25 November 2010 Internal T.I. 2010-0384481I7 - Lack of books and records

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether loss claimed by a corporation can be disallowed on the basis that there is no satisfactory evidence to support them.

Position: The corporate taxpayer must be able to support and prove the deductions claimed. If, after the CRA has informed the taxpayer of its concerns resulting from the lack of supporting documents, the said taxpayer still does not have sufficient and satisfactory proof of the loss claimed by it, it would be reasonable for the CRA to disallow the deduction of such loss. Of course, the taxpayer would have the right to object to an assessment or a loss determination issued in such a context.

Ms. Rosanna Huynh
Audit Division
Canada Revenue Agency						2010-038448
5001 Yonge Street 						U. Chalupa
Toronto ON  M2N 6R9

November 25, 2010

Dear Ms. Huynh:

Re: Lack of Books and Records in respect of Claimed Loss

This is in reply to your email dated October 22, 2010 in which you requested our comments on whether losses claimed by a taxpayer should be disallowed due to a lack of supporting documents.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (hereinafter the "Act").

In your email, you briefly described the facts of a situation as follows:

• A corporation ("Predecessorco") owned XXXXXXXXXX and had a XXXXXXXXXX fiscal year-end.
• On XXXXXXXXXX , Predecessorco amalgamated with another corporation to form Amalco.
• Pursuant to paragraph 87(2)(a), the taxation year of Predecessorco was deemed to end immediately before the amalgamation.
• Amalco continued to carry on the same business that was formerly carried on by Predecessorco and claimed a non capital loss of approximately XXXXXXXXXX dollars.
• Predecessorco filed a corporate tax return for its taxation year ending immediately before the amalgamation. However, no books and records were provided to support the financial statements and the tax return relating to Predecessorco's last taxation year.
• We understand that in response to your request for additional information and supporting documentation, Amalco's accountant suggested to add items found on the financial statements of Predecessorco for the year ended immediately before the amalgamation with those found on the financial statements of Amalco for the year ended XXXXXXXXXX , and compare them with the general ledger of the corporations involved.
• You indicated that the grouping of expenses on the two financial statements was different. In your opinion, the documentation provided to support Amalco's claim of the non capital loss is insufficient.

In the circumstances described above, you requested our comments on whether the loss claimed by Amalco can be disallowed on the basis that there is no satisfactory evidence to support them.

Our comments:

The Canadian tax system operates as a self-assessing system. Corporate taxpayers are required to file returns annually. However, subsection 152(7) provides that the Minister is not bound by a return or information supplied by a taxpayer and may, notwithstanding a return or information so supplied, assess the tax payable under Part I of the Act. In this regard, subsection 230(1) requires a taxpayer to maintain records and books of account, in such form and containing such information as will enable the taxes payable under the Act, or the taxes or other amounts that should have been deducted, withhold or collected, to be determined. Pursuant to paragraph 231.1(1)(a), the books and records of a taxpayer may also be inspected, audited, or examined, by an authorized person of the Canada Revenue Agency (hereinafter "CRA").

The onus is on the taxpayer to disprove an assessment (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336). The taxpayer's onus of proof is met where at least a prima facie case is made out. According to the jurisprudence (Njenga v. R., 96 DTC 6593 (FCA), Amiante Spec Inc. v. Canada, 2009 FCA 139) a taxpayer is responsible for documenting their own affairs in a reasonable manner. However, as discussed in Benjamin v. The Queen, 2006 DTC 2265 (T.C.C.), far from making documentary proof an absolute requirement, the courts have stated that other forms of proof, if credible, could be accepted.

The same position was reached in Technical Interpretation no. 2005-0156201E5 in which our Directorate had to determine if expenses could be disallowed by the CRA because purchase invoices were impossible to read. In that file, our Directorate indicated that, unless there is other satisfactory evidence to support the amounts claimed, the CRA's practice is to disallow unvouchered expenses.

In Keating v. The Queen, 2001 DTC 3750, the Tax Court of Canada summarized the case law relating to this issue:

In Archambault v. Canada, Judge Archambault reviewed the jurisprudence relating to section 230 and stated at paragraph 44:

Associate Chief Judge Christie provided a very good summary of the state of the law on that issue [s.230] in Kay v. Canada, [1994] T.C.J. No. 487, para. 9:

It may be appropriate to say something about taxpayers keeping records and books of account. Under subsection 230(1) of the Income Tax Act every person carrying on business and every person who is required to pay taxes shall keep records and books of account in such form and containing such information as will enable the taxes payable under the Act to be determined. Failure to comply with the subsection will not, of itself, result in the dismissal of an appeal against a reassessment of liability to income tax. But it could interfere with an appellant's ability to discharge the burden of proof on him of showing that, on a balance of probability, the reassessment is in error. This was recently dealt with by the Federal Court of Appeal in Sidhu v. M.N.R ., 93 DTC 5453 (F.C.A.). Mahoney J.A. in delivering the judgment of the Court said at page 5454-5:

The requirement of s. 230(1) may fairly be characterized as absolute but the consequence of not complying is liability to conviction of an offence under s. 238(2), not necessarily a conclusion that transactions which ought to have been recorded did not occur. The failure to record transactions will inevitably handicap a taxpayer seeking to discharge the burden of proving that they took place but the responsibility of the trial judge in such circumstances is to decide, on a balance of probabilities having regard to all the evidence and its credibility, whether any, all or none took place. The proper approach was demonstrated by Strayer, J., in Schwartz v. Her Majesty the Queen, 87 DTC 5274 at 5275.

The law places the onus on the taxpayer in such cases to prove wrong the Minister's reassessment on the basis that the taxpayer is in a better position to prove what actually happened, if he chooses and is able to do so. Unfortunately, the plaintiff has not been willing or able to particularize in any way the purchases made by him. He has confirmed on many occasions that the figures provided by his accountant as to his total purchases were correct. If he had made any effort to corroborate this and his oral evidence had seemed forthcoming and credible, it might have been possible to find in his favour even in the absence of any vouchers, receipts or other written records. Unfortunately neither of these requirements were met. [Emphasis added.]

Based on the above, we are of the view that Amalco must be able to support the deductions claimed. If, after the CRA has informed the corporate taxpayer of the concerns resulting from the lack of supporting documents, the said taxpayer still does not have sufficient and satisfactory proof of the loss it claimed, it would be reasonable for the CRA to disallow the deduction of such loss. Of course, the taxpayer would have the right to object to an assessment or a loss determination issued in such a context.

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch