Mr. Pouliot ran strip clubs and was a loan shark. Revenue Quebec seems to have started the audit based on a police referral. Justice Lamarre explained the principles of the deposit method which CRA used to challenge Mr. Pouliot’s 2000-2003 reported taxable income:
“[11] Briefly, the verification method based on deposits consists of adding all the deposits and from them subtracting all the amounts not forming revenue, being, in the appellant’s case, transfers, deposits made using lines of credit, as well as debts he contracted during the years under appeal. The result obtained is the revenue that the taxpayer should have declared according to this method.
…
“[28] The appellant raised many arguments which have no impact on the method of verification based on deposits. For example, he claimed that he had suffered losses as a consequence of his loans that he made to individuals. He said he had not declared these losses in his tax returns and he asserts that the Court should now take account of them. As I already explained in these reasons, the method of verification based on deposits only consists in taking account of deposits as sources of revenue and deducting from them amounts that artificially inflate the said deposits. Thus, the losses suffered are not relevant for the purposes of the calculation of revenue by this method.” [My translation.]
The Court upheld also CRA’s late reassessments and gross negligence penalties. To uphold the penalties, J Lamarre cited Lacroix v. Canada, 2008 FCA 241 para 32:
“[32] What, then, of the burden of proof on the Minister [under ITA s. 163(2), the gross negligence penalty rule]? How does he discharge this burden? There may be circumstances where the Minister would be able to show direct evidence of the taxpayer’s state of mind at the time the tax return was filed. However, in the vast majority of cases, the Minister will be limited to undermining the taxpayer’s credibility by either adducing evidence or cross-examining the taxpayer. Insofar as the Tax Court of Canada is satisfied that the taxpayer earned unreported income and did not provide a credible explanation for the discrepancy between his or her reported income and his or her net worth, the Minister has discharged the burden of proof on him within the meaning of subparagraph 152(4)(a)(i) and subsection 162(3).” [My underlining and bold.]