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Tax assessments: the “alternative assessment method”: last resort, otherwise, we’ll see you in court!

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Tax litigation

Quebec taxpayers are required to do their fair share to ensure that the provincial government is able to deliver the services and infrastructures to which it is committed to providing. «Fair share» first means compliance with Quebec’s self-reporting tax system, thus implying, in part, the taxpayer’s obligation to act as an agent of the Crown by collecting consumer taxes, maintaining accurate records and submitting an income tax return when required by law.

On that topic, this article reviews a recent decision in a Tax Law case, Peluso v. Agence du revenu du Québec (ARQ), rendered on May 28, 2014.

Never Underestimate the Power of a Credible Testimony 

The Court reiterated the importance of credible testimony at a trial to defend a taxpayer’s position. Too often, in oppositions, the opposing officers representing the taxation authorities demand new documents and place little or no credence on the taxpayer’s version. However, this recent decision reminds them to give serious consideration, during an audit and at each stage thereof, to the testimony presented by both the taxpayer and his accountant.

It is prudent to remember that, when the accounting was deemed lacking by the taxation authority, but was ultimately adequate for the Court, the trial judge, Armando Aznar, quashed the notice of reassessment resulting from an “alternative assessment method” used by the ARQ, which, for example, may assume additional, undeclared income. Thus, an accountant may not be forced to use an alternative method from the moment his accounting is deemed less than perfect by an auditor.

Can Your Lifestyle Help You in a Tax Law case?

Tax legislation assumes that re-assessment notices issued by the Minister are valid, but the Minister must demonstrate diligence before issuing assessments based on this type of method.

Therefore, this decision highlights the fact that the taxation authority failed to review Peluso’s lifestyle to check whether the assumption of additional undeclared income was plausible. Judge Aznar wrote, at paragraph 31 of the judgment:

[TRANSLATION] «The evidence also showed that the Appellant and his wife, Ms. Christina Peluso, had a modest lifestyle completely incompatible with that of persons with undeclared business income in the amounts by the Defendant. (ARQ)»

Thus, when a taxpayer is facing re-assessment based on an alternative assessment method, the results must coincide with the reality and the following questions must be asked. Did the auditor review the taxpayer’s lifestyle? Is it plausible to claim that there was undeclared income? Etc.

If not, the re-assessment may be successfully contested in Court if need be.

Sonia Rotondo, Attorney-at-Law
Alepin Gauthier avocats inc.

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