The recent case of Boroumand v. The Queen 2015 TCC 239 neatly illustrates just how challenging a forum the Tax Court can be for certain appellants. The facts of the case are unremarkable and common enough: the appellant was brought to the attention of CRA by way of a tip from the Toronto Police Services, Proceeds of Crime unit. An audit was commenced. The appellant’s returns showed income from interest but there was no information about the investments that provided the interest. This absence of information prompted the auditor to dig further and obtain bank records. The bank records indicated a significant discrepancy between funds that flowed through the accounts and what was declared as income and the appellant was reassessed based upon the information in those records using the net worth method.
On appeal, the appellant’s evidence, based upon his own testimony was that the funds came mainly from non-taxable sources including an inheritance from Iran and loans. This evidence was rejected by the Court and, in the result the appeal was unsuccessful.
Given the evidentiary rules at play and the evidence that was presented, the result is in no way surprising. However, the Court’s reasons are illustrative of certain elementary rules that can, in some instances make an appellant’s road to success a rather difficult one to navigate. In this case the road to the dismissal of the appeal was built upon the following points of law, evidentiary rulings and findings:
- A net worth method of assessment is “arbitrary”, an “imprecise approximation” and a “method of last resort”.
- There is nothing in law that precludes the net worth method from being used.
- Through operation of s.152(8) of the Income Tax Act, “[a]n assessment shall, subject to being varied or vacated on an objection or appeal…be deemed to be valid and binding notwithstanding any error, defect or omission…”.
- Therefore, despite its arbitrariness and lack of precision, an assessment based upon the net worth method is valid until and unless it is set aside.
- On an appeal, the onus is on the appellant to demolish the assumptions used by the Minister in the calculation of income.
- In some instances, the testimony from an appellant/taxpayer alone, without corroboration from documents will not constitute the credible evidence that is needed to demolish the assumptions. In this regard the Court held: “No clear picture emerged as to the real state of his affairs; no plausible explanation was provided for the increase in net worth. His version of events was not supported by proper documentation…”.
- That said, a document is not necessarily admissible as evidence. In Boroumand the appellant attempted to introduce records showing that he received money transfers from Iran. The respondent objected to the admissibility of the records on grounds that provisions of the Canada Evidence Act governing the introduction of business records had not been complied with. The Court agreed, finding that formal notice requirements had not been complied with and, the appellant failed to offer evidence showing the circumstances under which the documents were created so the court had no basis upon which to determine the reliability and admissibility of the documents. The Court held: “To admit these unproven documents for the truth of their contents would deprive the respondent of the opportunity to challenge the evidence and the Court of the ability to adequately assess its worth.”
- The failure to call witnesses who have relevant evidence to offer might result in a negative inference being drawn. The appellant’s evidence in this case was that money, which was an inheritance, was transferred to him by his uncle in Iran. The uncle was not called as a witness. The Court held: “There was no will. Given the large amount of money at issue, the respondent asks that I draw an adverse inference from the fact that the appellant’s uncle was not called to testify…I agree that such an inference is appropriate. The circumstances of the inheritance are implausible and beg for corroboration. I draw an adverse inference from the fact that no relative was asked to testify regarding the existence of the inheritance.”
- Because the appellant failed to discharge the onus which rested upon him, and given that the reassessed amounts of income calculated upon the net worth method were therefore valid and binding, the Court also concluded that the Minister met the burden of showing that there was a misrepresentation of income by the appellant and, that the misrepresentation was attributable to carelessness, neglect or wilfull default. On this basis, the Court found that the Minister was permitted in law to open statute barred years and assess gross negligence penalties.
It may be that the evidence that was presented was the best the appellant had to offer and I do not suggest otherwise. However, several lessons may be drawn from this case. First, the police do and, perhaps increasingly do pass tips to CRA. More importantly, this case illustrates the care that is needed in the preparation of litigation. The basis of the appeal must be carefully developed at an early stage, relevant documents must be assembled and legal issues governing the admissibility of those documents must be fully contemplated and addressed. Finally, as Boroumand illustrates, it may not be good enough for an appellant to simply testify about the goodness and generosity of an uncle or some other relative in order to explain what might otherwise be unaccounted for money. Instead, the relative’s generosity had better extend to a willingness to attend court and to tell the court, first hand, or his or her generosity. Importantly, the failure to present this evidence might not be a neutral factor – in some instances a negative inference will be drawn and the appellant will therefore be worse off.
This is not to say that the rules of evidence operate unfairly against an appellant. Equally, this is not to say that the rules necessarily operate in a manner that is fair. That is an entirely separate discussion. What is important, as all litigators know, is that in most cases you need the facts in order to succeed and the rules of evidence will determine what might be admissible as evidence and, what evidence might thereafter be found by the judge to be a fact. As counsel, this is not a question of fairness. Instead, it is a matter of understanding the applicable rules so that a client’s interests can be fully represented.