Executive Summary: Key Legal and Evidentiary Issues

• Scope of dispute centered on reassessments by the Agence du revenu du Québec (ARQ) for 2014–2016 based on alleged undeclared rental and business income of a married couple owning multiple income properties.
• Core legal issue involved the statutory presumption of validity of tax assessments and whether the taxpayers met their burden to “demolish” that presumption with prima facie, sufficiently precise evidence.
• ARQ’s use of an indirect “movement of cash/treasury” method, relying in part on Statistics Canada cost-of-living data, was challenged but ultimately upheld as justified given incomplete documentation and limited cooperation.
• Credibility and reliability of the taxpayers’ testimony and household expense breakdown were central, with the court finding their figures for food, clothing, education, rent, utilities and personal expenses implausible and poorly supported.
• Concessions by both sides regarding the amounts of undeclared income in the joint cash-flow analysis narrowed the monetary dispute and led to adjusted figures for 2014–2016.
• Final relief consisted of annulment of the original reassessments and an order to issue new assessments reflecting the conceded undeclared income amounts, with each party bearing its own legal costs.

Factual background

Jian He and Quanzhi Liu are spouses living in Montreal who, during the 2014–2016 tax years, derived most of their income from real estate and related businesses. Together or separately they owned five income-producing immovable properties, while residing with their two sons in a rented apartment in an unrelated building. Beyond their rental operations, Mr. He operated import–export businesses and motels or inns with his spouse, and Ms. Liu owned a motel with a restaurant and alcohol permit. The family unit thus presented as a household of four adults or near-adults with ongoing business and rental activities.

For the 2014, 2015 and 2016 taxation years, both spouses filed Quebec income tax returns reporting relatively modest net income. They claimed that, although they had positive gross rental revenues, the operating expenses of their income properties produced substantial net losses, particularly in Ms. Liu’s returns, which showed negative net income for those years. According to them, the couple’s combined taxable income was in fact negative for at least 2014 and 2016, once all rental and business expenses were taken into account.

The Agence du revenu du Québec (ARQ) selected their files for audit. Its preliminary review raised concerns that the declared income was insufficient to sustain the apparent standard of living and family composition: two adults with two sons in post-secondary age brackets. The ARQ repeatedly asked the taxpayers for supporting documents and for a detailed breakdown of their monthly and annual household expenses, including rent, utilities, food, tuition, personal expenses and other living costs. Only partial documentation was eventually provided.

Tax assessments and ARQ’s methodology

Confronted with incomplete records and unexplained discrepancies between reported income and observed expenditures, the ARQ resorted to an indirect verification method: a movement of cash or movement of treasury analysis. Using the bank and credit card records that were supplied, and supplementing the picture with cost-of-living benchmarks from Statistics Canada, the auditor reconstructed the household’s reasonable living expenses and compared them to declared income.

On that basis, the ARQ concluded that Mr. He and Ms. Liu must have earned substantial additional income that was neither reported nor explained by non-taxable sources. It then issued new notices of assessment for each spouse for the three years in dispute, adding “undeclared income,” imposing penalties and recalculating tax payable. The original reassessments alleged, for example, tens of thousands of dollars per year of undeclared income for each spouse, together with significant penalties.

In the course of the court proceedings, and particularly after the evidentiary hearing, both sides revisited the detailed movement-of-cash calculations. This led to reciprocal concessions and a revised joint view of the amounts of undeclared income at the household level. The parties ultimately agreed that the joint movement of cash showed undeclared income of 82,775.57 dollars for 2014, 110,499 dollars for 2015, and 166,762 dollars for 2016. These concessions reduced, but did not eliminate, the undeclared-income findings compared to the original ARQ reassessments.

Taxpayers’ position and evidentiary gaps

In their originating applications, the taxpayers argued that the ARQ’s reassessments were excessive and did not reflect the true economics of their rental and business operations. They maintained that the rental portfolio generated losses because the legitimate expenses of operating five income properties exceeded the rents. This, they said, justified the negative net income reported, especially by Ms. Liu.

However, at trial, this rental-loss theory was not meaningfully developed in evidence. The taxpayers did not present a detailed, reliable set of financial statements, ledgers or contemporaneous records that would substantiate the claimed expenses and losses. Nor did they clearly segregate personal and business spending, or demonstrate that card and bank expenditures were paid from, or reimbursed by, business revenues on a consistent basis. For instance, they asserted that numerous credit card purchases at wholesale and grocery stores were for a Sorel-area motel business, but there was no robust documentation tying those expenses to a business account or showing how they were treated in the books.

Instead, much of the testimony from Mr. He and Ms. Liu focused on attacking the assumptions and numbers used by the ARQ auditor in reconstructing their cost of living. They produced a homemade document labelled as a correction to the auditor’s cost-of-living schedule, in which they claimed that the annual total household expenses for four adults ranged only around 10,849 to 11,072 dollars per year over the three years. This implied very low monthly and weekly spending on essentials such as food, clothing, education, housing and personal care.

