Tax Court Allows Appeals Against Minister's Reassessments

OUTCOME: Allowed

Docket: 2022-69(IT)G BETWEEN: [APPELLANT] Appellant, and HIS [NAME] [NAME], Respondent . Appeals heard on common evidence with the appeals of [APPELLANT]. (2022-70(IT)G) and [APPELLANT] (2022-71(IT)G), on January 3,4 and 5, 2025 at Oakville, Ontario and continued on January 30, 2026 at Toronto, Ontario Before: The [[NAME]. [NAME] [NAME] : Counsel for the Appellant: [redacted] Counsel for the Respondent: [redacted] The appeals made under the Income Tax Act with respect to the [NAME] 2014, 2015 and 2016 taxation years are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that : The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2014 taxation year be reduced by $103. The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2015 taxation year be reduced by $292. The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2016 taxation year be reduced by $730.50. The penalties computed under subsection 163(2) be adjusted to give effect to the adjustments resulting from the reductions set out above. Signed this 14th day of May 2026. “[NAME]. [NAME]” [NAME[NAME]. Docket: 2022-70(IT)G BETWEEN: [COMPANY]., Appellant, and HIS [NAME] [NAME], Respondent. Appeals heard on common evidence with the appeals of [NAME] [APPELLANT] (2022-69(IT)G) and [APPELLANT] (2022-71(IT)G), on January 3, 4 and 5, 2025 at Oakville, Ontario and continued on January 30, 2026 at Toronto, Ontario Before: The [NAME] J. [NAME] [NAME] : Counsel for the Appellant: [redacted] Counsel for the Respondent: [redacted] [NAME] [COUNSEL] The appeals made under the Income Tax Act with respect to the [NAME] taxation years ending April 30, 2015 and April 30, 2016 are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that: The [NAME] net business income for its taxation year ending April 30, 2015, be reduced by $2,500. The penalties under subsection 163(2) be deleted for the taxation years ending April 30, 2015, and April 30, 2016. Signed this 14th day of May 2026. “[NAME]. [APPELLANT]” [APPELLANT[NAME]. Docket: 2022-71(IT)G BETWEEN: [APPELLANT], Appellant, and HIS [NAME] [NAME], Respondent. Appeals heard on common evidence with the appeals of [NAME] [APPELLANT] (2022-69(IT)G) and [APPELLANT] [NAME] [APPELLANT]. (2022-70(IT)G), on January 3, 4 and 5, 2025 at Oakville, Ontario and continued on January 30, 2026 at Toronto, Ontario Before: The [NAME] J. [NAME] [NAME] : Counsel for the Appellant: [redacted] Counsel for the Respondent: [redacted] The appeals made under the Income Tax Act with respect to the [NAME] 2014, 2015 and 2016 taxation years are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that: The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2014 taxation year be reduced by $103. The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2015 taxation year be reduced by $292. The [NAME] personal expenditures set out in Schedule IV of the net worth analysis utilized in determining the [NAME] income for the 2016 taxation year be reduced by $730.50. The penalties computed under subsection 163(2) be adjusted to give effect to the adjustments resulting from the reductions set out above. Signed this 14th day of May 2026. “[NAME]. [NAME]” [NAME[NAME]. Citation: 2026 TCC 84 Date: 20260514 Docket: 2022-69(IT)G BETWEEN: [NAME] [APPELLANT], Appellant, and HIS [NAME] [NAME], Respondent; Docket: 2022-70(IT)G AND BETWEEN: [COMPANY]., Appellant, and HIS [NAME] [NAME], Respondent; Docket: 2022-71(IT)G AND BETWEEN: [APPELLANT], Appellant, and HIS [NAME] [NAME], Respondent.

REASONS FOR

JUDGMENT [NAME[NAME].

I. INTRODUCTION [ 1 ] The individual [NAME], [NAME] [APPELLANT] ( “Mr. [APPELLANT]” ) and [APPELLANT] ( “Ms. [APPELLANT]” ) appeal from reassessments made under the Income Tax Act (the “Act” ) for each of their 2014, 2015 and 2016 taxation years. The corporate appellant, [APPELLANT]. ( “[NAME]” ) appeals from reassessments for its taxation years ending April 30, 2015, and 2016 (the “2015 and 2016 taxation years” ). The appeals were heard together on common evidence. I will refer to Mr. [APPELLANT], Ms. [APPELLANT] and [NAME] collectively as “the [NAME]” . Unless indicated otherwise, all statutory references will be to the Act. [ 2 ] [NAME] is owned by [NAME]. [APPELLANT] in equal shares. Mr. [APPELLANT] is a long‑haul freight transport truck driver. Before 2011, Mr. [APPELLANT] operated as a sole proprietor carrying on a [NAME]. In 2011, he transferred this business to [NAME]. Since the inception of the business, Ms. [APPELLANT] has done all of the related office work for the business, including the bookkeeping. [NAME]. [APPELLANT] are immigrants to Canada from Poland. They each learned English as their second language. [ 3 ] Using a net worth analysis, the [NAME] (the “Minister” ) reassessed each of [NAME]. [APPELLANT] to include unreported income for the 2014, 2015 and 2016 taxation years as follows: Mr. [APPELLANT]: 2014 $46,527 2015 $79,033 2016 $51,855 Mrs. [APPELLANT] 2014 $46,527 2015 $79,033 2016 $51,855 [ 4 ] For each of these taxation years the Minister assessed penalties under subsection 163(2) against each of [NAME]. [APPELLANT]. [ 5 ] The reassessments of the 2014 taxation year were made beyond the normal reassessment period for each of [NAME]. [APPELLANT]. [ 6 ] As a result of these net worth analyses, the Minister determined that [NAME] had unreported business income of $116,051 for the 2015 taxation year and $121,980 for the 2016 taxation year. The Minister also assessed penalties against [NAME] under subsection 163(2).

