The world of tax law often seems daunting for many individuals and businesses. Consequently, when disputes with the Canada Revenue Agency (CRA) arise, it becomes crucial to grasp your rights and understand the litigation process. Hence, this article elucidates tax litigation in Toronto and demonstrates how a specialized law firm like KR Law Firm can assist in resolving your tax disputes both effectively and efficiently.

What is Tax Litigation?

Fundamentally, tax litigation involves legal proceedings to settle disputes between taxpayers and tax authorities, particularly the CRA. Disputes often arise from varying interpretations of tax laws, disagreements over tax liability, or accusations of tax evasion or fraud. Given the high stakes and complex nature of the proceedings, it is vital to engage knowledgeable tax litigation attorneys.

When to Hire a Tax Litigation Lawyer?

So, when should you turn to a tax litigation lawyer? Primarily, you will need one if you find yourself disagreeing with the CRA’s assessment of your tax liability or if you face charges of tax evasion or fraud. Additionally, tax litigation lawyers can ensure fair treatment during tax audits, negotiate settlements, and guide clients through the appeals process at the CRA and in court. Engaging a tax litigation lawyer early in such situations is crucial to fully protect your rights.

Understanding the Tax Litigation Process in Toronto

In Toronto, tax disputes generally kick off with an audit or an objection to a CRA assessment. If the dispute persists and a resolution cannot be found at this stage, the case may advance to the Tax Court of Canada. That’s when formal litigation begins. The Federal Court of Appeal hears appeals from the Tax Court of Canada decisions, and in some rare cases, these disputes escalate to the Supreme Court of Canada.

The tax litigation process is often lengthy and intricate. Consequently, understanding the tax laws, procedural rules, and strategic considerations demands expertise and experience.

How KR Law Firm Assists with Your Tax Litigation

At KR Law Firm, our lawyers carry the necessary knowledge and experience to handle complex tax disputes. Our primary focus is on understanding your unique needs and devising personalized, effective legal strategies. Representing both individuals and businesses, we boast a successful track record in negotiating with tax authorities and litigating in courts at all levels.

We acknowledge that tax disputes can induce stress. Therefore, our aim is to relieve you of that burden by providing clear advice and robust representation, resolving your tax issues in the most beneficial manner.

If you need assistance with the CRA, don’t hesitate to book your free consultation or contact us. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer. 

The Tax Court of Canada serves as an independent judicial body that handles tax-related cases, primarily disputes between taxpayers and the Canada Revenue Agency (CRA).

Filing an Appeal

When a taxpayer disputes a CRA decision, the first step typically involves filing a Notice of Objection. However, if the CRA’s response time proves unsatisfactory or the taxpayer finds their decision unacceptable, the taxpayer can choose to escalate the matter to the Tax Court of Canada by filing a Notice of Appeal.

Throughout this process, the Department of Justice (DOJ) assumes the role of the CRA’s legal representative. From the date of the Notice of Appeal filing, the DOJ has a 60-day window to submit their counter-argument, known as a Reply.

Procedures at the Tax Court

The Tax Court of Canada offers two distinct procedures: the Informal Procedure and the General Procedure. The selection must be explicitly mentioned in the Notice of Appeal.

The Informal Procedure

The Informal Procedure caters to smaller disputes and prioritizes the reduction of the case’s duration and complexity. One notable advantage is the absence of a filing fee for the appeal.

Eligibility for the Informal Procedure hinges on the amount under dispute per year for federal tax and penalties, which must not exceed $25,000. For Goods and Services Tax (GST) disputes, the maximum allowable amount is $50,000.

The General Procedure

In contrast, the General Procedure is more formal and abides strictly by the Tax Court of Canada Rules. Deviations from these rules are permitted only with a court order. Additionally, the General Procedure involves a filing fee, which is determined by the appeal’s dollar value.

