If you are unfamiliar with the idiosyncrasies of Canadian tax law you will probably be surprised to learn that in a dispute with Canada Revenue Agency (CRA) the initial onus of proof is on the taxpayer. In other words, you have to convince CRA of your filing position, not the other way around. In fact, CRA can assess you based on factual assumptions which you, the taxpayer, have to disprove.

The policy and legal basis lies in the fact that Canada has a self-reporting tax system. It is this system that broadly underlies the justification to place the onus of proof on the taxpayer. It is repeated by courts as if just saying it makes it right. However, in practice it just serves to further disadvantage David against Goliath.

The Supreme Court of Canada, in Hickman Motors Ltd. v. Canada, [1997] 2 SCR 336, 1997 CanLII 357 (SCC) [http://canlii.ca/t/1fr0p], summarized the tax law reverse onus at paragraphs 92-95 as follows:

The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, 1948 CanLII 1 (SCC), [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340…

This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.)…The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.)…

Where the Minister’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: Magilb Development Corp. v. The Queen, 87 D.T.C. 5012 (F.C.T.D.), at p. 5018…

Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at p. 6381) the “evidence was not challenged or contradicted and no objection of any kind was taken thereto”.

In a vacuum, the above may be reasonable However, the majority of taxpayers are massively outgunned when facing the CRA and its taxpayer funded representatives from the Department of Justice (DOJ)), as a result the reverse onus can be very difficult to overcome.

We mention this because, in the realm of SR&ED, supporting documentation (tangible evidence) is key to “demolishing” CRA’s factual assumptions. It is especially difficult to get CRA to accept oral evidence, unless the supporting documentation is strong.

In short, Canadian tax law weighs heavily in favour of the CRA. Many Canadians abandon appeals of their tax matters solely because they do not have the resources or expertise to engage in a dispute with a CRA auditor, let alone an auditor represented by a DOJ lawyer. Therefore, it is very important that SR&ED claimants maintain adequate tangible evidence to support their claim. It will be harder for the RTA to rely on the reverse onus if your position is well documented.

CrossDynamix is the industry leader in filing and defending SR&ED claims as well as appealing the CRA's SR&ED assessments.