Vern Krishna: Beware the net worth assessment

The Canada Revenue Agency has an extraordinary power when it comes to calculating the tax owed by people who fail to file a tax return or who misrepresent their income in filings.

It’s called the “net worth” assessment, and you really don’t want to have it happen to you.

Looking at the numbers, the vast majority of Canadians avoid net worth assessments by voluntarily filing tax returns. One-third of the 27.5 million tax returns Canadians submit each year are non-taxable and are filed to claim tax benefits. The remaining two-thirds pay about $196 billion in tax annually. Most taxpayers file their returns without complications and the CRA assesses them quite quickly.

Sanctions

However, some taxpayers choose not to file their returns even when they have taxable income, or misrepresent their income in their filings. The sanctions for failing to file and filing false returns are severe, but different, for the two groups.

Although taxpayers are required to voluntarily file their tax returns, the CRA is not bound by the tax return or any information filed. The CRA may “arbitrarily” assess the taxpayer using any appropriate method for determining the tax payable by the taxpayer.

This is where an arbitrary “net worth” assessment of tax payable enters the mix.

When the taxpayer does not file a proper tax return, has insufficient records, or provides inaccurate information in his return, the Minister of National Revenue can issue a “net worth,” or arbitrary assessment of the tax payable. The consequences of a net worth assessment and any related penalties depend on the nature of the taxpayer’s delinquencies in filing or non-filing.

A net worth assessment estimates a taxpayer’s income for a year by valuing the appreciation in his or her wealth between two dates, then adjusting for consumption.

For example, if the taxpayer had net assets of $100,000 on Jan. 1 and $400,000 of net assets on Dec. 31, the increase is $300,000. If the taxpayer consumed $150,000 during that year, his or her income would increase to $450,000 for the year. The government typically overestimates the taxpayer’s income and leaves it to the taxpayer to establish whether any of the receipts are from non-taxable sources.

So, a net worth assessment is prone to errors. Inaccuracy is inherent in the method of calculation. A net worth assessment is a blunt instrument at best and the government is prone to maximize the taxpayer’s income.

Net worth

Flaws aside, a net worth assessment is valid and binding notwithstanding any error, defect, or omission in the assessment. The CRA needs only to demonstrate that the taxpayer’s net worth, adjusted for consumption, increased in the taxation year. It is not required to prove the taxpayer’s sources of income. Once the CRA demonstrates a net increase in wealth, the taxpayer has the onus to separate his or her taxable income from other various sources, such as, for example, business income, capital gains, or non-taxable sources receipts.

The explanation that taxpayers most often provide for undisclosed increases in net worth is that they had windfall gambling gains, or received a substantial bequest from a deceased elderly aunt in a distant land. The reason those explanations purport to support their claims is that gambling gains are usually not taxable to amateurs, and gifts are never taxable.

Given the frequency of the “generosity of elderly aunts” explanation, the CRA has a jaundiced view of such justifications, and will require substantiating evidence in support of the assertions. Of course, it is usually difficult to provide such evidence because it is the very absence of adequate records that led to the assessment in the first place.

Where the assessment is outside the normal assessment period of three years for individuals, the onus is on the government to prove, on a balance of probabilities, that the taxpayer made misrepresentations that were attributable to neglect, carelessness or willful default for the relevant year.

Deadlines

There is no assessment deadline if the taxpayer does not file a return and the minister of national revenue has not produced an initial assessment. In a net worth assessment, the clock begins to run from the date of the assessment. However, the CRA says that failure to file a return when tax is payable may be willful misrepresentation that there is no tax payable, and, therefore, open to indefinite assessment.

A special rule applies when a taxpayer does not report his or her disposition of real or immovable property. In such a case, there is no limitation period. The purpose of this recently enacted rule is to discourage taxpayers from not declaring taxable gains on speculative real estate flips.

The consequences are more severe where the taxpayer files a tax return, but the government issues a net worth assessment because of the inadequacy of the information filed. In these circumstances, the minister of national revenue can also impose gross negligence penalties, which will add an additional 50 per cent tax on the undeclared income.

