How Real Records Overturned a CRA Net Worth Assessment

The situation

Marcia had run her personal support worker business for about six years, incorporating it three years earlier once she started hiring a couple of part-time workers, including a personal support worker named Abdi, to cover more clients. Most days meant driving between clients' homes across the city, helping with bathing, medication reminders, meal preparation, and light housekeeping for elderly and disabled clients who wanted to stay in their own homes rather than move into care. The corporation paid her a modest salary and the occasional dividend, and she filed her taxes every year without much drama. Then a letter arrived from the Canada Revenue Agency (CRA) notifying her that her personal and corporate tax filings for the two most recent years were under audit.

The auditor's opening questions were about her bank accounts, not her invoices. CRA had pulled several years of statements for Marcia and her corporation and noticed that the total deposits into her personal accounts were higher than the income she had reported. Around the same time, she had bought a newer used car and put a few thousand dollars into renovating her basement. To the auditor, the pattern looked like a business owner living better than her reported income could support — a classic trigger for a particular kind of audit.

Marcia's bookkeeper, her sister-in-law Keisha, did the books part-time between hairdressing appointments and had never dealt with a CRA audit before. When the reassessment letter landed showing tens of thousands of dollars in extra income attributed to Marcia, she called Treadstone Law the same afternoon.

How the net worth assessment worked

When CRA suspects that a taxpayer's records are incomplete or unreliable — common in small cash-adjacent service businesses like home care, where clients sometimes pay by e-transfer, cheque, or cash on no fixed schedule — it can fall back on what is called a net worth assessment. Instead of relying on the taxpayer's reported figures, the auditor estimates a person's net worth (everything they own, minus everything they owe) at the start of a period and again at the end. If net worth grew by more than reported income can explain, CRA treats the unexplained difference as income that was never declared, and reassesses tax on it.

It is a blunt tool, and it places the burden on the taxpayer to explain the gap. The auditor had compared Marcia's bank balances, the value of the car, and the estimated cost of the basement renovation between the two years under review, and calculated that her net worth had grown by roughly $46,000 more than her reported salary, dividends, and living expenses could account for. CRA proposed to add that amount to her income across the two years, which — after federal and provincial tax on both her personal return and a related adjustment to the corporation's return, plus interest — pushed the total amount in dispute to just under $14,000.

The number was frightening to Marcia not because it was enormous, but because she genuinely did not know where it had come from. She had not hidden any income. The gap existed because the net worth method, done quickly, misses ordinary explanations that never show up as income at all.

What we did

1. Requested the auditor's full working papers. Before responding, our team asked for the specific calculation behind the $46,000 figure — which deposits, which asset purchases, and which years they were assigned to. A vague or emotional response to a net worth assessment rarely moves an auditor; a line-by-line rebuttal usually does.
2. Traced every deposit CRA had flagged. Working with Keisha's records and Marcia's own bank history, we identified the source of each unexplained deposit. About $18,000 turned out to be the repayment of a personal loan Marcia had made to a friend several years earlier, documented through old e-transfer records and text messages confirming the loan and the repayment schedule. Loan repayments are a return of capital, not income, and should never have been counted.
3. Corrected the car and renovation entries. The auditor had treated the full purchase price of Marcia's car as a net worth increase, without netting out the car loan she had taken to finance most of it — a common error in net worth calculations, since the method only works if assets and matching liabilities are tracked together. Once the loan was factored in, the car accounted for only a few thousand dollars of genuine net worth growth, not its full sticker price. A similar correction applied to the renovation, part of which had been paid for with a small gift from Marcia's mother, supported by a bank draft and a signed letter confirming it was a gift, not a loan or payment for services.
4. Reconstructed the corporation's cash records. A smaller, genuine gap remained: about $4,000 in client payments that Keisha had recorded in a notebook but deposited late, sometimes weeks after the service date, which had temporarily thrown off the timing comparison between the two accounts CRA was auditing. We did not dispute this portion — we explained it, showed it was timing rather than unreported income, and confirmed it had eventually been reported in the correct year.
5. Submitted a full written response with supporting documents. Everything went to the auditor as an organized package — bank records, the loan documentation, the gift letter, and a corrected net worth calculation showing what the real, explainable growth in Marcia's net worth had been over the two years.

The outcome

The auditor accepted the loan repayment and the gift documentation without dispute — both are common, well-understood exceptions to a net worth calculation once they are properly supported. The car loan correction was also accepted after a short follow-up call to confirm the loan agreement's terms. That left only the timing gap on the roughly $4,000 in late-deposited client payments, which the auditor agreed was a bookkeeping delay rather than hidden income, though CRA did apply a small amount of interest for the year the money should have been reported.

The final reassessment landed at just under $1,800 in additional tax and interest combined — a small fraction of the original figure CRA had proposed. Marcia paid it and moved on. Just as importantly, the case was resolved through a written response and one follow-up call, without an appeal or a formal objection, because the documentation answered the auditor's questions directly rather than arguing with the method CRA had used.

Marcia also came away from the process with a better bookkeeping habit: client payments are now deposited within a few days and logged the same week, closing the kind of timing gap that gave the auditor a reason to look twice in the first place.

The audit also changed how Marcia and Keisha handle money that passes through Marcia's personal accounts but has nothing to do with the business. Family loans, gifts, and reimbursements between relatives are common and entirely legal, but to CRA's net worth method they are indistinguishable from unreported income unless someone can show otherwise. Keisha now keeps a simple running note — with dates, amounts, and a one-line description — for any deposit that is not a client payment, so that if CRA ever looks again, the explanation is already on file rather than reconstructed months later from memory and old text messages.

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