The fees are as follows:

• Class A – disputes under $50,000: $250 filing fee.
• Class B – disputes between $50,000 and $150,000: $400 filing fee.
• Class C – disputes over $150,000: $550 filing fee.

In General Procedure cases, individuals can opt for self-representation or hire an attorney. Corporations, however, are obligated to engage a legal professional.

Impact on CRA Collections Actions

Generally, filing a Notice of Appeal halts the Canada Revenue Agency’s Collections Department from accruing the tax debt until the case concludes and a verdict is reached. However, interest continues to accumulate during this period. If the appeal concerns trust funds (e.g. HST), these remain collectible. Thus, communication with CRA Collections is crucial to avoid any legal complications during Tax Court proceedings.

The Tax Court process, with its intricacies, demands meticulous attention to detail. If you intend to dispute a CRA decision, feel free to book your free consultation or contact us. 

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer. 

Under Subsection 152(7) of the Income Tax Act (ITA), and subsection 299(1) of the Excise Tax Act (ETA), the Minister of National Revenue isn’t bound to accept information or returns from a taxpayer while determining their assessment.

If the Canada Revenue Agency (CRA) suspects that a taxpayer has earned more than reported on their tax returns, they can use these ITA and ETA provisions to conduct a “net worth audit” (also known as “net-worth assessment”) to ascertain the taxpayer’s income.

Understanding a CRA Net Worth Audit

A net worth audit is a specific audit type the CRA uses to examine a taxpayer’s standard of living. If it appears higher than what the reported income on their tax returns could reasonably support, the CRA may conduct this audit.

The CRA usually performs a net worth audit when a taxpayer has substantial assets, cash, or property that seem inconsistent with their reported income. If the reported income is inadequate to support their lifestyle, the CRA will assess them for undeclared income and impose interest and penalties through a net worth audit.

High-risk candidates for a net worth audit by the CRA include individuals operating cash businesses, those reporting low income or consistent losses, and those with poor record-keeping.

The Audit Process

A net worth audit calculates a taxpayer’s income by examining their family’s net worth changes over time that the reported income to the CRA cannot explain.

Typically, a net-worth audit happens when:

1. The taxpayer lacks sufficient documentation to back up their filed returns; or
2. Initial findings during a tax audit uncover substantial inconsistencies between the taxpayer’s spending/lifestyle and reported income.

A net worth assessment requires collecting a lot of information, data, and documentation during the audit stage. The CRA auditor must meticulously scrutinize the taxpayer’s bank transactions to determine expenses and analyze cash deposits.

Net Worth Audits for Businesses

A business net worth audit is similar to a personal net worth audit but focuses on a business rather than an individual. The CRA might conduct a net worth audit to verify a business’s financial reporting accuracy and to ensure compliance with tax laws and regulations. The CRA may review financial records such as balance sheets, income statements, and tax returns to determine the business’s net worth and tax obligations.

The Burden of Proof and Onus in CRA Net Worth Audits

In assessing a taxpayer, the CRA may make assumptions about a taxpayer’s income and expenses, and the burden of proof falls on the taxpayer to demonstrate that these assumptions are inaccurate. In other words, the taxpayer must provide evidence to show that the factual information used by the CRA to make the assessment is incorrect. 

Therefore, when the CRA conducts a net worth audit, it is assumed to be valid and accurate. The burden of proof falls on the taxpayer to show that the assessment is incorrect, rather than the CRA having to prove its validity.  

How to Challenge a CRA Net Worth Audit

In the 2020 Tax Court of Canada (TCC) case of Saini v The Queen, the Tax Court ruled that a taxpayer may challenge a net worth audit on three bases: necessity, methodology, and patent errors.

Necessity

The taxpayer must provide evidence showing sufficient records exist to determine their actual income.

Methodology

A taxpayer may challenge the auditor’s incorrect methodology. However, this requires a solid understanding of accounting and the methods used by the auditor.

