbia,” he said.

UN founder Clay Roueche, who was not targeted in the CRA probe, is appealing a 30-year U.S. sentence handed to him for being the head of a major cross-border drug-smuggling ring. A Seattle judge found the gang moved about $500,000 a week from Seattle to Los Angeles from drug sales.

UN-linked Daryl Johnson is one of the challengers who’ll share the court award. He is also awaiting trial in B.C. Supreme Court with two others on charges of conspiracy to import cocaine. Several other UN gang members and associates are also awaiting trial.

Phelan noted that two of the challengers — Duane (D. W.) Meyer and Elliott (Taco) Castaneda — were executed in gangland hits after the CRA delivered the RFIs.

“It is not necessary or even within the scope of this inquiry to determine whether the applicants are members of the UN Gang,” Phelan said. “However, the history of this litigation, involving change of the lead litigant due to ‘hits’ on other members and other steps taken by the applicants to protect personal information usually available in litigation due to the fear of harm from unknown persons, is consistent with membership in illegal gangs.”

]]> http://blog.danwhite.ca/2010/11/11/cra-gets-fined-200000-for-inappropriate-demand-for-information/feed/ http://blog.danwhite.ca/2010/11/11/jeopardy-case-cra-loses/ http://blog.danwhite.ca/2010/11/11/jeopardy-case-cra-loses/#comments Thu, 11 Nov 2010 15:31:05 +0000 Dan White http://blog.danwhite.ca/2010/11/11/jeopardy-case-cra-loses/

Below is a case CRA lost.

They lost because this time they got caught in a bald faced XXX or should we say misleading information given to the judge?

CRA does this kind of thing so often, that they don’t consider themselves subject to ethics or the law. It is just what they regularly do. However this time they got caught.

I would like to see this on W5

And it could happen

The minister loses on jeopardy

• Gowling Lafleur Henderson LLP
• Stevan Novoselac and John Sorensen

The minister loses on jeopardy

The Federal Court of Canada’s recent judgment in Minister of National Revenue v. Robarts,1 addresses the limitations in the Minister of National Revenue’s (“Minister”) ability to take aggressive steps to collect assessed tax in situations where a taxpayer is otherwise shielded from collection actions. In Robarts, the Court took a dim view of the Minister’s failure to provide complete and accurate facts and fair interpretations of the relevant legal principles and therefore ultimately halted the collections actions.

General Principles

The Minister generally has broad powers to collect assessed tax, subject to certain limitations. However, those limitations may not apply in situations where the Minister is satisfied that there are reasonable grounds to believe that collection of an amount assessed would be jeopardized by any delay. In those circumstances, the Minister can seek to take immediate collection actions against a taxpayer by obtaining a so-called “jeopardy order”. Jeopardy orders are obtained by an application to the Federal Court, without any notice to the taxpayer. When the Minister obtains a jeopardy order, the taxpayer can later apply to the Federal Court to review and reconsider the order.

Facts in Robarts

Mr. Robarts was a businessman from Kelowna, B.C. He was assessed for his 2005, 2006 and 2008 taxation years by notices of reassessment dated February 1, 2010. On April 6, 2010, the Minister applied for a jeopardy order to collect the assessed amount, based on an affidavit (“Affidavit”) by the Canada Revenue Agency (“CRA”) officer assigned to Mr. Robarts’ collection file. That Affidavit asserted that:

• funds in Mr. Robarts’ bank accounts were his only significant asset;

• he was in a position to withdraw those funds before the CRA could take collection actions;

• he had under-reported his income for the taxation years in issue and failed to report income in the past;

• he had conducted his tax affairs in an unorthodox way and had dissipated assets after being notified of the reassessments against him; and

• collection actions were not possible by law because of the 90-day statutory stay on collection which follows an assessment or reassessment.

Relying on the Affidavit, the Federal Court granted a jeopardy order to enable the CRA to deploy immediate collections actions against Mr. Robarts. Mr. Robarts then brought an application to have the jeopardy order reviewed.

