The Onus of Proof: Details Are Required

Dr. Mike Orth Inc. v. The Queen 2013 TCC 123. Does solicitor-client privilege trump the CRA’s requirement for a detailed burden of proof?

This was the subject of an interesting case that found its way to the Tax Court of Canada through the informal procedure. The taxpayer appealed its 2003 and 2004 reassessments claiming that the Minister of National Revenue ("Minister") denied its deduction for legal fees, and based the reassessments "on erroneous assumptions of fact and law". The appellant also claimed and that it was entitled to amortize or deduct the legal fees it incurred throughout the period in question.

The appellant taxpayer stated that its position was complaint with the Income Tax Act (the Act) and stated that the Minister had "insisted on receiving a detailed description of the specific legal services provided to the corporation in incurring the legal fees”, but that this information was subject to solicitor client privilege. The appellant declared that it did provide the Minister with a "general description of the nature of the legal services" as an "alternative method of substantiating the nature of the legal fees."

The Minister was of the opinion that the invoices did not satisfy the requirement of subsection 230(1) of the Act which requires every person carrying on a business in Canada to keep records and books of account in such form and containing such information as will enable taxes payable under the Act to be determined.

Counsel for the appellant taxpayer stated that one of the privilege issues was that the auditor of the Canada Revenue Agency ("CRA") wanted access to the contents of the files of the appellant's solicitor. The Crown denied the accusation, saying that the CRA auditor simply wanted more detail than was on the documents provided. That position was supported. Here is why:

When making an assessment, the Minister proceeds on assumptions of fact that lead him or her to assess in a particular manner and the onus is on the taxpayer to, as Justice L’Heureux-Dubé put it in the case of Hickman Motors,  “demolish”  those assumptions.

“… this initial onus of "demolishing" the Minister’s assumptions is met where the appellant makes out at least a prima facie case.” (para 93)

If this is met, the Minister must then rebut. So what constitutes a prima facie case? Well the Supreme Court of Canada has stated in Stewart v. Canada that a prima facie case is one:

“supported by evidence which raises such a degree of probability
in its favour that it must be accepted if believed by the Court unless
it is rebutted or the contrary is proved. It may be contrasted with
conclusive evidence which excludes the possibility of the truth of
any other conclusion than the one established by that evidence.”

The onus will not be swung back to the Minister lightly then, and claiming privilege over certain documents, while legally permissible, can cause problems as the appellant found out in this case. Taxpayers claiming privilege must consider the possible consequences. Those who wish to shift the onus must still make a case that will survive cross‑examination, and this may entail releasing some of that privileged information to the CRA.

The appellant in this case was largely denied the relief sought due to insufficient evidence, although some of the claims it made were believed. At paragraph 51 of his decision, Rip CJ stated:

“Mr. Olson’s evidence, for the most part, lacked precision. Mere
generalities describing the purpose of the legal fees without additional
explanation or corroboration are not helpful. I felt that I was given
partial access to a story, a headline that may or may not be at all
descriptive of the story under the heading. This makes it difficult for
me to agree with appellant's counsel that I have to accept Mr. Olson's
testimony because he is a lawyer and the person who he invoiced is
a client at arm's length. While Mr. Olson's credibility is not in issue, the
evidence he gave is not convincing. I note that the principal of the
appellant did not testify. The appellant did not make out a prima facie 
case as described by Trudel J.A. in Stewart and Huddart J.A. in
Northern Properties Corp. so as to rebut the Minister's assumptions
on many of  the expenses underlying the assessments.”

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

Source: http://decision.tcc-cci.gc.ca/en/2013/2013tcc123/2013tcc123.html