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Taxation law

The end of a tax saga!

Mar 16th, 2021

By Frédéric Delisle

Spiegel Sohmer Inc. is proud to have assisted its client, the late Mr. Massoud Pourafzal, and his estate (together the "Taxpayer"), in a dispute concerning notices of reassessment issued by Revenu Québec ("RQ"). In a detailed decision dated January 27, 2021, available here, the Court of Quebec reviews this tax saga which ended with the complete cancellation of said notices.

Succinctly, the Taxpayer was audited by RQ using the so-called “cash flow” method. The audit was conducted by four different auditors and took almost four years to complete. In the end, RQ issued notices of reassessment for years 2001, 2002 and 2003 on June 2, 2008. The Taxpayer immediately filed an objection. Nearly four years passed before an objection decision was rendered, on January 10, 2012. By virtue of said decision, the Taxpayer's supposedly unreported income for the relevant years was reduced but remained significant. The Taxpayer then filed a motion to institute proceedings with the Court. For various reasons, it was not until eight years later that the case proceeded on the merits.

In rendering its judgment, the Court was careful to note all of the arguments raised by the Taxpayer against the reassessments issued. As a result, the decision is a good reference for structuring both factual and theoretical arguments to challenge reassessments issued following a "cash flow" audit. The arguments include the appropriateness of using an alternative method, the reliability of the particular method used, the prescription of the years assessed and the resulting burden of proof, and a series of examples of problematic adjustments made by RQ.

More than 15 years after the Taxpayer's audit began, the Court agreed with the Taxpayer, noting the lax work of the auditors and RQ's inability to demonstrate the merits of its position.

Interestingly, an expert was retained by the Taxpayer in this case. RQ objected to the filing of the expert report into evidence. Although the decision on this objection was an interim decision prior to the hearing on the merits, the fact remains that the Court rejected RQ's objection and accepted the filing of the report and the testimony of the expert witness. Thus, the present case reconfirms the appropriateness of using an expert in the context of challenging "cash flow" reassessments.

It was an honor for our firm to assist the Taxpayer in his challenge of the reassessments issued and to obtain a complete victory in this case. If you are facing reassessments issued by RQ, including via the use of an alternate audit method, please do not hesitate to contact Spiegel Sohmer Inc.’s tax litigation team.