Unreported Income: Statute-Barred Periods

Unreported Income: Statute-Barred Periods

In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash flow analysis method, meaning that cash received was considered taxable income unless it could be shown that it  was from a non-taxable source, such as a gift or a loan.

Originally, the taxpayer’s son was under audit.  After it was noted that several transactions had occurred between the taxpayer and his son, the taxpayer came under audit.

The taxpayer argued that several items were not taxable. They included:

  • tax refunds gifted from the son to the taxpayer;
  • insurance and car payments by the son;
  • repayment of a loan following a condo purchase that did not go through; and
  • various cash deposits.

The taxpayer argued that he had safety deposit boxes with large sums of money which was deposited over time to prevent his first wife, who had struggled with mental health issues and addictions, from stealing the money and supporting her drug habit. He also noted that he continued to collect money in the boxes following the divorce of the first wife and on into the relationship with his second wife. It was implied that the cash deposits above came from these safety deposit boxes.

In order to assess outside of the normal reassessment period for Quebec purposes, similar to federal law, the taxpayer must have misrepresented the facts through carelessness or wilful omission, or have committed fraud in filing the statement or in providing information.

Taxpayer wins

The Court noted the following which indicated that the criteria for reassessment outside of the normal reassessment period were not met:

  • the taxpayer’s file was not identified as being a risk file, and was only a secondary file to that of his son;
  • the taxpayer provided good cooperation and provided the documents requested of him (over 700 pages were provided); and
  • the taxpayer’s testimony, along with those of his sons, were credible and never seriously shaken.

As Revenu Québec did not demonstrate that the requisite level of misrepresentation was present, their reassessments were overturned. Further, the Court noted that, even if the test had been met, using the cash flow method in such a case, where many of the receipts were reasonably explained, would not have been justified.

ACTION ITEM: An audit of one person can trigger audits of others around them.  Ensure to maintain proper documentation and comply with auditor requests as best as possible (with professional assistance) to conclude and contain the audit efficiently.

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