November 23, 2024
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A situation that many professionals face when dealing with the Canada Revenue Agency ("CRA") is the type of evidence that is required to support a taxpayer's claim. The CRA has specific items that it looks for whenever they determine whether a claim is acceptable or not. One set of documents often asked for by the CRA is proof that an individual lent money to a corporation when that individual wants to claim a capital loss or allowable business investment loss ("ABIL"). In a recent case (Gregory), a taxpayer had claimed an ABIL. The CRA disallowed the claim for the ABIL on the basis that there was not enough supporting evidence that the taxpayer actually lent this money to the corporation. The corporation in question, went bankrupt in a prior year and filed all necessary documents to effect the bankruptcy. At the time of the bankruptcy, there was a document that showed the $75,000 debt owing to the taxpayer that was prepared by the bankruptcy trustee. The taxpayer had given the trustee all of the books and records and never received those documents back. Therefore, when the CRA asked for books and records and other supporting documentation, the taxpayer did not have it. The judge noted that it is up to the appellant (or taxpayer) to establish on the balance of probabilities the factual basis on which the case rests. Having said that, the judge stated that the Department of Justice could have challenged the testimony of the taxpayer by serving subpoenas to get all of the necessary documentation. The judge finally decided that nothing that the taxpayer said was "incredible" and nothing that the taxpayer did "warrants disbelief." The judge allowed the taxpayer's appeal and the taxpayer was allowed to claim the ABIL. The key lesson to be learned from this case is that the CRA's requirement for documentation is not always the same level that is required by the Court. Many times, the issue comes down to the credibility of what the taxpayer is saying with regard to his/her situation. Obviously, the more documentation that the taxpayer has, the better his/her case will be. However, there are cases where that documentation is not available due to outside circumstances and this should not block the taxpayer from being able to claim properly deductible deductions or expenses. TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. |