Justice Graham wrote a 2007 BC paper on net worth assessments: “Anatomy of a Net Worth Assessment”, 2007 BC Tax Conference. pp. 11:1-55, (Canadian Tax Foundation). So he seems to like this area, making it less surprising that we get a detailed exploration of alternative assessing techniques from him.
[6] I have never seen so many different alternative assessment techniques used for one taxpayer. … Ultimately, to best determine Mr. Bousfield’s revenue, I have had to create a modified technique of my own.
[7] These appeals raise interesting issues concerning how alternative assessment techniques can be attacked, the use of industry averages in alternative assessment techniques, the use of assumptions of fact in alternative assessment techniques and the ability of a taxpayer to rely on his or her own alternative assessment techniques.
[17] Alternative assessment techniques should not be the norm. They should be a last resort.3 …
[20] While some cases seem to suggest that unreliable books and records are a prerequisite to a subsection 152(7) assessment, a more accurate description is that reliable books and records are one way that a taxpayer can attack an alternative assessment technique. The five ways of attacking an alternative assessment technique are described below.
[21] When the Minister determines a taxpayer’s income or revenue using an alternative assessment technique, the taxpayer can win:
(a) by showing that the taxpayer’s income or revenue can be more accurately calculated using the taxpayer’s own books and records;5
(b) by accepting that the alternative assessment technique used by the Minister is appropriate but attacking components of the calculation in an effort to reduce the income or revenue;6
(c) if the year in question is statute barred, by showing that the alternative assessment technique used by the Minister is fundamentally flawed;7
(d) by presenting a different alternative assessment technique that more accurately calculates the taxpayer’s income or revenue;8 or
(e) by accepting that the alternative assessment technique used by the Minister was appropriate but showing that the income or revenue calculated by the technique was from a non-taxable source.9
[24] The taxpayer cannot demolish the assumption by simply showing that the alternative assessment technique is fundamentally flawed. The taxpayer can only demolish the assumption by either showing that the assumed revenue or income was from a non-taxable source or presenting the Court with a viable alternative for determining the taxpayer’s revenue or income – be it the taxpayer’s own records or some other technique.
[58] Both parties relied on or attempted to rely on industry averages and Statistics Canada figures in their alternative assessment techniques. These types of averages and figures often appear in alternative assessment techniques. However, it would be extremely unusual for a party to actually call a witness to explain how the averages or figures were determined. In the absence of such a witness, what should the Court do with these types of averages and figures? The answer depends on how they are being used.
[61] In other words, the Minister does not have to prove that the average or figure is accurate. The Minister simply makes an assumption of fact that the average or figure applied to the taxpayer. It is up to the taxpayer to demolish the assumption.
[62] By contrast, if either party wants to rely on industry averages or Statistics Canada figures as evidence, that party will need to call a witness to explain how the averages or figures were determined. In the absence of such a witness, such averages and figures should not be admitted into evidence. They are hearsay.
Here, Graham J. rejected all four of the Crown’s approaches because they relied on facts that were not proved and weren’t assumed, so that the Minister could not rely on them without evidence.
To challenge the Minister, the taxpayer need not call an expert witness:
[118] It would be grossly unfair for me to allow the Minister to put forward evidence of the alternative assessment techniques that she employed while preventing a taxpayer from doing the same without calling an expert witness.
[119] As a CPA, Mr. Wirth brought his accounting expertise to bear in preparing his net worth assessment just as Ms. Canton brought her auditing expertise to bear in preparing her calculations. Their respective skills allowed them to perform competent calculations that I would be more likely to accept. But neither of them provided expert evidence.
[120] I am a judge of the Tax Court of Canada. My role is to determine what Mr. Bousfield’s income was. I do that based on the evidence and the law. Ms. Canton’s and Mr. Wirth’s calculations may assist me by collating and organizing parts of that evidence, but their calculations are not expert evidence. To hold otherwise would be to delegate to them the very task assigned to me—the task of determining Mr. Bousfield’s income.