Net Worth Assessment Unravelled by a Rental Property Paper Trail

The situation

Tomasz worked as a bookkeeper for a handful of small local businesses, taking on clients directly rather than through an employer. Heather worked as an early childhood educator. Together they owned a small rental property in Cambridge, purchased a few years earlier with help from a modest inheritance and a line of credit secured against their own home. On paper, their household income was modest — in the range most families in their position would report, with Tomasz's freelance bookkeeping income fluctuating year to year and Heather's salary steady but unremarkable.

In early 2026, Tomasz received a letter from the Canada Revenue Agency notifying him that his personal and business tax filings for the two most recent years were under audit. The letter did not allege a specific error in his return. Instead, it asked him to complete a detailed personal net worth statement — a list of every asset, liability, and major expense for the family over the audit period.

A net worth audit is one of the tools the CRA uses when it suspects a taxpayer's reported income does not match their actual spending and asset accumulation, but it cannot point to a specific transaction that was left off a return. The agency builds a picture of what the family owned and spent at the start and end of the period, and compares the increase to what was reported as income. If spending and asset growth outpace reported income by a meaningful margin, the CRA treats the gap as unreported income and assesses tax, interest, and often penalties on it — leaving the taxpayer to prove otherwise.

What the review found

Tomasz filled out the CRA's net worth questionnaire as best he could from memory and bank statements, and submitted it without seeking help. Several months later, the CRA sent a proposal letter — a preliminary calculation, issued before a final assessment, giving the taxpayer a chance to respond. The proposal estimated that the family's net worth had grown by roughly $38,000 more over the two years than their reported income could explain, and proposed to add that amount to Tomasz's business income, along with a gross negligence penalty for failing to report it.

The family came to Treadstone Law with the proposal letter and a response deadline that was uncomfortably close. Reviewing the CRA's worksheet, our team found the gap was built almost entirely from three sources the auditor had treated as unexplained inflows: the inheritance Heather had received and used toward the rental property down payment, a portion of the line of credit draw used for the same purchase, and renovation costs on the rental unit that the auditor had assumed were paid from undisclosed cash rather than from the couple's savings and the line of credit.

None of these were income. An inheritance is not taxable to the recipient. A draw on a line of credit is a liability, not income — it has to be repaid, and it should have appeared on both sides of the net worth calculation, as an increased asset (cash used) and an increased liability (debt owed), largely cancelling out. The auditor's version of the worksheet had picked up the asset side of these transactions without properly recording the offsetting liability or the non-taxable source, which inflated the apparent net worth increase. The rest of the gap was a smaller amount tied to renovation invoices the couple had paid but not yet matched against their own withdrawal records.

What we did

1. Rebuilt the net worth statement from source documents. Rather than argue with the CRA's numbers in the abstract, we reconstructed the couple's net worth position at the start and end of the audit period using bank statements, the mortgage and line of credit statements, and the closing documents from the rental property purchase, so every figure in the response could be traced to a document rather than an estimate.
2. Documented the inheritance with a paper trail. We obtained a copy of the estate's distribution statement showing the amount paid to Heather and the date of the transfer into the couple's joint account, closing the largest single gap in the CRA's worksheet with a source that was plainly not income.
3. Traced the line of credit draw to its use. Statements from the lender showed the draw dates and amounts, matched against the closing statement for the rental purchase and the invoices for the renovation work. This let us show the funds were borrowed, not earned, and that the corresponding liability had simply been left off the CRA's calculation.
4. Matched renovation costs to their funding source. For the remaining gap, we cross-referenced contractor invoices against the specific account withdrawals that paid them, showing each renovation expense came from already-accounted-for savings or the line of credit rather than from unreported cash income.
5. Prepared a written response to the proposal letter. Instead of leaving the auditor to draw conclusions from a dense stack of statements, we submitted a short cover explanation alongside the supporting documents, walking through each of the three disputed items and showing the corrected calculation with the offsetting liabilities properly recorded.
6. Requested a follow-up call with the auditor. A short conversation let us confirm the auditor's questions were fully answered and flag that the couple was cooperating fully, which tends to reduce the likelihood of a penalty even where some adjustment is ultimately made.

The outcome

After reviewing the response, the CRA revised its worksheet and closed the file without issuing an assessment. The inheritance and the line of credit draw were removed from the net worth gap entirely once their non-taxable and liability nature was documented, and the renovation costs were accepted as already accounted for through traceable withdrawals. The roughly $38,000 in proposed additional income, along with the associated gross negligence penalty, did not proceed. No further tax, interest, or penalty was assessed on the audited years.

The audit still cost the family several weeks of gathering documents and a period of real stress waiting for a response, and it is a reminder that even taxpayers who have done nothing wrong can be asked to prove it. What protected them in the end was not a clever argument but a documentary record they were able to reconstruct — bank statements, an estate distribution letter, and invoices matched to specific withdrawals. Families in a similar position without that paper trail available can face a much harder path, since the burden in a net worth audit sits with the taxpayer to explain the gap, not with the CRA to prove it is income.

What you can learn from this