The court found these figures implausible when compared with both common sense and the couple’s own banking and credit card evidence. For example, they claimed to feed four adults, including two young men aged roughly 19 to 21, on about 3,500 dollars per year in groceries, about 67 dollars per week. When confronted with regular purchases at Costco, Maxi and other grocers, Ms. Liu tried to explain their low reported food budget by saying they often ate rice and collected expired food from churches, but she could not identify specific organizations or provide corroboration. Similar credibility problems arose with clothing, where they claimed only 400 dollars per year for four people, and with personal care and cosmetic purchases, which were at odds with significant credit card charges to beauty and cosmetic suppliers.

On education, the taxpayers listed only 400 dollars per year for their two sons’ combined schooling costs, which Ms. Liu eventually described as book expenses. Under questioning, she also stated that one of the sons had attended Collège Brébeuf and that the annual tuition alone was roughly 6,000 dollars from at least part of 2016 onward. She did not, however, offer a coherent explanation of where this tuition was reflected in their expense breakdown or how it was funded in light of the low reported income. This inconsistency, together with unexplained large cash deposits and withdrawals—such as a 50,000-dollar deposit and same-day withdrawal in 2012—further eroded the court’s confidence in their narrative.

Court’s analysis on the burden of proof

The judgment situates the dispute within the established framework of Quebec tax law on reassessments and burden of proof. Under the Quebec Taxation Act (Loi sur les impôts), an assessment or reassessment enjoys a legal presumption of validity. To succeed, a taxpayer must “demolish” this presumption by providing prima facie evidence that the factual assumptions underlying the assessment are wrong or overstated. This requires more than vague, self-serving assertions; it calls for precise, convincing, and preferably documentary support.

The court reviewed leading authorities setting out that prima facie proof is evidence which, if believed, would establish a fact unless and until it is contradicted. In tax cases, this often means that the taxpayer must directly challenge the key factual assumptions in the auditor’s working papers with credible alternative figures, properly supported by records.

In this case, the ARQ’s resort to an indirect movement-of-cash method was justified, in the court’s view, by the taxpayers’ incomplete responses to document requests, inconsistencies in the information provided and the presence of “indicia of wealth” that were not reconciled with the modest reported income. The court accepted that using Statistics Canada cost-of-living data to build an annual household expense model is an accepted and reasonable technique when direct evidence is lacking or unreliable.

Assessing the taxpayers’ testimony and their attempt to recast household expenses, the court found their explanations riddled with evasions, exaggerations and improbabilities. Their homemade cost-of-living schedule was not supported by external documentation, conflicted with their own credit-card records and omitted key items such as rent, heating and electricity, or treated these in a cursory and inadequately substantiated way. The court also took note of their lack of a separate bank account or credit card dedicated to rental operations, which made it harder to distinguish personal from business expenditures and to test their assertions of rental losses.

Given these evidentiary deficiencies, the court held that Mr. He and Ms. Liu had not discharged their burden to demolish the presumption of correctness of the ARQ’s reassessments, except insofar as the ARQ itself had agreed to certain reductions in undeclared income during the litigation. In other words, their challenge failed as to principle and method, but succeeded narrowly to align the assessments with the updated joint cash-flow figures that both sides had accepted.

Outcome and practical implications

In its dispositive section, the Court of Québec formally allowed the taxpayers’ applications in part. It annulled the specific reassessment notices initially issued to Jian He and to Quanzhi Liu for the 2014, 2015 and 2016 taxation years. This annulment did not mean that the taxpayers owed no additional tax; instead, it cleared the way for new reassessments to be issued on a corrected factual basis reflecting the concessions made by both parties.

The court ordered the Minister of Revenue of Quebec to issue new reassessments for each of the three years, taking into account the judgment’s conclusions and the mutually agreed amounts of undeclared income in the joint movement-of-cash analysis. Those agreed amounts were 82,775.57 dollars for 2014, 110,499 dollars for 2015, and 166,762 dollars for 2016. The computation of the exact resulting tax, penalties and interest is left to the administrative process and is not specified in the judgment itself. Because the outcome stemmed largely from reciprocal admissions and compromises rather than a complete victory for either side, the court directed that each party bear its own legal costs, with no cost award being made. In practical terms, the ARQ is substantively successful in having its overall approach and the existence of significant undeclared income upheld, while the taxpayers achieve a limited success in having the original reassessments replaced by new ones based on reduced undeclared-income figures. The precise monetary impact in terms of final tax, penalties, interest, or any net amount payable in favor of the tax authority cannot be determined from the judgment alone, and no separate damages or quantified cost awards are granted.