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Income tax — expenses against unreported income

My client was an immigrant to Canada with little familiarity with Canadian accounting requirements. He had been running a group of storefront retail businesses, within his ethnic community, that dealt entirely in cash. He reported only minimal income on his annual tax returns.

The CRA found out about his activities, reviewed his bank deposit records, and assessed him for some $900,000 of unreported income over three years. Including interest and gross negligence penalties, his total income tax debt was $740,000. He had his bookkeeper file a simple Notice of Objection. When the CRA Appeals Officer asked him for documentary support for his objection, he came to me for help. He had spent a lot on expenses for the business, but had very poor records.

I worked with my client to have him track down expense records from various companies he had dealt with; in some cases he had to visit these companies and ask them for printouts from their records. I was also able to document that one bank account the CRA thought belonged to my client had never been in his name, so the deposits to that account were excluded from the calculation. I pressed my client to obtain copies of all cancelled cheques from his chequing accounts, and from those was able to prove a lot of his expenses.

Using all this information, I pieced together an account to explain the business and its expenses, and to show that my client's profits were far lower than the gross revenue amounts that the CRA presumed. I advised my client not to contest the gross-negligence penalties, as they were certain to be upheld.

The Appeals Officer was reasonable, and I worked with her to reach a reasonable compromise on all the issues. At the end of the day, the CRA reassessed to the amounts we agreed, and my client's total income tax bill went down from $740,000 to $303,000.

An excellent result, given the starting point and the lack of proper records. My client was able to pay off his debt without losing all of his assets.

(2015)