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A recent decision of the Tax Court of Canada deals with the situation of a husband who transferred money to his wife while having an outstanding tax debt balance. The CRA therefore went after the wife (the appellant in this case) to claim that money back.
Although the wife was the appellant, she did not testify, nor did she appear in court. The only person who testified was her husband. He claimed that the money that was transferred to her were shareholder loan repayments. In dismissing the appeal, the judge wrote:
18 The contention that the appellant directed her corporation to loan monies to her husband to pay her expenses rather than paying them herself or directing her corporation to pay them, is sufficiently atypical that reliable documentary evidence becomes all the more important.
19 Without documentary evidence, it would have been helpful to hear the appellant testify on her own behalf as to the arrangement rather than to hear only Mr. Remtulla’s account. Mr. Remtulla appeared to handle most of Chrisalex’s and the appellant’s financial affairs, but it would have increased the plausibility of the arrangement to hear the appellant’s understanding of it in her own words. I draw an adverse inference from her absence that her testimony would not likely have been helpful to the appellant’s case.
Any explanation put forward to support a taxpayer’s position needs to be substantiated. A “plausible” explanation does not meet the threshold, especially when the appellant chose not to testify. In fact, the appellant’s failure to testify led the Court to draw an adverse inference that, even had she done so, her testimony would not have been helpful to her case.