DISCLAIMER
PREFACE
PART I: NON-DISPUTE PROCESSES
Chapter 1: Filing a Return
Chapter 2: Changing a Return
Chapter 3: Taxpayer Relief Provisions
Chapter 4: The Voluntary Disclosures Program
PART II: RULES FOR DISPUTES
Chapter 5: Model of Tax Dispute Resolution
Chapter 6: Minister’s Assumptions
Chapter 7: Taxpayer’s Onus of Proof
Chapter 8: Minister’s Onus of Proof
PART III: AUDIT AND ASSESSMENT
Chapter 9: Features of Audit
Chapter 10: Strategy for Audit
Chapter 11: Methods of Assessment
Chapter 12: Net-Worth Assessment
Chapter 13: Normal Reassessment Period
PART IV: OBJECTION
Chapter 14: Features of Objection
Chapter 15: Strategy for Objection
PART V: APPEAL
Chapter 16: Features of Appeal to Tax Court
Chapter 17: Informal vs. General Procedures 1
Chapter 18: Strategies for Appeal
Chapter 19: Your Plan of Proof
Chapter 20: Planning for the Hearing
PART VI: COMMONLY DISPUTED ISSUES AND LEGAL TESTS
Chapter 21: Independent Contractor vs. Employee
Chapter 22: Director’s Liability for Corporation’s Tax Debt
Chapter 23: Your Tax Liability for Another Taxpayer’s Debt (Section 160/325)
Chapter 24: Gross Negligence Penalty
Chapter 25: Wilful Blindness
Chapter 26: Primary Place of Residence for GST/HST Purpose
Chapter 27: GST/HST Input Tax Credit (ITC)
Chapter 28: Business Expense Deduction
Chapter 29: Source of Income
Chapter 30: Shareholder Benefit
Chapter 31: Capital Gain vs. Business Income
Chapter 32: Definition of “Builder” for GST/HST Purpose
Chapter 33: Active Business Income
Chapter 34: Non-lawyer Representative for a Corporation at Court
Chapter 35: Charitable Donation Tax Credit
Chapter 36: Employment Expense Deduction
Chapter 37: Disability Tax Credit
Chapter 38: Spousal Support
Chapter 39: Business Investment Loss
Chapter 40: Resident vs. Non-resident for Tax Purpose
BIBLIOGRAPHY
Statutes and Procedural Rules
CRA and Court Publications

This book is intended to provide you with general information based on the author’s professional
experience and research, and it does not constitute professional advice. All tax situations are specific
to their facts and may differ from the situations in the book. If you have specific questions about your
case, you should consult a tax professional.

The contents of the book are not law nor of the force of law; the law is stated in the statutes and court
decisions.

Although the author and publisher have made every effort to ensure that the information in this book
was correct at press time, the author and publisher do not warrant or guarantee the quality, accuracy,
or completeness of any information in the book and do not assume and hereby disclaim any liability
to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or
omissions result from negligence, accident, or any other cause.

I am writing and publishing this book to celebrate the twentieth anniversary of my first win at the Tax
Court of Canada in 2003 in the case of Xincon Technology (Canada) Inc. v. MNR, 2003 TCC 448.

I am a Chartered Professional Accountant (CPA) with over twenty years of experience in
representing taxpayers in audits, objections, and appeals. This is my first book written in English,
after my publication of The Complete Guide to Canadian Taxes (2009), Canadian Tax Resident &
Non-resident (2011), Tax Planning for New Immigrants (2012), Canadian Tax Guide for Business
(2012), Canadian Real Estate Tax Guide (2013), and International Tax Planning for Enterprises
(2017) in Chinese.

This book focuses on resolving issues concerning income tax, GST/HST, and payroll taxes
administered by the Canada Revenue Agency (CRA). These issues or disputes may generally be
resolved through non-dispute processes and dispute processes. The non-dispute processes discussed
in this book include filing a return, changing a return, taxpayer relief provisions, and the voluntary
disclosure program; and the dispute processes include audit, objection, and appeal, known as the three
stages of tax disputes.

Other tax-related issues—such as complaints about the CRA’s services, disputes over the CRA’s
discretionary decisions (e.g., denial of the relief requested under the taxpayer relief provisions), debt
collection actions by the CRA, and criminal investigations and charges on tax evasions—are beyond
the scope of this book.

Although the information on the rules and processes covered in this book is all available to the public
through other channels, I have worked diligently to find and select the most useful and relevant to
common situations, illustrate them with examples, offer my analyses and strategies to inspire readers,
and present these contents in a logical order.

