A specialized indirect verification of income (IVI), a “yield analysis”, was completed to determine the unreported income. The primary variables included the number of plants in the crop, the expected yieldof dried marihuana from each plant, the frequency of harvest, and the price at which marihuana is sold. In this case, the taxpayer did not dispute the variables of the analysis, but rather argued that nothing was produced in the first few years, and that there was no profit in the third due to the seizure of crops and the claim that what was produced was for personal use.

2017-10 BUSINESS/PROPERTY INCOME MARIHUANA – INDIRECT VERIFICATION OF INCOME

In a July 25, 2017 Tax Court of Canada case (Hole vs. H.M.Q., 2011-3541(IT)G, 2013-164(GST)G), at issue was whether the taxpayer earned income and appropriately charged GST on the sale of marihuana. An RCMP search of the taxpayer’s premise resulted in the discovery of 90 mature marihuana plants, 144 clones, and a lead to a forest location where 172 other mature plants were located. CRA also assessed tax with regards to unreported logging income. Gross negligence charges were applied on all unreported income and GST.

A specialized indirect verification of income (IVI), a “yield analysis”, was completed to determine the unreported income. The primary variables included the number of plants in the crop, the expected yieldof dried marihuana from each plant, the frequency of harvest, and the price at which marihuana is sold. In this case, the taxpayer did not dispute the variables of the analysis, but rather argued that nothing was produced in the first few years, and that there was no profit in the third due to the seizure of crops and the claim that what was produced was for personal use.

Taxpayer loses The Court noted that there was no change in electricity usage despite the alleged commencement of production, and the amount produced would be sufficient for decades of use, yet the potency of the product deteriorates after one year. These factors, among others, persuaded the Court that CRA’s revenue projection was, if anything, conservative.Income tax was assessed on the income, and GST was imputed based on the expectation that the market price included GST. The Court noted that no expenses were considered, but no evidence of any expenses such as electricity, interest or property tax was provided.The Court agreed that just over $315,000 in income from marihuana sales was made over a three-year period.

Taxpayer loses again CRA also assessed the individual with unreported logging income. A bank deposit analysis tied to trucking invoices was used to make the determination. The Court voiced concerns about the use of multiple IVI techniques, for multiple streams of income, however, was ultimately satisfied that that the auditor had exercised care to avoid any double counting of income. The CRA agent started with a summary of deposits made by the taxpayer, his spouse, and their children. He then reduced the total for:

1. transfers between accounts;
2. cash deposits (under the assumption that they were revenues already included in income from the marihuana projections); and
3. unknown deposits of less than $1,000 that were round figures (assuming that they were cash deposits from the marihuana business). Round numbers over $1,000 were left in as the taxpayer was often paid amounts in larger round numbers for his logging services.

The Court ultimately determined that over $100,000 in logging income over 4 years should be included. The gross negligence charge was upheld, primarily due to the comparative magnitude of the missed income. The taxpayer had originally argued that he felt that his income was low and, therefore, would be able to just file without reporting income