Anyone who has been audited will tell you about the amount of time they spent compiling receipts, bank statements, and other documentation to refute assessments made by an auditor. Once an auditor has made their determination of what a taxpayer owes, it seems like the burden of proof is solely on the taxpayer to refute their calculations, no matter how outlandish they might be. However, while taxpayers do bear the burden of disproving auditors’ determinations, auditors also have a burden of proof that their methodology must meet.
Tax Audits and the Reasonable Minimum Standard
The conduct and methodology of auditors are subject to a “reasonable minimum standard”. If the auditor’s work meets that standard, then the burden of proof shifts onto the taxpayer to show that the auditor’s calculations are incorrect.
There are cases where auditors’ assessments were overturned because they were not reliable or credible enough to reasonably be enforced. In the leading case Huyen v The Queen, Revenue Quebec was conducting an audit of a convenience store by monitoring the store for three months and extrapolated that data onto a thirty-nine month period. This methodology is quite commonly used by auditors but is often flawed. The court ruled that the CRA has a duty to perform tax audits which meet a minimum standard of reliability, and overturned the audit. The fact that the taxpayer bears the ultimate burden of proof does not excuse incomplete or superficial work.
The application of this principle on auditors’ has not been entirely reliable. In Telus Communications (Edmonton) Inc v. the Queen, the taxpayer was also audited using the extrapolation method, but the data was applied to a much smaller time frame than in the previous case. The court ruled that the reasonable limits standard will vary with the circumstances, and in that case, the methodology was reasonable.
However, the Tax Court did not back off completely; it actually widened its power to intervene in future cases. It held that the court has discretion in making adjustments for the benefit of the taxpayer where it appears likely that the methodology used by the CRA is not fair to the taxpayer. This might occur when the methodology is inconclusive and produces a range of possible figures, and the CRA enforces calculations most favourable to their position. When the methodology applied is not conclusive, the CRA is expected to give some benefit of the doubt by resolving ambiguity in favour of the taxpayer.
Overall, it is possible to overturn a reassessment from an audit by showing that the auditing methodology is flawed, and fails to meet the reasonable minimum standard. If you are currently being audited or have been reassessed as the result of an audit, you should reach out to one of our highly skilled lawyers at Rosen Kirshen Tax Law, who can evaluate the methodology used by the CRA and help you challenge the reassessment successfully.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.