Illustrative example based on the kinds of matters we handle — not a specific client engagement; outcomes depend on the facts.
The situation
A family-run service business with a handful of employees received a reassessment after a CRA audit. The auditor had reviewed several years of records, concluded that reported revenue did not reconcile with bank deposits, and added a substantial amount of unreported income — pushing the total demand, with penalties and interest, into the high six figures. The reassessment also carried gross negligence penalties under subsection 163(2), which alone added a significant percentage to the bill.
The owners were frightened. The figure was larger than a year of profit, collections letters had begun to arrive, and they worried about losing a business they had spent more than a decade building. They had already filed a Notice of Objection on their own, and it had been confirmed at the objection stage with little movement.
The challenge
By the time the file reached us, the objection had been decided and the clock was running on the 90-day window to appeal to the Tax Court of Canada. Because the amounts in dispute exceeded the Informal Procedure limits, the matter belonged in the General Procedure — the Court's more formal track, with pleadings, documentary discovery, examinations for discovery, and the formal rules of evidence.
Several features made the file difficult:
- The CRA had used an indirect, deposit-based method to estimate income, which can sweep in non-taxable amounts — loans, transfers between accounts, GST/HST collected, and repaid shareholder advances.
- The bookkeeping was incomplete, so the business's own records did not cleanly rebut the auditor's numbers.
- The gross negligence penalties raised the stakes and the tone of the file, even though the Minister carries the burden of justifying them.
How we approached it
The first step was reassurance grounded in a plan, not optimism. We explained early that an over-reaching reassessment is something that can be challenged, and that the goal would be to reduce the assessment to what the facts actually supported — not to win a rhetorical fight.
We filed a Notice of Appeal in the General Procedure to preserve the appeal rights, then built the case methodically:
- Reconstructing the numbers. Working alongside the client's accountant, we traced the deposits the CRA had counted as income and identified categories that should never have been included. Each adjustment was tied to source documents.
- Pleadings and discovery. The Reply set out the Minister's assumptions; in the General Procedure those assumptions can be tested through documentary and oral discovery, which is where many reassessments built on estimates begin to soften.
- Pressure on the penalties. We focused on the evidentiary gap behind the 163(2) penalties, because the standard for gross negligence is high and the burden sits with the Crown.
- A settlement framework. The Tax Court strongly encourages resolution, and most General Procedure appeals settle before trial. We prepared the file as if it were going to trial, which is what gives a settlement position credibility. For background, see our guide on settling a Tax Court appeal before trial and what makes a Tax Court appeal succeed.
This kind of matter began at the audit and reassessment stage and is closely related to the indirect-verification methods used in net-worth audits; the principles overlap with how the CRA reconstructs income in GST/HST audits as well.
The outcome
After discovery exposed how much of the "unreported income" was made up of non-taxable transfers, the parties entered settlement discussions with Justice Canada. A negotiated settlement was reached and the appeal was resolved on consent before any trial date. In a matter like this, that can mean the reassessed income is materially reduced, the gross negligence penalties are reduced or removed, and the remaining balance becomes something the business can actually manage — sometimes through a payment arrangement that stops collections pressure.
We do not promise figures. What this illustrates is that a reassessment built on estimates is not the final word, and that the General Procedure gives a taxpayer real tools to test it.
The takeaway
- A large reassessment is an opening position, not a verdict. Indirect, deposit-based estimates frequently overstate income.
- Deadlines are strict. The 90-day window to appeal to the Tax Court matters, and an unfavourable objection result is not the end of the road.
- Settlement is the norm in the General Procedure — but a credible settlement comes from preparing the file to trial standard, not from asking nicely.
- On gross negligence penalties, the burden is on the Crown; that distinction can drive a meaningful part of the result.
If you are facing a reassessment that feels disconnected from your real numbers, the path from audit through objection to a Tax Court appeal is a defined process, and most of it happens well before any courtroom.
Results vary. Every tax matter turns on its own facts, evidence, and procedural posture, and nothing here is a prediction or assurance of any particular outcome. This is general information, not legal advice.