Onus of Proof and Ministerial Assumptions:
The Role and Evolution of Burden of
Proof in Income Tax Appeals
William Innes and Hemamalini Moorthy*
PRÉCIS
La notion de l’inversion du fardeau de la preuve dans le cadre des appels
en matière d’impôt sur le revenu, c’est-à-dire la réfutation par le
contribuable « des hypothèses ministérielles », a une longue histoire
quelque peu trouble sur le plan de la jurisprudence canadienne en
matière d’impôt sur le revenu. Les auteurs examinent ici l’évolution de la
notion du fardeau de la preuve dans le cadre des appels en matière
d’impôt sur le revenu, ainsi que les racines réglementaires et
jurisprudentielles de cette notion.
Les auteurs concluent que la décision d’imposer au contribuable le
fardeau de réfuter les hypothèses ministérielles est une forme d’inférence
négative tirée par les tribunaux, à titre de question d’ordre public, lorsque
les faits sous-jacents sont surtout connus du contribuable, et non pas du
ministre. Le contribuable qui doit « démolir » les hypothèses ministérielles
reposant sur les faits n’a qu’à présenter une preuve prima facie démontrant
que ces hypothèses sont erronées. Si la Couronne ne présente alors
aucune preuve, il sera généralement admis que la preuve du contribuable
démolit les hypothèses du ministre, à moins qu’elle ne soit rejetée en
contre-interrogatoire, qu’elle ne soulève des questions sérieuses du point
de vue de la crédibilité, ou que le tribunal ne tire une inférence négative
de l’omission du contribuable de présenter une preuve substantielle.
Après que le contribuable a présenté une preuve prima facie réfutant les
hypothèses du ministre, les règles usuelles de procédure civile
s’appliquent. Le fardeau de prouver les faits importants invoqués dans
l’avis d’appel incombe au contribuable et celui de prouver les faits
* Of Genest Murray DesBrisay Lamek, Toronto. We would like to express our gratitude
to our colleagues Sean Horgan and Christopher Moore for their gracious and enthusiastic
assistance in the preparation of this article. In addition, we are indebted to four authors for
their very thorough and intelligent observations in this area: A. Christina Tari, Federal
Income Tax Litigation in Canada (Markham, Ont.: Butterworths) (looseleaf ); Charles
McNab, “The Burden of Proof in Income Tax Cases” (1978), vol. 26, no. 4 Canadian Tax
Journal 393-411; and A. Meghji and G. Genron, “New Arguments in Support of an Assessment: More Than an Issue of Onus” (1997), 5 Tax Litigation 344-47. Any remaining errors
are, of course, the sole responsibility of the authors.
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importants invoqués dans la réponse revient au ministre. Si le tribunal
conclut que tous les faits importants ont été présentés en preuve, il sera
alors en mesure de rendre une décision sur le fond, sans tenir compte
des hypothèses du ministre, mais en déterminant si le contribuable et la
Couronne se sont acquittés du fardeau de la preuve qui leur est imposé en
vertu des règles de procédure civile sur la prépondérance des probabilités.
ABSTRACT
The concept of a reverse onus in income tax appeals—that the taxpayer
must disprove “ministerial assumptions”—has a long and somewhat
confused history in Canadian income tax jurisprudence. In this article, the
authors examine the evolution of the concept of onus of proof in tax
appeals and review the statutory and jurisprudential roots of the concept.
The authors conclude that the onus placed on a taxpayer to disprove
ministerial assumptions is a form of negative inference drawn by the
courts as a matter of public policy where the underlying facts are
peculiarly within the knowledge of the taxpayer, not of the minister.
Where a taxpayer is called upon to “demolish” ministerial assumptions of
fact, this involves nothing more complicated than adducing a prima facie
case that such assumptions are incorrect. If the Crown calls no evidence,
a taxpayer’s evidence will normally be accepted as demolishing the
minister’s assumptions unless it is successfully challenged on crossexamination or presents serious issues of credibility, or unless the court
draws a negative inference from the taxpayer’s failure to call material
evidence at his or her disposal. Once a taxpayer has adduced a prima
facie case rebutting the minister’s assumptions, the normal rules of civil
procedure apply; that is, the taxpayer has the burden of proving material
facts alleged in the notice of appeal, and the minister has the burden of
proving material facts alleged in the reply. If the court concludes that all
material facts have been adduced in evidence, it will be in a position to
dispose of the appeal on its merits without having regard to the minister’s
assumptions but solely on the basis of a determination of whether the
taxpayer and the Crown have met the normal evidentiary burdens imposed
on them under the rules of civil procedure on the balance of probabilities.
INTRODUCTION
The related concepts of “onus of proof ” and “ministerial assumptions”
are two of the least understood and most easily confused aspects of litigation arising under the Income Tax Act. 1 We think that a great deal of
unnecessary time and effort are devoted in tax litigation to argumentation
concerning ministerial assumptions and whether the taxpayer has or has
1 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless
otherwise stated, statutory references in this article are to the Act.
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ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
1189
not met the onus of “demolishing” those assumptions.2 In recent years,
the courts appear to have been moving toward a demystification of the
whole notion of onus and a common-sense approach to the role of “assumptions” in tax proceedings. In this article, we propose to examine the evolution
of these concepts in an effort to dispel some of the uncertainty that has
been evident in the case law and commentary. We also hope to demonstrate that the current model of these concepts that has emerged from the
jurisprudence is closely related to the concepts of onus and standard of
proof in normal civil litigation, albeit tailored to certain specific exigencies of tax litigation.
The starting point for civil litigation under the Act is that the taxpayer
is an appellant.3 As such, a taxpayer must allege and prove all facts
material to his or her appeal unless those facts are admitted (or, in certain
cases, not denied4 by the minister). The Crown, as respondent, has the
obligation of alleging and proving any facts material to the appeal that
would raise a defence to the claims made by the taxpayer. To this extent,
tax appeals do not differ from normal civil litigation. The two forms of
litigation begin to diverge, however, because of the peculiar nature of the
assessing process. In Canada’s self-assessment system, the minister’s assessment is initially based solely upon the facts related to him or her by
the taxpayer. The facts material to most assessments are peculiarly within
the knowledge of the taxpayer; as a purely practical matter, the minister’s
knowledge of a taxpayer’s affairs is extremely circumscribed and normally almost entirely dependent upon the taxpayer’s cooperation.5
This disparity of information between the taxpayer and the minister
manifests itself in two procedural rules. In the first place, the Crown can
oblige the taxpayer to prove any material facts alleged if the Crown
denies knowledge of these allegations.6 This rule is no different from the
2 “I think, frankly, that altogether too much time is spent on the question of assumptions and of onus of proof in tax cases. One should bear in mind that the ultimate question
is whether the assessment is right or wrong, not what thoughts might have been going
through the assessor’s mind when the assessment was made.” The Honourable Mr. Justice
Donald G.H. Bowman, “Proceeding Before the Tax Court,” The Essentials of Tax Litigation: Practice, Procedure and Evidence (Toronto: Law Society of Upper Canada, Department
of Continuing Legal Education, 1994), F-1 to F-22, at F-11. Similarly, according to Joanne
E. Swystun, “[i]n the typical tax case . . . the onus usually does not have a great impact on
the outcome.” Joanne E. Swystun, “Presenting a Tax Appeal,” ibid., B-1 to B-17, at B-3.
3 A “plaintiff ” in cases commenced in the Federal Court—Trial Division before January 1,
1991 under former section 176 of the Act. In the authors’ view, nothing turns on this
distinction.
4 Rule 49(2) of the Tax Court of Canada Rules (General Procedure), SOR/90-688 (1990),
vol. 124, no. 22 Canada Gazette Part II 4376-4476, as amended, states, “All allegations of
fact contained in a notice of appeal that are not denied in the reply shall be deemed to be
admitted unless it is pleaded that the respondent has no knowledge of the fact.”
5 While it is true that the minister has broad powers of investigation under the Act, the
self-assessment system would essentially collapse if the minister were required to prove
the facts underlying every disputed assessment.
