Introduction – Burden of Proof in Tax Litigation
"Burden of Proof" is a legal term used to assign evidentiary responsibilities to parties in litigation. The party that carries the burden of proof must produce evidence to meet a threshold or "standard" in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail.
"Burden of Proof" at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the CRA. In other words, if you intend to take the CRA to Tax Court over an assessment, you will need to collect and present evidence in order to disprove the CRA's position. This is the basic principle; however, there are some situations where this responsibility or "onus" is reversed. The onus may also shift based on the stage of the proceedings and the actions taken by the parties.
Self representation in litigation is difficult at any level of court. The special rules for the Tax Court may present another hurdle to an unrepresented litigant. If you intend to pursue a tax appeal against the CRA you should contact one of our Toronto tax lawyers for tax help.
The Basic Principle- Initial Burden of Proof at Tax Court
In the Johnston  CTC 195 (SCC) case, the Supreme Court of Canada decided that the onus is on the taxpayer to "demolish the basic fact on which the taxation rested". The rationale for the placement of this onus on the taxpayer stems from the structure of the Canadian tax system.
Appellate courts usually operate to confirm or reverse the decisions of lower courts. However, the Tax Court is also an appellate court, even though there are no lower tax courts. An application to the Tax Court is, in essence, an appeal of assumptions made by the CRA tax auditor or a position taken by the CRA about a taxpayer's tax situation, based on information that the taxpayer has or has not provided the CRA. The CRA's knowledge of a taxpayer's affairs is limited compared with the knowledge of the taxpayer. Therefore, it is fair to expect the taxpayer to disprove the assumptions made by the CRA, because the taxpayer is in a better position to do so.
Standard of Proof in Tax Litigation
The Johnston judgement has caused issues with respect to another legal concept called "standard of proof". Once it is determined who bears the "burden of proof" the next question is to determine what "standard of proof" they should be held to.
The highest standard of proof in Canadian law, in criminal cases, is probably a familiar concept. In criminal trials, there must be "proof beyond a reasonable doubt" before a person can be convicted. This is significantly higher than the civil standard of a "balance of probabilities" where a "balance of probabilities" means is it more likely than not. The word "demolish" connotes a higher standard of proof than the civil standard of "more likely" that is in force in taxation courts.
So how does a Toronto tax lawyer "demolish" the CRA's assumptions? The Supreme Court of Canada provided guidance on this issue in the In the Hickman  2 S.C.R. 336 case. This case stated that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means "on its face". To prove a case "on its face" you must provide evidence that, unless rebutted, would prove your position.
According to the Supreme Court, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. For example, if the CRA assumes you own two businesses but you have clear documentation to prove that you own only one, you have "demolished" the CRA's assumption by providing unchallenged and uncontradicted evidence.
Once the Canadian tax lawyer for the taxpayer has made out a prima facie case to prove the facts in the tax appeal, the onus then shifts to the CRA to rebut the prima facie case. If the CRA cannot provide any evidence to prove their position, the taxpayer will succeed.
Select Exceptions to the Basic Principle that the Initial Burden of Proof is on the Taxpayer
There are some instances where it is unfair to place the initial burden of proof on the taxpayer. In the other instance, legislation dictates that the burden of proof is on the CRA.
In Anchor Pointe Energy Ltd [2007 FCA 188], the Federal Court of Appeal spoke to a circumstance where the initial onus is on the CRA instead of the taxpayer. The court agreed that, where the assumptions made by the CRA are exclusive and peculiarly within the CRA's knowledge, a corrective measure must be applied to the typical onus of proof. If the taxpayer has no knowledge with respect to the assumptions made by the CRA it would be unfair to require the taxpayer to disprove them.
The other situation in which a change occurs is when the CRA chooses to assess penalties under sections 163 and 163.2 of the Income Tax Act ("the Act"). Under section 163(3) of the Act the "burden of establishing the facts justifying the assessment of the penalty is on the [CRA]". Therefore, if the taxpayer has been assessed a gross negligence penalty, the burden of proof is placed on the CRA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.