II. ISSUES [ 7 ] The issues to be determined in these appeals are as follows: Was the Minister justified in reassessing each of [NAME]. [APPELLANT] beyond the normal reassessment period for the 2014 taxation year? Was the Minister justified in reassessing [NAME]. [APPELLANT] to include as unreported income the amounts set out above for the applicable taxation years? Was the Minister justified in reassessing [NAME] to include as unreported business income the amounts set out above for the 2015 and 2016 taxation years? Was the Minister justified in imposing penalties under subsection 163(2) on each of the [NAME] for each of the taxation years under appeal? III. WITNESSES [ 8 ] [NAME]. [APPELLANT] appeared as witnesses for the [NAME]. I found the testimony of each of these witnesses to be credible and reliable. [ 9 ] The Respondent called one witness. Mr. [RESPONDENT] is an auditor with the Canada Revenue Agency (the “[NAME]” ). Mr. [NAME] has worked for the [NAME] for approximately 10 years in various capacities. He received a chartered professional accountant designation in 2021. Mr. [NAME] performed the audits with respect to the [NAME] which resulted in the reassessments under appeal. I found his testimony to be reliable and credible.

IV. ANALYSIS A. Was the Minister Justified in [NAME]. [APPELLANT] beyond the Normal Reassessment Period for the 2014 Taxation Year? [ 10 ] Under subsection 152(4), the Minister may reassess beyond the normal reassessment period determined under subsection 152(3.1) where the [NAME] has made a misrepresentation in the filing of returns or the provision of information due to carelessness, neglect, wilful default or fraud. [ 11 ] Under subsection 152(4), the Minister bears the burden of establishing that [NAME]. [APPELLANT], in this case, first, made a misrepresentation and secondly, that the misrepresentation so made was due to carelessness, neglect, wilful default or fraud. In these appeals the Minister has not alleged fraud. [ 12 ] A misrepresentation occurs when there is a false statement on a return. In [NAME] v Canada , 96 DTC 6588, at paragraph 8 the Federal Court of Appeal stated as follows: It appears to me that one purpose of subsection152(4) is to promote careful and accurate completion of tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment . It remains a misrepresentation even if the Minister could or does, by careful analysis of the supporting material, perceive the error on the return form. It would undermine the self‑reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time. [underlining added] [ 13 ] At the beginning of the trial of these matters, [NAME]. [APPELLANT] conceded that mistakes were made in the returns that each filed for the taxation years at issue, including the 2014 taxation year. As discussed below, counsel’s main concern in these appeals was the reassessments made against [NAME], which counsel argued were fundamentally flawed and therefore should be vacated. With respect to the reassessments against [NAME]. [APPELLANT], counsel argued that the reassessment amounts are not accurate. However, he conceded that there were nevertheless shareholder appropriations made by [NAME]. [APPELLANT] that were not accounted for in their returns. [ 14 ] As [NAME]. [APPELLANT]’s returns filed for the 2014 taxation year contain incorrect statements, which given the amounts at issue, as described below, were material, misrepresentations were made for purposes of subsection 152(4). [ 15 ] The next question is whether such misrepresentations were made due to carelessness, neglect or wilful default. [ 16 ] The standard of care required for purposes of subsection 152(4) is that of a wise and prudent person. In [COMPANY]. v Canada , [1991] 1 CTC 297 at page 299, Justice MacGuigan of the Federal Court of Appeal quoted with approval, the following words of the trial judge in that matter, Justice Addy: Where a [NAME] thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 ( 1056 [COMPANY]. v. Canada , [1989] 2 CTC 1, 89 DTC 5287). In [NAME] (J.) v. [NAME] , [1989] CTC 151; 89 DTC 5385 at 176 (DTC 5403), [NAME], J. quotes with approval the following statement by [NAME]. in the above case: Subsection 152(4) protects such conduct, and perhaps only such conduct, where the [NAME] thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the [NAME] bona fide believes does not exist . [Emphasis added] It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the [NAME] truly believes to be correct… [ 17 ] It is the Respondent’s position that in filing their tax returns for the 2014 taxation year, neither Mr. nor Ms. [APPELLANT] exercised the standard of care of a wise and prudent person. [ 18 ] On cross‑examination, Ms. [APPELLANT] described the process by which the returns for the couple were prepared, reviewed and filed. She testified that after [NAME] was incorporated, a [NAME] was retained to prepare the returns for [NAME], Mr. [APPELLANT] and herself. Ms. [APPELLANT] said that she would provide bank statements and other information as requested by the [NAME] and the [NAME] would then prepare and file the necessary returns. She testified that she didn’t remember seeing the returns, reviewing them or asking any questions. She testified that she recalled that the accountant would tell her the amount of tax owing by her and Mr. [APPELLANT]. She would then pay the amounts so directed. She said that she felt it unnecessary to check the work of the [NAME]. She relied on their expertise which is why she paid them. [ 19 ] Mr. [APPELLANT]’s testimony revealed that he took even less interest in the preparation and filing of the couple’s tax returns. He left it to Ms. [APPELLANT] to deal entirely with the [NAME]. He could not recall ever meeting with the accountant. He, too, testified that he never reviewed any of the tax returns prepared by the accountants and never asked any questions. [ 20 ] In [COMPANY]. v. R. 2009 TCC 409, Justice Bowie explained that the standard to be applied in considering whether to allow an assessment beyond the normal reassessment period was lower than the standard to be applied when considering whether to impose a penalty under subsection 163(2). At paragraph 13, Justice Bowie stated as follows: In examining this question it is important to remember that the purpose of subparagraph 152(4)(a)(i) is simply to preserve the Minister’s right to reassess a [NAME] in circumstances where the [NAME] has not divulged all that he should have, as accurately as he should have, and thereby has denied the Minister the opportunity to assess correctly all of the [NAME] liability under the Act in the first instance. It is not at all concerned with establishing culpability on the part of the [NAME]. Other provisions of the Act are in place to do that. Mr. [NAME] relies on the following statement that I made in an oral judgment: There may well be circumstances in which misrepresentations are made in reliance on the advice of an accountant or other professional where it was reasonable to do so and where negligence of that professional advisor does not have the effect of establishing misrepresentation for the purposes of subsection 152(4). I am satisfied that this is not such a case,… Clearly this statement was obiter dictum . More important, it does not accord with the decisions of [NAME]. in [NAME] v. R. , and of [NAME]. (as he then was) in Snowball v. R. [NAME[NAME]. explained in Snowball the significant difference in the effect of negligence of a [NAME]’s accountant or other tax preparer between cases where the assessment is made after the normal reassessment period and those cases where the Minister has imposed a penalty under subsection 163(2): In any event, even if Mr. [NAME] was negligent, it is no answer to an otherwise statute‑barred assessment under subparagraph 152(4)(a)(i). It is quite true that the negligence of an accountant may be a defence to a penalty under subsection 163(2): [NAME] v. [NAME] , 70 D.T.C. 6019 (Ex. Ct.). Subparagraph 152(4)(a)(i) is not a penal provision. It serves an altogether different purpose from section 163(2). Negligence in the preparation of an income tax return retains its consequences under subparagraph 152(a)(i) whether it is the negligence of the [NAME] personally or that of the accountant or other tax return preparer who is his or her agent. In [NAME] v. The Queen , 96 DTC 6045, [NAME[NAME]. held that a [NAME] could not shield himself from the effect of subparagraph 152(4)(a)(i) by blaming his accountant. The same considerations apply here. [ 21 ] Similarly, [NAME]. [APPELLANT] cannot shield themselves from the application of paragraph 154(2) by pointing to the advice they received from the [NAME] they retained to prepare their tax returns. In not reviewing the income tax returns that were prepared by their accountant and in fact showing a complete disinterest in the preparation of such returns they did not meet the standard of care of a wise and prudent person. [ 22 ] The Minister therefore was justified in reassessing [NAME]. [APPELLANT] beyond the normal reassessment period for the 2014 taxation year. B. Was the Minister justified in reassessing each of [NAME]. [APPELLANT] to include as unreported income the reassessed amounts for the 2014, 2015 and 2016 taxation years? [ 23 ] At the commencement of the trial of these appeals the parties filed a Partial Agreed Statement of Facts, which included the following statements:

