One of my favorite parts of being a tax lawyer is being able to act on behalf of taxpayers in their communications with Canada Revenue Agency. I am passionate about making sure that taxpayers understand the dispute resolution process – and I wrote about this A LOT in the last year!
To learn more, check out the following blog posts:
And if you are interested in listening to two tax litigators talk about the tax dispute process, check out this episode of The Tax Chick Podcast (with special guest, Sophie Virji): https://thetaxchickpodcast.transistor.fm/s1/5
And, if you are interested in learning more about tax audits, I am hosting an Instagram Live on May 12th at 10:30 a.m. (CST) – my IG handle is @tax.chick – here is the info!
What is a tax audit, and what do I actually NEED to know about it?
First, don’t panic. I know it’s probably the last thing you need after all you’ve been doing to keep your business and family running. Take a deep breath, then tune into my Instagram Live with CPA Taheera Fidaali (@tula.cpa) onMay 12th at 10:30 am CST. We’ll cover what you need to know about tax audits!
(The IG live will be recorded and available on our feeds following the event if you are not able to attend live.)
In Canada, if I decide to sue you for a breach of contract (for example), I would bear the “burden” (i.e., the responsibility) to prove that you breached the contract. You (as the defendant) would have no responsibility to disprove my claims.
A very different scenario exists in the realm of tax litigation. In most scenarios, it is the responsibility of the taxpayer to disprove an assessment made by CRA.
WHEN DOES THE TAXPAYER BEAR THE BURDEN?
At the Tax Court of Canada, the general principle regarding “burden of proof” is that the taxpayer bears the burden of disproving an assessment by CRA.
In the legal documents filed with the Court, the taxpayer would file a document called a “Notice of Appeal” which sets out the taxpayer’s issues and basis for appealing. In response, the Minister of National Revenue (through the Federal Department of Justice) files a document called a “reply”.
In looking at the Reply, there is a key portion of the document called the “assumptions”. In this part of the document, the Minister sets out the assumptions made that led to the reassessment. It is the job/responsibility of the taxpayer to “demolish” each of these assumptions. Namely, the taxpayer must:
Show the assumption is wrong; or
If the assumption is right, show that it is irrelevant to the reassessment, or does not support the reassessment.
If the taxpayer fails to do this, they will lose the appeal. This basic requirement comes from the Supreme Court of Canada case, Johnston (1948) where the Court decided that the onus would be on the taxpayer to “demolish the basic fact on which the taxation rested”. The rationale behind this conclusion is that the Canadian tax system is a self-assessing system, and the taxpayer should be bestapprised to know the facts upon which he/she filed the tax return.
WHEN DOES CRA BEAR THE BURDEN?
There are certain circumstances where the burden and onus flips back to CRA. This usually happens in circumstances where it can be shown that CRA is better positioned to understand and know the facts.
Over the last couple of weeks, I have been talking about administrative penalties. One of those penalties is the “gross negligence penalty”. CRA bears the burden of proof with respect to these penalties. As indicated in the post, CRA typically prepares a “penalty recommendation report” which sets out the evidence they have to support their position.
In the Anchor Pointe Energy case (2007), the Federal Court of Appeal talked about another circumstance where CRA would bear the initial onus/burden. The Court felt that where assumptions were within CRAs knowledge only, then it would only be appropriate for CRA to bear the burden. Consider the situation where CRA is making an assumption based on the circumstances of another taxpayer (and that taxpayer is unknown/unrelated to the taxpayer who has filed the appeal).
CRA says taxpayer owes more money and that the taxpayer participated in a “scheme”.
Turns out the taxpayer is one of 1000 people that also got assessed for the same “scheme”
Unfortunately, I have heard this story too many times. It can wreak havoc on a taxpayer and can be scary for the tax preparer – especially if the tax preparer does not have all the information about the “scheme”.
Not to scare anyone, but sometimes a penalty can apply to a third party – including a tax preparer – if there is a “misrepresentation” on a tax return. I am talking about the “third party civil penalties”.
You have been dealing with a CRA audit for the last couple of months. Today, you get a final letter from CRA that sets out the changes/adjustments they plan to make to your assessment. The letter includes a 30 day time frame for you to make any additional submissions.
Your eyes scan down the changes, and come to a paragraph that talks about “gross negligence” penalties. Immediately, you panic.
Are you being criminally charged?
Is CRA saying you are a “bad person”????
Can you do anything about this????
If this scenario sounds familiar to you, please know that you are not alone. In the last couple of years, I have seen an increase in the times that CRA chooses to assess gross negligence penalties.
Yes, I recognize that the deadline for filing your personal T1 income tax return is April 30th (June 15th for self-employed individuals). So, you might be thinking, “Amanda – why are you raising this now?!?!?”
I chose today to blog about this topic because I believe that filing the 2020 T1 income tax return will be a bit more complex than in past years. So why not get a head start on things?
Do you know how the sale of the house and/or the cabin will be taxed?
Later this week, I am releasing the first episode of Season 2 of The Tax Chick Podcast, featuring fellow tax chick, Anna Malazhavaya. Anna and I are chatting about a topic that impacts many individual taxpayers – access to the “principal residence exemption”.
Let’s take a few moments to break down the fundamentals of this rule.
Last week, I was arguing an appeal in the Tax Court of Canada. The case was about the application of the specific anti-avoidance rule found in ss. 256(2.1) of the Income Tax Act (Canada) to a set of corporate taxpayers. I will give you an update on how that turned out once the decision is released…
In the meantime, we return to our regularly scheduled programming. Today, I wanted to talk a bit about audits.
Audits are generally not a fun thing to endure. An audit is a bit like going through security screening at an airport – the whole environment has the ability to make you feel guilty, even if you have not done anything wrong.
But if you are an honest person and have done your best to file your taxes properly, then you should not have much to fear with an audit. At worst, the auditor might find a mistake that was made, which might result in some additional tax to pay. You will also lose time dealing with the audit, which could otherwise have been spent with family, relaxation or perhaps on your business.
I had planned to take a week off from the blog to focus on a Tax Court of Canada hearing I am running this week which involves the application of the specific anti-avoidance rule in ss. 256(2.1) of the Income Tax Act… but… I was sitting in my living room working on my opening statement for Court and realized I had a serious case of writer’s block.
In the past, when I have writer’s block, I find it helpful to switch gears and write about something that I know. So here goes nothing!
Clients often find the Tax Court of Canada process to be quite mysterious. Just the other day, I had a witness ask if we still wore robes and wigs to court. (As an aside, I had the privilege of taking Appellate Advocacy in law school from a visiting professor who also happened to a be a judge in Australia – where the judges (at that time) still wore wigs. He brought his wig to class so we could check it out! If you are interested in learning more about the history of wig wearing by the Courts in Australia, here is a great article: http://www.courts.sa.gov.au/Community/ForSchools/Resources/Pages/History-of-wigs.aspx).