Executive Summary: Key Legal and Evidentiary Issues

• Dispute centered on undeclared income reassessed using the bank deposit method by Revenu Québec.

• Application of article 1014 of the Loi sur les impôts presuming the correctness of tax assessments.

• The taxpayer contested the reassessment but failed to rebut the presumption with reliable evidence.

• Use of unexplained bank deposits to justify additional income and penalties.

• Gross negligence penalty applied due to repeated failure to report business income.

• Evaluation of credibility and reliability of taxpayer testimony in absence of supporting documents.

Facts of the case

In Khan c. Agence du revenu du Québec, 2025 QCCQ 2069, the taxpayer, Mr. Nisar Ahmed Khan, challenged income tax assessments issued by Revenu Québec for the 2014 and 2015 taxation years. Mr. Khan operated a business called Transport Khan Inc. and was reassessed for undeclared income and penalties after an audit revealed large unexplained deposits in his bank accounts.

Revenu Québec used the bank deposit method, an indirect audit technique, to determine Mr. Khan’s income. According to the assessment, deposits made into his personal and business bank accounts exceeded the income he declared. Revenu Québec presumed the entire excess constituted undeclared income, citing article 1014 of the Loi sur les impôts, which provides that tax assessments are presumed valid unless the taxpayer proves otherwise.

Mr. Khan contested the assessments, arguing that the deposits came from non-taxable sources such as personal loans and gifts from relatives, particularly from his brother and sister. However, he did not provide sufficient documentary evidence—such as loan agreements or credible records—to support these claims.

Legal analysis on the presumption of validity and taxpayer's burden

The court emphasized that under article 1014 L.i., the burden lies with the taxpayer to rebut the presumption that a tax assessment is correct. Mr. Khan failed to produce credible evidence to support his version of the facts. His explanations regarding the source of funds were vague and unsupported by objective proof. The judge noted that the taxpayer’s testimony, unsupported by documents and inconsistent in some respects, could not overcome the statutory presumption.

The Tribunal also examined whether Revenu Québec had properly applied the gross negligence penalty. The audit had shown that Mr. Khan had previously failed to report business income, despite being aware of his obligations. Given the repeated omissions and lack of diligence, the court upheld the penalty under article 1041(a) of the Loi sur les impôts, which addresses gross negligence resulting in underreporting of tax.

Outcome

The Court of Québec dismissed Mr. Khan’s appeal and upheld the tax reassessments for both 2014 and 2015, including the penalties. The judgment reaffirmed the strength of the presumption under article 1014 and the need for concrete and credible evidence when disputing income reassessments based on unexplained deposits. The decision serves as a clear example of how courts apply administrative and evidentiary standards in Québec tax litigation.