Few questions decide a tax appeal more quickly than this one: who has to prove what? When the Canada Revenue Agency reassesses a taxpayer for unreported income — especially through an indirect, net-worth calculation — the answer can feel counter-intuitive. The taxpayer, not the Crown, usually carries the initial burden. The Federal Court of Appeal's decision in Lacroix v. Canada, 2008 FCA 241, is one of the clearest illustrations of how that burden works in practice, and of how a taxpayer's credibility can make or break the case.
For anyone facing a net-worth reassessment or a gross-negligence penalty, Lacroix is required reading. It explains why simply denying the CRA's numbers is not enough, and why the explanation a taxpayer offers for an unexplained increase in wealth must be one a judge can actually believe.
The facts
The CRA audited Régent Lacroix using the net-worth method — an indirect technique the Minister uses when a taxpayer's books and records do not reliably show income. Rather than tracing each dollar earned, the auditor measures the change in a person's net worth (assets minus liabilities) over a period, adds personal expenditures, and treats any unexplained increase as income that should have been reported.
The audit revealed substantial liquid assets and a significant gap between what Mr. Lacroix had reported and the wealth he appeared to have accumulated. On the strength of that analysis, the Minister assessed unreported income across several taxation years (in the range of roughly $145,000 to $231,000 in the larger years), added gross-negligence penalties under subsection 163(2) of the Income Tax Act, and reassessed two years that were otherwise beyond the normal reassessment period.
Mr. Lacroix's answer was that the money was not income at all. He said it came from a large cash loan — on the order of $500,000 — advanced to him in instalments by an acquaintance, allegedly as a gesture of gratitude after Mr. Lacroix had saved the man's son from drowning. The Tax Court judge who heard the evidence did not accept that account. The judge found the explanation implausible and concluded that the supporting documentation was not genuine. With no credible source for the wealth, the unreported amounts stood, as did the penalties and the out-of-time reassessments.
The issue
On appeal to the Federal Court of Appeal, the central questions were ones that recur in almost every unreported-income file:
- When the Minister uses the net-worth method, does the CRA have to identify a source for the alleged income, or is an unexplained increase in wealth enough?
- Who bears the onus of proof, and what does a taxpayer have to do to discharge it?
- Can the same finding — that the taxpayer's explanation is not credible — support both the underlying reassessment and a gross-negligence penalty under subsection 163(2), where the Minister carries the burden?
That last point matters because the burden of proof is not the same throughout a tax appeal. On the underlying tax, the taxpayer must displace the Minister's assumptions. On penalties and on reassessments beyond the normal period, the statute puts the burden on the Minister.
What the Court decided (and why)
The Federal Court of Appeal dismissed the appeal. In doing so, it tied together several threads of Canadian tax procedure.
The Minister need not prove the source of the income. The Court confirmed that, in a net-worth assessment, the CRA is not required to pinpoint where the money came from. The net-worth method exists precisely because reliable records are missing. What the Minister must establish is a genuine, reliable-information-based discrepancy between the taxpayer's wealth and expenditures on one hand, and reported income on the other.
The onus then rests on the taxpayer. The reassessment rests on the Minister's assumptions of fact. Under the framework the Supreme Court of Canada set out in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, those assumptions are presumed true unless the taxpayer "demolishes" them by making out at least a prima facie case to the contrary. In a net-worth appeal, that means the taxpayer must show, with credible evidence, that the unexplained increase in wealth was something other than taxable income — for example, a genuine loan, a gift, a non-taxable capital receipt, or assets that existed before the period under review.
An unexplained, inexplicable discrepancy carries the day for the Crown. The Court drew on its earlier reasoning in Molenaar v. Canada, 2004 FCA 349, for the proposition that once the Minister establishes — on reliable information — a substantial discrepancy between a taxpayer's assets and expenditures and that discrepancy remains unexplained, the Minister has discharged the burden of proof. Where the taxpayer's only explanation is rejected as not credible and no other plausible hypothesis emerges, the logical conclusion is that the money was unreported income.
Credibility findings can support the penalty too. Perhaps the most important practical holding concerns subsection 163(2). The Court reasoned that where the evidence shows the taxpayer earned income, knew about it, declined to disclose it, and filed a return that did not report it, the inference of a knowing misrepresentation — or conduct amounting to gross negligence — can be drawn. On those facts, the same record that defeated the appeal on the tax also justified the penalties and the reassessment of statute-barred years.
It is worth being precise about the limits of this point. Later appellate decisions have cautioned that Lacroix does not stand for a rule that a non-credible explanation will automatically justify a gross-negligence penalty. The Minister still bears the burden under subsection 163(2), and a finding that a taxpayer's story was not believed does not, by itself, prove the taxpayer's state of mind in every case. Lacroix tells us such a finding can support a penalty on the right facts — not that it always must.
Why this decision matters / practical takeaways
For taxpayers and their advisors, Lacroix offers several concrete lessons that apply far beyond its own facts.
- Denial is not a defence. Telling the Tax Court that the CRA's net-worth numbers are "wrong" accomplishes nothing on its own. The taxpayer has to put forward affirmative, documented evidence that displaces the Minister's assumptions.