1. The Minister reassessed [Ms. [APPELLANT]’s] and [Mr. [APPELLANT]’s] personal tax liability using the net worth method covering the 2014, 2015 and 2016 taxation years.

2. As a result of that net worth analysis , the Minister determined that [[NAME]] had unreported business income for the taxation year ending in 2015 and 2016. [underlining added] [ 24 ] Except for a couple of adjustments which, during the course of the trial, the parties largely agreed upon, the [NAME] did not challenge the amounts the Minister reassessed against [NAME]. [APPELLANT] using the net worth method. Rather, the [NAME] focus was the appropriateness of the Minister’s determination that [NAME] had unreported business income, which determination, as the parties agreed, resulted from the net worth analysis performed by the Minister in respect of [NAME]. [APPELLANT]. [ 25 ] Accordingly, before considering whether the Minister was justified in his reassessment of [NAME] to include unreported income, it is necessary to first consider the legal underpinnings of the net worth method utilized by the Minister in its assessment of [NAME]. [APPELLANT]. [ 26 ] The method was explained by Justice Lafleur in [NAME] v. [NAME] , 2024 TCC 121 at paragraph 48 as follows: The reassessments at issue were made by applying the net worth method to Mr. [NAME] financial situation. This method is “…based on an assumption that if one subtracts a [NAME]’s net worth at the beginning of a year from that at the end, adds the taxpayers expenditures in the year, deletes non‑taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the [NAME], must be attributable to unreported income earned in the year, unless the [NAME] can demonstrate otherwise” ( Bigayan v. R (1999), [2000] 1 CTC 2229, [2000] DTC 1619 at para. 2 [ [NAME] ]). The courts have recognized that a net worth assessment is an arbitrary and imprecise approximation of a [NAME]’s income, but: Any perceived unfairness relating to this type of assessment is resolved by recognizing that the [NAME] is in the best position to know his or her own taxable income. Where the factual basis of the Minister’s estimation is inaccurate, it should be a simple matter for the [NAME] to correct the Minister’s error to the satisfaction of the Court ( [NAME] v. R , 2001 FCA 240, at para. 30).

Accordingly, Mr. [NAME] bears the onus to identify the source of income and to show, on a balance of probabilities, that it is not taxable. Mr. [NAME] will have to prove, on a balance of probabilities, the facts justifying his position. Alternatively, Mr. [NAME] can also challenge the net worth reassessments by establishing that the net worth method was inherently flawed. As indicated by the Court in Bigayan (supra, at paras. 3‑4):

3. The best method of challenging a net worth assessment is to put forth evidence of what the [NAME]’s income actually is. A less satisfactory, but nonetheless accepted method is described by [NAME]. in [NAME] v. [NAME] , 49 DTC 680 at page 683: In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete “net worth” basis the assessments were wrong.