In his application, Mr. Robarts stated that his bank accounts included long-term investments which were not readily dissipated. Moreover, one of the substantial amounts that had been withdrawn from his bank account after he was reassessed had been returned to the account six weeks later. Further, the allegation that he had under-reported his income was a matter in dispute, and was the issue which the CRA appeals division and potentially the Tax Court of Canada would be called upon to determine. In Mr. Robarts’ submission, he did not conduct his affairs in an unorthodox way, and he alleged that the Minister did not provide all of the relevant evidence with respect to his finances when the Minister applied for the jeopardy order.

Legal Principles on a Court’s Review of a Jeopardy Order

In reviewing and reconsidering the jeopardy order against Mr. Robarts, the Federal Court relied on the following two-step test.

First, the taxpayer must establish that there are reasonable grounds to doubt that collection of assessed tax would be jeopardized by delaying collection. However, even if the taxpayer is not able to establish that position, a judge may set aside the jeopardy order where the Minister has not met his obligation to make full and frank disclosure of all relevant facts and law to the Court on the initial application for the jeopardy order.

Second, if the taxpayer establishes that collection is not in jeopardy, the onus shifts back to the Minister to prove that the jeopardy order is justified. At this point, the Court reviews all of the evidence and considers whether, on the whole, there are reasonable grounds to believe that collection of an assessed amount would be jeopardized by delay.

The Court Applies the Legal Principles to the Facts in Robarts

The Court held that the Minister failed in his obligation to provide full and frank disclosure to the Court. The Court explained that the Minister has the duty to exercise utmost good faith and to ensure full and frank disclosure of all relevant facts, even those facts which are unhelpful or inconvenient or which demonstrate weaknesses in his own case. This is because a jeopardy order is granted without notice to or representations from the taxpayer. The Court found that the Minister omitted relevant facts from the Affidavit. For example, although the Affidavit alleged that $109,000 was withdrawn from Mr. Robarts’ bank account after he was reassessed, the Affidavit omitted to state that the amount was re-deposited about six weeks later. In the Court’s view, this was the single most important fact in the Affidavit. The Court further held that the Minister’s representative had failed to seek and obtain the necessary information that would have properly informed the Affidavit.

The Court also held that the Minister did not make full and frank disclosure of the factual and legal elements of the case law he relied on in his submissions to obtain the jeopardy order. Moreover, the Court stated that although good faith on the Minister’s part must be presumed, the Minister’s representations left “a sour taste” and “important omissions on relevant case law from the Minister’s written submissions are certainly not compliant with the spirit of these extraordinary [jeopardy order] procedures”.

Consequently, the jeopardy order was based on misleading, incomplete or incorrect facts and law, and had to be vacated.

The Court further considered whether the Minister had, in the first place, demonstrated that there were reasonable grounds to be believe that the collection of assessed tax would be jeopardized by delay. On this question, the Court found that the Affidavit contained factual allegations that went beyond the reassessments that were in issue, “in an effort to taint the taxpayer’s character and form the basis for the issuance of the Order”. The Court held that it would be wrong to draw a negative inference regarding Mr. Robarts’ management of his tax affairs, since the issues were litigious questions that were not yet settled.

Conclusion

The Robarts decision should provide useful guidance for both the CRA and taxpayers. For the CRA, it is hoped that the decision will serve as a reminder of the strict and vigorous standards to be applied when seeking jeopardy orders. For taxpayers, it could certainly be used as further support to challenge any jeopardy orders that may be obtained based on incomplete or wrong facts and/or statements of law.

Always check out our main site for the latest and best information on CRA and Taxes… click here.  

One layer of privacy at a time, those who were offshore tax avoiders and tax evaders are getting nailed and those who advised and helped them, get exposed.

It would make sense that the politicians who just may have been in the offshore tax evasion stew pot, need to protect those who advised them, in order to protect themselves from being exposed to having gotten into the pot. Now comes the kettle… and the fire… things will get hot now.

