Statute-Barred Periods: UNREPORTED INCOME

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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