The net worth method accounts the variation between the balance sheets of a taxpayer at different years. Should the increase of the net worth be impossible to reconcile with the taxpayer declared income in the intervening period, an audit may ensue. The method can and will be used when traditional methods failed due to deficiencies in books keeping, for example. It is the taxpayer obligation to explain that the increase is justifiable by nontaxable sources.
The wealth indicator approach was developed by ARQ. It uses information from a variety of data banks (luxury cars/Société de l’assurance automobile du Québec, travels, land and buildings/Québec Land Register, etc.) and compares the apparent wealth with declared income. When a discrepancy is obvious, the taxpayer will be subjected to an audit. The taxpayer is then asked to provide details on income, assets, debts, and all information needed to explain assets and lifestyle.
If the first ‘’polite tax authorities’ request‘’ doesn’t constitute a formal obligation to provide information, it will rarely be a good idea to refuse collaboration. Should the information provided be not satisfactory to the auditor, a reassessment can follow or a peremptory request for information, and probably an audit.
Before providing information to tax authorities, it is better to consult a professional who can assess potential problems and advise you on a secure path to proceed.
Net worth analysis
The Québec Government adopted laws which give it access to information on a taxpayer from numerous sources. The Québec Revenue Agency compares this information to the taxpayer’s declared income to identify discrepancies which may trigger an audit. We are well aware of the workings of the net worth method, and can establish if apparent deviations need to be addressed. Documentary evidence can justify variations of net worth. Legal deeds properly made are valid evidence that can satisfy the fiscal authorities.
Tax authorities’ request of information
The Québec Revenue Agency particularly will ask selected taxpayers by its wealth indicators program to fill in extended questionnaire. The tax authorities have legal backing to request information, but that power has its limits. We have the necessary acumen and experience to guide you through this process. Adequate information provided to the tax collector can result in a quick end to the audit. On the other hand, misguided information or shoddy documents may lead to unneeded painful consequences.
Support during an audit
The net worth method can and will be used when traditional methods failed due to deficiencies in books keeping, for example. The method accounts the variation between the balance sheets of a taxpayer at different years. Should the increase of the net worth be impossible to reconcile with the taxpayer declared income in the intervening period, an audit may ensue. The method can and will be used when traditional methods failed due to deficiencies in books keeping, for example. It is the taxpayer obligation to explain that the increase is justifiable by nontaxable sources. Often, because of the technical nature of the net worth method used by the auditor, the taxpayer can’t identify the assumptions behind the preliminary findings of the auditor. Professional advice from experts working on your behalf can be a tremendous help.
Support with collaborators
The workings of the net worth method can appear complex. In reality, even people with good proficiency in accounting may be disconcerted by it. We have experts who were auditors, and who understand fully the net worth method. It is most profitable for our clients to benefit from such expertise. Being familiar with the workings of the method helps in reducing the costs of simply untangling a heap of financial data to get at important weakness in the auditors’ assumptions.
Negotiation at the proposal letter stage
After the audit, you will be sent a proposal letter. If you disagree with the proposal, you are encouraged to contact the auditor to try and resolve factual disagreements. It is not too late to be represented by tax experts. It is important to promptly react at this stage, because you will generally have only 30 or 21 days to do so. At this stage, our experts will identify the auditor’s important assumptions. It could be critical to establish a defensive balance sheet with different assumptions based on your situation. Additional representations on your behalf can reduce taxes, interests and penalties. In certain cases, the assessment can be annulled. If needed, we can obtain additional delays to provide more information to the auditor.
Appeal after a reassessment
After the audit, unless the auditor finds nothing, a reassessment will be issued. Often taxpayers are taken by surprise by the reassessment and find it difficult to understand how the auditor came to it. All reassessments contain assumptions, they represent the crux of the matter. It is important to know that the law says that the reassessment is presumed valid. To fight the presumption, the taxpayer needs to offer strong evidence that contradicts and demolishes the assumptions.
Even when the taxpayer doesn’t want to fight the reassessment to the end, it is generally sound practice to file an appeal nevertheless. Thus your rights are saved as long as the appeal is filed on time. During the appeal, further negotiation is possible with the appeal officer and new evidence can be presented.
Fighting the reassessment in court
The first step in opposing a reassessment is filing an appeal which will be revised by an appeal officer of the Canada or Québec Revenue Agency. These appeal officers will often limit themselves to verify that the audit was properly conducted, and that no accounting error has been made. Their job is not to validate taxpayers’ arguments that rely on the taxpayer’s credibility or that of witnesses. In some cases, such as establishing a non-standard lifestyle, evidence before a court will be the only means to demolish the auditor’s assumptions. A disputed legal contention is also generally left for a judge to decide.
When representations to the appeals officers do not result in a satisfactory decision, the remaining option is to file an appeal with either the Tax Court of Canada or the Court of Québec. That doesn’t exclude the possibility to negotiate further during formal proceedings. We have experienced lawyers in tax litigation, and out of court settlements are often reached. The time limit to file an appeal at the appropriate court is rigid. In exceptional circumstances, appeals can be made out of the time limit specified in the law, but that will cause other expenses if not to lose rights if permission for a late appeal is not granted. |
