Recent Developments
CRA Auditor Gets AuditedOn September 22, 2011, the Federal Court of Appeal delivered its judgment in Lubega-Matovu. In this case, the appellant was a CRA auditor who also operated a number of side businesses and also rented a portion of his house. CRA audited Mr. Lubega-Matovu with respect to the expenses he claimed he incurred to operate these side businesses and rental property. CRA had denied certain expenses claimed against the income from these side businesses and had also assessed him with gross-negligence penalties.
Ultimately, the Federal Court of Appeal denied Mr. Lubega-Matovu’s appeal with respect to the expenses. The Federal Court of Appeal agreed with the Tax Court’s decision that the auditor had failed to substantiate the expenses that he claimed were incurred to operate his side businesses. However, the Federal Court of Appeal allowed his appeal with respect to the gross negligence penalties and found that the Minister of National Revenue had failed to satisfy its onus of proof. In fact, the Federal Court of Appeal found that the testimony that the Minister’s witness provided contradicted with their basis as to why the appellant was assessed with the gross negligence penalty.
What makes this case so interesting is that it highlights two common issues – what is required to successfully defend an expenses claim and the circumstances in which the assessment of the gross negligence penalty is justified.
Based on the judgment from the Federal Court of Appeal, it appears that the appellant failed to argue his case in a clear and organized manner. Often a clear and logical argument can mask an apparent lack of documents. It is apparent from the comments from the Tax Court of Canada that the appellant failed miserably at his attempt.
What is even more interesting is that the Minister was unable to successfully defend its assessment of the gross negligence penalty. It appears that the Minister failed to clearly explain its position in the pleadings to the Tax Court of Canada, since their own witness provided contradictory evidence. Given that both the appellant and this witness were CRA auditors, it shouldn’t be surprising that neither could provide a clear and concise answer – it appears to be a common problem!
