Failure to Keep Records Leaves Taxpayer Without Evidence to Support Tax Return Numbers

January 26, 2022

Written on behalf of Feigenbaum Consulting

Whether you own a small business or a large one, it is critical to maintain proper record-keeping. Good record-keeping practices help ensure your business is in compliance with tax laws and can position your business to pay less tax, resulting in more profit. If a taxpayer finds themselves in the critical eyes of the Canada Revenue Agency in Canada or the Internal Revenue Service in the United States, a taxpayer can find themselves involved in tax litigation. The recent Tax Court of Canada case of Eva Enterprises Inc. v. The Queen demonstrates how not having records to back up a position before the court can leave a taxpayer without a leg to stand on.

Trucking business caught the eye of the CRA

The taxpayer involved in the matter (“MC”) drives a transport truck owned by the appellant corporation (“the corporation”). MC was the corporation’s only employee during the tax years in question. Additionally, MC and his wife were the corporation’s only shareholders and directors. The truck owned by the corporation and driven by MC was in the business of moving meat, produce, and other items across the United States/Canada border.

The tax years in question were 2012, 2013, and 2017. The Canada Revenue Agency (“CRA”) made what are known as “arbitrary assessments” of tax payable while not being bound by any tax returns or information supplied by the taxpayer. The CRA had concluded that about $20,000 was owed by the taxpayer for the years in question. This was in addition to penalties applied for failing to file taxes in those years.

To successfully appeal the assessments, the Income Tax Act states that the corporation must disprove the assumptions of facts made by the CRA in arriving at their assessment results on a balance of probabilities.

Taxpayer lost computer in serious collision

MC told the court that he kept all of the corporation’s financial records on a laptop computer on which tax software was installed.

In July 2018, MC was involved in a serious collision while driving the truck. This led to him spending a night in hospital as well as many months recovering. He told the court that he was unable to retrieve any of his belongings from the truck.

This claim did not sit well with the court, which wrote that while there was no doubt MC was involved in an accident, there was no good reason presented as to why he did not attempt or have someone attempt to retrieve his computer from the truck afterwards. Additionally, no attempts were made to determine whether the software used retains information in the cloud and could therefore be recoverable.

Taxpayer had poor record-keeping practices

In addition to not having his tax software records, the court also found that MC had a “casual” financial record-keeping system. He told the court he would pay for expenses on the road with a personal credit card and would be reimbursed by the corporation. However, he did not keep records of these transfers since it was a “family business”.

The corporation did not have a bookkeeper, and all receipts were kept at MC’s home. He neglected to bring these receipts with him to court. Instead, MC provided the court with a one-page summary outlining the revenue and expenses of the corporation for two of the three tax years in question.

The court found the numbers provided to be suspect, noting that fuel costs were listed at exactly $15,000, with food costs listed at exactly $2,000.

The court found that it could not assign much credibility to the position taken by MC because he failed to support that position with evidence. The court said these were likely estimates but had no way of knowing without being able to review the source documents.

Court forced to rely on CRA’s assessment due to lack of evidence from taxpayer

Due to MC’s failure to provide any records, the court found it had to rely on the CRA’s assessment of the tax years being investigated. The formula the CRA used was to look at the gross income reported on the corporation’s HST returns and apply an estimate of 30% for operating expenses.

The court found this approach to be a reasonable one, especially considering the circumstances, writing,

“In light of the complete absence of source documents, and serious concerns about the reliability of the summaries, the corporation has not disproved, on a balance of probabilities, the assumptions of fact underlying the Minister’s assessment of tax for each of the corporation’s 2012, 2013, and 2017 taxation years.”

The court also turned to allegations that the corporation did not file income tax returns for 2012, 2013, or 2017. The CRA sought to apply penalties for a failure to submit. However, MC told the court that he did file them but provided no evidence to support this assertion. MC had inconsistencies in his story, as he alternately advised the court that he filed his returns on time or filed them a year late.

Once again, the court found that on a balance of probabilities, the CRA’s assessment of the corporation’s income and the penalties imposed for a failure to file taxes.

Contact the Feigenbaum Law for Experienced Tax Compliance Advice

One of the best decisions a business can make is to work with experienced tax professionals, such as the tax team at Feigenbaum Law. Led by Mark Feigenbaum, the firm provides proactive guidance to ensure clients and their businesses meet their tax obligations in either Canada or the United States. We also represent clients in disputes with the CRA or the courts regardingCRA’s formula audits, assessments, or other tax litigation. Contact us online or by phone at 1-877-275-4792 to discuss how we can help you.

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