It was cool in  the good old glory days of offshore banking, prior to 911 to have an offshore bank account. A rainy day nest egg. In those days  Offshore was an option for people who had reasons to keep their money private, regardless of being associated with taxes or not, they could have privacy.

That fateful day of the planes crashing, made me realize that the gig was up and that having money offshore even for legal non tax reasons, would no longer be private. If your offshore bank account is not private, that means anyone who really wants to, can find out about it.

Those who did not immediately take precautions against being caught doing hanky panky,  have opened themselves up to being looked at sooner or later. The question is not “if”… the question is “when.”

When it comes to offshore, I have seen it all, been there done that. I moved on… Money offshore is not safe from the prying eyes of the governments. If you need to  have offshore money, be well advised to report it on your tax returns because normally CRA does not make that knowledge public. You still get the advantage of offshore privacy laws to protect you from prying eyes and offshore business, you just better not think you can use it to avoid paying taxes on your world wide income.

CBC… our investigative reporters exposed Andrew Saxton, a former banker and now an MP for North Vancouver is now looked at. While politicians are supposed to eat their own, sometimes Metaphorically speaking, (and.. I am not calling or suggesting Andrew a pig) a stuck pig squeals. So naturally the politicians will want to protect Andrew. The only reason I can think of for Baird to try protecting Saxton, is because Saxton knows too much about too many people, who do not need Saxton to squeal on them.

Pierre Poilievre, parliamentary secretary to the prime minister, said Saxton “has done his work with integrity; he has spoken out about tax evasion.” Hmmmm… so if a bank robber goes public and says that bank robbing is wrong, that would mean that  the robber stole the money with integrity? Give me a break! Please! The likelihood - reality is that Saxton learned after the fact, that offshore tax evasion is a really bad idea.

I noted in the following article “comments” that Paul Martin was mentioned. What is important to note is… Yes… Paul Martin was offshore. However it is important to note that he was running a legitimate business and paying tax on his world wide income. It makes complete sense to have your corporation offshore rather than in Canada, “IF” it is a legitimate International business.

Hiding your income and Moving your money offshore to avoid taxes, because you think privacy will protect you from paying tax on your world wide income,  is called “OffshoreTax Evasion 101.”

The whole onion of offshore banking is highly complex and how to do tax evasion is not something taught in university. It is only something learned from those who do it. In today’s world, those who advise and those who do -  will get caught. Sooner or later.

The problem now is…. what you did in the past can catch up to you as in the case of Andrew Saxton.

Read on and also check out our web site at www.taxauditsolutions.ca

Tories defend MP named in offshore tax probe

Last Updated: Friday, November 5, 2010

CBC News

Andrew Saxton, a former banker who is the Conservative MP for North Vancouver, is entangled in a political controversy over a tax-evasion investigation. (Courtesy andrewsaxton.ca)

The Conservative government is rejecting opposition demands for the removal of a Tory MP whose name appears in an offshore tax probe.

During question period Friday, NDP finance critic Thomas Mulcair said MP Andrew Saxton “simply cannot continue in his role” as parliamentary secretary to the president of the treasury board during the investigation and “has to step aside.”

Government House leader John Baird dismissed Mulcair’s demand, calling it “a drive-by smear” and adding: “I regret that the member would come to this place and ask that kind of question.”

Saxton, during his previous career as a banker, approved a transfer of funds on behalf of a Canadian taxpayer to an account in Switzerland that the taxpayer set up to help evade taxes, CBC News and the Globe and Mail learned.

The investigation uncovered court documents that show Saxton, now the Conservative MP from North Vancouver, instructing the transfer of $199,975 into a Swiss bank account in 1994 on behalf of a Canadian client of RBC Dominion Securities in Victoria.

Saxton was the head of private banking for the Vancouver branch of Credit Suisse Canada from 1992 until 1994, when he left for a series of HSBC banking posts across Asia. He has been the Treasury Board parliamentary secretary since he was elected to Parliament in 2008.

