Arbitrary (net worth) assessments are one of the mostpowerful weapons in the Taxman’s arsenal. Based on a comparative statement of net worth in simplified form, it usually works as follows:
A period of time is selected for the calculations. The amount of undeclared income will be the difference between the taxpayer’s net worth at the end of this period plus the estimated cost of living during that time and his/her net worth at the beginning of the period. CRA auditors use the taxpayer’s bank statements, credit cards, other bills and style of living as part of the information they feed into their computers to generate the assessment. Cost of living numbers obtained from Statistics Canada are also added to the mix.
Some typical taxpayer defences are:
– part of the net worth is offset by outstanding loans or liabilities
– a portion of the total property, held at the end of thetime frame, should have been included in the net worth at the beginning of the period
– there was cash on hand at the beginning of the net worth period in addition to the cash represented by the taxpayer’s bank deposits
– some of the increase is attributable to non-professional gambling gains or an inheritance
– estimated living expenses are too high
– the taxpayer’s accounting records prove the real amount of income for the period despite the net worth figures produced by the CRA
– some of the increase in the taxpayer’s net worth is attributable to gifts received.
Specialized knowledge is necessary to fight such assessments. In a civil case, because of the reverse onus of proof, if the taxpayer cannot prove the net worth is wrong, he or she will lose.
But it can get worse! An arbitrary assessment can be the basis on which the Crown lays tax evasion charges. In that case, in addition to civil penalties, a criminal penalty of between 100% and 200% of the tax evaded (plus dailyinterest) will be added to the tab. The only benefit in this latter situation is that the onus of proof is on the Crown.
The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.