6 Supra footnote 4.
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normal rules of civil procedure and simply responds to the common-sense
notion that a party cannot be called upon to either deny or admit allegations of which he or she has no means of knowledge.7 It is on the level of
the second procedural rule that the two systems diverge significantly: if
the Crown alleges that the minister assumed a particular fact in the assessment process, that fact is presumed to be true unless the taxpayer (1)
demonstrates that the minister did not rely upon that fact, (2) shows it to
be irrelevant, or (3) “demolishes” the assumption.
While a great deal of concern has been expressed about the fairness of
this “reverse onus,”8 we think that the system is less draconian than counsel for taxpayers sometimes appear to believe and less of a weapon for
the minister than counsel for the Crown sometimes seem to suggest. In
substance, the rule respecting ministerial assumptions of fact is nothing
more than a form of negative inference. If the Crown alleges that a particular material fact was assumed by the minister in the assessment process
and that fact was peculiarly within the knowledge of the taxpayer, the
court will draw a negative inference if the taxpayer does not lead evidence to disprove that fact.9 The odd judicial terminology of “demolishing”
a ministerial assumption has undoubtedly contributed to the confusion in
this area, conjuring up as it does visions of adamantine pleadings that can
be dislodged only through the use of evidentiary explosives. On the contrary, in our view what is necessary to “demolish” a ministerial assumption
is to prove the material facts that are within the knowledge of the taxpayer if those facts do not support the minister’s assumption. If the court
is convinced that all material facts within the taxpayer’s knowledge are
before the court10 and those facts prima facie rebut the minister’s assumptions, then such assumptions cease to have any continuing role in the
proceedings. At that point, insofar as standard and onus of proof are
7 See, for example, rule 25.07(2) of the Ontario Rules of Civil Procedure, RRO 1990,
O. Reg. 194, as amended.
8 See, for example, Horst G. Wolff, “The Burden of Proof in Tax Disputes” (1970), vol. 18,
no. 1 Canadian Tax Journal 1-18; and Hugh F. Gibson, “An Overview of Income Tax
Litigation,” in Report of Proceedings of the Thirty-Fifth Tax Conference, 1983 Conference
Report (Toronto: Canadian Tax Foundation, 1984), 967-77.
9 Although the case law does not appear to have examined this point in any depth, we
think that the minister’s assumptions must be confined to facts peculiarly within the knowledge of a taxpayer; in other words, the minister cannot plead as an assumption a fact that
the taxpayer could not reasonably be expected to either prove or disprove (for example,
dealings of unrelated parties of which the taxpayer is unaware). In such a case, the courts
would likely proceed “generally on the basis of respect for equity and common sense”:
The Queen v. J. Leung, [1993] 2 CTC 284, at 304 (FCTD). As well, the onus does not
extend beyond factual considerations to questions of law. H. Goldman v. MNR, [1951]
CTC 241, at 247 (Ex. Ct.). See also Paul Festeryga, “The Onus Issue: Who Carries the
Burden of Proof in an Income Tax Appeal?” (July 1992), 125 CA Magazine 34-36, at 36.
10 If the court concluded that the taxpayer had failed to bring forward material evidence of which he or she had knowledge, that would justify a negative inference based on
the minister’s assumptions. The same would hold true if the court found the taxpayer’s
witnesses to lack credibility.
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ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
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concerned, the tax appeal returns to exactly the same status as any normal
civil litigation. If the minister has adduced no evidence (as is often the
case), the court will accept the taxpayer’s factual assertions and determine whether, as a matter of law, the relief sought is available to him or
her. If the minister has adduced evidence, the court will weigh the evidence; in that determination, the taxpayer will have the onus of proving
his or her allegations on the balance of probabilities; similarly, the minister will have to establish his or her allegations to the same standard. Once
that evidence is weighed, the court will apply the law to determine whether
the taxpayer has made out a case for the relief sought or whether the
minister has raised effective defences.
In this article, we will attempt to trace the evolution of these rules with
particular emphasis on recent developments in the case law. We hope
that, in the course of our review, we can reduce the level of anxiety and
confusion that tends to plague this area of the law.
BASIC RULE AND UNDERLYING POLICY
The Supreme Court of Canada recently confirmed in Hickman Motors
Limited v. The Queen 11 that, in income tax appeals, the taxpayer bears the
initial burden of establishing, on a balance of probabilities, sufficient
evidence to cast doubt on the facts found or assumed by the minister in
assessing the taxpayer. Specifically, the taxpayer must “demolish the exact
assumptions made by the Minister but no more.”12
The most important distinguishing feature between a hearing under the
Act and an ordinary civil trial is the nature of the onus that rests on the
taxpayer. An income tax appeal is an “appeal from taxation,”13 as distinct
from a civil proceeding in which each party has independent knowledge
of the facts underlying the dispute. In Canada’s self-assessment system,
where the facts “are in a special degree if not exclusively, within the
[taxpayer’s] cognizance,”14 the minister is obliged to rely, as a rule, on
the taxpayer’s disclosures. 15 As a consequence, when assessing the taxpayer, the minister may have to assume certain matters to be different
from, or additions to, what the taxpayer has disclosed. The issues in
dispute will often deal with subjective elements such as the taxpayer’s
knowledge, intention, or motives. The equities between the parties, in
terms of knowledge of the facts, are therefore skewed in favour of the
taxpayer. The taxpayer is contesting the assessment in relation to his or
her own affairs and is therefore in the best position to adduce the relevant
evidence to prove the material facts. Were the minister to bear the burden
11 97
DTC 5363 (SCC).
at 5376. See also First Fund Genesis Corporation v. The Queen, 90 DTC 6337
12 Ibid.,
(FCTD).
13 Johnston v. Minister of National Revenue (1948), 3 DTC 1182, at 1183 (SCC).
14 Anderson Logging Co. v. The King (1924), 52 DTC 1209, at 1211 (SCC).
15 Pollock v. The Queen, 94 DTC 6050, at 6053 (FCA).
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of proving facts of which he or she had no firsthand knowledge, the
system would not function effectively (if at all). Thus, given the nature
and structure of the income tax regime and the taxpayer’s degree of access
to and control over the relevant information, the taxpayer must bear the
initial burden in contesting the minister’s assessment.
EVOLUTION OF THE BURDEN OF PROOF
The exact origin of the rule that the Canadian taxpayer should bear the
onus of proof in a tax appeal is uncertain. Some judges and authors claim
a statutory basis while others rely on the common law. Vern Krishna, one
of those advocating a statutory basis for the onus, thinks that “the law in
respect of the burden of proof in income tax cases is simple” 16 and points
to subsection 152(8) of the Act. This section states that
an assessment shall, subject to being varied or vacated on an objection or
appeal under this Part and subject to a reassessment, be deemed to be valid
and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.
If subsection 152(8) does indeed serve as the basis for the imposition of
the onus of proof on the taxpayer, it does so, at the very least, “rather
cryptically.”17
In our view, subsection 152(8) should be read in conjunction with
section 166. 18 Both these sections deal with the effect of errors or omissions, and both can be traced back to the Income War Tax Act, 1917.19
Subsection 152(8) can be traced back to section 14, which provided:
16 Vern Krishna, Essentials of Canadian Law: Income Tax Law (Concord, Ont.: Irwin
Law, 1997), 18. See also A. Christina Tari, “The Crown’s Reply,” in Pleading with Revenue Canada: New Opportunities, New Procedures, May 31, 1993 (Toronto: Canadian Bar
Association—Ontario, Continuing Legal Education, 1993), tab 5, at 7.
17 Peter W. Hogg and Joanne E. Magee, Principles of Income Tax Law, 2d ed.
(Scarborough, Ont.: Carswell, 1997), 19. Hogg and Magee seem to prefer the rationale
argued for above, namely, that the taxpayer should bear the onus because “the taxpayer has
the best access to the facts.” Ibid., at 20. It is likely that this practical consideration also
led the Carter commission to support the imposition of the burden of proof on the appellant in tax appeals. Canada, Report of the Royal Commission on Taxation, vol. 5 (Ottawa:
Queen’s Printer, 1966), 166.
