Income

Paul Delean: If expenses don’t reflect your income, expect scrutiny

Recent court rulings where Revenue Quebec challenged people’s abnormally low tax returns.

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Last week’s column outlined some of the ways people are getting on the radar of tax investigators through social media posts.

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Recent court judgments involving Revenu Québec bring to mind some of the other red flags.

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For example, buying an expensive home that seems at odds with your reported household income.

Or having banking transactions of suspicious size or frequency.

If your explanations don’t satisfy the revenue department, you could end up having to review your financial statements or tax returns in front of a judge. At this point, you may need receipts and written documents to win your case, so don’t be too quick to destroy any documents you may one day need as proof.

A case heard by the Court of Quebec involved a man who bought a $500,000 home in a South Shore community in 2004, but reported self-employment income of $17,378 in 2004, $19,666 in 2005 and $5,599 in 2006.

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Revenu Québec reassessed him for the 2008 to 2012 tax years and used his banking transactions to calculate the amounts he said he failed to report.

He had explanations for certain sums, but Judge Daniel Bourgeois did not buy them all. In his August decision, he did not accept the claim that a sister in Italy had given him money for the school fees of his two children because there were no documents there. ‘support. And he was unconvinced that a $17,000 family vacation to Italy had been paid for by funds from a 1999 inheritance sitting in a crate at home.

The man said he handled a lot of money in his business. Justice Bourgeois said that while an entrepreneur can legally operate a business by receiving cash payments and paying bills in cash, it is imperative to keep invoices, records and receipts.

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In his ruling, he said Revenu Québec could add a total of more than $122,000 to the man’s taxable income for the years in question – less than the tax collectors had originally requested.

In another case heard by Court of Quebec judge Luc Huppe, a couple living in a $1 million home in the West Island had to account for a slew of deposits of varying sizes in two bank accounts on a period of several years.

They testified it was the gradual repayment of a $1.8 million (US) interest-free loan given to the husband’s mother in Bulgaria in 1998 when they transferred seven properties to her before immigrating in Canada.

With one exception — the sale of a property for $105,000 (US) in 2011 — they had no documentation of the original deal or repayment terms. And they had no explanation for the randomness of the deposits – sometimes multiple in a day – or any documentation linking the mother to the payments.

Judge Huppe said it was their responsibility to take the necessary steps to obtain evidence protecting their interests. It authorized the addition of more than $50,000 to the wife’s taxable income for the years 2010 and 2011.

The Montreal Gazette invites readers to ask questions about taxation, investments and personal finance. If you have a question, please email it to Paul Delean at [email protected]

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