The Burden of Proof in CRA Disputes: What Taxpayers Must Show
One of the most common misconceptions amongst taxpayers involved in disputes with the Canada Revenue Agency (“CRA”) concerns who bears the burden of proof. Many taxpayers assume that if the CRA reassesses them, the CRA must prove that its reassessment is correct. In most cases, that assumption is incorrect.
The General Rule
The burden of proof determines two key things:
- Who must present evidence; and
- Who loses if the evidence does not meet the applicable standard.
In Canadian tax law, the general rule is that the taxpayer bears the burden of proving that the CRA’s assessment is wrong.
CRA assessments are presumed to be correct unless and until the taxpayer demonstrates otherwise. Practically, this means the taxpayer must disprove the factual assumptions underlying the CRA’s assessment.
What the Taxpayer Must Prove in a CRA Dispute
First, the taxpayer must identify the CRA’s assumptions of fact. Every assessment or reassessment rests on one or more assumptions. Common examples include assumptions of unreported income, personal expenses claimed as business expenses, or real estate dispositions giving rise to GST/HST obligations.
Second, the taxpayer must present credible and reliable evidence that contradicts those assumptions. This may include financial records, bank statements, accounting reports, invoices, receipts, and email or other correspondence. Unsupported explanations are rarely sufficient on their own.
The Standard of Proof: Balance of Probabilities
CRA disputes are decided on the balance of probabilities. This means the taxpayer must show that their version of events is more likely than not. Absolute certainty is not required. However, cases often fail where there are inconsistent explanations, gaps in documentation, or credibility concerns.
Before the Tax Court of Canada in particular, credibility is critical. A logical, consistent narrative from a credible taxpayer, supported by documents, can succeed even if the records are not perfect.
The Importance of Documentation
Because the burden of proof usually rests with the taxpayer, proper record-keeping is essential. Poor or missing documentation significantly weakens a taxpayer’s ability to challenge a CRA assessment.
For example:
- Written agreements can demonstrate that amounts received were loans or gifts rather than income.
- Invoices and receipts can establish that expenses were incurred to earn income.
- Emails or correspondence may show that professional tax advice was sought and relied upon.
Often, the absence of records leads to an unfavourable outcome for the taxpayer.
When the Burden Shifts to the CRA
In Canadian income tax disputes, the taxpayer generally bears the burden of disproving the Minister’s assumptions underlying an assessment on a balance of probabilities. There are, however, important statutory and jurisprudential exceptions where the onus rests with the CRA instead.
One key exception is gross negligence penalties under subsection 163(2) of the Income Tax Act, where the Minister must prove a high degree of negligence tantamount to intentional conduct or indifference to the law to sustain the penalty. Another is reassessments of statute-barred years under subsection 152(4), where the CRA bears the burden of establishing, on a balance of probabilities, that the taxpayer made a misrepresentation in the return and that the misrepresentation was attributable to neglect, carelessness, wilful default, or fraud before it may validly reassess an otherwise time-barred year. Outside of these and similar specific situations prescribed by the Act or developed in the case law, the ordinary rule typically exists that the taxpayer carries the onus in challenging an assessment.
Not Sure What to Do About Your CRA Dispute?
Tax controversies with the CRA require more than accounting support. They demand legal expertise grounded in Canadian tax law. Rosen & Associates helps clients navigate CRA disputes with confidence and precision.
If you are facing a CRA assessment or reassessment, or have been contacted regarding potential unreported income, deductions, or GST/HST issues, it is important to act quickly. Schedule a free consultation with Rosen & Associates Tax Law to discuss your situation and protect your financial interests.
Rose Zhang