Image by Wavebreak Media via Freepik

Introduction: “An Immigrant’s Journey to Success: But Wait, There’s Tax Glitches”

In the case of Yadgar v. The King, 2024 FCA 107, the Federal Court of Appeal rendered a verdict in June 2024, confirming the Tax Court of Canada’s July 2023 decision. The Canada Revenue Agency (CRA) was affirmed to have the power to reevaluate the taxpayer’s income after the normal reassessment period, and the court rejected the taxpayer’s appeal. The court also maintained that fines for gross negligence were applicable. In response to this finding, Yadgar, the taxpayer, requested leave to appeal to the Supreme Court of Canada in September 2024 in order to have another chance to contest the decision.

Yadgar, who came to Canada in 1995, was originally from Afghanistan. He finished high school and two years of physics at university in Afghanistan before coming to Canada. Even if it’s unclear from the case whether he formally completed his college degree, it’s obvious that he had a strong educational foundation.

Yadgar started his profession as a butcher at Kabul Supermarket, a grocery shop in Mississauga, Ontario, after relocating to Canada. He quickly rose to greater heights thanks to his work ethic and business savvy. Yadgar became the sole proprietor of Kabul Supermarket in 2004 after acquiring 50% of the company and the remaining 50% in the same year.

Yadgar proceeded to broaden his commercial ventures throughout the ensuing years. He further expanded his business portfolio in 2008 when he acquired a share in a storage company and became the sole stakeholder of a supermarket shop.

Although he appeared to be financially successful and his business empire was expanding, Yadgar’s income during the 2006–2009 tax years was much lower. He only reported $38,150 in total income during these four years, which was a huge disparity given the scope of his company operations.

Because of the suspicions this caused, the CRA audited Kabul Supermarket’s financial records as well as Yadgar’s personal tax returns. The audit found that the reported and real income differed significantly. A total of $512,211 was discovered to have been earned by Yadgar between 2006 and 2009, which was 13.5 times more than what he had first reported.

The cause of the disparity was found to be shareholder appropriations, which are undocumented personal withdrawals from the company that were not appropriately recorded in his tax returns.

Reassessments for Fraud or Misrepresentation-Reevaluation After the Normal Assessment Period

The case does not specify when the reassessments were conducted, but it was uncontested that they took place after the normal reassessment period, which is four years for corporations other than Canadian-controlled private corporations and three years for individuals and Canadian-controlled private corporations.

Under certain circumstances, the Canada Revenue Agency (CRA) may reassess a taxpayer after the normal reassessment period, in particular, if the taxpayer has committed misrepresentation as a result of intentional default, gross negligence, carelessness, or fraud.. The onus of proving that fraud or misrepresentation has taken place in these situations rests with the CRA, which must offer enough proof to support the extended assessment time limit.

In this specific case, the CRA claimed that Yadgar, the taxpayer, had provided false information on his tax returns. Yadgar claimed that his accountant, not he himself, was responsible for any falsification in his returns, even though he did not dispute the accuracy of the assessed income. He insisted he was not personally liable for any mistakes or omissions in the returns because he had trusted his accountant’s knowledge.

Relying Only on your Accountant will not Save You: Why it is not a Valid Defence in Tax Court

Yadgar’s main contention in the case involving him and Kabul Supermarket was that he and his company were totally dependent on the knowledge and behaviour of their longtime accountant, Costa. Yadgar argued that Costa had taken care of all his tax filings since he first arrived in Canada. He claimed that because of his poor knowledge of the English language and the Canadian tax system, he gave Costa total authority over his financial records, both personal and business. Yadgar added that Costa was in charge of creating and submitting tax returns for his companies as well as his family.

Yadgar also claimed that Costa had advised him to make the shareholder appropriations, which involved moving funds from Kabul Supermarket’s account to his own and depositing cash sales from Kabul Supermarket to his own. He was not responsible for the false statements as a result.

The Tax Court of Canada dismissed this argument. Yadgar acknowledged that the adjusted income was inaccurate by not contesting it. Carelessness, purposeful default, or negligence can all be considered forms of misrepresentation.

To refute the CRA’s evidence of his negligence, the taxpayer must demonstrate that he operated with due diligence. In this instance, Yadgar defended himself without taking any action to confirm the accuracy of his returns.

He was careless in making false statements in his returns, as he did not use reasonable caution.

The Unbiased Measure of Gross Negligence: An Objective Standard

In the case of Yadgar v. The King, the taxpayer attempted to contest the application of gross negligence penalties by arguing that the penalties should be based on his unique circumstances, which included his immigration history, low educational attainment, and inability to communicate effectively in English and in tax matters. In order to determine whether his acts justified penalties for gross negligence, the taxpayer contended that these elements should be taken into consideration, as they contributed to his failure to comprehend his tax duties.

The Federal Court of Appeal concurred with the Tax Court of Canada’s repeated rejection of this argument. The objective threshold for gross negligence—what a reasonable person would have done—was reaffirmed by the Tax Court of Canada. Personal circumstances don’t matter.

A reasonable individual would have been more focused on his business and personal profits in this situation. Yadgar’s actions have deviated significantly from what is anticipated of a responsible taxpayer.

Pro Tax Tip: Taxpayers Need to Be Careful When Filing Their Tax Returns

This is an intriguing example since the taxpayer’s argument backfired, exposing his own carelessness in making sure the returns were accurate by attempting to place the responsibility on his accountant.

It is not a legitimate defence in tax disputes to depend only on the work of an accountant. A more successful approach would have been to show proactive engagement by carefully going over tax returns, raising any concerns, and speaking with tax professionals to ensure that tax laws were being followed. But in this case, Yadgar, the taxpayer, did not take any such action.

This case serves as a reminder to taxpayers that relying only on an accountant does not absolve taxpayers of obligation. In order to ensure that his or her tax returns are accurate and in compliance, the Canada Revenue Agency (CRA) expects taxpayers to actively participate. Experienced Canadian tax lawyers should always be consulted when dealing with tax disputes.

Frequently Asked Questions

Question: I don’t have any prior accounting or tax knowledge. A tax accountant has already been hired to prepare my returns. What else might I do to understand my tax obligations?

Answer: Not everyone is expected to be an expert in taxation and accounting, as not everyone has received the necessary training. Nonetheless, it is required of you as a taxpayer to take reasonable steps to ensure that your returns are accurate.

Employing an accountant does not release you from accountability. Working together, you must provide the accountant with accurate and up-to-date information, examine the returns, look into any inconsistencies, and, if necessary, seek further assistance. In the end, your returns—not the accountant’s—are filed.

Question: My tax return was assessed by the Canada Revenue Agency (CRA) almost three years ago. Will I still be subject to a reassessment?

Answer: Although there are few exceptions, the typical reassessment term is three years for individuals and private businesses with Canadian control and four years for corporations other than those with Canadian control. The taxpayer’s deception or fraud is one exception. Other exceptions do exist as well.

Seeking knowledge from Canadian tax lawyers is advised if the CRA issues a reassessment after the normal reassessment period. A Canadian tax lawyer can evaluate the reassessment’s legitimacy, ascertain whether the CRA behaved within its bounds, and offer advice on whether or not to file a notice of objection.

DISCLAIMER: The information in this article is only general. Only as of the publishing date is it current. It can be outdated as it hasn’t been updated. It is not a reliable source and does not offer legal advice. Every tax case is different from the examples given in the article since it depends on its own conditions. A Canadian tax lawyer should be consulted if you have special legal issues.