The Power of Assumption: A Tax Context

Marco Iampieri B.A., JD, M.B.A.

The Canada Revenue Agency (“CRA”) is a body corporate that, inter alia, carries out the duties and functions of the Minister of National Revenue (“Minister”). The CRA routinely audits Canadian taxpayers in order to ensure compliance with various taxation legislation, including the Income Tax Act and the Excise Tax Act.

During the audit of a taxpayer that is subject to Canadian tax, the CRA proceeds on assumptions. Assumptions in this context are understood to mean the facts, with or without a clear basis on the reviewed books and records, that were present in the mind of the CRA auditor or auditors at the time of assessing the taxable income of a taxpayer.

The power of assumption is unique to the Minister. In order for a taxpayer to succeed on an income tax appeal, the taxpayer must disprove ministerial assumptions. Reassessments of tax are deemed to be valid notwithstanding any error, defect or omission in the assessment under subsection 152(8) of the Income Tax Act.

Essentially, the CRA is granted a wide scope of assumption abilities by the Income Tax Act in order to accurately administer the Income Tax Act and ensure compliance from those that are subject to the tax legislation.

So What?

When a taxpayer does not agree with their tax assessment or reassessment, assumptions play a large part regarding whether the Tax Court of Canada will uphold or vacate the assessment or reassessment.

In order to challenge a tax assessment, the burden of proving that the reassessment is incorrect is on the taxpayer.

1. The burden of proof in taxation cases is that of the balance of probabilities (51% and above). (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman))
2. With regard to the assumptions on which the Minister relies for his assessment, the taxpayer has the initial onus to “demolish” the assumptions. (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman))
3. The taxpayer will have met his initial onus when he or she makes a prima facie case. (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman))
4. Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by providing, on a balance of probabilities, the assumptions. (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman))
5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed. (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (Hickman))

A taxpayer may attack or demolish the Minister’s assumptions by:

• challenging the Minister’s allegation that he did assume those facts; (Pillsbury Canada Ltd. v. Minister of National Revenue, [1964] C.T.C. 294, [1965] 1. E. C.R. 676, 64 D.T.C. 5184)
• assuming the onus of showing that one or more of the assumptions was wrong; (Pillsbury Canada Ltd. v. Minister of National Revenue, [1964] C.T.C. 294, [1965] 1. E. C.R. 676, 64 D.T.C. 5184) or
• contending that, even if the assumptions were justified, they do not of themselves support the assessment. (Pillsbury Canada Ltd. v. Minister of National Revenue, [1964] C.T.C. 294, [1965] 1. E. C.R. 676, 64 D.T.C. 5184)

The taxpayer must attack or demolish the Minister’s assumptions through compiling and raising evidence. Once the taxpayer raises a case above 50% that a particular Ministerial assumption is untrue, the Minister has an opportunity to rebut the taxpayer’s case. Finally, if the Minister fails to adduce satisfactory evidence after the taxpayer has raised a prima facie case, the taxpayer will succeed. For a recent example of the role of assumptions at the Tax Court of Canada, click here.

Key Takeaway

Assumptions in a tax context are fundamental ‘facts’ that must be explored and understood by any Canadian taxpayer who does not agree with their tax assessment or reassessment.

Assumptions play an important role during the audit of a taxpayer and should not be overlooked.

Advisors must be aware of the role of assumptions during a tax assessment in order to mitigate client risk of an increased liability to tax.

Additional educational resources:  Be sure to enrol in the September 23 CE Summit to see Marco speak while taking in GST, financial statement and payroll audit-proofing tips and traps. Early registration ends September 15, and if you sign up by August 23, you receive your lunch included!

Check out the full agenda and enrol here