McLeod et al. v. R. – TCC: Net Worth Assessment Trials Don’t Top Court’s Wish List

Bill Innes on Current Tax Cases New Window

McLeod et al. v. The Queen[1] (August 28, 2013) is a fairly routine net worth assessment case involving the owner of a restaurant and the corporation operating the restaurant.  There are two somewhat unusual aspects of the case.  In the first place the Crown alleged that all of the undisclosed income was hidden in the taxpayer’s shareholder loan account with the corporation operating the restaurant.  Secondly, the taxpayer was successful in substantially reducing the assessment.  He did that by calling credible evidence that a portion of his loan account derived from funds he had borrowed and lent to the restaurant.  He called the lenders as witnesses and much, although not all, of the evidence was accepted.  Secondly he demonstrated that a large amount of the funds were posted to his loan account in error and that error was subsequently reversed.

The court upheld penalties against the individual taxpayer for 2003 but not for 2004 since his unreported income for 2004 was reduced from $164,749 to $9,673.  The court upheld penalties against the corporate taxpayer for both 2003 and 2004.

Perhaps the most interesting aspect of this decision is the court’s characterization of net worth assessment trials:

[58]        There is a reason net worth assessment trials are not at the top of Tax Court judges’ list of favourite cases. The Respondent often flies by the seat of its pants, having received insufficient source documents and often little cooperation, and consequently relying on guess work and gross assumptions; for example, that Mr. McLeod has only one asset, no liabilities and the determination of that asset is suspect. Not a well founded starting point.

[59]        The Appellant often suffers from sloppiness or lack of attention to detail or bookkeeping that may result in inaccurate reported income, but pleads the huge numbers suggested by the CRA simply do not make sense: for example, a restaurant business doing poorly, renovating for eight months and surviving for a couple of years is unlikely to have an additional $250,000 revenue over a two year period, especially when for eight months of those two years it was closed for renovations. As always, reality is likely somewhere between the opposing positions. Such cases scream out to be settled, something I suggested to the Parties but was met with a complete absence of enthusiasm. Indeed, each side represented they wanted to make submissions on costs depending on my Judgment.

[66]        In the circumstances, I make no award of costs, but should either Party wish to make costs submissions, I ask that they do so by September 30, 2013.

Such candour is refreshing.

[1] 2013 TCC 269.