4. This method of challenging a net worth assessment is accepted, but even after the adjustments have been completed one is left with the uneasy feeling that the truth has not been fully uncovered. Tinkering with an inherently flawed and imperfect vehicle is not likely to perfect it. The appellant chose the second method. More recently in [APPELLANT] v. R. , 2017 TCC 22 (at para. 36, aff’d 2018 FCA 6, leave to appeal to the Supreme Court of Canada dismissed), the Court has indicated that a [NAME] may challenge an alternative assessment issued under subsection 152(7) in one of the following ways: by challenging its necessity or method chosen in the first instance, by challenging specific aspects of the quantum, methodology or inclusions or by submitting evidence concerning non‑taxable sources of income received by the [NAME]. [ 27 ] As indicated by Justice Lafleur in the passage quoted above, the statutory basis for use of the net worth method is subsection 152(7), which provides as follows: The Minister is not bound by a return or information supplied by or on behalf of a [NAME] and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part. [ 28 ] In [NAME] v. R , 2001 FCA 240 at paragraph 22, the Federal Court of Appeal determined that that this provision empowers the Minister to “issue “arbitrary” assessments using any method that is appropriate in the circumstances” . [ 29 ] In [NAME] v. [NAME] , 2022 TCC 169, Justice Graham explained the meaning of an “arbitrary assessment” by comparing the term with the terms, “alternative assessment” and “net worth assessment” . Justice Graham wrote at paragraph 9 as follows: Alternative assessment techniques are sometimes called “arbitrary assessments” or “net worth assessments”. However, these three terms have very different meanings. An arbitrary assessment is an assessment that the Minister issues with little, if any, analysis usually with the goal of prompting a [NAME] who has failed to file a tax return to do so. By contrast, an alternative assessment technique involves some level of analysis and calculation (often very detailed) in an attempt to determine the [NAME]’s income or revenue. A net worth assessment is one type of alternative assessment technique. While net worth assessments are perhaps the most common form of alternative assessment technique, referring to all alternative assessment techniques as net worth assessments is both inaccurate and potentially confusing. [ 30 ] Justice Graham goes on to note at paragraph 16 that while subsection 152(7) sanctions the use of arbitrary or alternative techniques, it does not establish a specific technique that must be used. Nor does it specify limits on when such a technique may be used. For example, he notes that while the alternative assessment technique is often used where the Minister determines that a [NAME]’s books and records are inaccurate, such a determination is not a prerequisite for the use of an alternative assessment technique. At paragraph 18, Justice Graham writes: [ADDRESS] does not have to be satisfied that it was necessary for the Minister to use an alternative assessment technique. The Minister can use an alternative assessment technique at any time regardless of the state of the [NAME]’s records. [ 31 ] At paragraph 46 of [NAME] , Justice Lafleur described the general rule with respect to which party carries the burden of proof before this Court as follows: As a general rule, in an appeal to the Court, the burden rests on the appellant. An appellant thus bears the burden of demolishing the Minister’s assumptions of fact and of proving, on a balance of probabilities, the facts justifying his or her position. On the other hand, the Minister has the burden of proving, on a balance of probabilities, the facts justifying the assessment of penalties under subsection 163(2) (subsection 163(3)) and the facts justifying reassessment beyond the normal reassessment period (subparagraph 152(4)(a)(i)). [ 32 ] Subsection 152(8) provides as follows: An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto. [ 33 ] At paragraph 23 of [NAME] , the Federal Court of Appeal confirmed that this provision maintains the general rule in this Court with respect to where the burden of proof lies in the instance of an arbitrary assessment. Justice Desjardins wrote: Subsection 152(8) grants a presumption of validity to these assessments and places the initial onus upon the [NAME] to disprove the state of affairs assumed by the Minister ( [NAME] v. [NAME] (1947), 3 DTC 1101 (Can. Ex. Ct.), at 1102). Notwithstanding the fact that such an assessment is “arbitrary”, the Minister is obliged to disclose the precise basis upon which it has been formulated ( [NAME] v. [NAME] (1948), 3 DTC 1182 ([NAME]), at 1183). Otherwise, a [NAME] would be unable to discharge his or her initial onus of demolishing the “exact assumptions made by the Minister but no more” ( Hickman Motors Ltd v. R (1997), 97 DTC 5363 ([NAME]), at 5376. [ 34 ] Having set out the legal underpinnings of alternative assessments, I will now turn to the specifics of the present appeal. [ 35 ] As mentioned, counsel for the Appellant did not challenge the Minister’s use of the net worth method with respect to the determination of [NAME]. [APPELLANT]’s unreported income in the taxation years in dispute. However, he did call into question certain aspects of the Minister’s calculations in an effort to reduce such income. [ 36 ] [NAME] questioned Mr. [COUNSEL] extensively during cross‑examination on the technical aspects of the audit process and the specifics of the various calculations made by Mr. [NAME] in completing the net worth assessments that were the subject of the appeals of [NAME]. [APPELLANT]. In my view, Mr. [APPELLANT] answered these questions in an honest and forthright manner. Despite the best efforts of [NAME], the cross‑examination did not expose, on a balance of probabilities, any errors in such calculations. [ 37 ] Further, the testimony of [NAME]. [APPELLANT] did not reveal any facts or evidence, which on a balance of probabilities challenged, much less demolished the essential assumptions relied upon by the Minister in determining their tax