18 Section 166 states, “An assessment shall not be vacated or varied on appeal by
reason only of any irregularity, informality, omission or error on the part of any person in
the observation of any directory provision of this Act.” Section 166, subsection 152(3)
(which states that “[l]iability for the tax under this Part is not affected by an incorrect or
incomplete assessment or by the fact that no assessment has been made”), and subsection
152(8) have been properly called “the curative provisions” of the Act responsible for
dealing with “a defect as to form,” and not of substance, in an assessment. R. Kirby v.
MNR, [1991] 2 CTC 2639, at 2643 (TCC).
19 SC 1917, c. 28. Subsection 152(8) was also formerly subsection 46(7) of the Income
Tax Act, RSC 1952, c. 148 and subsection 42(6) of the 1948 Income Tax Act, c. 52 and
was derived from section 69A of the Income War Tax Act, RSC 1927, c. 97. Section 166
was also formerly section 61 of the Income Tax Act, RSC 1952, c. 148 and section 56 of
(The footnote is continued on the next page.)
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ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
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Any person objecting to the amount at which he is assessed, or as having
been wrongfully assessed, may, personally or by his agent, within twenty
days after the date of mailing of the notice of assessment, as provided in
section ten of this Act, give notice in writing to the Minister in form II of
the Schedule to this Act that he considers himself aggrieved for either of
the causes aforesaid, otherwise such person’s right to appeal shall cease,
and the assessment made shall stand and be valid and binding upon all
parties concerned, notwithstanding any defect, error or omission that may
have been made therein, or in any proceeding required by this Act or any
regulation hereunder: Provided, however, that the Minister, either before
or after the expiry of the said twenty days, may give a taxpayer further
time in which to appeal [emphasis added].
Section 166 can be traced back to subsection 19(1) of the Income War
Tax Act, which stated:
No assessment shall be set aside by a Board or by the Court upon the
ground that there has been any error or omission in connection with any
proceedings required to be taken under this Act or any regulation hereunder, but such Board or Court in any case that may come before it may
determine the true and proper amount of the tax to be paid hereunder
[emphasis added].
In our view, the proper construction of these sections precludes the use
of technical errors or omissions to overturn otherwise valid assessments.
Section 14 (now subsection 152(8)) ensured this result once the time for
an appeal was over, and section 19 (now section 166) achieved the same
result but dealt with these concerns when raised within the appeal process.20
It is submitted that this is exactly what subsection 152(8) and section 166
are still meant to accomplish in the present Act. These sections, along
with subsection 152(3), “were designed to relieve the Minister from detrimental consequences of errors in his department.”21
19
Continued . . .
the 1948 Income Tax Act, c. 52 and was derived from section 69D of the Income War Tax
Act, RSC 1927, c. 97. The present wording of subsection 152(8), with the exception of the
final phrase “in the assessment or in any proceeding under this Act relating,” was first
introduced as subsection 42(6) of the 1948 Income Tax Act.
20 If the error had been in respect of the jurisdiction to tax, however, it is unlikely that
section 14 would have validated the assessment. Charles Percy Plaxton and Frederick
Percy Varcoe, A Treatise on the Dominion Income Tax Law (Toronto: Carswell, 1921), 255.
21 The Queen v. L. Riendeau, [1990] 1 CTC 141, at 145 (FCTD), Cullen J, aff ’d. [1991]
2 CTC 64 (FCA). See also Leung, supra footnote 9, at 302: “It may be assumed the
Parliament had a purpose in enacting subsection 152(3) and subsection 152(8). That purpose, in my view, was to ensure that in the process of issuing millions of assessments
yearly, many of these involving complex statutory provisions and equally complex calculations, technical accuracy or a peremptory level of disclosure, reference and source would
not be imposed on the assessor. The notice of assessment is an administrative procedure
and reliance on the technical rules applicable to other processes to defeat it ab initio is not
necessarily warranted.” These two sections also serve to demonstrate that the liability to
pay tax “arises by the operation of the Act and not by the process of assessment.” Arthur
R.A. Scace, The Income Tax Law of Canada, 5th ed. (Scarborough, Ont.: Carswell, 1983), 568.
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What specific kinds of errors were being contemplated? One indication
comes from the discussion in the House of Commons Standing Committee
on Banking and Commerce concerning section 56 of the 1948 Income
Tax Act (now section 166). Appearing before the committee, the minister
of finance, D.C. Abbott, stated:
One example might be the sending of a notice of assessment by registered
mail. Suppose it went by ordinary mail. It was received and the rest of it,
but through a mistake it went by ordinary mail instead of registered mail.
You would not vacate the assessment and declare the taxpayer to be free of
tax because of that irregularity.22
When viewed in conjunction with section 166 and in its historical
context, therefore, subsection 152(8) should not be seen as mandating any
burden of proof on the taxpayer during the appeal process, but rather as
simply depriving the taxpayer of the ability to take advantage of minor,
technical errors on the part of government officials to vary or vacate an
assessment outside the appeal process.
Had Parliament wished to provide a statutory basis for the imposition
of the onus on the taxpayer, it likely would have used language similar to
that of section 190(b) of the Australian Income Tax Assessment Act, 1936,
which stated, “The burden of proving that the assessment is excessive
shall lie upon the taxpayer.” 23 Alternatively, the wording employed in
section 137(4) of the UK Income Tax Act, 1918, c. 40 could have been
used. That section stated:
If, on an appeal, it appears to the majority of the Commissioners present at
the hearing, by examination of the appellant on oath or affirmation, or by
other lawful evidence, that the appellant is overcharged by any assessment
or surcharge, the commissioners shall abate or reduce the assessment or
surcharge accordingly, but otherwise every such assessment or surcharge
shall stand good. 24
Whether the approach is legitimate or not, there is no doubt that subsection 152(8) and its predecessors have been held by some judges to be
statutory authority for the proposition that the burden of proof in a tax
appeal lies with the taxpayer. 25
22 Testimony of D.C. Abbott as contained in Canada, Standing Committee on Banking
and Commerce, Consideration of Bill No. 338, Entitled, “An Act Respecting Income Taxes”
(Ottawa: King’s Printer, 1948), 651.
23 As quoted in Charles MacNab, “The Burden of Proof in Income Tax Cases” (1978),
vol. 26, no. 4 Canadian Tax Journal 393-411, at 400.
24 This wording has survived to the present day in the United Kingdom as section 50(6)
of the Taxes Management Act (UK) 1970, c. 9. In Norman v. Golder (HM Inspector of
Taxes) (1944), 26 TC 293, at 297 (CA), Lord Greene MR held that the language of this
section “makes it clear, beyond possibility of doubt, that the assessment stands, unless and
until the taxpayer satisfies the commissioners that it is wrong.”
25 See, for example, Noralta Hotel Ltd. v. MNR, 54 DTC 1079, at 1080 (Ex. Ct.); The
Queen v. W. Taylor, [1984] CTC 436, at 439 (FCTD); and J. Levy v. The Queen, [1989] 2
(The footnote is continued on the next page.)
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While the basis for the taxpayer’s assumption of the burden of proof
has consistently attracted the attention of commentators and judges in
recent times, it was far from a burning issue in the early years of Canada’s
federal income tax system.26 It is remarkable that during the first six
years after the adoption of the federal income tax (1917-1923), there was
not a single formal appeal of a tax assessment. 27 When the appeal process
was revised in 1923, Finance Minister Fielding explained this past success
as being due to “a little patience, correspondence, and negotiation.”28 The
process needed to be changed to give the Exchequer Court exclusive
25
Continued . . .
CTC 151, at 156-57 (FCTD). There is also, however, support for viewing the onus as
arising out of the common law only: “The burden of proof is on the appellant to show that
the respondent’s assessments are incorrect. This burden of proof derives not from one
particular section of the Income Tax Act, but from a number of judicial decisions.” C. Piette
v. MNR, [1979] CTC 2577, at 2578 (TRB), Tremblay J. The question whether the taxpayer’s
assumption of the onus is based on statute or common law will not likely be of great
importance to most taxpayers. It could, however, lead to complications arising out of the
undermining of the reasoning in certain judicial decisions. MNR v. Simpson’s Ltd., [1953]
CTC 203 (Ex. Ct.), for example, stands for the proposition that an appeal from an Income
Tax Appeal Board is a trial de novo and thus the onus remains on the taxpayer. Absent an
original statutory basis for the onus, however, “there would appear to be no authority other
than the Simpson case itself for the statement made by Thorson, P. in his reasons for
judgment in that case.” MacNab, supra footnote 23, at 400.
