Executive Summary: Key Legal and Evidentiary Issues

• The Minister, through CRA, used the indirect “net worth” assessment method under the Income Tax Act to conclude that Falah Alyas had unreported income of $21,166, $25,655/$25,657, and $38,204 for 2013, 2014, and 2015, with the source assumed to be unreported sales of 2251102 Ontario Inc. (Gemini Market).

• The Minister assumed, and the Court accepted, that the corporation’s books and records were inadequate and contained “plug” journal entries for inventory, shareholder loans, and common shares, which made them inaccurate and unreliable.

• The Court noted substantial discrepancies between the income reported by Mr. Alyas and his spouse and their household expenditures and changes in net worth, including cash gambling, $6,000 cash childcare in 2015, and an estimated $500 annual grocery bill for a family of four.

• The Minister’s disallowance of $50,000 and $25,000 of costs of goods sold for the corporation’s 2014 and 2015 taxation years—reversing “plugged” common share and inventory entries—was upheld because no evidence was led to dispute those assumptions.

• The Minister’s inclusion, under subsection 15(1), of shareholder benefits in the amounts of $21,166, $25,657, and $38,204 in Mr. Alyas’ 2013, 2014, and 2015 income was maintained, as there was insufficient evidence of the alleged $30,000 shareholder loan he said should reduce these amounts.

• Both appeals (those of 2251102 Ontario Inc. and of Falah Alyas) were dismissed, and the judgment specifies that each appeal is dismissed without costs.                                                                                                                                                                                                                                                                                                                                                               

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Background and parties

These are two appeals under the federal Income Tax Act, heard together on common evidence, by 2251102 Ontario Inc. (the corporation) and by Falah Alyas. At all relevant times, the corporation operated a convenience store in Windsor, Ontario, named “Gemini Market,” and was managed by Mr. Alyas. The corporation was incorporated under the laws of Ontario on July 20, 2010, and its fiscal year-end is June 30. It is owned 50% by Mr. Alyas, who operated the business, and 50% by Sarmad Najim, who did not participate in operating the business and is described as a silent partner. The appeals concern the corporation’s taxation years ending June 30, 2013, 2014, and 2015, and Mr. Alyas’s 2013, 2014, and 2015 taxation years. For those personal years, he reported net business income and total income of $16,243, $15,471, and $21,272 respectively.

The Minister reassessed both the corporation and Mr. Alyas. For the corporation, the reassessments added unreported income amounts and reduced costs of goods sold (COGS). For Mr. Alyas, the Minister reassessed to include shareholder benefits under subsection 15(1) in his income for each of the three years.

Tax audits and reassessments

The Minister, through CRA, conducted a net worth analysis of the household of Mr. Alyas and his spouse for the 2013–2015 period. The analysis compared their declared income with their personal expenditures and the increase of net assets acquired during that period, taking into account non-taxable sources such as income tax refunds, GST refunds, child tax benefits, Ontario Trillium benefits, and the Ontario Energy and Property Tax Credit.

For Mr. Alyas, the Minister concluded there were substantial discrepancies of $21,166, $25,656/$25,657, and $38,204 for the 2013, 2014, and 2015 taxation years. These amounts were treated as unreported income and were included in his income as shareholder benefits under subsection 15(1).

For the corporation, the Minister assumed that the source of Mr. Alyas’ unreported income was unreported sales of Gemini Market. The corresponding unreported revenue amounts attributed to the corporation were $12,281, $22,455, and $39,865 for its 2013, 2014, and 2015 taxation years. The Minister also added rental revenue of $7,800 and $7,200 to the corporation’s income for its 2013 and 2014 taxation years, on the basis that Mr. Alyas and his family lived in a house behind the store and that he paid rent to the corporation in those amounts in those years.

Use of net worth method and record-keeping issues

The reasons describe the legal basis for the Minister to use alternative assessment techniques such as a net worth audit under subsections 152(7) and 152(8) of the Income Tax Act, and summarize the jurisprudence (including Bousfield, Hsu, and Bigayan) confirming that:

• the Minister is not bound by a taxpayer’s return or information supplied and may assess using such alternative methods;

• an assessment is deemed valid and binding subject to objection, appeal, or reassessment; and

• a taxpayer cannot succeed merely by showing that an alternative assessment technique is flawed but must demolish the Minister’s assumptions by showing that the income was from a non-taxable source or by presenting a viable alternative method, such as reliable books and records.

