Recently, on June 6, 2011, the Tax Court of Canada released its decision in Long Ha v. The Queen. I will admit that I read the case because of the name of the appellant. The case was actually very interesting (from a factual perspective).
This case involved a sole proprietorship that was assessed income tax and goods and services tax (GST) on a net worth assessment basis. The main focus of the appeal was the GST assessment. Interestingly, Mr. Ha was partially successful in showing that CRA's net worth calculation was incorrect.
Most interesting is how the case began. On June 8, 2002, Mr. Ha was returning to Canada and was sent to a secondary inspection by the Canada Border Services Agency. In the secondary search, $40,000 in cash was discovered. The matter was referred to the Royal Canadian Mounted Police (RCMP) who did not seize the cash. However, the RCMP were not satisfied with Mr. Ha's explanations as to why he had such a large amount of cash in his possession, the RCMP sent a referral to the Canada Revenue Agency (CRA) who reviewed Mr. Ha's income tax returns. The CRA found that the $40,000 was not explained by Mr. Ha's income tax returns. The CRA took the position that Mr. Ha had unreported income from business (Mr. Ha was a salal picker and fisherman). The CRA conducted a net worth assessment based on a bank deposit analysis, bank statements, mortgage applications and mortgage statements. The schedule for personal expenditures was calculated using Statistics Canada information to estimate the costs for a single individual. The CRA assessed Mr. Ha income tax and GST.
Mr. Ha conceded that his income was under reported. However, he disputed the CRA's net worth calculation as too high. The CRA felt Mr. Ha's calculation of his unreported income was too low. The Tax Court had to find the right answer. The Tax Court found that Mr. Ha's evidence was not credible. His explanation concerning the $40,00 changed each time he told it. When he was stopped in the Vancouver International Airport, he told the authorities that the $40,000 in his possession was from his employment as a fisherman and from a restaurant business. On December 12, 2004, he told a CRA auditor that the $40,000 was from his savings, salal picking and a few hundred dollars from friends. At the hearing before the Tax Court, Mr. Ha testified that the $40,000 was a loan or gift given to him.
After determining that Mr. Ha's evidence was not credible, the Tax Court found that the evidence of a number of witnesses was credible. As a result, the Tax Court reduced the net worth assessment by the certain amounts that, based on the evidence, were not attributable to business activities (e.g. were loans, insurance proceeds, transfer from spouse, a withdrawal from an RRSP, etc.).