This book will serve as a handbook to guide my own practice. I also intend to share the information
provided herein with taxpayers who intend to resolve their own tax issues, accountants who intend to
represent their clients in the tax dispute process, lawyers who are planning to enter the taxation
practice, and consultants/educators/students/researchers/other professionals who have an interest in
taxation and intend to broaden their knowledge in the area.

Sean Hu, CPA
Toronto, Ontario

​Chapter 1
Filing a Return

Under our self-reporting tax system, taxpayers have to file their tax returns for every year or reporting period. If you did not file your tax return for a year, you may have the following problems: 1) the CRA may send you an arbitrary assessment for that year, and/or 2) you may not receive a tax benefit or refund you are entitled to for the year. In those situations, you may fix the problem by filing a tax return for the year. Section headings include:
Arbitrary Assessment
Filing a Return to Claim Refund
Filing a Return to Pay Taxes Owing

Chapter 2
Changing a Return

Changing a return means filing a request to the CRA to make a change, amendment, or adjustment to a return that was previously filed. Therefore, if your tax issue is that you made a mistake in filing your return or if you find an error in the assessment received from the CRA, changing a return is the best way for you to make it right. Section headings include:
The Type of Mistakes
Time Limit for Changing a Return
After the Return Is Processed
How to Change a Return
Taxpayers’ Right of Redress
Changing a Return vs Filing an Objection

Chapter 3
Taxpayer Relief Provisions

The Taxpayer Relief Provisions in the tax legislation provide the channels to resolve certain tax issues where a taxpayer is not challenging any tax assessments. For example, you receive a tax assessment or reassessment including penalties and interest and you have no legal or factual ground to dispute it; but you wish to have the penalties and interest cancelled because you have financial difficulty. Section headings include:
Types of Relief
Waive or Cancel Penalties and Interest
Late, Amended, or Revoked Elections
Allow Returns to be Filed or Changed Beyond Three-Year Period
Limitation Period
Taxpayers’ Right of Redress
Taxpayer Relief Provisions vs Voluntary Disclosures Program

Chapter 4
The Voluntary Disclosures Program

Voluntary Disclosures Program (VDP) provides an opportunity for taxpayers to correct their non-compliance, intentional or unintentional, by changing a tax return or filing a return if no return was filed. However, unlike the procedures for filing a return and changing a return discussed previously, the VDP is only for those who have failed to fulfill their tax obligations and want to increase their tax liabilities in order to avoid unwanted consequences. Section headings include:
Main Aspects of VDP
Types of Non-Compliance Covered
Conditions
Voluntary
Complete
Penalty and Interest
One Year or One Reporting Period Past Due
Payment of Estimated Tax Owing
Types of Relief
Taxpayers’ Right of Redress
How to Apply

Chapter 5
Model of Tax Dispute Resolution

In a self-reporting tax system like ours, disagreements between taxpayers and the tax
authorities are normal and avenues are available for taxpayers to challenge tax assessments
and decisions. In this chapter, we will look at the main features of our model of dispute
resolution and basic rules of proof at the three stages of the dispute process: audit, objection,
and appeal. Section headings include:
Classic Model
Key Terms or Concepts
Minister’s Assumptions
Initial and Shifting Onus of Proof
Prima Facie Case
Civil Balance of Probabilities
Recent Development

Chapter 6
Minister’s Assumptions

The role of the Minister’s assumptions in taxation was briefly touched on in the last chapter.
In this chapter, we will take a closer look at the special status of Minister’s assumptions in tax
litigation and the rules for making such assumptions. Section headings include:
Special Status
Minister’s Assumptions in Reply
Exclusively or Peculiarly Within the Knowledge of the Minister
Clear, Accurate, and Adequate
Facts Only
Only Facts Assumed at the Time of the Assessment

Chapter 7
Taxpayer’s Onus of Proof

A basic rule in tax disputes is that the taxpayer bears the initial onus of proof. In this chapter
we will examine the legal basis for the rule, how the rule is followed the dispute process, and
possible ways for the taxpayer to discharge his onus of proof. Section headings include:
Legal Basis for Taxpayer’s Initial Onus of Proof
Rules Are Followed Throughout the Process
Ways of Discharging Initial Onus of Proof
Case Study

Chapter 8
Minister’s Onus of Proof

Much of the existing literature in tax dispute resolutions has focused on the taxpayer’s onus of proof,
but the Minister’s onus of proof is by no means insignificant. There are quite a few areas where the
Minister bears the onus of proof, and it is important for taxpayers in dispute with the CRA to know
where the Minister bears the onus of proof and whether that onus has been properly discharged by the
Minister. Section headings include:
The Shifting Onus of Proof
Facts that are not or Cannot be Pleaded as Assumptions
Statutory Provisions

