Judge Gives Lesson in Record-Keeping
In the recent Tax Court of Canada decision in Malik v. The Queen, Judge Hershfield was clearly frustrated by the record-keeping (or lack thereof) of Mr. Malik, a resident of Canada of Pakistani origin. Judge Hershfield's written reasons also demonstrate that the testimony of the Appellant lacked credibility. The decision is an interesting read from the perspective of watching a judge struggle to be fair when he knew that the taxpayer was spinning facts.
There are many lessons to be taken from this decision. Judge Hershfield wrote a number of paragraphs dealing with record-keeping in the Canadian tax system. Other taxpayers can benefit from reading the lessons. Two of my favorite passages are:
[18] ...The Canadian tax system is based on a self-reporting system. This applies to new Canadians, who venture into new business activities in Canada, as much as it applies to seasoned business persons. The lack of proper accounting records and supporting documents, in this case, has not only made it impossible to determine with any degree of certainty the actual business income of the Appellant but it is further blurred by an organizational structure emanating in Pakistan. Such arrangements must be documented in such a way so as to identify with certainty the legal nature of the relationships of the parties as well as their income entitlements so as to permit consistent and legally effective income and expense allocations amongst the various jurisdictions in which these enterprises operate.
...
[31] One last comment on the reporting obligations and the bank deposit methodology used in this case lest the Appellant has not learned something in the course of these assessments and the prosecution of his appeals. Two things should be obvious from this Judgment. One is that both the Appellant’s domestic and foreign business arrangements need to be organized and structured, in a legal manner, with appropriate documentation in place to support the filing position arising from that legal structure. Secondly, a bookkeeper or accountant is going to sooner or later have to show the Appellant that business bank accounts need be segregated to account for all business transactions and that each and every bank entry requires a support ledger that indicates the nature of the entry and the background to it. Behind that ledger are the physical documents that support or evidence the explanation of the entry. Without the latter supporting documentation, ledgers will become questionable and will lose their value in supporting a particular treatment in respect of bank statement entries.
It is important to note that Judge Hershfield attempted to take into account cultural differences and language issues. At the end of the day, the judge could not find that the auditor was wrong.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