26 Indeed, it is not clear that the Income War Tax Act, 1917 even contemplated the
adoption of the adversarial system for appealing assessments. A “Board or Boards of
Referees” could be appointed under subsection 12(1) of the Act, but such a board was to
be given the “powers and authority of a commissioner appointed under Part I of the
Inquiries Act,” (RSC 1906, c. 104). Subsection 15(1) provided that the board, in reviewing
an assessment, could embark “upon such other inquiry as it considers advisable.” Section
16 provided that the board could proceed ex parte if the taxpayer did not appear at the
hearing. In the House of Commons debate on the Income War Tax Act, Prime Minister Sir
Robert Borden described the board’s procedure as an “inquisitorial proceeding” and noted
that “the object of the Bill is to procure a fair assessment, and we have, as a guarantee that
this will be done, an investigation by the Board of Referees in the first instance.” Canada,
House of Commons, Debates, September 15, 1917, 5884. As noted in a recent appeal of a
municipal tax board decision, “Because the proceedings are inquisitorial, the onus is really
on no party. However, it will obviously be in the interests of all parties to present the
evidence which best supports the position which is most advantageous to them.” Burnaby/
New Westminster Assessor, Area No. 10 v. Haggerty Equipment Co., [1997] CanRepBC
1453, at paragraph 14 (BC SC, in Chambers), Burnyeat J. If the Income War Tax Act, 1917
did not foresee the use of the adversarial system, the argument above is strengthened that
subsection 152(8), which is derived from section 14 of the Income War Tax Act, 1917, is
not related to the issue of onus on appeals. It should be noted, however, that section 17 of
the Income War Tax Act did allow for an appeal of a board’s decision to the Exchequer
Court. It was the responsibility of this court to “hear and consider such matter upon the
papers and evidence referred, and upon any further evidence which the taxpayer or the
Crown produces under the direction of the Court, and the decision of the Exchequer Court
thereon shall be final and conclusive.”
27 Robert McMechan and Gordon Bourgard, Tax Court Practice (Scarborough, Ont.:
Carswell) (looseleaf ), 1-4; and Colin Campbell, Income Tax Administration in Canada
(Scarborough, Ont.: Carswell) (looseleaf ), 13-1.
28 Canada, House of Commons, Debates, June 27, 1923, 4499.
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original jurisdiction over appeals, however, because “if in any case a
cantankerous person is not satisfied with the judgment of the local officers,
he ought to have the right of appeal but he had better not go to the
Minister of Finance.”29
Eventually, however, courts were asked to assume a larger role in settling tax appeals and, inevitably, also to determine the question of the
burden of proof. The first pronouncement on this issue by the Supreme
Court of Canada came in 1924 in Anderson Logging Company v. The
King, wherein Duff J, as he then was, stated:
[The appellant] must show that the impeached assessment is an assessment
which ought not to have been made; that is to say, he must establish facts
upon which it can be affirmatively asserted that the assessment was not
authorized by the taxing statute, or which bring the matter into such a state
of doubt that, on the principles alluded to, the liability of the appellant
must be negative.30
Twenty-four years later, the Supreme Court of Canada once again dealt
with the burden of proof in Johnston v. Minister of National Revenue. 31 In
that case, the taxpayer had been assessed under the provisions of the
Income War Tax Act32 on the basis that he was subject to income tax at a
rate of 9 percent as opposed to 7 percent, because his spouse had income,
other than earned income, in excess of $660.00. The higher rate of tax
applied to taxpayers who “supported” spouses having income, other than
earned income, in excess of $660.00; the taxpayer contended that since
he did not “support” his spouse, he should be taxed at the lower rate. The
court considered the question who should bear the onus of proof in respect
of this issue. In simple terms, the issue was whether the taxpayer was
required to prove that he did not support his wife or the minister was
required to prove that the taxpayer did support his wife.
In the following passage, Rand J, speaking for himself, Rinfret CJ, and
Kerwin J, expressed what is now viewed as the general rule:
Every such fact found or assumed by the assessor or the Minister must then
be accepted as it was dealt with by these persons unless questioned by the
appellant. If the appellant here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have
raised that issue in his pleading, and the burden would have rested on him
as on any appellant to show that the conclusion below was not warranted. For
that purpose he might bring evidence before the Court notwithstanding that
it had not been placed before the assessor or the Minister, but the onus was
his to demolish the basic fact on which the taxation rested [emphasis added].33
29 Ibid.
30 Supra
footnote 14, at 1211.
footnote 13.
32 RSC 1927, c. 97, as amended.
33 Supra footnote 13, at 1183.
31 Supra
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ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
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The court thus accorded the facts found or assumed by the minister the
rebuttable presumption of correctness and validity, thereby casting the burden of disproving the minister’s grounds for the assessment on the taxpayer.
Although Rand J’s decision resolved the question who bore the initial
onus on an appeal of an assessment, it did not elaborate on the ways
through which the taxpayer could meet this burden.
In a series of cases beginning with MNR v. Pillsbury Holdings Ltd. 34 in
1964, the Exchequer Court attempted to explain and elaborate on the
principles established in the Johnston decision. In Pillsbury Holdings, the
taxpayer company borrowed over $1 million from two of its subsidiary
companies, with each loan bearing interest payable semi-annually. When
the first interest payment came due, each of the subsidiaries agreed to
waive and forgo the interest. Subsequently, the taxpayer company repaid
both loans and each of the subsidiaries agreed to waive the interest accrued
since the last waiver. The minister assessed the taxpayer on the basis that
the waiver of the interest was a benefit that was conferred on the shareholder (the taxpayer company). The taxpayer was successful in an appeal
to the Tax Appeal Board, and the minister appealed from that judgment to
the Exchequer Court. In his notice of appeal, the minister did not allege
that the series of waivers was anything other than the granting of relief by
a lender to a borrower. There was no allegation that this arrangement was
mere subterfuge to confer a benefit on the borrower qua shareholder. 35
The taxpayer did not dispute the assumptions or suggest that the assumptions were incorrect; instead, it adduced evidence as to the facts that
existed at the time and argued that those facts did not support the assessment. The minister alleged that waiver of interest, in and of itself,
constituted a benefit that was conferred on the shareholder. The court disagreed and dismissed the minister’s appeal, thereby striking out the
assessment. In so doing, the court found that the minister was required to
specifically plead that the waivers in question were arrangements that
conferred a benefit. The court concluded that the taxpayer had discharged
its onus by simply raising the minister’s failure to make this allegation.
Pillsbury Holdings is often cited as the blueprint for the strategy that a
taxpayer should adopt when appealing an assessment. Cattanach J, after
citing Johnston for the proposition that “every such fact found or assumed
by the Minister must then be accepted . . . unless questioned by the appellant,”36 suggested that a taxpayer may attack the minister’s assumptions by
a) challenging the Minister’s allegation that he did assume those facts;
b) assuming the onus of showing that one or more of the assumptions
was wrong; or
34 64
DTC 5184 (Ex. Ct.).
at 5189.
36 Supra footnote 13, at 1183.
35 Ibid.,
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c) contending that, even if the assumptions were justified, they do not
of themselves support the assessment. 37
Cattanach J also made the parenthetical observation that the minister is
not bound by the facts and assumptions made at the time of assessment,
but if he changes his position before the court, he will bear the burden of
proof to the extent of the change:
The Minister could, of course, as an alternative to relying on the facts
found or assumed in assessing the respondent, have alleged by his Notice
of Appeal further or other facts that would support or help in supporting
the assessment. If he had alleged such further or other facts, the onus
would presumably have been on him to establish them [emphasis added].38
ANALYSIS OF THE PILLSBURY HOLDINGS STRATEGY
Challenging the Minister’s Allegation That He Did
Assume Those Facts
Since only facts and assumptions raised by the minister in the assessment
are accorded the presumption of correctness, where a taxpayer is able to
show that any of these purported assumptions was not in fact assumed by
the minister, the assumption cannot be presumed to be correct. Consequently, the Crown must then bear the burden of proving the facts necessary
to uphold the assessment. If, however, the assumption in question was not
crucial to the defence of the assessment, the minister may “rest” on the
remainder of the assumptions pleaded.