Chapter 9
Features of Audit

A tax audit is an action taken by the CRA to enforce tax compliance. It usually results in a
reassessment against the taxpayer and is the initial stage to a tax dispute. In this chapter, we will look
at the essence of an audit and its main features; a proper understanding of these features will help us
form an effective strategy to achieve our goals at this stage. Section headings include:
Essence of Tax Audit
Types of Audits
Type of Tax
Scale of Audit
The CPP/EI Rulings
Audit Notification Letter
Auditor’s Proposal Letter
Onus of Proof and Evidence

Chapter 10
Strategy for Audit

A tax audit is an action launched by the CRA to investigate a taxpayer for the purpose of establishing
grounds for assessing or reassessing the taxpayer. CRA auditors are well-trained professionals and
have well-designed plans to conduct the audit. If you have been selected for an audit, you should also
have a plan or strategy to handle the audit in your best interest. In this chapter, we will explore how to
develop such a strategy to help you achieve your goal. Section headings include:
General Strategy
Two Phases
Understanding the Proposed Adjustments
Making Your Representation
Set a Low Goal
Other Dos and Don’ts
Seek Professional Help if Needed
Be Consistent in Your Positions and Explanations
Do Not Provide False Documents

Chapter 11
Methods of Assessment

A key to an effective challenge of the proposed adjustments, and the reassessments is your understanding of the method of assessment applied in your case. A method of assessment is the general rationale followed by the auditor to calculate your tax liability, which can be found in the auditor’s proposal. This chapter will give brief introductions to six common methods of assessment. Section headings include:
The Arbitrary Method
The Net-Worth Method
The Deposit Method
The Sales Analysis Method
​The Alternative Method
The Expense Verification Method

Chapter 12
Net-Worth Assessment

The net-worth method is perhaps the most complex method of assessment. Taxpayers generally have
difficulties understanding it, and even CRA auditors often make various technical mistakes in
applying this method. In this chapter, we will first examine its main features, such as its basis for
assessment and components of the calculation model, and then discuss how to find mistakes and
errors in net-worth assessments. Section headings include:
Two Bases for Assessment
Three Components
Balance Sheet
Personal Expenditures
Adjustments
The Minister is not Concerned with the Source of Income
Working Principles
How to Find Errors in Net-Worth Assessment
Errors in the Balance Sheet
Due-to-Shareholder Account as an Asset
Loans
Living Expense Amounts Based on Statistics Canada Averages
Potential Double Counting in Personal Expenditures
Expenses Incurred for Earning Income
Gifts and Other Non-Taxable Sources
Case Studies
Cash Gifts
Gifts from Parents
Living Expenses

Chapter 13
Normal Reassessment Period

How far back can the CRA go to audit and reassess a taxpayer? This is a common question asked by
taxpayers. Both the Income Tax Act and Excise Tax Act provide a limitation period, referred to as the
“normal reassessment period,” within which the CRA may reassess a taxpayer. Any taxation years after
this period expires are considered statute-barred. However, there are exceptions to the limitation. In this chapter, we will take a closer look at some of the common reasons that justify reassessments
beyond the normal reassessment period. Section headings include:
Legislative Provisions
Misrepresentation
Neglect, Carelessness, Wilful Default, or Fraud
Taxpayer’s Neglect
Minister’s Burden of Proof

Chapter 14
Features of Objection

In the three stages of the tax dispute process—audit, objection, and appeal—an audit is an action
taken by the CRA for the purpose of reassessing a taxpayer, while an objection is an action taken by
the taxpayer to appeal the reassessment to the CRA’s Appeals Branch. To differentiate it from an
appeal to the Tax Court of Canada, this administrative appeal process is called an objection. In this
chapter, we will look at some of the main features of the objection stage, such as what can be
objected to, the informality of the process, the onus of proof, the deadline for filing an objection, the
filing method, and tax debt collections. Section headings include:
What Can Be Objected To
The Informality of the Process
Onus of Proof
Deadlines for Filing an Objection
Filing Methods
Tax Debt Collections

Chapter 15
Strategy for Objection

The previous chapter discussed the main features of the objection stage; in this chapter, we will explore how to develop a strategy to achieve the best results at this stage of a dispute based on what we know about objections. Section headings include:
Reidentifying Your Issues
Determining the Nature of Dispute
Factual Issues
Conceptual Issues
Legal Research
Setting Your Goal
Format and Content of Notice of Objection
Plan of Proof
Other Do’s and Don’ts