liability for the 2014, 2015 and 2016 taxation years. Those essential assumptions, as set out in the Replies prepared by the Minister in the appeals of each of [NAME]. [APPELLANT] include the following: [NAME]. [APPELLANT] are equal shareholders of [NAME]. Each of [NAME]. [APPELLANT] withdrew funds from [NAME]’s bank account and deposited them into their personal bank accounts. Each of [NAME]. [APPELLANT] used the funds so deposited to pay for personal living expenses, pay down personal debt and pay down the mortgage on their home. [NAME]. [APPELLANT] did not have adequate funds for their living expenses based on their reported taxable incomes. [NAME]. [APPELLANT] realized yearly changes in net worth as set out in a Schedule to each Reply. A copy of the Schedule which was attached to the Reply to Ms. [APPELLANT]’s Notice of Appeal, is attached to these Reasons as Appendix A. A nearly identical Schedule was attached to the Reply filed to Mr. [APPELLANT]’s Notice of Appeal. [NAME]. [APPELLANT] did not report all of their income in the 2014, 2015 and 2016 taxation years. In 2014, 2015 and 2016 [NAME]. [APPELLANT] funded their yearly changes in net worth and personal living expenditures, less their reported income, by funds appropriated from [NAME] and benefits conferred on each of them by [NAME] in their capacities as its shareholders. [NAME]. [APPELLANT] each received and failed to report income of $46,527, $79,003 and $51,855 in the 2014, 2015 and 2016 taxation years respectively. [ 38 ] At the trial of these appeals, counsel for the Respondent advised the Court that the Minister had agreed to reduce certain personal expenditures which were set out in Schedule IV to the net worth analysis completed with respect to [NAME]. [APPELLANT] and which is attached to the Partial Agreed Statement of Facts as Schedule IV to Appendix A. Such Schedule is attached hereto as Appendix B (see the horizontal column marked, “Accepted by Respondent” ). The agreed upon reductions are as follows: For the period January 1, 2014 to April 30, 2014, the Respondent conceded that the personal expenditures of [NAME]. [APPELLANT] should be reduced by a total amount of $206. For the period January 1, 2015, to April 30, 2015, the Respondent conceded that the personal expenditures of [NAME]. [APPELLANT] should be reduced by a total amount of $28. For the period May 1, 2015, to December 31, 2015, the Respondent conceded that the personal expenditures of [NAME]. [APPELLANT] should be reduced by a total amount of $556. For the period January 1, 2016, to April 30, 2016, the Respondent conceded that the personal expenditures of [NAME]. [APPELLANT] should be reduced by a total of $317. For the period May 1, 2016, to December 31, 2016, the Respondent conceded that the personal expenditures of [NAME]. [APPELLANT] should be reduced by a total of $1,144. [ 39 ] Apart from these agreed upon reductions in the personal expenditures of [NAME]. [APPELLANT], [NAME]. [APPELLANT] did not produce any evidence, which on a balance of probabilities, discharged their burden of demolishing the assumptions the Minister made in completing the reassessments at issue. [ 40 ] Accordingly, subject to the concessions set out above, the Minister was justified in reassessing each of [NAME]. [APPELLANT] to include as unreported income the reassessed amounts for their respective 2014, 2015 and 2016 taxation years. C. Was the Minister justified in reassessing [NAME] to include as unreported income the reassessed amounts for the 2015 and 2016 taxation years? [ 41 ] At the trial of these matters, the Respondent made a further concession with respect to the amount reassessed against [NAME] for its taxation year ending April 30, 2015. [ 42 ] [NAME]. [APPELLANT] testified that they had previously made a loan in the amount of $50,000 to a [NAME]. This amount was repaid by the [NAME] in their 2014 taxation year, together with $2,500 of interest. As part of the audit, the interest received from the [NAME] was included in the net worth analysis completed with respect to [NAME]. [APPELLANT]. For reasons explained below, such amount was also added to [NAME]’s unreported income for its taxation year ending April 30, 2015. [ 43 ] As [NAME]. [APPELLANT] testified that the source of this $2,500 was other than [NAME], the Respondent conceded that the amount included in [NAME]’s reassessment for the taxation year ending April 30, 2015, should be reduced by $2,500. [ 44 ] With respect to the remainder of the reassessments against [NAME], it is the position of the [NAME] that the technique utilized by the Minister in completing such reassessments is fundamentally flawed. Therefore, in the view of the [NAME], such reassessments must be vacated. [ 45 ] In his testimony. Mr. [NAME] explained the process he followed during the audit. He explained that in his view the records of all three [NAME] were generally unorganized, and insufficient for him to be able to complete a proper audit. He therefore undertook a net worth assessment with respect to [NAME]. [APPELLANT], which resulted in the discrepancies and the reassessments of unreported income against them, as discussed above. [ 46 ] He further testified that that he determined, after speaking with [NAME]. [APPELLANT] and their accountant, that due to the state of [NAME]’s records, he was unable to proceed with an in‑depth audit of [NAME]. [ 47 ] He testified that he completed a bank deposit analysis of [NAME]’s bank accounts, but he either did not, or could not, due to his view of the state of [NAME]’s records, undertake an in‑depth analysis of [NAME]’s expenditures, revenues, retained earnings or other accounts such as its shareholder loan account. [ 48 ] Rather he proceeded on the view that since [NAME] was the only known source of income for [NAME]. [APPELLANT] (apart from the interest paid by their [NAME]), the source of any unreported income assessed against them personally had to be [NAME]. Further, if [NAME]’s income for the taxation years at issue was less than the unreported income assessed against [NAME]. [APPELLANT] pursuant to the net worth assessment he undertook, then [NAME] must also have also earned unreported income.

