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Taxation law

Re-opening of a prescribed year: not enough to assume

Feb 9th, 2021

By Frédéric Delisle

On January 25, 2021, the Quebec Court of Appeal rendered a short and very interesting decision regarding the burden of proof that tax authorities must meet in order to legitimately issue a notice of reassessment for a prescribed year. The decision Boies v. Quebec Revenue Agency (2021 QCCA 107) is available here.

The decision under appeal was rendered by the Honourable Pierre Labbé of the Court of Québec (Administrative and Appeal Division), District of Trois-Rivières, on November 29, 2018. The case involved an audit of the taxpayer for years 2005 to 2007 using a "cash flow" audit approach. As a result of the audit, substantial amounts of "unreported" income were added to the taxpayer's reported income.

It should be noted that the taxpayer offered little cooperation during the audit and at the objection level. Furthermore, the taxpayer showed a certain laxity in the management of the file before the Court of Quebec. Also noteworthy is that the taxpayer admitted having failed to properly declare some income and accepted adjustments for year 2007 for additional income totalling approximately $142,000.

The trial judge ratified the notices of assessment issued to the taxpayer. The taxpayer then appealed. According to the Court of Appeal, the taxpayer appeared to want to reiterate the factual arguments that had been submitted to the trial judge. The Court of Appeal therefore rightly pointed out that its role was not to evaluate factual evidence de novo, and that its intervention with respect to an evaluation of the facts could only be justified if there was a manifest and determining error, which was not the case for years 2006 and 2007.

However, and we believe this to be the most relevant aspect of the decision, the Court noted that the reassessment for year 2005, unlike those for 2006 and 2007, was not presumed to be valid. Indeed, the year 2005 was statute-barred at the time the relevant notice of reassessment was issued, such that the Respondent had to demonstrate the presence of a misrepresentation of the facts that was attributable to negligence or wilful default, or the presence of fraud, in order to justify the notice of reassessment issued.

The Court noted the following:

The trial judge concluded that the 2005 Notice of reassessment was well-founded because, in his view, "the preponderant evidence reveals that [the taxpayer] had made misrepresentations". However, he did not indicate on what elements he based this conclusion. The mere existence of misrepresentations on certain facts admitted by the taxpayer for year 2007 does not, in the absence of other elements, make it possible to infer that he made misrepresentations in all of his returns and to assess him for prescribed years on that basis alone. (our translation and our emphasis)

The Court then concluded that "[...] the judge's conclusions for year 2007 cannot simply be transposed to year 2005 without further justification" (our translation).

Thus, it is not sufficient for the Agency to show that there was some misrepresentations in order to benefit from a presumption as to the existence of other misrepresentations. On the contrary, it is the Agency's obligation to demonstrate the presence of misrepresentations for each year that is reassessed when such year is statute-barred. Another relevant conclusion is that the failure by a taxpayer to reverse the presumption of validity of a notice of reassessment issued for a non-prescribed year is not sufficient justification for the re-opening of a prescribed year.