Can the Ministère du Revenu use the combined net worth method to determine a cash taxpayer’s contributions and unreported income?

To remember, in 30 seconds:

If declared assets do not match declared income (for example, owning luxury goods despite a low declared salary), this may lead to an audit by the tax authorities.

Using the net worth method, they estimate the income that should have been declared, which determines the additional taxes payable.

A look back at the Chenel affair

Jean-Pierre Chenel is an employee and shareholder of Maçonnerie Jean-Pierre Chenel inc. He paid himself and his wife salaries of less than $20,000 for the 1995, 1996 and 1997 tax years. However, the spouses’ standard of living clearly exceeds the salary they receive, as Mr. bought a Corvette and a Cadillac in 1994.

Alternative verification method

The Agence du revenu de Québec (ARQ) is seized of the case, conducts a tax audit and issues a new notice of assessment using the alternative combined net worth method. This method takes the couple’s income into account, and aims to establish a more realistic sum than that proposed by a taxpayer when filling out his or her tax return.

Opposition to notices of assessment

Mr Chenel objects to the new assessment notices, while the court upholds the new assessment notices. The court reasoned that the tax return is a “transparency-based system,” and as such, “the taxpayer has a duty of care. The Ministère du Revenu therefore has a duty to intervene when it has reason to believe that a taxpayer is abusing this system. Although the net worth method is arbitrary and “sometimes inaccurate and riddled with loopholes,” it has proven its worth and legitimacy when a taxpayer refuses to cooperate or uses the family unit to hide the extent of his assets.

Conclusion of the case

As a result, the Department of Revenue can use the combined net worth method to assess a taxpayer and to determine a taxpayer’s undeclared income, because the method is legitimate and provides tax information in the event of abuse of the self-declaration system.