John's case study: Back Taxes - John Saves $60,000 at Tax Court
by The Tax Doctors
Another stellar day in tax court for Tax Doctors Canada
We represented a client (John) on an informal basis at Tax Court recently and saved John approximately $60,000. John had an interesting situation. John’s tax returns were audited for a number of years – about four years. He operated a small insurance business and enjoyed a bit of gambling on the side.
Canada Revenue Agency (CRA) uses various techniques to estimate a taxpayer’s tax liability. They will use notional assessments and net worth assessments as tools to create a tax balance that they think you owe. An example of a notional assessment would be CRA using prior year income levels to estimate the tax payable for subsequent years. This could result in an overvalued amount, and this happens quite often.
Then net worth assessment is another tool in the tax auditor’s tool box. If CRA believes that you are not reporting an appropriate amount of income to support your lifestyle, they will use statistics to estimate a tax liability. If you own a BMW, a house, a cottage, and other expensive assets, CRA will conclude that you had to earn enough money to pay for the assets. For example, if your net assets (assets less liabilities) are worth $500,000, CRA’s base revenue number could be $500,000; this could result in approximately a $200,000 tax bill. A nice Christmas present!
In John’s situation, CRA used a net worth assessment to create a tax bill. They used statistics from Statistics Canada to determine reasonable living expenses and concluded that he must have earned sufficient income to at least cover living expenses. We provided the auditor with numerous receipts; however, she did not take the time to compile the receipts - a poor effort on the tax auditor’s part. We provided the auditor and the tax counsel with the compiled receipts. With the receipts totalled, we were able to substantiate the actual expenses to claim as a deductible expense.
The tax auditor also included debt that was used for gambling purposes as income; this was incorrect. Capital transactions are not income. The tax auditor assumed that ALL deposits were revenue. John used his credit card to gamble. He would borrow $10,000 from the credit card then pay it back at the end of the gabling session. Based on this example, the tax auditor would include $20,000 as revenue. This type of transaction occurred many times.
With John’s situation, the tax auditor used the net worth assessment approach to estimate John’s tax bill. This is a very arbitrary approach that is used by auditors and can result in a very high and incorrect tax bill. In the end, we reduced John’s tax bill by approximately $60,000.
The certified general accountants at Tax Doctors Canada look at the overall big picture and implements tax strategies and tax planning components that best serves the client’s interest. Not only do Tax Doctors Canada aggressively take care of any current back tax / tax audit issues, our tax accountants make sure that the client has proper tax management and tax planning strategies in place so as to best avoid future tax related problems with the CRA and maximize on tax savings. An ounce of prevention is worth a pound of cure!
If you are a small business owner, you likely have your hands full managing your company; handling your tax obligations is probably the last thing on your mind. At Tax Doctor’s Canada, we can help. We have a team of professional tax accountants who will provide you with the assistance you need to manage your business taxation. In addition, we have helped numerous clients file appeals and fight CRA re-assessments, thereby reducing their tax obligations and saving them cash.