Sarmadi, 2017 FCA 131: a net worth appeal fails on credibility, and Webb J.A. questions whether a taxpayer's 'prima facie case' is a lower standard than the balance of probabilities

2017 FCA 131 · Federal Court of Appeal

Author: Sas Tullo

This is an appeal from the Tax Court about net worth reassessments of a Toronto taxi driver, landlord, and denturist student who reported less than $4,000 of income in each of 2003 and 2004. The only live question was whether his father had lent him $90,000 in cash; the Tax Court did not believe either of them, and the Federal Court of Appeal found no reviewable error. The case matters less for its result than for the concurring reasons of Webb J.A., which examine seventy years of authority on the burden of proof in tax appeals and conclude that the familiar idea of a taxpayer “demolishing” the Minister’s assumptions with a “prima facie case” should not mean anything less than proof on a balance of probabilities.

Facts

During 2003 and 2004 Mr. Sarmadi was married with three children, was studying to be a denturist, drove a taxi, and owned rental properties; he reported income of $3,857 and $1,807 (para 2). Dissatisfied with the information he gave on audit, the CRA prepared a net worth analysis and concluded that he had failed to report more than $150,000 of income over the two years; the Minister reassessed on that basis and imposed gross negligence penalties (para 3). The Tax Court, per Favreau J., upheld the reassessments (para 4). On appeal the only issue was whether the judge made a palpable and overriding error in rejecting evidence that the appellant’s father had lent him a total of $90,000, which would have reduced the net worth income by that amount (para 5).

The decision under appeal

In the Tax Court, the Minister’s assumptions were that the appellant operated a taxi business and owned six properties, that he bought a Burlington commercial plaza for $470,000 in June 2003 and a Hamilton plaza for $185,000 in June 2004 and paid cash for both, that his personal expenditures exceeded $5,000 a month, and that he had unreported rental and business income (TCC para 5). The appellant and his father testified that the father had sold his house in June 2002, withdrawn $85,000 in hundred-dollar bills the next day, carried it home in envelopes hidden in his pockets, and kept it in a safe in the basement of the appellant’s home, from which it was lent to the son over the next two and a half years (TCC paras 17-19). Favreau J. catalogued the contradictions: the father could not say where the safe was; the appellant had said on discovery that the money was in GICs; the amounts advanced were described differently at the objection stage, at discovery, and at trial; a diary said to record the loans was never produced; and the stated use of the money shifted from paying a credit card to buying the two plazas (TCC paras 20-33). He held that the initial onus was on the taxpayer to demolish the assumptions by presenting a prima facie case, after which the onus would shift to the Minister (TCC para 36), found the explanations “simply implausible and are riddled with contradictions” (TCC para 40), and dismissed the appeals with costs (TCC para 47).

Issues

Woods J.A. framed the single issue as whether the judge made a palpable and overriding error in rejecting the loan evidence (para 5). Webb J.A., in concurring reasons, addressed a further question the appellant had raised: whether a taxpayer need only raise a prima facie case in the Tax Court, and whether that is a standard lower than the balance of probabilities (para 18).

Holding

The appeal was dismissed with costs (para 17). Webb J.A. agreed with the disposition and concluded that the taxpayer has the onus of proving, on a balance of probabilities, the facts alleged in the notice of appeal and, subject to exceptions, that the facts assumed by the Minister are not true (paras 31, 61-63). Stratas J.A. concurred with Woods J.A. and declined to express a definitive opinion on Webb J.A.’s analysis (paras 71-72). Woods J.A. stated that she agreed with the comments of Stratas J.A. (para 16).

The court’s reasoning

Woods J.A. dealt with the appellant’s arguments briefly. Whether the CRA should have used a net worth method at all was not raised below and could not be raised on appeal without unfairness to the Crown, applying Quan v. Cusson, 2009 SCC 62 (para 10). The absence of aggravating circumstances did not oblige the judge to accept the loan evidence once he had found the witnesses not credible (paras 11-12), and it was not absurd to find that a full-time student had significant income (para 13). The reasons met the standard in R. v. R.E.M., 2008 SCC 51 (para 14), and a transcript review showed no pre-judgment (para 15).