The Court notes that subsection 230(1) requires persons carrying on business to keep records and books of account in such form and containing such information as will enable taxes payable under the Act to be determined. The Minister assumed, and the CRA auditor testified, that the corporation’s books and records were inadequate, inaccurate, and unreliable. Specifically, the auditor identified that the corporation’s bookkeeper had used “plug figures” in journal entries for inventory, shareholder loans, and common shares in order to make the balance sheet balance. The bookkeeper did not deny using such plug figures. It was also noted that the books and records were not kept current; Mr. Alyas acknowledged that the bookkeeper updated the corporation’s books and records monthly.

In addressing the net worth audit of the household, the evidence included that:

• the household’s yearly cost of living was determined based on a bank withdrawal analysis and estimates provided by Mr. Alyas;

• Mr. Alyas acknowledged that he engaged in gambling using cash;

• he paid $6,000 in childcare in cash in 2015; and

• he estimated his four-person family’s annual grocery bill at $500.

The Court concluded that there was no basis for questioning the Minister’s use of the net worth audit method and that the appellants did not establish that the method was wrongly used or that the Minister’s assumptions respecting the net worth discrepancies were mistaken.

Disallowance of costs of goods sold

One of the issues identified by the Court was whether the Minister rightly disallowed $50,000 and $25,000 of costs of goods sold for the corporation’s 2014 and 2015 taxation years. Paragraph 18(1)(a) of the Act requires that business expenses be incurred for the purpose of gaining or producing income from the business to be deductible.

The Minister assumed that the common shares and inventory figures in the corporation’s books were plug figures used to balance the balance sheet, and that the corporation did not issue any common shares during its 2014 and 2015 taxation years. As a result, the CRA auditor reversed the common share entries by decreasing inventory purchases (and thus COGS) by $50,000 and $25,000 for those respective years.

The auditor testified that she undertook a cost of goods sold analysis to correct for the plug figures, and that the bookkeeper had admittedly inserted estimated inventory amounts and made journal entries plugging the common shares. She also testified that the amounts she used as COGS in her net worth working papers were amounts reported by the corporation in its returns or financial statements, and that she had asked Mr. Alyas and the bookkeeper to confirm the beginning and closing inventory amounts; they responded that the specified amounts were good estimates and could be relied upon.

The appellants did not call the bookkeeper to testify and led no evidence to dispute the Minister’s assumptions that these entries were plug figures or to show that the disputed COGS amounts were actually incurred to earn income. The Court held that the appellants did not meet their burden to prove, on a balance of probabilities, that the Minister’s adjustments to COGS were wrong.

Shareholder benefits and alleged shareholder loan

Another identified issue was whether the Minister rightly reassessed Mr. Alyas’ 2013, 2014, and 2015 taxation years under subsection 15(1) for inclusion of shareholder benefits in the amounts of $21,166, $25,657, and $38,204. Following the net worth audit, the Minister reassessed Mr. Alyas to include these amounts in his income as shareholder benefits, on the basis that they represented unreported income of the corporation appropriated by him as a shareholder.

The appellants argued that the Minister should first have reduced the unreported income appropriated by Mr. Alyas by $30,000, which he asserted he had loaned to the corporation. The CRA auditor testified that the corporation’s bookkeeper had made a journal entry reading “Debit – due to shareholder: $30,000,” which effectively removed $30,000 from the shareholder loan account in 2013 as part of the plug figures. She stated that she asked Mr. Alyas and the bookkeeper whether the corporation had ever repaid a shareholder loan made by him; they said it had not. She therefore reinstated the $30,000 shareholder loan with a correcting entry (“Credit – due to shareholder: $30,000”) when correcting the plug-figure entries as a whole. She clarified that the shareholder loan account was not actually audited and that this correction should not be taken as an indication that the Minister accepted that a loan was in fact made or that its quantum was valid.

The Court referred to the Federal Court of Appeal’s decision in Babich, which confirmed that a Tax Court judge may reject an ex post facto set-off of a shareholder benefit where there is insufficient evidence of an asserted shareholder loan. In this case, the appellants did not call evidence to confirm that such a $30,000 loan had been made. The Court found that the Minister’s assumptions of fact regarding the shareholder benefits were not disproven and that the amounts identified in the net worth schedule as “ITA 15(1) benefit conferred on shareholder” remained applicable.

Court’s ruling and outcome

The Court reviewed the Minister’s assumptions and the evidence of the CRA auditor and the appellants, and applied the legal principles governing alternative assessment methods and the burden of proof. It held that the appellants had not demolished the Minister’s assumptions on any of the three issues: unreported corporate revenues, disallowed costs of goods sold, and shareholder benefits to Mr. Alyas.

Accordingly, the Court ordered that each of the two captioned appeals—those of 2251102 Ontario Inc. and of Falah Alyas—be dismissed. The judgment specifies that each appeal is dismissed “without costs.” The judgment is dated March 25, 2026, and was signed by Justice Bruce Russell.