Later in question period, Bloc Québécois MP Serge Cardin demanded that Prime Minister Stephen Harper fire Saxton, in view of the “very serious” information uncovered in the joint investigation by CBC News and the Globe and Mail.

Pierre Poilievre, parliamentary secretary to the prime minister, said Saxton “has done his work with integrity; he has spoken out about tax evasion.”

The Canada Revenue Agency is getting aggressive about taking additional steps to check on whether sole proprietors are hiding sources of income during field audits.

Our current audit experience has found that CRA field auditors are generally effective in checking for unreported income during field audits of sole proprietors. Further, we see that CRA has increased pressure on auditors to do net worth audits. As a minimum the auditors have to fill out a report at the audit’s end explaining why a net worth audit was not necessary.

I guess another way of looking at this is that small businesses are seen as tax cheaters unless proven otherwise.

While CRA auditors generally check for unreported income, we find that CRA is doing a close look at the lifestyle of the entrepreneur for determining that the taxpayer must be earning more than they claimed on their tax returns.

Auditors take a close look at personal-living-expense data. The preliminary cash transaction analysis involves little or no taxpayer burden, but uses tax return and personal expense data are used to determine whether the sole proprietor’s income and expenses are roughly equal. If the auditor determines that the lifestyle suggests a higher income than reported, there will be a life style assessment levied.

In lifestyle audits, CRA does not have a credible test, instead looks to the auditor to do serious assumptions that do not require verification by the auditors.

CRA really needs to read their code of ethics and code of conduct, then they need to revisit the subject of net worth assessments.

for more information on audit ready bookkeeping, please go to www.taxauditsoluitons.ca or directly by clicking here.

The CRA is rolling out a new audit program. CRA auditors will be armed with Quickbooks 2010 available to look at, and request, full Quickbooks files.

CRA has been getting agresssie about getting QuickBooks files. A recent news release from the National Association of Enrolled auditors discussed The TaxMan’s decision to issue Quickbooks 2010 to 1100 and specialty tax Auditors with the intention to request full backups of business taxpayers Quickbooks files as part of certain in-person field audits.

The CRA auditors have been bringing in a specialist who has taken a training course on how to use the software, use data files, and generate various Quickbooks reports. Nowwith the new software, CRA no longer needs the special tech guy to go into your computer.

Business taxpayers and tax accountants have reason for concern.

Information Requested by the CRA in Field Audits

Initially an CRA exam is limited in scope to certain years and certain issues. Therefore they are only allowed to request information specific to tax years and issues that are within the scope of the audit. Meaning not “Statute Barred.” By requesting Quickbooks backup files, the CRA auditor gains access to all of the taxpayer’s business information- financial records for all the years that the business has been  using Quickbooks, vendor lists, client lists, client addresses and telephone numbers, client credit card information and many other valuable and often confidential business information.

Another Problem with Giving Quickbooks Files to the CRA is that  many taxpayers aren’t very adept in using Quickbooks. For example in some cases small business owners who do in-house bookkeeping have managed to double count income. Such examples prove the need for audit ready bookkeeping. The thing to ask yourself, if you are using accounting software, why is it not audit ready?

In the absence of Audit Readiness; A good accountant who is about to have a client face an CRA field audit, will generally spend countless hours with the client’s bank statements, credit card statements, and canceled checks auditing the unlucky client’s Quickbooks file and often re-doing the audit exposed year’s bookkeeping. Hmmmmm another reason to do it right in the first place.

The idea of providing, and risking a CRA auditors unanticipated review of certain auditable, accounting records that haven’t been fully reviewed is unconscionable and highly likely to increase the risk of broadened CRA audit- especially for taxpayers with poor accounting skills.

Unfortunately, the CRA has yet to set, or disclose, any changes to the Auditors Training Manual, AKA TOMS (CRA Auditor’s Bible) dictating how this new audit weapon is to be used or requested.

Professionals are very concerned that some CRA auditors may not have the restraint to keep within the limited scope of audits when so much unnecessary additional information is being provided with Quickbooks backup files.