Showing That One or More of the Assumptions Was Wrong
The taxpayer may attack the minister’s assessment by adducing evidence
to demonstrate that one or more of the minister’s assumptions was incorrect. This tactic does not guarantee success on an appeal, for two reasons.
First, the Crown may show that the assumptions that remain are, in and of
themselves, sufficient to support the assessment. Second, the Crown in
37 Supra footnote 34, at 5188. “These three possibilities should be taken as exhaustive
of a taxpayer’s options for overcoming assumptions of fact pleaded by the Minister.”
944787 Ontario Inc. v. The Queen, [1998] 3 CTC 2293, at 2295 (TCC), Brulé TCCJ. It is
interesting to contrast these criteria for appealing an assessment with what the 1946 Special
Committee of the Senate on Taxation believed existed under the Income War Tax Act:
“[U]nder the express language of the statute an appeal is stated to be from an assessment
only. This has been confirmed on a number of occasions by the Exchequer Court of
Canada and the inference is clear that there is no direct appeal from the exercise of the
Minister’s discretion per se. The only method by which a taxpayer can attack or even
question the exercise of ministerial discretion under the law as presently constituted is by
means of taking an appeal to the Exchequer Court and urging that the Court consider the
exercise of discretion as one of the factors in the assessment which is appealed against. . . .
[A] Court may only interfere with the exercise of a discretionary power where it appears
that 1. The discretion has not really been exercised. 2. It has not been exercised honestly
and fairly. 3. The person exercising the discretion was influenced by extraneous and irrelevant facts. 4. The decision was based on principles incorrect in law.” Canada, Special
Committee of the Senate on Taxation, Final Report, part 1 (Ottawa: King’s Printer, 1946), 381.
38 Supra footnote 34, at 5188.
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defending the assessment is not precluded from adopting a different position from that taken by the minister in the assessment. In such circumstances, the Crown would bear the burden of proving the facts in support
of the new position.39
Showing That Assumptions Do Not Support the Assessment
Where the taxpayer can show that the facts and assumptions put forward
by the minister should not result in taxation, the appeal must be allowed.
In essence, this is a question of law. The taxpayer raises no dispute as to
the facts and assumptions of the minister but instead argues that the facts
do not deprive the taxpayer of the relief sought in the appeal.
COMMON LAW EXCEPTIONS TO THE GENERAL RULE
Although Johnston and Pillsbury Holdings made it clear that, in general,
it is the taxpayer who bears the initial burden of proof in income tax
appeals, the courts in subsequent decisions have attempted to reconcile
this rule with those circumstances in which it seemed to place a particularly onerous and unfair burden on the taxpayer. As a consequence, several
exceptions to the general rule emerged from the common law, 40 whereby
it has been established that the Crown, rather than the taxpayer, bears the
initial burden of proof. These exceptions include the following:
• additional, new, or other facts raised subsequent to the assessment;
• unpleaded assumptions; and
• alternative pleadings.
The underlying rationale behind these exceptions is a concern that the
taxpayer would not know the precise nature of the case against him or
her. The lack of clarity in the facts and assumptions asserted by the
minister in the assessment would therefore render it unfair to expect the
taxpayer to bear the initial onus.
Additional, New, or Other Facts Raised Subsequent to
the Initial Assessment
In Pillsbury Holdings, Cattanach J in obiter stated that the minister could
allege in the notice of appeal further or other facts supporting the assessment, rather than relying only upon the facts that he found or assumed in
assessing the taxpayer at first instance. He added that, if such further
39 Ibid. Also note that “in certain circumstances, it may be enough to show that some
(not all) of the Minister’s assumptions are incorrect to shift the onus from the taxpayer to
the Minister.” Thomas E. McDonnell, “Administrative Matters and Appeals,” in Income
Tax for the General Practitioner, Special Lectures of the Law Society of Upper Canada,
1986 (Don Mills, Ont.: De Boo, 1986), 181-205, at 199, citing The Queen v. Farmparts
Distributing Ltd., [1980] CTC 205 (FCA).
40 In addition, other exceptions have been codified in the Income Tax Act and the Tax
Court of Canada Rules (General Procedure). These exceptions are discussed in greater
detail below.
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facts were indeed alleged, the minister would have the onus of establishing them. Since Cattanach J ’s decision in Pillsbury Holdings, the courts
have continued to hold that the Crown is not restricted to merely relying
upon the assumptions made by the minister in the initial assessment. The
Crown may plead allegations of fact in the reply that are different from,
or in addition to, the facts found or assumptions made by the minister at
the audit or objection stage. Nevertheless, as Cattanach J made clear,
where the Crown pleads additional, new, or other facts, it bears the burden of establishing these facts. Since these new pleadings are not facts
found or assumptions made by the minister in the initial assessment, they
will not be accorded a presumption of correctness by the court.
In Continental Bank Leasing Corporation et al. v. The Queen, 41 Bowman TCCJ reiterated the principle that the minister is not bound by the
assumptions made on the initial assessment. He added that the minister,
in support of an assessment of a taxpayer, is entitled to allege new facts
or facts inconsistent with those assumed on the initial assessment provided that he or she bears the onus of proving those facts. In addition,
Bowman TCCJ clarified that an assumption, as the word is used in income
tax appeals, is not a binding admission.42
Unpleaded Assumptions
It is the general rule that every party to litigation must plead the facts
upon which he or she relies in such a way as to put his or her opponent on
notice of the case that is to be met.43 Thus, where an assumption is not
pleaded by the minister, the courts have ruled that there is no onus on the
taxpayer to disprove the assumption.
In del Valle v. MNR, 44 the issue before the Tax Court of Canada was
whether the Crown was correct in reassessing the taxpayer on the basis
that she had received $5,100 from her husband. There was no evidence
before the court to establish that this payment had been made, nor any
factual basis or assumption pleaded in support of this allegation. Since
the minister had failed to allege an ingredient essential to the validity of
the reassessment, there was no onus on the taxpayer to prove a phantom
or non-existent fact or an assumption not made by the minister. 45
The Federal Court of Appeal reviewed at length the onus of proof in
the case of unpleaded assumptions in Pollock v. The Queen. 46 The court
commenced by stating the aforementioned general principle that “every
party to litigation . . . must plead the facts upon which he relies in such a
41 93
DTC 298 (TCC).
at 302.
43 See Pollock, supra footnote 15, at 6053.
44 86 DTC 1235 (TCC).
45 Ibid., at 1237.
46 Supra footnote 15.
42 Ibid.,
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ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
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way as to put his opponent fairly on notice of the case he has to meet.”47
It then went on to explain that, in the case of taxation litigation, where
assumptions are pleaded by the minister in the assessment, the burden is
cast on the taxpayer to disprove those assumptions. The court determined,
however, that the same effect could not result where the assumptions
were not in fact pleaded. In the case of unpleaded assumptions, the taxpayer does not have the advantage of knowing the case against him or
her. Consequently, in such circumstances, the onus instead must fall upon
the Crown to establish the correctness of the minister’s assessment. The
court stated:
Where pleaded, however, assumptions have the effect of reversing the burden of proof and of casting on the taxpayer the onus of disproving that
which the Minister has assumed. Unpleaded assumptions, of course, cannot
have that effect and are therefore, in my view, of no consequence to us
here. . . .