Chapter 16
Features of Appeal to Tax Court

The Tax Court is designed to help taxpayers get relief from tax assessments, so your appeal at this stage is starkly different from the objection. In this chapter, we will look at some of its main features; section headings include:
Trial Court
Limits of the Tax Court’s Power
Onus of Proof
Rules for Evidence
Costs and Filing Fees
Representative
Filing Notice of Appeal
Tax Debt Collections

Chapter 17
Informal vs. General Procedures

The Tax Court of Canada hears appeals under either the general procedure or the informal procedure. If your appeal qualifies for the informal procedure, you may use the informal procedure; otherwise, you have to go through the general procedure. In this chapter, we will look at the main features of the two procedures, the qualifications for the informal procedure, and their commonalities and differences. Section headings under this chapter include:
The Informal Procedure
The General Procedure
Table of Comparison

Chapter 18
Strategies for Appeal

People often say that the Tax Court is empathic to taxpayers and is there to help you get relief from the assessments. That is true but you have to give the court the reasons to do so. You will not get relief just by arguing that the assessment is unfair and you do not like it; you have to make a case by showing that the facts and law are on your side. In this chapter, we will discuss the game strategy to win at the Tax Court of Canada. Section headings include:
Developing Your Game Strategy
Whether to Appeal
Further Legal Research
Whether to Hire a Lawyer
Contents and Format of Notice of Appeal
Request for Further Information from CRA
Settlement Strategy

Chapter 19
Your Plan of Proof

The Tax Court of Canada bases its decisions on facts that have to be proved by evidence. That is why the parties at hearings usually spend the bulk of their time presenting evidence. To have a practical plan of proof is crucial to your success in the appeal as the taxpayer generally bears the initial onus of proof. In this chapter, we will introduce a three-step approach to working out a plan of proof, section headings include:
Determining the Facts to be Proved or Disproved
Looking into Sources for Evidence
Select and Organize Evidence

Chapter 20
Planning for the Hearing

A hearing or trial is the most important event of an appeal; this is the showtime after all the steps taken and the efforts made. Your successful performance at the hearing will rely largely on your thorough preparation; the importance of your preparation and planning can never be overemphasized. Section headings include:
Main Components of Planning
Court Etiquette and Process
Knowledge of Facts and Law
List of Facts You Need to Prove
Opening Statement
Calling Witnesses
Ensuring Attendance of Witnesses
Preparation of Witness
Direct Examination Questions
Cross-Examination Questions
Book of Documents
Presenting Argument
Book of Authorities
Summary of Arguments
Preparing a Checklist

Chapter 21
Independent Contractor vs. Employee

The issue to be discussed in this chapter is how to determine whether a worker is an independent
contractor or employee of the payor. Section headings include:
Background
Legal Test
Analysis
Intention
Control
Ownership of Tools
Chance for Profit and Risk of Loss
Integration
Cases

Chapter 22
Director’s Liability for Corporation’s Tax Debt

The issue to be dealt with in this chapter is whether a director is liable to the corporation’s tax debt. Section headings include:
Background
Legal Test
Analysis
Due Diligence
Two-Year Limitation Period
Inability to Recover the Debt from the Corporation
Cases

Chapter 23
Your Tax Liability for Another Taxpayer’s Debt (Section 160/325)

The issue to be discussed in this chapter is whether a taxpayer is liable to pay tax owed by another
taxpayer as a result of a transfer of property. Section headings include:
Background
Legal Test
Analysis
Transferor’s Tax Liability at the Time of Transfer
Transfer of Property
Not Dealing at Arm’s Length
Inadequate Consideration
Cases

Chapter 24
Gross Negligence Penalty

This chapter will discuss how case law determines the issue of whether a taxpayer’s conduct amounts
to gross negligence and justifies the penalty under Subsection 163 (2) of the Income Tax Act and/or
Section 285 of the Excise Tax Act. Section headings include:
Background
Legal Test
Analysis
The Magnitude of the Omission
The Opportunity the Taxpayer Had to Detect the Error
The Taxpayer’s Education, Experience, and Apparent Intelligence
Genuine Effort to Comply
General Principles
Credible Explanation for Unreported Income
Misrepresentation not Including Mischaracterization or Mistreatment
Case Studies
Cases for Further Reading

Chapter 25
Wilful Blindness

This chapter will focus on the issue of whether a taxpayer’s conduct amounts to wilful blindness. Section headings include:
Background
Legal Test and Analysis
Cases