Accordingly, for each dollar of deficiency between the total amount that was determined by virtue of the net worth assessment and the total income reported by [NAME]. [APPELLANT] for the taxation years at issue, one dollar of unreported income was included in the reassessments issued to [NAME]. [ 49 ] [NAME] argued that this assessment technique was fundamentally flawed. He argued that it did not involve any level of thoughtful analysis in an attempt to determine [NAME]’s actual revenue or income during the years in question. [ 50 ] He noted that on cross‑examination, Mr. [NAME] admitted that the bank deposit analysis completed with respect to [NAME]’s bank accounts did not reveal a significant deficiency when compared to the revenues reported and that such analysis contained a number of errors. Further, he noted that the evidence showed that there was little, if any, analysis completed with respect to [NAME]’s expenditures, paid up capital accounts, retained earnings and shareholder loan account. Without such analysis, the reassessments could not accurately reflect [NAME]’s financial position. [ 51 ] He argued that there could be several explanations for why [NAME]’s reported taxable income did not support the amounts determined to be the unreported income of [NAME]. [APPELLANT] pursuant to the net worth analysis completed with respect to them, apart from [NAME] having unreported income. Such explanations could include that [NAME] paid [NAME]. [APPELLANT] amounts out of retained earnings or had incurred past losses that reduced [NAME]’s net income in the years in question. Yet no fulsome analysis was undertaken by Mr. [NAME] of [NAME]’s actual financial situation in completing the reassessments against [NAME]. [ 52 ] Accordingly, in Counsel’s view, the technique utilized by the Minister in issuing such reassessments did not produce an accurate calculation of [NAME]’s actual revenues or income. [ 53 ] I agree. [ 54 ] However, that conclusion is not justification to vacate the reassessments against [NAME]. As described above, subsection 152(7), as it has been interpreted by various courts, at various levels, gives the Minister wide latitude in determining the technique it may utilize in assessing a [NAME], including an arbitrary assessment. Further, once the Minister assesses under subsection 152(7), subsection 152(8) deems that assessment to be valid subject to it being varied or vacated on an objection or appeal. [ 55 ] Admittedly, in many circumstances this may lead to a harsh result, including double taxation. For example, the technique employed by the Minister does not allow a corporation a deduction for the amounts deemed to have been earned by the corporation but then transferred to the shareholders and taxed fully in their hands. [ 56 ] While the result may be harsh, the use of the technique is consistent with the oft‑cited principle that in a self‑reporting tax system, such as Canada’s, it is the [NAME] that knows his or her situation best. It is therefore the [NAME]’s responsibility on an objection or appeal to demolish the assumptions made by the Minister in support of the assessment. [ 57 ] In its Reply to [NAME]’s Notice of Appeal, the Minister noted that in determining [NAME]’s tax liability for the taxation years at issue, the Minister’s assumptions of fact included the following: In 2014, 2015 and 2016 the discrepancy identified per the net worth of [NAME]’s shareholders were amounts appropriated by or benefits conferred on [NAME]. [APPELLANT] in their capacities as shareholders. In 2014, 2015 and 2016 the discrepancy identified per the net worth of [NAME]’s shareholders, was the result of unreported business income or over‑claimed expenses of [NAME], including personal expenses. For the 2015 and 2016 taxation years, [NAME] failed to report net business income in the amounts reassessed. [ 58 ] As Justice Graham points out in [NAME] , if the year in question is statute‑barred, it may be possible for a [NAME] to challenge a reassessment on the basis that an assessment technique utilized by the Minister is fundamentally flawed. This is because in such a situation, it is the Minister who carries the burden of proving its assumptions in order to open the statute‑barred year. However, where the years in question are not statute‑barred, as is the case in [NAME]’s appeal, it remains the responsibility of the [NAME] to demolish the Minister’s key assumptions made in support of the reassessment. [ 59 ] This could be done by showing, for example, that the unreported income assessed against each of [NAME]. [APPELLANT] was from a source other than [NAME], such as the interest paid by their [NAME]; by showing that the unreported amounts assessed against them were paid from accounts which would make the receipt of such amounts non‑taxable, such as a shareholder’s loan account or a paid- up capital account; or by presenting the Court with a viable alternative for determining [NAME]’s revenues or income in a manner that might explain why the amounts determined to have been appropriated by [NAME]. [APPELLANT] exceeded [NAME]’s reported income, such as [NAME]’s application of loss carry forwards. The [NAME] made no attempts to do so. [ 60 ] [NAME] may have been successful in demonstrating that the assessment method utilized by the Minister was flawed in that it did not portray an accurate picture of [NAME]’s actual financial situation. However, [NAME] was unable, on a balance of probabilities, to demolish the assumptions made by the Minister in issuing the reassessments against it. Such assumptions were based upon an assessing method allowed by subsection 152(7). Faced with such assumptions, [NAME] provided no evidence to prove, on a balance of probabilities, that either the source of the unreported income assessed against [NAME]. [APPELLANT] was other than [NAME] (apart from the repayment of the loan to a [NAME]) or that such income resulted from other than unreported income or overclaimed expenses within [NAME]. Subsection 152(8) makes it [NAME]’s burden to so. It did not discharge such burden. [ 61 ] Therefore, subject to the concession described above, the Minister was justified in reassessing [NAME] to include as unreported income the reassessed amounts for the 2015 and 2016 taxation years. D. Was the Minister justified in imposing penalties under subsection 163(2) on each of the [NAME] for each of the taxation years under appeal? (1) Penalties imposed against [NAME] [ 62 ] Subsection 163(2) allows the Minister to impose a penalty when the [NAME] “knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer”. [ 63 ] The burden of proving that a penalty imposed under subsection 163(2) is justified lies with the Minister. The Minister must prove, first that the [NAME] made a false statement or omission, and secondly that such false statement or omission was made knowingly, or under circumstances amounting to gross negligence. [ 64 ] In [NAME] v The Queen , [1984] CCT 223 (F.C.T.D), Justice Strayer explained the term “gross negligence” as follows at paragraph 37: “Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. [ 65 ] This explanation was cited with approval by the Supreme Court of Canada in [NAME] v Canada 2015 [NAME] 41 at paragraph 60. [ 66 ] Because gross-negligence penalties are intended to capture serious misconduct that goes beyond ordinary neglect or carelessness, the Federal Court of Appeal wrote in [NAME] v. Canada 2017 FCA 195 at paragraph 21 that the issue is whether the [NAME]’s conduct represents a “marked departure from the standards, practices, and due diligence expected of a [NAME]” . [ 67 ] In distinguishing gross negligence from negligence simpliciter, Justice Bowman stated in [NAME] v. The Queen 2004 TCC 147 at paragraph 68 that gross negligence “connotes a much greater degree of negligence amounting to reprehensible recklessness” . [ 68 ] In my view the Minister has failed to discharge its burden. The Minister failed to prove on a balance of probabilities that [NAME] made a false statement or omission. Further, the Minister failed to prove on a balance of probabilities that [NAME]’s conduct represented a marked departure from the standards and practices expected of a [NAME]. [ 69 ] The testimony of Ms. [APPELLANT], who was responsible for looking after the administrative functions of [NAME], including the bookkeeping, indicated that [NAME] retained the services of a [NAME] in the preparation of its tax returns. The retention of apparently competent professionals is consistent with the conduct expected of a [NAME]. [ 70 ] Nevertheless, in his testimony, Mr. [NAME] stated that in his view the books and records of the [NAME] were unorganized and insufficient. He stated that he came to this view after interviews with both [NAME]. [APPELLANT] and the [NAME] retained by [NAME]. However, there were few details given as to why he came to this view. [ 71 ] He pointed to a discrepancy he found in the revenues [NAME] reported following the completion of a bank deposit analysis of [NAME]’s bank accounts. However, on cross‑examination he admitted that the bank account analysis contained errors as it failed to properly account for several interbank transfers between of two of [NAME]’s bank accounts. He further admitted that when such interbank transfers were properly accounted for, there appeared to be no significant discrepancy in the revenues recorded by [NAME]. [ 72 ] Further, Mr. [NAME] testified that following his determination that [NAME]’s books and records were insufficient and that after noting the discrepancies he initially found following the completion of the bank account analysis (which was shown on cross‑examination to contain some errors) a complete analysis of [NAME]’s expenditures and key accounts such as its shareholders loan account was never undertaken. [ 73 ] Rather, he determined it prudent to proceed with the net worth analysis of [NAME]. [APPELLANT]. As discussed above, the reassessment of [NAME] was based entirely on the reassessment of its shareholders, following the completion of the net worth analysis with respect to such shareholders, and not on [NAME]’s own books and records or on any errors, intentional or otherwise, contained therein, including in [NAME]’s tax returns. [ 74 ] As the Minister, as part of its reassessment of [NAME], did not attempt to verify the information contained in [NAME]’s returns, the Minister was not in a position at trial to discharge its burden of proving on a balance of probabilities that [NAME] made false statements or omissions in its returns, much less that it conducted itself with a marked departure from the standards and practices expected of a [NAME]. [ 75 ] The Minister would have to discharge its burden with respect to both of these criteria to be able to successfully justify the imposition of penalties against [NAME]. It failed to discharge its burden with respect to either. [ 76 ] Accordingly, the penalties assessed against [NAME] should be deleted. (2) Penalties imposed against [NAME]. [APPELLANT] [ 77 ] The situation with respect to [NAME]. [APPELLANT] is different. [ 78 ] [NAME]. [APPELLANT] questioned some of the specific amounts set out in the reassessments in dispute, neither challenged the basis of the net worth assessments against them.