Webb J.A. traced the language of “prima facie case” and “demolishing” assumptions to Anderson Logging Co. v. The King, [1925] S.C.R. 45, and Johnston v. Minister of National Revenue, [1948] S.C.R. 486, and read neither as reducing the taxpayer’s burden below the balance of probabilities (paras 24-27). The difficulty arose from paragraphs 92 to 95 of Hickman Motors Ltd. v. The Queen, [1997] 2 S.C.R. 336, where L’Heureux-Dubé J. said the initial onus is met by “at least a prima facie case” after which the onus shifts to the Minister, language that could suggest a lower standard or could refer only to an evidentiary burden (paras 28-29). The Tax Court’s own cases conflicted, with Samaroo v. The Queen, 2016 TCC 290, holding that the standard is the balance of probabilities and nothing less (para 30). In this Court, Loewen, 2004 FCA 146, and Anchor Pointe Energy, 2007 FCA 188, spoke of disproving assumptions on a balance of probabilities, while Amiante Spec, House, McMillan, and Newmont suggested a lower initial standard without addressing F.H. v. McDougall, 2008 SCC 53, which held that “there is only one standard of proof and that is proof on a balance of probabilities” (paras 33-43). Post-Hickman Supreme Court decisions in Canderel, Canada Trustco, Copthorne, and GlaxoSmithKline describe the taxpayer’s burden as being to refute or establish facts, without any reference to a reduced standard (paras 44-52). Reading the General Procedure rules on pleadings, Webb J.A. reasoned that the taxpayer who files a return and pleads material facts should bear the burden of proving them, that an informal procedure appellant should be no better off, and that the judge should weigh all the evidence once at the end rather than deciding a prima facie question midway (paras 53-63). Applied here, the loan was a fact the appellant alleged and the Crown put in issue, and the onus to prove it on a balance of probabilities rested on the person who knew the facts (paras 64-68).

Practical implications

The majority reasons confirm that a net worth appeal resting on undocumented cash loans from a relative will stand or fall on credibility, and that findings of credibility attract the palpable and overriding error standard. Taxpayers should also note the pleading point at paragraph 10: a challenge to the use of the net worth method itself must be raised in the Tax Court.

The concurring reasons are the reason this case is still cited. In my view Webb J.A.’s analysis is persuasive on the Supreme Court authorities and on the logic of a single civil standard. But it was not adopted by the panel. Stratas J.A. expressly declined to decide the point and invited commentary from the bar, the Tax Court, and future litigants (paras 70-71), and Woods J.A. aligned herself with that reservation (para 16). The result is a carefully signposted invitation rather than a holding. Readers should also notice the distinction between the legal burden and the evidentiary burden that Webb J.A. draws at paragraph 29; much of the confusion in the cases comes from treating a tactical shift in who should call evidence as a shift in who must prove the fact. Whether an application for leave to appeal was made is not verified here. The appeal reasons quote no provision of the Act, so no statutory text is checked here.

The practical lesson is familiar: money said to have moved within a family must be documented when it moves. Advisers reading the case for its law on onus should treat Webb J.A.’s reasons as a strong statement of principle rather than a binding rule.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Sarmadi v. Canada, 2017 FCA 131, judgment dated June 21, 2017 (corrected July 21, 2017), Stratas, Webb, and Woods JJ.A.; reasons for judgment by Woods J.A., concurring reasons by Webb J.A. and by Stratas J.A. Appeal heard at Toronto on November 22, 2016, docket A-309-15. Reasons on the Federal Court of Appeal’s site. Also on CanLII. Decision under appeal: Sarmadi v. The Queen, 2015 TCC 133, Favreau J., judgment dated June 3, 2015, docket 2010-361(IT)G. Reasons on the Tax Court’s site. Also on CanLII.