However, the penalty applies only to a misrepresentation in a return, and not to the lack of filing of a return. The sanctions for failure to file and filing false returns are anomalous. The Income Tax Act imposes a penalty for misrepresenting a return, but not for failing to file a return that falsely implies that there is no tax payable for the year. The sin of omission is less severe than the sin of commission.

The net worth assessment is an extraordinary power, but taxpayers can avoid it by filing returns that tell the full story on their sources of income.

Vern.Krishna@TaxChambers.ca

Vern Krishna is a professor in the common law section of University of Ottawa Law School and counsel with TaxChambers LLP in Toronto.

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Manulife among investors pumping US$10 million into digital medical platform

Figure 1, a medical technology platform that has been referred to as Instagram for doctors, has raised US$10 million with a handful of new backers including a division of Manulife Financial Corp.

Gregory Levey, chief executive of the four-year-old Toronto-based startup, said the money has been earmarked for international expansion, retention of a core stable of medical students as they become doctors, and investments to stay on top of technology developments in areas such as artificial intelligence, machine learning, and augmented reality that could be integrated into Figure 1’s digital platform.

He said the funds will also help the company to move beyond pilot projects to secure sponsored content from brands to help “monetize” the platform that allows medical professionals from the fields of medicine, nursing, and dentistry to share information and images. Sponsors could include medical device and pharmaceutical companies.

Levey said a decision was made to raise funds rather than try to sell the company at this point in its development. Figure 1 has raised a total of about US$20 million including earlier venture capital and seed funding. An early backer was Union Square Ventures, which also funded successful startups such as Twitter, Etsy, and Kickstarter, and which put additional money into the latest round of funding for Figure 1.

Besides Union Square and Manulife, investors in the Series B round of funding for the Toronto-based startup include Kensington Capital Partners,  Samsung NEXT Ventures, and WTI, an early investor in Facebook and Google.

Financial Post

Hands-On With Apple’s New 10.5-Inch iPad Pro

The first orders for the new 10.5-inch iPad Pro, which was introduced at the Worldwide Developers Conference last week, started arriving to customers today, and the new tablet, along with its larger 12.9-inch sibling, became available for purchase in Apple retail stores this morning.

With the 10.5-inch iPad Pro out in the wild, our videographer Matt was able to get his hands on one, and he spent the day testing it out and making a video that shows off all of the new features.

Subscribe to the MacRumors YouTube channel for more videos.


The 10.5-inch iPad Pro is slightly larger than the 9.7-inch iPad Pro it replaces, but the size and weight difference is hardly noticeable, especially when you take in the much larger display. Apple was able to introduce a 20 percent larger display by shrinking the iPad’s bezels by 40 percent.

The iPad’s display has an awesome new feature — ProMotion. ProMotion introduces a 120Hz display refresh rate, which brings smoother, more responsive animations and motion response. For example, there’s a dramatic difference when you scroll. It’s smooth enough that you can read the text that’s scrolling by.

ProMotion also allows for a better experience with the Apple Pencil, bringing 20ms latency, and it can dynamically adjust the refresh rate to save battery when the higher refresh rate isn’t needed. The display also supports P3 wide color gamut, True Tone for auto white balancing, and it is 50 percent brighter at 600 nits.

Inside, there’s an A10X Fusion chip, so it’s incredibly fast, even compared to the speedy 9.7-inch iPad Pro with an A9X Fusion chip, and it uses the 12-megapixel iPhone 7 camera. If you’re someone who likes to take photos with an iPad, the image quality here is impressive. There’s also a 7-megapixel front-facing camera for selfies and FaceTime. Second-generation Touch ID, four speakers, USB 3 transfer speeds, and fast charging, are all included features. Even with the much faster processor and the brighter display, the iPad Pro continues to get up to 10 hours of battery life on a single charge.

The 10.5-inch iPad Pro isn’t cheap, though, with an asking price of $649 for the 64GB model. 256GB of storage is available for $749, and 512GB of storage is priced at $949. Cellular connectivity is also available for a $130 premium.

All of the features in the 10.5-inch iPad Pro are also built into the new 12.9-inch iPad Pro, so there’s feature parity between the two models for the first time. Pricing on the larger-screened 12.9-inch iPad Pro starts at $799.

