Executive Summary: Key Legal and Evidentiary Issues

• Alternative audit methods upheld where books and records are unreliable; median industry gross margin (29.5%) from Statistics Canada accepted as reasonable for income reconstruction

• Statutory presumption of assessment validity stands unless taxpayer produces precise, probative prima facie evidence; mere denials or incomplete records are insufficient

• Employer source deductions confirmed via observational headcounts and workload estimates when payroll documentation is deficient

• Undeclared corporate profits attributed to sole shareholder under LI art. 111 based on control and absence of credible contrary explanation

• Reassessments beyond normal limitation period sustained for misrepresentation attributable to negligence/incurie (LI s.-al. 1010(2)(b)(i))

• Gross negligence and evasion-type penalties maintained given systemic destruction of Z-reports, cash practices, and scale of omissions

Facts and procedural background
A fruit and vegetable retailer/wholesaler operated multiple Montréal stores and an warehouse with annual sales exceeding $50 million, all under the tight control of its sole shareholder. Prices were set informally, all sales were cash, cash register “Z” reports and till slips were discarded daily, wages were paid in cash from the till without timesheets, and bank deposits (net of cash wages) were used as the basis for reported sales. Revenue Québec opened three audits (corporate income tax, source deductions, and the shareholder’s personal tax) covering 2007–2012. Finding the records unreliable and taxpayer cooperation poor, ARQ used alternative methods: for income, it applied the Statistics Canada median gross margin (29.5%) for the “fruit and vegetable markets” industry to reported purchases; for payroll, it used anonymous in-store observations to estimate staffing and hours across three stores. This led to additions of ~$55M to revenues and ~$23M to payroll over six years, and three series of assessments issued in November 2014: (1) corporate income tax of $8,111,858; (2) source deductions of $8,099,772; and (3) personal tax to the shareholder of $13,819,763, with some years reassessed outside the normal limitation period.

Trial decision
The trial judge held the taxpayer was obliged to keep Z-reports and supporting records and that traditional verification was impossible. ARQ was entitled to rely on indirect methods. Although the taxpayer’s expert evidence “demolished” the initial presumption at one stage regarding the choice of margin, the court found ARQ’s use of Statistics Canada medians reasonable and sufficiently reliable on the full record and confirmed the corporate income reassessments. On source deductions, the taxpayer failed to provide reliable schedules or timesheets; a one-day, one-store KPMG headcount in 2019 did not prima facie rebut the assessments for 2007–2012. The court attributed undeclared corporate profits to the shareholder under LI art. 111 based on his full control and lack of credible explanation, allowed reassessments outside the normal period for misrepresentation by negligence, and upheld gross-negligence/evasion-type penalties.

Issues on appeal
On appeal, the taxpayers argued: (1) the alternative income method was not sufficiently justified and the expert critique should prevail; (2) the source-deduction assessments were invalid, including hearsay objections to ARQ’s headcount and the absence of employee-specific linkage; (3) profits could not be attributed to the shareholder absent specifics of when/how appropriation occurred; (4) reassessments beyond the normal period were time-barred; and (5) penalties for gross negligence/evasion were unjustified.

Corporate income tax: Alternative method and burden of proof
The Court of Appeal agreed that ARQ could use an alternative method once records proved unreliable. Applying a median industry gross margin from Statistics Canada to the taxpayer’s own purchase data was reasonable, objective, and intelligible. While the taxpayer’s statistician critiqued the representativeness of a median given variability and argued the wrong revenue “strata” were used, the court found no evidence that this business’s margin fell below the median and noted the chosen class/strata favored the taxpayer versus other available categories. A separate 23% price-comparison check further supported reasonableness. The presumption, once initially shaken, was re-established on the preponderant evidence, so the reassessments stood.

Source deductions: Evidence, hearsay point, and employee linkage
Given missing timesheets/payroll records and cash practices, ARQ’s observational method to estimate headcount/hours was acceptable. The taxpayer’s 2019 KPMG snapshot (one store, one day, years after the audit period) did not rebut 2007–2012 estimates and in fact highlighted payroll inconsistencies. The court declined to entertain, as raised too late, the legal argument that source-deduction liabilities must be tied to identified employees. Any hearsay objection to ARQ’s internal headcount evidence was immaterial because the taxpayer never “demolished” the presumption in the first place on RAS; thus, the assessments were maintained.

Personal tax: Attribution of corporate profits to the shareholder
The court reiterated that where undeclared corporate profits are proven, do not appear in the company’s records, and the sole shareholder exercises full control without a credible explanation of the funds’ destination, a presumption of fact supports attribution under LI art. 111. ARQ need not prove the precise timing and mechanics of appropriation or perform a net-worth/trend-in-lifestyle analysis. The shareholder’s general denial and claims of modest living did not “demolish” the presumption.

Prescription (limitations) and penalties
Reassessments beyond the normal period were valid under LI s.-al. 1010(2)(b)(i) due to misrepresentation attributable to negligence/incurie, supported by systemic record deficiencies and destruction of Z-reports even after audit visits. Penalties under LAF s. 59.4 and LI s. 1049 for wilful evasion/attempted evasion and gross negligence were upheld, based on the magnitude and repetition of omissions, poor record-keeping, the taxpayer’s sophistication and control, and credibility findings.

Disposition
The Court of Appeal dismissed all appeals with costs, endorsing ARQ’s alternative methods, confirming corporate and source-deduction reassessments, attributing undeclared profits to the sole shareholder, permitting out-of-time reassessments for misrepresentation, and maintaining penalties.