Tax Court of Canada


Income Tax

Administration and Enforcement

Auditor erring in methodology in valuating taxpayer’s investments

Taxpayer operated retail flower business as sole proprietor during taxation years 2002 through 2006, and was GST registrant. Minister determined by net worth method that taxpayer had unreported income totalling $440,249 over years at issue. Minister reassessed taxpayer under Income Tax Act beyond normal reassessment period, adding unreported amounts into income and imposing gross negligence penalties and reassessed taxpayer under Excise Tax Act for GST relating to unreported income in amount of $30,853.89 as well as gross negligence penalties. Taxpayer appealed. Appeal allowed in part. Minister conceded amounts that reduced total unreported income to $364,876.73 and related GST to $25,319.80. Errors in net worth assessment were mostly because taxpayer was unwilling to provide books, records and information in timely manner. Taxpayer produced some credible evidence in appeal process to demolish some of Minister’s assumptions. While auditor did not err in excluding some unsubstantiated business assets and liabilities, other items such accounts receivable and inventory, should not have been excluded from calculations as their exclusion created approximately $60,000 in additional “income”. Auditor’s admission of error in not showing “cash on hand” warranted adjustment in favour of taxpayer but there was no error in assumption that cash from sale of jewelry was held by taxpayer and spent as it was not deposited in bank accounts. Taxpayer demonstrated that adjustment was necessary to avoid double-counting $15,000 transferred between bank accounts. Taxpayer did not establish all of claimed repayments of loans to family members, but established some repayments beyond what auditor recognized. Auditor erred in methodology in valuating taxpayer’s investments. Taxpayer established that she mostly spent less than average figures used by auditor for personal expenditure categories. Taxpayer’s evidence of expenditures incurred in role as head of church’s kitchen, for which church reimbursed her, was accepted and led to certain adjustments.

Lee v. R. (2017), 2017 CarswellNat 1983, 2017 TCC 74, K. Lyons J. (T.C.C. [General Procedure]).


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