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What's your net worth?
Andy Wong Guest columnist Monday, November 17, 2008 Previous columns 
Do you know your net worth? If you fail to report all your income, the Canada Revenue Agency will be glad to figure it out for you. In fact, the net worth assessment is commonly used to uncover unreported business income. Most of the CRA's net worth assessments are aimed at the self-employed and the owner-manager of corporations. These individuals generally manage their own records and therefore have some (presumed) discretion in how they report income. A net worth assessment is marvellously simple. Your net worth is determined at the beginning and at the end of a period, usually over a few years. It's a tally of your investments, bank accounts, properties, minus your debts. Any increase, plus an estimate of your personal expenses during that period must have come from income you earned. This reconstituted income is reduced by actual income you reported, and tax-free money such as gambling winnings, if any. For example, let's assume your net worth was $100,000 at the beginning of 2005 and increased to $200,000 at the end of 2006. Your total estimated living expenses were $50,000 over the two-year period. This suggests you must have earned $150,000 over that period (more or less). You are in trouble if you reported income way less than $150,000. In Wang vs. The Queen, June 2008, a Tax Court of Canada case, a Toronto restaurant operator was reassessed with additional income and penalties under CRA's net worth assessment. In court, the taxpayer argued he had borrowed $85,000 from relatives which wasn't accounted for in the net worth assessment. The judge disregarded that statement because there was no proof it happened. He ruled the CRA's reassessment and penalties were justified. A different taxpayer whom we'll call "Ralph" was also caught in a net worth assessment. The auditor asked Ralph to explain himself. Ralph showed up at the auditor's office with his lawyer. The auditor asked Ralph why he reported no income in 2004-2006 and was able to spend an estimated $150,000 in personal expenses over those three years? "That's easy. I gamble and I win all the time," Ralph replied. "Let me prove this to you - I bet you $1,000 I can bite my left eye". The auditor thought for a moment and agreed. To the auditor's dismay, Ralph removed his glass eye and bit it. "Alright, here's a chance to win back your $1,000 and some," Ralph proposed. "I'll bet you $2,000 I can bite my right eye". The auditor knew Ralph wasn't blind and agreed to the bet. To the auditor's horror, Ralph removed his dentures and bit his right eye. "Okay, here's a last chance to win your money back. Let's double or nothing what you already owe me," Ralph said. "I bet I can stand on your desk and pee into that waste basket 12 feet away and not miss a drop." The auditor shook his head, smiled and agreed to the bet. Ralph jumped onto the auditor's desk and peed all over the documents on the auditor's desk. "I won, I won," the auditor shouted in joy. Meanwhile, the lawyer's face turned deadly grey. "What's the matter with you?" the auditor asked. The lawyer replied "Before we arrived, Ralph bet me $20,000 he would pee all over your desk and you would be jumping for joy."
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