- Credibility is the battleground. Net-worth appeals are won and lost on whether the judge believes the taxpayer's explanation for the unexplained wealth. A loan or gift theory needs corroboration — bank records, contemporaneous documents, third-party witnesses — not just testimony after the fact.
- Manufactured documents are catastrophic. In Lacroix, the finding that supporting documents were not genuine did more than weaken the appeal; it helped justify penalties and the reopening of otherwise closed years. Evidence that does not withstand scrutiny can be worse than no evidence at all.
- Attack the net-worth methodology itself. Net-worth assessments are estimates, and they are frequently flawed: incorrect opening net worth, double-counted assets, ignored non-taxable receipts, unrealistic personal-expenditure figures. Demolishing the assumptions often starts with the arithmetic and the auditor's working papers, not just the taxpayer's own story.
- Penalties and statute-barred years deserve a separate fight. Because the Minister carries the burden on subsection 163(2) penalties and on reassessing beyond the normal period, those issues can sometimes be resisted even where the underlying tax is difficult to dislodge. They should never be conceded automatically.
If you are dealing with an indirect or net-worth reassessment, our overview of net-worth audits and our guide to appealing a net-worth assessment in the Tax Court explain how these assessments are built and where they tend to break down. For the penalty side, see our discussion of gross-negligence penalties.
How Barrett Tax Law approaches unreported-income files
Unreported-income and net-worth files turn on evidence and credibility, so the work begins long before any hearing. Our process on these matters generally follows a few steps.
- Deconstruct the assessment. We obtain the auditor's net-worth schedules and working papers and test every assumption — opening balances, asset valuations, claimed personal expenditures, and any non-taxable receipts the CRA may have overlooked.
- Build a credible evidentiary record. Where the increase in wealth has an innocent explanation, we work to corroborate it with documents and witnesses while memories and records are still available, rather than relying on testimony alone. Our note on evidence and the burden of proof in the Tax Court sets out why this matters.
- Separate the tax, the penalties, and the statute-barred years. Because the burden differs on each, we treat them as distinct issues and press the points where the Minister, not the taxpayer, must prove the case.
- Choose the right forum and procedure. Depending on the amounts and issues, that may mean a response at the audit stage, an objection, or an appeal to the Tax Court of Canada. Our guide to the Tax Court appeal process walks through what to expect.
In some cases, the better path is to come forward before the CRA does. Where unreported income has not yet been assessed, the Voluntary Disclosures Program may reduce penalty and prosecution exposure. If you have received a net-worth reassessment or a gross-negligence penalty, you are welcome to reach out for a free, confidential consultation to discuss your options.
This article is commentary on a public court decision and is general information only. It is not legal advice, and outcomes depend on the specific facts of each case.
Frequently asked questions
What did Lacroix v. Canada decide?
In Lacroix v. Canada, 2008 FCA 241, the Federal Court of Appeal upheld a net-worth reassessment, gross-negligence penalties, and the reopening of statute-barred years. It confirmed that the Minister does not have to prove the source of unreported income in a net-worth assessment; once a substantial, unexplained discrepancy between a taxpayer's wealth and reported income is shown on reliable information, the onus shifts to the taxpayer, and a non-credible explanation can leave the assessment standing.
Who has the burden of proof in a net-worth tax appeal?
The Minister's reassessment rests on assumptions of fact that are presumed true. Following Hickman Motors Ltd. v. Canada, the taxpayer has the initial onus to 'demolish' those assumptions by making out at least a prima facie case that the unexplained wealth was not taxable income. If the taxpayer succeeds, the burden shifts back to the Minister. On gross-negligence penalties and on reassessing beyond the normal period, however, the burden rests on the Minister.
Does the CRA have to identify where the unreported income came from?
No. In a net-worth assessment the CRA is not required to identify the source of the income. The method is used precisely because reliable records are missing. The Minister must establish a genuine, reliable-information-based discrepancy between the taxpayer's assets and expenditures and the income reported; it is then up to the taxpayer to explain that discrepancy with credible evidence.
Can a non-credible explanation justify a gross-negligence penalty?
It can, on the right facts. In Lacroix, the same finding that the taxpayer's explanation was not believable helped support both the tax and the subsection 163(2) penalty. But later decisions caution that Lacroix does not create an automatic rule. The Minister still bears the burden on penalties, and a rejected explanation does not, by itself, always prove the taxpayer's state of mind.
How can a taxpayer challenge a net-worth assessment?
Effective challenges usually attack the methodology and build a credible evidentiary record. That means scrutinising the auditor's working papers for errors in opening net worth, asset valuations, double-counted items, and inflated personal-expenditure estimates, and corroborating any innocent source of wealth (such as a genuine loan or gift) with documents and witnesses rather than testimony alone. Penalties and statute-barred years should be contested separately because the Minister carries the burden on those issues.
Is Lacroix v. Canada still good law in 2026?
Yes. Lacroix remains a frequently cited Federal Court of Appeal authority on net-worth assessments, the onus of proof, and the interaction between credibility findings and gross-negligence penalties. It should be read together with later appellate guidance that limits any suggestion that a non-credible explanation automatically supports a penalty.