Where, however, the Minister has pleaded no assumptions, or where
some or all of the pleaded assumptions have been successfully rebutted, it
remains open to the Minister, as defendant, to establish the correctness of
his assessment if he can. In undertaking this task, the Minister bears the
ordinary burden of any party to a lawsuit, namely to prove the facts which
support his position unless those facts have already been put in evidence
by his opponent. This is settled law.48
In Bowens v. The Queen, 49 Bowman TCCJ cited Pollock as authority for
the proposition that there is an onus on the minister to disprove unpleaded
assumptions in certain situations. The facts of this case were highly unusual. In raising the assessment under appeal, the minister had originally
assumed that the parties to the transaction in question were not dealing at
arm’s length. In the reply filed in response to the taxpayer’s appeal, the
Crown did not disclose this assumption; rather, it pleaded a completely
different theory of the case—that is, that the transaction was in fact an
arm’s-length transaction between the parties. The taxpayer sought to rely
upon the minister’s original, unpleaded assumption. Bowman TCCJ concluded that the taxpayer could in fact rely upon this unpleaded assumption.
He went on to add that it was “incumbent upon the Crown to plead
honestly and fully all of the assumptions relevant to the assessment.”50
He added that if the Crown wished to advance at trial a new basis for
upholding the minister’s assessment which was inconsistent with the original assumption, it would normally be required to disclose the original
assumption in its reply and to demonstrate why it was wrong. Thus, the
taxpayer did not have to adduce any evidence to support the contention
that the parties were not dealing at arm’s length because the minister’s
47 Ibid.,
at 6053.
48 Ibid.
49 94
DTC 1853 (TCC).
at 1856.
50 Ibid.,
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original assumption to that effect survived its abandonment by the Crown
and the Crown bore the burden of disproving it.51
Alternative Pleadings
Historically, the courts have held the view that the minister cannot plead
alternative bases for liability. In Brewster v. The Queen, 52 Gibson J of the
Federal Court—Trial Division considered whether the income at issue
was that of the individual taxpayer or that of a corporation that he controlled and to which he had transferred a partnership interest. The minister
pleaded that either the transfer of the partnership interest was ineffective
or the corporation was a sham. The court found that these assertions were
mutually exclusive and therefore unfair to the taxpayer. Since the taxpayer was unable to discern the precise facts of the case against him,
Gibson J concluded:
It seems therefore that it is fundamentally wrong to plead assumptions in
the alternative. In like manner, it is fundamentally wrong in law for assessors of the Minister of National Revenue to assess or reassess and not tell
precisely the basis for such assessment or reassessment.53
In subsequent decisions, however, the courts have adopted a less
stringent view of pleadings in the alternative. For example, in Hillsdale
Shopping Centre Limited v. MNR , the Federal Court of Appeal stated:
If a taxpayer, after considering a reassessment made by the Minister, the
Minister’s reply to the taxpayer’s objections, and the Minister’s pleadings
in the appeal, has not been aware of the basis upon which he is sought to
be taxed, the onus of proving the taxpayer’s liability in a proceeding similar
to this one would lie upon the Minister. This defect may be due to a number
of reasons such as lack of clarity on the part of the Minister in expounding
the alleged basis of the taxability which could include an attempt by the
Minister to attach liability on one of two or more alternative bases thus
failing to make clear to the taxpayer the assumption on which he relies.54
Where the minister attempts to attach liability to a taxpayer on various
alternative bases, he or she may fail to make clear to the taxpayer which
assumptions he or she is relying upon. Although the court was cognizant
of this possibility, the practice of pleading in the alternative was not
challenged. Instead, the court merely concluded that, where the minister
proceeded by way of alternative pleadings, the Crown had to bear the
initial burden of proof in the case of the alternative allegations.
The Federal Court of Appeal reconfirmed the view that the minister
was entitled to plead alternative bases for liability in Schultz v. The
Queen.55 In this case, the minister in making his assessment had proceeded
51 Ibid.
52 76
DTC 6046 (FCTD).
at 6049.
54 81 DTC 5261, at 5266 (FCA).
55 [1996] 2 CTC 127 (FCA).
53 Ibid.,
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1203
on the assumption that the two taxpayers were in an agency relationship.
At trial before the Tax Court of Canada, however, the minister, in addition to the agency argument, espoused the alternative position that the
transaction at issue constituted a joint venture or partnership. The taxpayers on appeal contended that the Tax Court of Canada erred in permitting
the minister to make the alternative argument.
In dismissing the appeal, the Federal Court of Appeal concluded that
the minister was entitled to plead, in the alternative, the joint venture or
partnership argument. In so doing, the court recognized that there are
certain restraints on the minister’s ability to plead in the alternative.
Notably, it was pointed out that the minister “cannot plead an alternative
assumption when to do so would [so] fundamentally alter the basis on
which his assessment was based as to render it an entirely new assessment.”56 In other words, the minister’s alternative pleading must arise
from the same set of facts upon which the principal pleading is based.
The minister may rely upon additional facts, but he cannot assert a completely different set of facts and assumptions. In addition, the court
reiterated that, where the minister pleads in the alternative, the Crown
must bear the burden of establishing the grounds for that pleading.
CODIFIED EXCEPTIONS TO THE GENERAL RULE
In addition to the common law exceptions described above, several
exceptions to the general rule have been codified in both the Income Tax
Act and the General Procedure Rules.
Reverse Onus Provisions of the Act
Several sections of the Act either specifically stipulate that the Crown
bears the initial burden of proof or have been interpreted by the courts as
imposing this onus on the Crown. The most common reverse onus provisions
are subsection 110.6(6), subparagraph 152(4)(a)(i), and subsection 163(2).
Subsection 110.6(6): Denial of Capital Gains Exemption
Subsection 110.6(6) permits the minister to deny a capital gains exemption where a taxpayer has failed to report a capital gain either knowingly
or under circumstances amounting to gross negligence. It states:
Notwithstanding subsections (2) and (2.1), where an individual has a capital gain for a taxation year from the disposition of a capital property and
knowingly or under circumstances amounting to gross negligence
(a) fails to file a return of the individual’s income for the year within
one year after the day on or before which the individual is required to file
a return of the individual’s income for the year pursuant to section 150, or
(b) fails to report the capital gain in the individual’s return of income
for the year required to be filed pursuant to section 150,
56 Ibid.,
at 136.
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no amount may be deducted under this section in respect of the capital gain
in computing the individual’s taxable income for that or any subsequent
taxation year and the burden of establishing the facts justifying the denial
of such an amount under this section is on the Minister.
This provision clearly stipulates that, if the minister seeks to deny a
capital gains exemption, he or she must bear the burden of establishing
the facts that justify the denial. The reverse onus is appropriate in this
context given that, by invoking this section, the minister is alleging that
the taxpayer either with knowledge or under circumstances amounting to
gross negligence failed to report a capital gain. The minister not only
makes a bald declaration about the state of the taxpayer’s knowledge, but
uses the allegation as the basis for penalizing the taxpayer by denying the
capital gains exemption to which the taxpayer would otherwise be entitled.
Consequently, it is reasonable for the Crown, rather than the taxpayer, to
shoulder the responsibility of demonstrating the facts that support the
denial of the exemption.
Subparagraph 152(4)(a)(i): Statute-Barred Taxation Years
and Allegations of Fraud or Misrepresentation
Subsection 152(3.1) stipulates that the normal reassessment period for a
taxpayer in respect of a specific taxation year is four years where the
taxpayer is a mutual fund trust or a corporation other than a Canadiancontrolled private corporation, and three years in all other cases. Nevertheless, paragraph 152(4)(a) permits the minister to assess the taxpayer at
any time where a misrepresentation in the return may be attributed to
neglect, carelessness, or wilful default, or where the taxpayer has committed a fraud in filing the return or in supplying information under the
Act. Subparagraph 152(4)(a)(i) states:
The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any,
payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional
assessment may be made after the taxpayer’s normal reassessment period
in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in filing
the return or in supplying any information under this Act.
Thus, subparagraph 152(4)(a)(i) confers upon the minister the extraordinary power to open up a statute-barred taxation year where the taxpayer
has committed a fraud or made a misrepresentation in filing the return for
that particular year. In MNR v. Taylor,57 Cameron J specifically considered
the issue of burden of proof in circumstances where a reassessment based
57 61
DTC 1139 (Ex. Ct.).
