Bousfield – Attacking net-worth assessments and other alternative assessment techniquesPublished by Chris Canning & Morgan Watchorn
Bousfield v. The King, 2022 TCC 169, is a recent decision of the Tax Court of Canada that addresses “alternative assessment techniques”. The decision serves as a helpful guide to both the legal bases for such techniques and the methods by which taxpayers can attack them. The decision also includes instructive comments regarding the responsibility of the Crown (as the Respondent) to properly plead the assumptions of fact made by the Minister of National Revenue (the “Minister”) in reassessing the taxpayer.
What are alternative assessment techniques?
The Court first highlights the difference between three concepts: “arbitrary assessments”, “alternative assessment techniques”, and “net-worth assessments”. Simply put, arbitrary assessments are issued by the Minister with little—if any—analysis, whereas alternative assessment techniques involve a more detailed analysis undertaken by the Minister to determine the taxpayer’s income. A “net-worth assessment” is only one example of an alternative assessment technique.
Subsection 152(7) of the Income Tax Act (Canada) empowers the Minister to use alternative assessment techniques. Importantly, the Minister is not restricted to using such techniques only when the taxpayer’s books and records are inadequate. Thus, an argument that the Minister should not have used an alternative assessment technique will not be successful on its own.
How can taxpayers attack alternative assessment techniques?
The Court set out five methods that taxpayers can employ to successfully dispute alternative assessment techniques:
- Taxpayers can show that their income can more accurately be calculated by using their own books and records.
- Taxpayers can attack components of the Minister’s alternative assessment technique to reduce the calculation of their income.
- If the taxation year is statute barred, taxpayers can show that the alternative assessment technique is fundamentally flawed.
- Taxpayers can present a different alternative assessment technique that more accurately calculates their income.
- Taxpayers can show that the income calculated under the technique was, in fact, from a non-taxable source, such as a gift.
The Respondent must properly plead assumptions
The Court emphasized that alternative assessment techniques are buttressed by the Respondent’s ability to rely on assumptions of fact. In filing his Reply, the Respondent pleads the assumptions of fact that the Minister made when assessing the taxpayer. Those assumptions of fact are presumed to be true unless the taxpayer leads evidence to demolish those assumptions.
The importance of assumptions of fact in attacking alternative assessment techniques differs when taxpayers are appealing statute-barred years versus non-statute-barred years. When the years under appeal are statute barred, as in the third avenue of attack, the Respondent cannot simply rely on assumptions of fact, because he bears the burden of justifying the issuance of a statute-barred reassessment. He must instead prove that the taxpayer had unreported income. In those circumstances, if the taxpayer can show that the Minister’s technique is fundamentally flawed, then the technique must be abandoned.
In contrast, if the year is not statute barred, the Respondent can rely on assumptions of fact that the Minister made in determining the taxpayer had the amount of unreported income determined by the alternative assessment technique. Demonstrating that the technique used was fundamentally flawed is insufficient for the taxpayer to succeed.
However, the Court set out an important caveat: to benefit from assumptions of fact made by the Minister, the Respondent must properly plead those assumptions in the Reply. Even if it is clear that the Minister made certain assumptions, if those assumptions are not set out in the Reply, the Respondent cannot rely on those assumptions and must instead adduce evidence to prove the relevant facts.
In the context of alternative assessment techniques, this means that the Respondent must plead all assumptions forming the basis for the technique—not just the final outcome. If the Respondent fails to do so, then he will be required to prove those elements for which there is not a properly pled assumption.
After setting out the above guidance, the Court addressed Mr. Bousfield’s case. Mr. Bousfield operated a taxi and transportation business in Regina. He personally operated his taxi some of the time. At other times, he employed other drivers and split the revenue equally with them. Mr. Bousfield collected most of his revenue in cash. He also earned a relatively small amount of his revenue electronically, which was collected and distributed to him by a dispatch company. The Court found that Mr. Bousfield’s records of cash revenue collected were scattered and incomplete.
Mr. Bousfield failed to file income tax returns for his 2006 and 2007 taxation years. The Minister first issued arbitrary assessments to estimate Mr. Bousfield’s revenue from the taxi business. Mr. Bousfield subsequently filed income tax returns for his 2006, 2007, and 2008 taxation years. The Minister then employed four different alternative assessment techniques, calculating income using the average of the four techniques, to reassess Mr. Bousfield’s 2006 and 2007 taxation years and assess his 2008 taxation year. Mr. Bousfield appealed those (re)assessments to the Tax Court.
The Court first reviewed the four alternative assessment techniques the Minister used. Ultimately, the Minister assessed Mr. Bousfield by taking the average income calculated using these four techniques. The Court found that none of the techniques accurately computed Mr. Bousfield’s income.
In reaching that conclusion, the Court found that the Respondent had not properly plead the assumptions of fact that supported any of the four alternative assessment techniques. Although the Reply did include the assumptions regarding the Minister’s conclusions on the amount of unreported income determined using each technique, it did not include many of the underlying assumptions supporting the techniques themselves. For example, the first technique was based on average income of other taxi drivers in the industry, but the assumptions regarding that average income were not included in the Reply. Without those assumptions, the Respondent would need to lead evidence to prove the average income earned by other taxi drivers in the industry, and the Respondent did not do so.
Aside from the evidentiary issue, the Court also noted that there were significant flaws with the techniques themselves. As noted above, however, unless taxation years are statute barred (and in this case none were) the taxpayer cannot succeed by showing only that the technique used was fundamentally flawed. Mr. Bousfield was still required to present the Court with a more accurate method of computing his income.
The Court had no difficulty finding that Mr. Bousfield’s books and records were unreliable and an inadequate means of computing his income. As an alternative, Mr. Bousfield presented three of his own alternative assessment techniques, one of which was a net worth assessment technique.
Ultimately, however, the Court was not satisfied with any of them. Importantly, for a taxpayer to rely on an alternative assessment technique, all elements of the technique must be supported by evidence—taxpayers cannot rely on assumptions. Here, the Court was not satisfied with Mr. Bousfield’s evidence.
Faced with seven flawed alternative assessment techniques, the Court relied on the evidence that it had accepted to employ its own alternative assessment technique, which it held most accurately reflected Mr. Bousfield’s income.
Bousfield is a comprehensive and well-reasoned decision that provides a framework for taxpayers and their representatives in disputing alternative assessment techniques.
There are two notable takeaways from Bousfield:
- In disputing an alternative assessment technique, unless the relevant year is statute barred, taxpayers must either (1) present the Court with a more accurate method of calculating their income; or (2) address specific elements of the technique itself. If the relevant year is statute barred, then taxpayers can also succeed by showing that the technique is fundamentally flawed.
- Taxpayers and representatives should always carefully review the assumptions of fact set out in the Reply. Where certain assumptions are not properly pled, taxpayers can argue that the Respondent must adduce evidence to prove the relevant facts.