What is to stop a CRA agent from nonchalantly peeking at books from other financial years? What then would stop the auditor from using illegitimately obtained information to open the scope of the audit to other tax years?

This is an upcoming tax issue, and one that professional legal and accounting organizations and this author will keep a vigilant eye on.

What if the Dreaded CRA Examination Notice is Received? Call a Tax Professional!

Attorneys, Accountants and Tax Representatives are authorized to represent any taxpayer before all levels of the CRA and many provincial taxing agencies. Being “represented” means that the tax professional is a buffer between taxpaying clients and the CRA agent- after a taxpayer has hired a professional that individual or business shouldn’t ever need to directly correspond with CRA personnel.

A (good) tax professional will vigorously guard clients from additional audit exposure. These upcoming requests for Quickbooks backup files is one request that should not be graciously complied with. The CRA only has a right to request information pertinent to the tax years and issues identified in the audit notification, and a business’ full Quickbooks file provides far more information than a CRA agent needs to carry out the already planned scope of the audit.

A good professional will assert all legal remedies against requests that may lead to a broadened CRA examination. If an individual or business taxpayer hires a professional that recommends compliance with audit-exposure risky CRA agent’s request like granting access to the business’ Quickbooks backup file without putting up a major fight, that taxpayer should consider hiring a new professional.

To learn more about audit ready bookkeeping go to www.taxauditsolutions.ca

The taxpayer, Mr. Moss,  who sells insurance, sold six life insurance policies to his mother worth 700 thousand dollars. ($700,000.00) Initially he was the beneificiary, however that was subsequently changed to his daughter.

CRA audited  Mr. and Mrs.Moss and his mother. CRA wanted 800k. Naturally Mr. Moss went bankrupt.

The mother died 3 years later.

The daugher got the insurance proceeds.

Lang Michner posted the following article in their newsletter.

To learn more about taxes and bankruptcy, go to www.taxauditsolutions.ca 

To go directly to the bankruptcy information click here.  http://taxauditsolutions.ca/cms/index.php/bankruptcy-and-insolvency/

Dan White

BANKRUPTCY & INSOLVENCY:  CHANGE OF BENEFICIARY AUTHENTICITY
Between 1993 and 1995, Mr. Moss sold six policies of life insurance to his mother, Eliza, with a total face value of $700,000.  He was the sole beneficiary on all six policies.  His mother lived with Mr. and Mrs. Moss, who were then being audited and reassessed for income tax by the Canada Revenue Agency in the amount of $800,000. Mr. Moss filed an assignment in bankruptcy in 1996.  Approximately five months before his assignment, notices of change in beneficiary were purportedly executed by Eliza, changing the beneficiary of the insurance proceeds from Mr. Moss to his daughter, Carrie.  Eliza died in August of 1999 and Carrie received payment of $700,000 in insurance proceeds.  Approximately $630,000 of these funds were eventually deposited into an account at BMO Nesbit Burns Inc. (”BMO”) in Carrie’s name. Certain trades were made that resulted in losses of $320,000.  Carrie brought an action against BMO in connection with those losses. BMO learned of Mr. Moss’s bankruptcy during discoveries and amended its statement of defence, alleging that the change in beneficiary forms were invalid.  BMO sought a declaration that the insurance proceeds were the property of Mr. Moss and should be paid to the trustee in bankruptcy for distribution to creditors.  The trustee filed a statement of claim, seeking the same relief. Mr. Moss maintained that the change in beneficiary forms were valid and that he had guided his mother’s hand when she signed them.  The issue of the ownership of the insurance proceeds was made the subject of a separate trial.  The Manitoba Court of Queen’s Bench dismissed the actions for declarations brought by the trustee and the bank.  The C.A. allowed the appeal.
Danny Moss, Carrie Moss v. Keith G. Collins Ltd, et al  (Man. C.A., April 29, 2010) (33760)

“The motion for an extension of time to serve and file the application for leave to appeal is granted.  The application for leave to appeal…is dismissed with costs.”