Accordingly, apart from the variances outlined above, the reassessments must stand. As discussed further below, the unreported income assessed against each of [NAME]. [APPELLANT] is material and must be considered omissions on the returns they filed for the 2014, 2015 and 2016 taxation years. [ 79 ] Despite this, it is the position of [NAME]. [APPELLANT] that the penalties assessed against each of them should be deleted. The pointed out that English was a language they learned largely after they had immigrated to Canada from Poland. Neither of them had any formal training in the Canadian tax system and both had spent their formative years and education under a communist regime that had no analogous system of taxation. [ 80 ] Further, they argued that they had displayed a desire to comply with their Canadian tax obligations by hiring a [NAME] to assist them in preparing their returns and that they had relied on the advice and expertise of such [NAME] in filing such returns. They also noted that they had only incorporated [NAME] in 2011. Prior to that, Mr. [APPELLANT] had operated a long‑haul [NAME] operation as a sole proprietor. Although the change of structure likely had some benefits, it also brought a host of compliance obligations with which they were unfamiliar and which proved difficult for them to navigate in the midst of carrying on their business and raising their family, which is why they relied heavily on the advice of the [NAME] they retained. [ 81 ] The evidence also indicated that they had at least a general awareness of a shareholder loan account within [NAME], although neither could specify how the account was intended to operate. Although it was not stated directly, it seems that the inference they wanted the Court to draw was that they understood that as a result of this account they had the ability to extract funds from [NAME] in repayment of such loans. Amounts so repaid would not be included in their incomes. [ 82 ] However, neither put into evidence the total amounts they understood they had forwarded to [NAME] as a loan, or the amounts that [NAME] repaid to them over time. Mr. [NAME] testified that he did not undertake an audit of the shareholder loan account because of his assessment of the poor state of records kept by the [NAME]. [ 83 ] For purposes of completing the net worth assessments, he therefore accepted the shareholder loan amounts reported in [NAME]’s income tax returns. Those amounts indicated shareholder loan balances of $11,581, $29,577 and $21,875 for the 2014, 2015 and 2016 taxation years, respectively. The [NAME] did not introduce any evidence to contradict these amounts. [ 84 ] Mr. [NAME] testified that he did not deduct these amounts from the unreported income assessed. He noted that such assets could be accessed at a future date and that the books and records of [NAME] did not indicate that any loan amounts were repaid during the years at issue. No evidence was provided as to the current balance of the shareholder loan accounts. [ 85 ] In determining whether these penalties should be deleted, I considered whether penalties should be imposed on shareholders with the degree of tax sophistication proclaimed by [NAME]. [APPELLANT], where they reasonably believed that they were extracting amounts as loan repayments. However, the net worth method utilized by the [NAME] resulted in [NAME]. [APPELLANT] being assessed unreported income which would materially exceed their reported incomes, even if the shareholder loan amounts reported in [NAME]’s income tax returns had been deducted. [ 86 ] The Minister pointed to the following variances between [NAME]. [APPELLANT]’s reported incomes and the incomes assessed as a result of the application of the net worth method: [NAME] Income per Assessment Variance Ms. [APPELLANT] – 2014 $4,939 $51,466 $46,527 Ms. [APPELLANT] – 2015 $19,523 $98,526 $79,003 Ms. [APPELLANT] – 2016 $30,707 $82,563 $51,855 Mr. [APPELLANT] – 2014 $38,622 $85,184 $46,527 Mr. [APPELLANT] – 2015 $29,104 $108,107 $79,003 Mr. [APPELLANT] – 2016 $40,415 $92,270 $51,855 [ 87 ] In my view the variances (omissions from the tax returns) set out above are so consistently large over a sustained period of time, that they can only be explained, in the absence of any other credible explanation, by a high degree of negligence which in the words of the Justice Strayer in [NAME] is “tantamount to intentional acting, an indifference to whether the law is complied with or not” . [ 88 ] With respect to the burden of proof carried by the Minister, in cases such as this where it would be very difficult, if not impossible, to show direct evidence of the [NAME]’s state of mind when returns were filed, the Federal Court of Appeal noted the following in [NAME] v. Canada , 2004 FCA 349 at paragraph 4:

