The Minister determined, under a net worth assessment, that the taxpayer had $559,673 of unreported income over four years, and thus reassessed the taxpayer beyond the normal limitations period and imposed penalties, pursuant to ss. 152(4)(a) and 163(2). The taxpayer argued that the alleged income was actually a loan from a friend, but the trial judge did not find the claim credible. The taxpayer further argued that a net worth assessment could not support a finding of willful default because, by its very nature, a net worth assessment does not directly point to any specific default.
The Court upheld the Minister's assessments. There were two separate questions to be decided. The first was whether, leaving aside s. 152(4), the Minister was required to prove the additional sources of the income determined under the net worth assessment. Pelletier JA stated (at para. 20):
Applying the net worth method changes nothing in [the ordinary] method of proof. Where the Minister presumes that the income detected using the net worth method is taxable income, the onus is on the taxpayer to demolish this presumption. If the taxpayer presents credible evidence that the amount in question is not income, the Minister must then go beyond these assumptions of fact and file evidence proving the existence of this income.
The second question was whether a net worth assessment could, by itself, support assessments under s. 152(4) or penalties under s. 163(2). Pelletier JA stated (at paras. 29-30):
In the case at bar, the Minister found undeclared income [by way of a net worth assessment] and asked the taxpayer to justify it. The taxpayer provided an explanation that neither the Minister nor the Tax Court of Canada found to be credible.
...Clearly, there must be some other explanation for this income. It must therefore be concluded that the taxpayer had an unreported source of income, was aware of this source and refused to disclose it, since the explanations he gave were found not to be credible. In my view, given such circumstances, one must come to the inevitable conclusion that the false tax return was filed knowingly, or under circumstances amounting to gross negligence.