Patent Errors

A taxpayer can challenge a net worth audit if they believe it includes patent errors. Identifying these errors often requires a level of accounting or tax knowledge.

If you are facing a net-worth audit, don’t hesitate to book your FREE consultation or contact us. 

We’ll deal directly with the CRA auditor on your behalf and guide you through the audit process. We’ll also assist you in gathering and organizing the necessary documentation and help tailor your response to the CRA audit.

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer. 

Record-Keeping Requirements

Sections 230 and 230.1 of the Income Tax Act (“ITA”) set out taxpayers’ requirements to keep adequate books of account and records for tax purposes. Section 230(1) requires every person carrying on business or required to pay or collect taxes under the ITA to keep records and books of account at their place of business or residence in Canada. The books of account must also include an annual inventory kept in a prescribed manner. 

If a taxpayer wants to keep its records anywhere else in Canada or outside Canada, they must request permission from the Canada Revenue Agency (“CRA”) to do so. In general, the CRA’s policy is to allow books and records to be maintained outside of Canada, providing that the auditor has reasonable access to them and that the taxpayer bears additional costs required to review the books and records outside Canada. 

Nature of Records to be Kept

Generally, courts have held that taxpayers are not required under section 230 of the ITA to keep any specific forms of records or books for tax purposes. For instance, in the case of Labbe v. M.N.R., the Court held that “the Act does not require the taxpayer to keep a specific accounting system, but such accounts as are sufficient to give the amount of income taxable, and the amount of tax owing.” 

“Adequate” Records 

Under section 230(3), if the taxpayer fails to keep adequate records and books of account, the CRA has authority to require the taxpayer to keep such records and books of account as the CRA specifies. In the case of Empire House (London) Ltd. v. The Queen, the Court highlighted that the right of the CRA to require a person to keep such specified records only arises when the taxpayer has failed to keep “adequate” records and books of account. 

In Merchant (2000) Ltd. v. Canada (Attorney General), the Court held that

the word “adequate” means “sufficient to enable the taxes payable under the Act to be determined.” In this case, the Court found that the CRA had failed to establish that the taxpayer’s records were not adequate and quashed the requirement. 

In Sidhu v. M.N.R., the Court set out that failure to meet the record-keeping requirements under section 231 of the ITA is an offence under section 238(2). However, the Court also held that such a failure to meet the record-keeping requirements does not mean that courts will not accept the transactions claimed by the taxpayer. Rather, it is the responsibility of the trial judge to determine, on a balance of probabilities, whether such transactions actually took place. Therefore, if the taxpayer has failed to keep adequate records, the taxpayer must show other documentary evidence to substantiate its claims. 

Required Retention Period

Section 230(4) to 230(8) of the ITA set out the mandatory retention periods for books and records. The general rule is that taxpayers must keep all records and supporting documentation for six years from the end of the last taxation year that they relate to. There are certain exceptions to this general rule which require taxpayers in specific cases to keep their books and records for a shorter or longer period. 

Exceptions to General Rule 

The following are some of the exceptions to the general six-year retention period rule: 

• If a taxpayer files their taxes late, the books, records, and supporting documentation relating to the tax year must be kept for six years after the date the return is actually filed.
• If a taxpayer files an objection or an appeal, they must keep the required books, records, and supporting documentation until the latest of the following dates below: 

            – the date the objection or appeal is completed; 

            – the date for filing a further appeal has expired; 

            – the date the six-year record-keeping period ends.

• The books and records of a deceased taxpayer or a trust can be destroyed on receipt of a “clearance certificate” regarding the distribution of property.

Generally, most books and records (except for “permanent” records and books of corporations and businesses) can be destroyed by taxpayers at the expiration of the six years. In order to destroy books and records before the expiry of the six years, the taxpayer must get written permission from the CRA. 

Contact us today to receive professional legal assistance against the CRA.

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By Kaveh Rezaei – Attorney at KR Law Firm

**Disclaimer 

This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.