Executive Summary: Key Legal and Evidentiary Issues

• Use of the alternative cash-flow method (méthode des mouvements de trésorerie) by the tax authority to infer undeclared income based on “indices de richesse” and asset holdings.
• Challenge to whether Revenu Québec properly considered available information that might explain the taxpayer’s assets before resorting to an indirect audit method.
• Adequacy of the trial judge’s reasons where very long passages of the tax authority’s written submissions were reproduced and effectively adopted without independent analysis.
• Rebuttal of the strong presumption that a judge has independently assessed the evidence and arguments, and the threshold for finding that the reasons do not reflect an autonomous judicial decision.
• Appellate limits when trial reasons are insufficient to permit meaningful review, including the inability of the Court of Appeal to correct errors or reassess the evidence on an incomplete record.
• Consequences of inadequate reasons, leading to the setting aside of the Cour du Québec judgment and remitting the case for a new hearing, with costs in favor of the appellant.

Facts and procedural background

Veng Kheang Ngoy, an individual taxpayer in Québec, was the subject of a tax audit by the Agence du revenu du Québec (ARQ). The audit arose from unexplained discrepancies between his reported income and his apparent financial position and lifestyle over several taxation years. In particular, an analysis performed as part of a project targeting tax evasion, based on “indices de richesse” or wealth indicators, showed that Mr. Ngoy owned multiple real estate assets that appeared inconsistent with his declared income.
In response, ARQ used an indirect audit technique known as the alternative cash-flow method (méthode alternative des mouvements de trésorerie). This method attempts to reconstruct a taxpayer’s income by examining cash inflows and outflows, asset acquisitions, and financing, rather than relying solely on the taxpayer’s books and returns. Based on this method, ARQ issued reassessments for the 2009, 2010 and 2011 taxation years, adding unreported income and imposing penalties for gross negligence.

Tax audit and reassessments

The reassessments were grounded in the conclusion that Mr. Ngoy’s declared income did not plausibly support the acquisition and holding of several immovable properties identified during the audit period. ARQ treated the gap between reported income and apparent financial capacity as indicative of undeclared revenue.
In addition to increasing taxable income, ARQ levied penalties for négligence flagrante (gross negligence), effectively asserting that the discrepancies could not be explained by mere error or oversight. To reassess beyond the normal limitation period for the 2009 and 2010 years, ARQ relied on the exception in article 1010 (2) b) i) of the Loi sur les impôts (LI), which allows the reopening of prescribed years where there is misrepresentation attributable to neglect, carelessness or willful default. Thus, the case combined both substantive tax issues (existence and amount of undeclared income, penalties) and procedural limitation issues under the LI.

Proceedings before the Court of Québec

Mr. Ngoy appealed the three notices of assessment to the Court of Québec. He sought the annulment of the reassessments, disputing both the use of the cash-flow method and the imposition of penalties, as well as the reopening of otherwise prescribed years.
The trial judge, the Honourable Eliana Marengo of the Court of Québec, identified four central issues: whether ARQ was justified in using the alternative cash-flow method; whether the taxpayer had displaced the presumption of validity attaching to notices of assessment; whether ARQ was entitled to open prescription for 2009 and 2010 under article 1010 (2) b) i) LI; and whether the gross-negligence penalty was properly imposed for each year. The first issue—justification for the method used—was logically prior, since acceptance of that methodology underpinned the reassessments and the later questions about burden of proof, prescription, and penalties.
After a four-day hearing spread across June 2022 and February 2024, the Court of Québec dismissed Mr. Ngoy’s appeal and upheld ARQ’s reassessments. However, the judge’s written reasons for rejecting the challenge to the cash-flow method would later become the focus of the appellate scrutiny.

Court of Appeal’s analysis of the trial reasons

On appeal to the Québec Court of Appeal, Mr. Ngoy challenged not only the substantive tax conclusions but also the sufficiency and nature of the trial judge’s reasons. The appellate court noted that, when addressing the key question of whether ARQ was entitled to use the alternative cash-flow method, the trial judge began by stating that the defendant (ARQ) had correctly summarized the state of the law in its written submissions. She then reproduced, over approximately five pages, an extended excerpt from ARQ’s written argument and concluded, almost summarily, that the taxpayer’s challenge to the use of the method was “irrecevable.”
The Court of Appeal emphasized that a judge may, in appropriate circumstances, incorporate or adopt portions of a party’s written argument. However, when the reasons for judgment largely consist of extensive reproductions of one party’s submissions with minimal or no independent analysis, they risk creating the impression that the judge has not actually conducted a personal evaluation of the evidence and the competing arguments.
Canadian case law recognizes a strong presumption that trial judges perform their duties in accordance with constitutional and ethical obligations: they are presumed to have attentively considered the evidence, listened to the parties, and reached an impartial and independent decision. Nonetheless, this presumption can be rebutted where the structure and content of the reasons reasonably suggest that the judge did not form an autonomous view on the decisive issues. The test is whether an informed, reasonable observer, aware of all relevant circumstances, would conclude that the judge failed to decide independently and impartially on the questions in dispute.
In this case, the Court of Appeal held that the presumption was overcome. The “facture” or structure of the judgment showed that on the first and foundational issue—ARQ’s entitlement to use the cash-flow method—the trial judge provided no genuine analysis of her own. Her conclusion that the taxpayer’s argument was irrecevable was not accompanied by any explanation of why his evidence and submissions were rejected. Instead, she relied entirely on the lengthy reproduction of ARQ’s written brief, without engagement with the taxpayer’s position and even including material not truly related to the issue supposedly under discussion.
The appellate court reiterated that trial reasons are not held to a standard of perfection, nor must they be exhaustive. Practical realities such as high caseloads, limited resources and time constraints must be taken into account. Still, read in their full context, reasons must explain sufficiently what the judge decided and why, in a way that allows meaningful appellate review. In the present matter, this threshold was not met: the reasons on the key preliminary question offered no independent reasoning and thus did not permit the Court of Appeal to review the issues appealed in a substantive way.

Disposition and outcome

Given the inadequacy of the trial reasons, the Court of Appeal concluded that the judgment of the Court of Québec had to be set aside. Without proper reasons on the first and central issue—the justification for the cash-flow method—the appellate court was unable to perform its corrective role or assess whether the reassessments, the opening of prescription, and the gross-negligence penalties were legally and factually justified. Additionally, the appellate record was incomplete, which meant the Court of Appeal could not reliably undertake its own weighing of the evidence.
The Court therefore allowed the appeal, quashed the judgment of the Court of Québec rendered on 10 June 2024, and remitted the case to the Court of Québec for a new hearing before a different judge. The order was made “avec frais de justice,” meaning that Mr. Ngoy, as the successful party on appeal, is entitled to his costs for the appellate proceeding according to the applicable tariff or later assessment. The decision does not, however, specify any concrete dollar amount for tax, penalties, interest, or costs. As a result, while the appellant is clearly the successful party in this appellate decision, the total monetary award or quantification of costs in his favor cannot be determined from the judgment itself.