Is The Burden Of Proof In Tax Litigation Always On The Taxpayer?

• Published date: 15 November 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Miller Thomson LLP
• Author: Ms Marie-Hélène Tremblay

Burden of proof is a complex subject in Canadian tax litigation and has been heavily debated in recent years. While many mistakenly think the concept can be summarized by the often-heard phrase "the burden of proof in tax matters is on the taxpayer," it is actually much more complicated and has many exceptions. While the general rule is that the factual assumptions made by the tax authorities in support of assessments are presumed to be valid¹ and the prima facie burden to "demolish" the assumption is on the taxpayer, some assumptions are not presumed valid: for example, factual assumptions that are not within the exclusive knowledge of the taxpayer. A recent interlocutory decision issued by the Tax Court of Canada ("TCC") on February 22, 2022 in the case of Hong Kong Style Café Ltd.² directly addresses whether certain factual assumptions made by the tax authorities in support of assessments were deemed to be valid.

Hong Kong Style Café Ltd. decision

In this case, the tax authorities conducted a tax audit of two companies (Hong Kong Café Ltd. and Emerald Seafood Restaurant Ltd.) and one individual (Mr. Decade Chun Ping Or, a restaurateur). During the audit, the tax authorities used a sales estimation method based on an e-commerce audit algorithm. They concluded that the companies had used "zapping" software to delete transactions from their records. This of course would have resulted in under-reporting of sales (income tax) and associated sales tax. The CRA assessed consumption taxes on the allegedly unreported sales. The appellants, through their interlocutory motion, sought to strike out certain factual assumptions on which they claimed the assessments in dispute were based.

Appellants' position

The appellants argued that the tax authorities' evidence was based primarily on data from the use of the algorithm to estimate sales, and that it was the data from the algorithm that was the basis for certain factual assumptions supporting the assessments in dispute. According to the appellants, the facts arising from the use of the algorithm were exclusively within the tax authorities' knowledge, and the appellants would have had to incur significant costs to disprove these assumptions. As such, the burden of proof with respect to these assumptions should be borne by the tax authorities.

Tax authorities' position

The tax authorities argued that the factual assumptions...