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1205
on fraud or misrepresentation was made after the statutory period of limitation had expired. He concluded that the initial burden of proof belonged
to the minister to establish to the satisfaction of the court that the taxpayer had made the misrepresentation or committed the fraud. He added
that the only exception to this rule would arise where the taxpayer had, in
the pleadings, in the notice of appeal, or at the hearing of the appeal,
admitted the misrepresentation or fraud alleged by the minister. Cameron J’s
conclusions were based on fundamental common law principles that an
individual who alleges fraud must clearly and distinctly prove the fraud
that he or she alleges. Thus, the minister cannot assume in an assessment
that the taxpayer has committed a fraud or misrepresentation; moreover,
the court will not presume that such an allegation is correct. Instead, the
Crown must prove the validity of its assertion in order to assess the
taxpayer for a statute-barred year.
Subsection 163(2): False Statements or Omissions
Subsection 163(2) permits the minister to impose a penalty on a taxpayer
who has knowingly, or under circumstances that amount to gross negligence,
made a false statement or omission in his or her tax return. It states:
Every person who, knowingly, or under circumstances amounting to gross
negligence in the carrying out of any duty or obligation imposed by or
under this Act, has made or has participated in, assented to or acquiesced
in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or
made in respect of a taxation year as required by or under this Act or a
regulation, is liable to a penalty.
The penalty that may be charged pursuant to this section is a punitive
measure, similar to the fines that may be levied under provisions of the
Criminal Code of Canada. In the criminal law context, it is the Crown
that bears the burden of proving beyond a reasonable doubt the charges
laid against the accused. Similarly, where the minister seeks to impose a
penalty against a taxpayer under the Income Tax Act, the Crown bears the
onus of proving the facts that justify such a charge. The standard of
proof, however, remains the civil standard of a balance of probabilities
rather than the criminal standard.
Failure of the Crown To Reply Within the Prescribed
Time Limits
Pursuant to section 63 of the Tax Court of Canada Rules (General Procedure),
a taxpayer may bring a motion for judgment where a reply to a notice of
appeal has not been filed and served by the Crown within the prescribed
time limits. Section 63(2) grants the court the discretion to “direct that
the appeal proceed to hearing on the basis that the facts alleged in the
notice of appeal are presumed to be true [emphasis added].”58 Thus, the
58 See
the Tax Court of Canada Rules (General Procedure), supra footnote 4.
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presumption of correctness applies to the facts asserted in the taxpayer’s
notice of appeal rather than the minister’s assessment. Consequently, it is
the Crown that bears the initial onus of rebutting and disproving the
taxpayer’s assertions in his or her notice of appeal.
HICKMAN MOTORS AND CADILLAC FAIRVIEW
The case law subsequent to Johnston and Pillsbury Holdings demonstrates the courts’ preoccupation with the taxpayer’s initial burden of
proof in income tax appeals. In particular, the courts, in striving to find
exceptions to this general rule, were caught up in analyzing the nature of
the facts and assumptions pleaded by the minister in the assessment.
Following the early decisions, taxpayers attempted to circumscribe and
limit the assumptions pleaded by the minister. In order to reconcile the
competing interests of the taxpayer and the Crown, the courts developed
exceptions to the general rule where the initial burden on the taxpayer was
perceived to be particularly onerous. In so doing, the courts categorized
and pigeon-holed the minister’s assumptions, thereby overlooking the
underlying principles applicable to the burden of proof in litigation. Two
recent decisions, one in the Supreme Court of Canada and one in the Tax
Court of Canada, have re-examined and rearticulated the law in this area
and in so doing have provided a much-needed clarification of the entire
area of onus and ministerial assumptions.
In Hickman Motors, L’Heureux-Dubé J set out her view of the ministerial assumptions in clear and unambiguous terms:
K. Onus of Proof
As I have noted, the appellant adduced clear, uncontradicted evidence,
while the respondent did not adduce any evidence whatsoever. In my view,
the law on that point is well settled, and the respondent failed to discharge
its burden of proof for the following reasons.
It is trite law that in taxation the standard of proof is the civil balance of
probabilities: Dobieco Ltd. v. M . N . R., [1966] S . C . R . 95, and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance v. Dalton Cartage, [1982] 1 S. C. R. 164; Pallan v. M. N . R ., 90
DTC 1102 ( T .C . C .) at p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge Estates v. M. N . R., 59 DTC 1098 (Ex. Ct.),
at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. M.N.R., S. C.R. 486; Kennedy
v. M . N . R ., 73 DTC 5359 (F . C .A .), at p. 5361). The initial burden is only to
“demolish” the exact assumptions made by the Minister but no more: First
Fund Genesis v. The Queen, 90 D. T. C . 6337 ( F . C . T. D .), at p. 6340.
This initial onus of “demolishing” the Minister’s exact assumptions is
met where the appellant makes out at least a prima facie case: Kamin v.
M . N . R ., 93 DTC 62 ( T . C . C .); Goodwin v. M . N . R ., 82 DTC 1679 (T . R . B.). In
the case at bar, the appellant adduced evidence which met not only a prima
facie standard, but also, in my view, even a higher one. In my view, the
appellant “demolished” the following assumptions as follows: (a) the
assumption of “two businesses,” by adducing clear evidence of only one
business; (b) the assumption of “no income,” by adducing clear evidence of
(1998), Vol. 46, No. 6 / no 6
ONUS OF PROOF AND MINISTERIAL ASSUMPTIONS
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income. The law is settled that unchallenged and uncontradicted evidence
“demolishes” the Minister’s assumptions: see for example MacIsaac v.
M . N . R ., 74 DTC 6380 ( F . C . A.), at p. 6381; Zink v. M . N . R ., 87 DTC 652
( T. C . C .). As stated above, all of the appellant’s evidence in the case at bar
remained unchallenged and uncontradicted. Accordingly, in my view, the
assumptions of “two businesses” and “no income” have been “demolished”
by the appellant.
Where the Minister’s assumptions have been “demolished” by the appellant, “the onus shifts to the Minister to rebut the prima facie case”
made out by the appellant and to prove the assumptions: Magilb Development Corp. v. The Queen, 87 DTC 5012 (FCTD ), at p. 5018. Hence, in the
case at bar, the onus has shifted to the Minister to prove its assumptions
that there are “two businesses” and “no income.”
Where the burden has shifted to the Minister, and the Minister adduces
no evidence whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the
judgment of the Trial Division, on the grounds that (at pp. 6381-2) the
“evidence was not challenged or contradicted and no objection of any kind
was taken thereto.” See also Waxstein v. M . N. R ., 80 DTC 1348 ( TRB);
Roselawn Investments Ltd. v. M . N . R ., 80 DTC 1271 (T. R . B .). Refer also to
Zink v. M . N . R., supra, at p. 653, where, even if the evidence contained
“gaps in logic, chronology and substance,” the taxpayer’s appeal was allowed as the Minister failed to present any evidence as to the source of
income. I note that, in the case at bar, the evidence contains no such “gaps.”
Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the
appellant is entitled to succeed.
In the present case, without any evidence, both the Trial Division and
the Court of Appeal purported to transform the Minister’s unsubstantiated
and unproven assumptions into “factual findings,” thus making errors of
law on the onus of proof. My colleague Iacobucci, J. defers to these socalled “concurrent findings” of the courts below, but, while I fully agree in
general with the principle of deference, in this case two wrongs cannot
make a right. Even with “concurrent findings,” unchallenged and uncontradicted evidence positively rebuts the Minister’s assumptions: MacIsaac,
supra. As Rip T. C . J . stated in Gelber v. M . N . R., 91 DTC 1030 ( T. C . C.), at p.
1033, “[the Minister] is not the arbiter of what is right or wrong in tax
law.” As Brulé T. C . J ., stated in Kamin, supra, at p. 64:
the Minister should be able to rebut such [prima facie] evidence and
bring forth some foundation for his assumptions. . . .
The Minister does not have a carte blanche in terms of setting out
any assumption which suits his convenience. On being challenged by
evidence in chief he must be expected to present something more
concrete than a simple assumption. [Emphasis added.]
In my view, the above statement is apposite in the present case: the
respondent, on being challenged by evidence in chief, failed to present
anything more concrete than simple assumptions and failed to bring forth
any foundation. The respondent chose not to rebut any of the appellant’s
evidence. Accordingly, the respondent failed to discharge her onus of proof.