4. Once the Ministère establishes on the basis of reliable information that there is a discrepancy, and a substantial one in the case at bar, between a [NAME]’s assets and his expenses, and that discrepancy continues to be unexplained and inexplicable, the Ministère has discharged its burden of proof. It is then for the [NAME] to identify the source of his income and show that it is not taxable. [ 89 ] In this case, the Minister successfully established a discrepancy between the net income reported by [NAME]. [APPELLANT] and their change in net worth utilizing the methodology described above. [NAME]. [APPELLANT] have not substantially challenged that methodology (focusing instead on a challenge of the methodology utilized in the reassessment of [NAME]). Moreover, they have not introduced evidence to explain the material discrepancies made apparent by the Minister’s utilization of that methodology. [ 90 ] In my view, the Minister has discharged it burden. The imposition of the penalties against [NAME]. [APPELLANT] under subsection 163(2) is therefore justified.

V.

CONCLUSION [ 91 ] The appeals of Mr. [APPELLANT]’s 2014, 2015 and 2016 taxation years are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that: his personal expenditures set out in Schedule IV of the net worth analysis utilized in determining his income for the 2014 taxation year be reduced by $103; his personal expenditures set out in Schedule IV of the net worth analysis utilized in determining his income for the 2015 taxation year be reduced by $292; his personal expenditures set out in Schedule IV of the net worth analysis utilized in determining his income for the 2016 taxation year be reduced by $730.50; the penalties computed under subsection 163(2) be adjusted to give effect to the adjustments resulting from the reductions set out above. [ 92 ] The appeals of Ms. [APPELLANT]’s 2014, 2015 and 2016 taxation years are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that: her personal expenditures set out in Schedule IV of the net worth analysis utilized in determining her income for the 2014 taxation year be reduced by $103; her personal expenditures set out in Schedule IV of the net worth analysis utilized in determining her income for the 2015 taxation year be reduced by $292; her personal expenditures set out in Schedule IV of the net worth analysis utilized in determining her income for the 2016 taxation year be reduced by $730.50; the penalties computed under subsection 163(2) be adjusted to give effect to the adjustments resulting from the reductions set out above. [ 93 ] The appeals of [NAME]’s taxation years ending April 30, 2015, and April 30, 2016, are allowed, without costs, and referred back to the [NAME] for reconsideration and reassessment on the basis that: its net business income for its taxation year ending April 30, 2015, be reduced by $2,500. the penalties under subsection 163(2) be deleted for the taxation years ending April 30, 2015, and April 30, 2016. Signed this 14th day of May 2026. “[NAME]. [NAME]” [NAME[NAME]. Appendix A Appendix B CITATION: 2026 TCC 84 COURT FILE NOS.: 2022-69(IT)G, 2022-70(IT)G, 2022-71(IT)G STYLES OF CAUSE: [NAME] [APPELLANT] v. HIS [NAME] [NAME], [COMPANY]. v. HIS [NAME] [NAME], [APPELLANT] v. HIS [NAME] [NAME] OF HEARING: Oakville, Ontario and Toronto, Ontario DATES OF HEARING: June 3, 4 and 5, 2025 and January 30, 2026

REASONS FOR

JUDGMENT BY: The [NAME] J. [NAME] [NAME] OF

JUDGMENT: May 14, 2026 APPEARANCES: Counsel for the Appellant: [redacted] Counsel for the Respondent: [redacted] [COUNSEL] COUNSEL OF RECORD: For the Appellant: [redacted] [APPELLANT]: [NAME] 390 [ADDRESS] [POSTCODE] For the Respondent: [redacted] Ottawa, Canada