Skip to main content

One Large Tax Bill

...please explain where the money for these deposits came from...

I

n Nowak v. The Queen (2011 TCC 3) the Tax Court of Canada addressed the issue of the Canada Revenue Agency's reassessments of an individual with unreported income.

The facts of the case are cloudy for a number of reasons. The taxpayer's records of his income and expenses were incomplete and inconsistent. He was reluctant to answer questions posed by the auditor. And documents provided by the taxpayer raised more doubts and questions in the mind of the judge.

The CRA claimed the taxpayer had unreported income in excess of $290,000 during the two tax years in question. The auditor determined these amounts from an analysis of banking records. In essence, the records showed deposits that were clearly not reported as income.

As the judge notes, the burden is on the taxpayer to demonstrate the money received is not income subject to tax.

In this case the judge writes,

[25] The first issue is whether the Appellant failed to report income in his 2000 and 2001 taxation years. This issue turns mainly on the credibility of the Appellant and his spouse, and for the reasons that follow, I do not believe their testimony concerning the source of the unidentified bank deposits. I find their explanations unconvincing and implausible, and very little in the way of corroboration was presented to the Court. The few documents they did produce raise as many questions as they answer.
...
[42] I find therefore that the Appellant has not shown on a balance of probabilities that the unidentified bank deposits were not income to him in his 2000 and 2001 taxation years.

It would appear the taxpayer spun a story about where the money came from and it wasn't credible, hence he lost.

The second issue raised was the assessment of the gross negligence penalty under subsection 163(2) of the Income Tax Act. The provision can be summarized as: a 50% penalty of the tax owing where a taxpayer knowingly makes a false statement in a tax return. In this case, did the taxpayer knowingly understate his income?

In citing previous cases on this issue, the judge points out the burden of proof is on the government to show the taxpayer knowingly misrepresented his income.

Once the Ministère establishes on the basis of reliable information that there is a discrepancy, and a substantial one in the case at bar, between a taxpayer's assets and his expenses, and that discrepancy continues to be unexplained and inexplicable, the Ministère has discharged its burden of proof. It is then for the taxpayer to identify the source of his income and show that it is not taxable.
...
[49] These comments would appear equally applicable in a case such as this one where it has been shown that the taxpayer has had a substantial unexplained increase in his assets. I find that the Respondent has shown that there is a substantial discrepancy between Mr. Nowak’s income in the form of deposits to his bank account and his reported income, and that at the end of the day, this discrepancy remains unexplained.

In losing his appeal, the taxpayer faces a large tax bill. First, there is the tax owing on the unreported income for the 2000 and 2001 tax years. Second, there is arrears interest covering a period of a decade--that's a lot of interest. Finally, there is the 50% penalty. Add up these amounts and it's between two-thirds to 100% of the unreported income.

The lesson. First, don't understate your income. You'll get caught and be subject to a larger tax bill than if you had reported the income and paid tax on it.

Second, if in the past you have unreported income and the CRA hasn't started an investigation, it's time to consider the Voluntary Disclosure Program.

Posted 2011/04/28 at 16h11ET in Tax Law.

Comments

Popular posts from this blog

Day 5: Writing a Novel—The Deep Blue Hold

Monday, November 21st, 2016 No work on the novel on Day 4. Note: Unedited writings from my notebook for this novel. Square bracket items represent added comments.
At 18:31—Office ... if I use Leänne instead of Leanne how will people react... Y esterday was Sunday and I took it off, plus I was dealing with some mental health issues. I know this story is something that is simply a matter of putting in the time to make it happen. I’m supposed to be working on it as much as I can but I haven’t been doing that. Two main reasons. It’s been a while since I’ve worked on a story. Then there’s the issues of my mental health. Things happen. I get down and it impacts on my writing. I might be using it as an excuse, but it’s clearly something I need to deal with. I have to find a schedule I can work with. Perhaps I need to put this first and cut out other things. Not sure but I will figure it out. A name for the hero came to me. For the moment going with Leanne or is it Leanna? Should be Le…

Writing a Novel: The Deep Blue Hold–Introduction

Thursday, March 9th, 2017 ... I fight my insecurities and doubts and I withdraw farther away from people and life ... I n November 2016 I started work on a new novel with the working title: The Deep Blue Cage. A few weeks after I started, I stopped. I was feeling too depressed about everything including the idea of writing a new novel. It happens to me at various times, with varying degrees, and it is debilitating. The ultimate issue was: Why bother? Why bother write another novel no one will read and no one will care about. I also found I was dreading the writing process more and more. It was painful to think about. I walked away and focused on other things. Or tried to. That didn’t work either. I felt trapped and unsure where I should head, what I should do. I even asked the big question, what the hell is life about anyway. There’s no one answer to this question despite the proclamations of some and because I believe I can think critically, can reason, I look at it from many a…

Day 6: Writing a Novel—The Deep Blue Hold

Tuesday, November 22nd, 2016 Note: Unedited writings from my notebook for this novel. Square bracket items represent added comments.
At 20:44—Office ... Lost at sea, she's rescued by a ship and wished she had never set foot on it.... N othing new on this story. Nothing came to me while I was sleeping or when on my errands. I thought something would come about, but nope. So be it. I have two chapters written. Not sure if they are any good but they are there. And so Chp. 3 to write. And I don’t see the scene because I’m not sure what should happen. The question is what is the cliffhanger. Nope. 3 about her, not the ship and crew. And I’ve already written the last line of the chapter. She wakes up and feels immense pain. Not sure if I should mention blood in the water. This chapter or the following. So it’s early dawn or not quite sunrise. And she’s in the cockpit unconscious. But how do I write it from her POV if she’s out. Hmmm. I can do it but should I do it? And I don’t w…