Read the Crown's Reply carefully
Taxpayer's have the responsibility of the disproving the facts that the CRA has assumed. The CRA's "assumptions" are listed in a separate paragraph (and many subparagraphs under it). These facts should support the tax assessment. Sometimes, they do not. If the Crown fails to plead an essential fact, you could succeed in your case, even if you don't have the evidence you otherwise would need.
For an example of a case where the taxpayer, whose evidence the Court described as "weak", was allowed a helpful business deduction for two purchases of equipment, see Kandasamy v. The Queen.
The importance of a strong witness
Mavis Tidd claimed a deduction from her employment income for the cost of her residence, relying on the clergy residence exemption in Canada's Income Tax Act. The legal tests seemed strongly against her. She could not show that she had formal religious training or that she had been ordained by a religious community. But she had an excellent witness: a former pastor who confirmed that she had been recognized by her congregation as a person having special status in spiritual affairs. Throughout trial preparation, I could not shake his faith in her right to the deduction, as we confronted each legal test. And though the Government's lawyer questioned him for hours, the more he answered, the more convincing he became.
Though the courts had loosened the rules for this deduction over the years, especially for the Evangelical communion, still this decision seemed exceptional. It shows the importance of having a credible witness to support your case on the facts. The pastor believed in Ms. Tidd and her right to the deduction. And the judge believed in the pastor.
Read the case: Tidd v. The Queen.
Perhaps because of this decision, for the past two years, the Canada Revenue Agency has changed its form for the clergy residence deduction. Read comments on the 2012 version of the form at the Canadian Council of Christian Charities webpage.
Sometimes, the CRA's witnesses can make your case for you but don't count on it
When assessing a taxpayer for income tax, the CRA may assume whatever it pleases. You must prove the CRA's assumptions are wrong. In Jan Osinski's case, the CRA accused him of taking $2.7 million from his family's construction company. With penalties and interest, he faced a $4 million tax debt if he lost.
But the CRA could not show that he took the money and his bank accounts showed that he had no unreported money. Though the CRA assumed he used the missing money to build a real estate portfolio, the CRA's own documents and witnesses disproved that assumption too. And one CRA key witness showed that there may never have been unreported money to take in the first place.
So, even though the judge found the taxpayer and his key witness were largely unreliable, the documents the taxpayer had plus the evidence from the CRA auditor and the CRA's other witnesses were enough to make the CRA's assumptions seem wrong. And that is as much as a taxpayer must do: Once you show some believable evidence that the CRA's assumptions are wrong, the burden shifts to the Government to prove that its reassessment is right. The Government could not do that in this case.
Read Osinski v. The Queen, 2013 TCC
It can take a year or more to get to Court. Use the time to gather evidence & settle your case
Mr. Cyr was in construction. CRA's auditor examined his business bank account and saw that Mr. Cyr deposited more money than he reported as business sales. So, the auditor reassessed him to include the extra deposits as unreported business income. And as usual in these cases, the auditor assessed gross negligence penalties and disallowed many of Mr. Cyr's business expenses.
We spent over a year before the hearing date investigating Mr. Cyr's case and gathering evidence to challenge the CRA's assumptions and answer the Government's reasonable questions, just as we would have to do if the case went to a hearing.
We found evidence to support some of Mr. Cyr's expenses. But the biggest issue facing Mr. Cyr was not the expenses; it rarely is in these cases. Unreported income was the big issue and the penalties were based on that. We could show that Mr. Cyr was on WSIB during the tax years, so that he could only work part-time in light construction-related work. But he had to explain the large deposits. He claimed that his deposits came from Casino gambling winnings. So, we contacted the Casino and got a statement showing the dates he was there and the amounts he won during those years. He was at the casino in three of the four years and was there the most in the year CRA said he had the most unreported income. The statements showed that, during the assessed years, he had large cash payouts which easily explained most of the extra bank deposits. And though over-all he lost money, we could show that he borrowed the extra money he lost. The money just cycled through his business account and back out to the casino, giving an appearance of more income than he really had.
In the week before trial, the Government agreed to settle the case, reversing the reassessments for two of the four years, eliminating the penalties, allowing many of the business expenses, and reducing the unreported business income so much that it wasn't worth going to Court. And so, Mr. Cyr and the Government filed a "Consent to Judgment" on the settled terms and the case ended one day before the hearing.
As this case showed, most cases can settle. You can work with the Government's lawyers to get that result, by gathering the evidence you have to answer early the questions you will otherwise face in Court.
See Cyr v. The Queen, Consent Judgment June 2013