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Theories abound on stock market’s ‘tech wreck’

Blame the computers … or the hedge funds … or the hedge funds with computers.

Pundits have been grasping for the root cause behind the brisk retreat in tech giants like Facebook Inc., Amazon.com Inc., Netflix Inc., Alphabet Inc., Microsoft Corp., and Apple Inc. that started on June 9 and carried through the weekend.

This group of stocks averaged a 1.6 per cent decline over the past two sessions that still leaves the group up more than 20 per cent year-to-date.

Theories aiming to explain their sudden dip run the gauntlet from the reasonable to the absurd to the relatively boring.

Lost My Mojo

The Friday selloff was part of a systematic unwinding of momentum strategy, according to Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA.

Stocks that had done well over the past 12 months — regardless of whether they were in the Nasdaq 100 or S&P 500 — were the ones that took it on the chin. Tech shares have been the market leaders all year, with the likes of Apple, Facebook and Netflix up more than 30 per cent before Friday. That compares to a 10 per cent gain in the S&P 500. 

“The uniformity of the prices moves all on the same day indicates a market driven by price chasing momentum, with investors heading for the door all at the same time,” he wrote in a note to clients on Monday. “Friday’s plunge serves as a warning; when it’s time to head for the door, you better move fast.”

On Notice

To some, the tech selloff had its genesis in a Goldman Sachs Inc. note put out a few hours before the move. The group of mega-cap stocks had been seeing exceptionally low levels of realized volatility that led to “positioning extremes,” Robert Boroujerdi, the firm’s global chief investment officer, said.

“Mean reversion risk is increasing,” he warned. And lo and behold, some reversion to the mean ensued.

Social Media

Here’s another reason that doubles as an explanation for why volatility’s been historically low.

A tweet from Citron Research’s Andrew Left calling for a steep decline in Nvidia Corp. appeared to help clip the high-flying tech company’s wings — and was also cited by some as the cause for the broader selloff in the space.

Ironically, Left advised investors to take profits “and move on to Google” — a firm whose shares have also been hit, though not as bad as NVIDIA’s.

Evil Computers

Brean Capital LLC macro strategist Peter Tchir raised the prospect of a sell program that had earlier targeted one of the most famous four-letter acronyms in the market — ‘FANG’ — resurfacing on Friday.

“On Wednesday morning, I highlighted that the only thing that had struck any fear into my streams of market chatter was the ‘FANG’ led sell program that started around 3 p.m. on Tuesday,” he wrote. “Whether Friday was a continuation of someone looking to drive this sector lower or just a coincidence remains to be seen.”

Central Banks

And now for what seems to be the go-to reasoning for many market moves these days: monetary policymakers.

“If I wanted an alternative explanation of why tech stocks finished last week with a caning, I’d be sorely tempted to think about the greater fool theory and the BOJ,” writes Bloomberg’s Richard Breslow, citing market-moving reports of a communication tweak regarding the potential for some sort of balance sheet normalization.

The Bank of Japan has become a massive player in not only bonds, but also domestic equities through its ETF purchases.

This argument is bolstered by the fact that Fast Retailing Co. has done worse than the six aforementioned tech giants so far this week. The BOJ owns roughly half of the free float of Fast Retailing, and the stock has a history of being influenced by rumors about changes to the central bank’s purchasing programs.

There’s also a theory floating around that the Swiss National Bank has been dumping its hefty tech holdings.

Viking Ship Has Sailed

One potential culprit for the retreat in these leaders of the 2017 equity rally: hedge fund Viking Global Investors said they’d be returning US$8 billion to investors in a letter sent to investors on Monday. The US$30 billion fund already liquidated a sufficient amount of its holdings by then — and as of March 31, it had loaded up on large-cap tech names.

Valuation Concerns

Consolidation; a healthy pullback — call it what you will. All good things come to an end. Tech shares have been the market leaders all year, with the sector ETF more than doubling the S&P 500’s year-to-date advance before Friday, prompting Morgan Stanley analyst Michael Wilson to remark that a selloff was “way overdue.”

At the end of May, the ratio of the Nasdaq 100 to the Russell 2000 Index had reached levels unseen since the tech bubble was bursting in 2001, suggesting this recent run of outperformance may have run too far.