I note that, in upholding the Minister’s unproven assumptions, my colleague Iacobucci, J. may be seen as reversing the above-stated line of
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caselaw, without explicitly providing the rationale for doing so. With respect
for the contrary opinion, in my view, changes in the jurisprudence regarding the onus of proof in tax law should be left for another day. Furthermore,
on the facts of the case at bar, sanctioning the respondent’s total lack of
evidence could seem unreasonable and perhaps even unjust, given that the
appellant complied with a well-established line of jurisprudence as regards
its onus of proof. 59
Before we turn to the content of the preceding remarks, it is important
to put them into a juristic context. L’Heureux-Dubé J allowed the taxpayer’s
appeal; McLachlin J wrote separate reasons allowing the appeal, which
were concurred in by La Forest and Major JJ . Iacobucci J, in dissent,
would have dismissed the appeal; his dissent was concurred in by Sopinka
and Cory JJ . McLachlin J made the following observation with respect to
the reasons of L’Heureux-Dubé J :
While I concur in the general approach and the conclusion of Justice
L’Heureux-Dubé, I prefer to decide the appeal on somewhat narrower
grounds. 60
While Iacobucci J took issue with a number of L’Heureux-Dubé J’s conclusions, both legal and evidentiary, he did not comment directly upon
her observations on onus.
We are therefore left with a very recent decision of the Supreme Court
of Canada that deals directly with the question of onus in tax appeals. In
our view, L’Heureux-Dubé J’s comments on onus formed part of her “general approach,” which was concurred in by a majority of the court (and
with which the dissenting justices did not take issue), and therefore is
binding upon lower courts in accordance with the stare decisis doctrine.
In any event, since there is no such thing as obiter61 in a decision of the
Supreme Court of Canada, the observations of L’Heureux-Dubé J are
binding on lower courts unless and until they are reversed by a subsequent decision of that court.
The fundamental principle to be taken from Hickman Motors is that all
that is required for a taxpayer to rebut a ministerial assumption is a prima
facie case. That is achieved where the taxpayer puts forward credible,
uncontradicted evidence on the point. If the Crown chooses to call no
evidence, as it did in Hickman Motors, it does so at its peril. It would be
“unreasonable and perhaps even unjust” to permit the Crown to rely upon
assumptions without adducing any evidence in the face of credible evidence put forward by the taxpayer.
The general approach advocated by L’Heureux-Dubé J in Hickman
Motors is mirrored in a recent decision of Bowman TCCJ in the Tax Court
59 Supra
footnote 11, at 5376-77.
at 5363.
61 R v. Matheson, [1994] 3 SCR 328, at 335; and Sellars v. The Queen, [1980] 1 SCR
527, at 529.
60 Ibid.,
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of Canada. In an endnote to his decision in The Cadillac Fairview Corporation Limited v. The Queen,62 Bowman TCCJ observed that the traditional
approach focusing upon the nature and content of the minister’s assumption is misguided. Rather, Bowman TCCJ enunciated an approach relying
upon the ordinary rules of practice and pleadings:
An inordinate amount of time is wasted in income tax appeals on questions
of onus of proof and on chasing the will-o’-the-wisp of what the Minister
may or may not have “assumed.” I do not believe that M . N . R. v. Pillsbury
Holdings Ltd., [1964] DTC 5184, has completely turned the ordinary rules
of practice and pleading on their head. The usual rule—and I see no reason
why it should not apply in income tax appeals—is set out in Odgers’ Principles of Pleading and Practice, 22nd edition at p. 532:
The “burden of proof” is the duty which lies on a party to establish
his case. It will lie on A , whenever A must call some evidence or
have judgment given against him. As a rule (but not invariably) it
lies upon the party who has in his pleading maintained the affirmative of the issue; for a negative is in general incapable of proof. Ei
incumbit probatio qui dicit, non qui negat. The affirmative is generally, but not necessarily, maintained by the party who first raises the
issue. Thus the onus lies, as a rule, on the plaintiff to establish every
fact which he has asserted in the statement of claim, and on the defendant to prove all facts which he has pleaded by way of confession
and avoidance, such as fraud, performance, release, rescission, etc.63
Thus, Bowman TCCJ implies that an analysis focused on the nature of the
assumption (that is, unpleaded, alternative, or additional) is too narrow.
This restrictive analysis results in obscuring the principled approach to
the burden of proof. Emphasizing the nature of the assumption fails to
recognize the idea that a person who puts forth an affirmative assertion
bears the onus of proof with respect to that assertion.
We think that the observations of Bowman TCCJ are completely in
keeping with the policy considerations underlying the burden of proof
rules, the growing judicial tendency to demystify the operation of these
rules, and the observations of L’Heureux-Dubé J in Hickman Motors.
CONCLUSION
It seems clear to us that in recent years the courts have moved considerably in the direction of simplifying and clarifying the rules respecting
onus and ministerial assumptions in tax litigation. Apart from certain
exceptions such as false statements or omissions, statute-barred years,
and alternative pleadings (which we have dealt with above), we believe
that the rules can be summarized as follows:
1) The rule respecting ministerial assumptions is a form of negative
inference drawn by the courts as a matter of policy in light of the common-
62 97
DTC 405 (TCC).
at 407, footnote 2.
63 Ibid.,
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sense proposition that the material facts underlying an assessment are
peculiarly within the knowledge of the taxpayer, not of the minister.
2) While the point is not entirely free from doubt, the rule probably
does not extend to facts assumed by the minister that the taxpayer could
not reasonably be expected to either prove or disprove (for example,
dealings of unrelated parties of which the taxpayer is unaware); it is
likely that the onus is on the Crown to prove such facts.
3) In a tax appeal, the taxpayer has the normal burden of an appellant
in civil litigation: proving, on the balance of probabilities, the material
facts to support his or her appeal.
4) In a tax appeal, the Crown has the normal burden of a respondent in
civil litigation: proving, on the balance of probabilities, material facts to
support a defence against claims raised by the taxpayer.
5) If the Crown pleads that it has no knowledge of material facts, the
taxpayer must prove those facts on the balance of probabilities.
6) If the Crown alleges that the minister relied upon specific assumptions of fact in the course of raising an assessment, the taxpayer must
either
a) prove, on the balance of probabilities, that the minister did not
rely upon such assumptions of fact;
b) demonstrate that the minister’s assumptions of fact are irrelevant; or
c) demolish the minister’s assumptions of fact.
7) “Demolition” of the minister’s assumptions of fact involves nothing more complicated than adducing a prima facie case that those
assumptions are incorrect.
8) Where the Crown calls no evidence, a taxpayer’s evidence will
normally be accepted as demolishing the minister’s assumptions unless
a) it is successfully challenged on cross-examination;
b) it presents serious issues of credibility; or
c) the court draws a negative inference from the taxpayer’s failure
to call all material evidence at his or her disposal.
9) Where a taxpayer has adduced a prima facie case rebutting the
minister’s assumptions, the onus and standard of proof revert to the normal
rules of civil procedure.
10) If the court concludes that all material facts have been adduced in
evidence, it will be in a position to dispose of the appeal on its merits
without having regard to the minister’s assumptions but solely on the
basis of a determination of whether the taxpayer and the Crown have met
the normal evidentiary burdens imposed on them under the rules of civil
procedure on the balance of probabilities.
While to some extent our conclusions differ from historical expressions of these rules, we think that they are completely consistent with the
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principles set out in Hickman Motors and Cadillac Fairview. In tax litigation, as in other areas of the law, the courts are showing an increasing
tendency to base their decisions on a measured assessment of all material
facts, rather than on technical procedural niceties. In a tax appeal, ministerial assumptions cease to be relevant if a court believes that all material
facts are in evidence. Ministerial assumptions should be invoked to dismiss an appeal only in cases where a court concludes that a taxpayer has
not adduced material evidence in his or her possession or control; where
serious doubts as to credibility are raised by the taxpayer’s case; or where,
quite simply, the taxpayer’s evidence can reasonably be seen as supporting the minister’s assumptions.
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