Chapter 26
Primary Place of Residence for GST/HST Purpose

The issue to be discussed in this chapter is how to determine whether a new housing unit is used as
primary place of residence for the GST/HST rebate purpose. Section headings include:
Background
Legal Test
Analysis
Cases

Chapter 27
GST/HST Input Tax Credit (ITC)

This chapter will focus on how to resolve a dispute over whether a business is entitled to a GST/HST
input tax credit (ITC). Section headings include:
Background
Legal Test and Analysis
Three Conditions
Agency Relationship
Supporting Documentation and Prescribed Information
Cases

Chapter 28
Business Expense Deduction

The issue to be discussed in this chapter is whether an expense is deductible in computing business
income. Section headings include:
Background
Legal Test
Analysis
Whether the Expense Was Actually Incurred
Whether the Expense Was Incurred for the Purpose of Earning Income
Whether the Expense’s Amount Was Reasonable
Cases

Chapter 29
Source of Income

This chapter will discuss the issue of whether a taxpayer’s activity constitutes a source of income.
Background
Legal Test
Analysis
Rental Property
Commercial Activities
Conducting Activities in a Commercial Manner
Cases

Chapter 30
Shareholder Benefit

This chapter will deal with the issue of whether a shareholder benefit should be assessed. Section headings include:
Background
Legal Test
Analysis
A Benefit Must Be Received by a Shareholder
The Assessment of Shareholder Benefit is not Automatic
No Shareholder Benefit is Conferred Merely Because the Due-to-Shareholder Account is
Overstated
Credible Oral Evidence is Sufficient to Demolish the Minister’s Assumption
Cases

Chapter 31
Capital Gain vs. Business Income

This chapter will look at how case law determines the issue of whether a gain realized on sale of real
property is a capital gain or business income. Section headings include:
Background
Legal Test
Analysis
Motive or Intention
Length of Period of Ownership
The Circumstances Responsible for the Sale of the Property
The Frequency or Number of Other Similar Transactions by the Taxpayer
The Nature of the Property Sold
Work Expended on or in Connection with the Property Realized
Weighing of Factors
The New Anti-Flipping Tax Rules
Cases

Chapter 32
Definition of “Builder” for GST/HST Purpose

This chapter will deal with the issue of whether an individual is a “builder” for GST/HST purpose. Section headings include:
Background
Legal Test
Analysis
Cases

Chapter 33
Active Business Income

The focus of this chapter will be on the issue of whether a business carried on by a corporation is an
active business. Section headings include:
Background
Legal Test
Analysis
Making the Distinction
The Requirement of More than Five Full-time Employees
Personal Services Business
Cases

Chapter 34
Non-lawyer Representative for a Corporation at Court

The issue to be discussed in this chapter is whether a corporation can be represented by a non-lawyer
in the Tax Court proceedings. Section headings include:
Background
Legal Test
Analysis
The Corporation’s Ability to Pay a Lawyer
The Proposed Representative’s Connection with the Corporation
The Proposed Representative’s Ability to Represent the Corporation.
Cases

Chapter 35
Charitable Donation Tax Credit

This chapter will be devoted to the issue of whether a taxpayer is entitled to claim the charitable
donation tax credit. Section headings include:
Background
Legal Test and Analysis
Prescribed Information
Donative Intent
No Market Value
Tax Shelter Identification Number
Cases

Chapter 36
Employment Expense Deduction

The issue to be discussed in this chapter is how to determine whether an expense is deductible in
computing employment income. Section headings include:
Background
Legal Test
Analysis
Motor Vehicle Expenses
Cell Phone Expenses
Legal Expenses
Cases

Chapter 37
Disability Tax Credits

This chapter will deal with the issue of whether a taxpayer is entitled to the disability tax credits. Section headings include:
Background
Legal Test
Analysis
Cases

Chapter 38
Spousal Support

This chapter will be devoted to the issue of whether payments to ex-spouse qualify for deduction as
support amounts. Section headings include:
Background
Legal Test
Analysis
Cases

Chapter 39
Business Investment Loss

This chapter will focus on the issue of whether a taxpayer is eligible to deduct a business investment
loss. Section headings include:
Background
Legal Test
Analysis
Small Business Corporation (SBC)
For the Purpose of Gaining or Producing Income
Deemed Disposition
Cases

Chapter 40
Resident vs. Non-resident for Tax Purpose

This chapter will deal with a dispute over whether an individual taxpayer is a resident or non-resident
of Canada for tax purpose. Section headings include:
Background
Legal Test
Analysis
Physical Presence vs. Residential Ties
Deemed Resident and Deemed Non-Resident
Cases