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Taxation law

Reassessments by the CRA: Timing is Everything, or is it?

Sep 29th, 2014

By Steven Sitcoff

Normally, the Canada Revenue Agency (CRA) can only reassess a taxpayer for up to three years (or four years in the case of a mutual fund trust or a corporation that is not a Canadian-controlled private corporation).

So, does that mean that once the reassessment period has expired then the year cannot be re-opened? Not exactly.

First, the reassessment period remains open indefinitely if the taxpayer does not file a tax return, since the “normal reassessment period” starts to run only once the CRA sends either a notice of an original assessment for the year or a notice that no tax is payable for the year.

Second, a taxpayer may file a waiver of the normal reassessment period so as to extend it. While it may seem strange that one would voluntarily agree to this, in certain circumstances it could actually be beneficial to do so. Such a waiver could be revoked by the taxpayer and can also be expressly limited to certain matters so as not to leave the year open for all purposes.

Third, the normal reassessment period may be extended indefinitely where it can be established that the taxpayer (1) made a misrepresentation due to negligence, carelessness, or wilful default, or (2) committed any fraud, in filing a return or in supplying any information under the Income Tax Act. The Tax Court of Canada (in Ross et al. v. The Queen 2013 TCC 333) suggested (albeit in obiter) that different standards must be met by the CRA to reassess a statute-barred year, depending on whether arising in the context of a tax return filed by the taxpayer on the one hand or in supplying any information under the Income Tax Act on the other: a mere misrepresentation suffices with regard to the former, but fraud must be proven with regard to the latter.

Where the CRA seeks to rely on a misrepresentation by the taxpayer as the basis to reassess a statute-barred year, technically it bears the onus of proving such a misrepresentation, but as a practical matter it will only have to do so if the reassessment is objected to or appealed; otherwise, the reassessment is presumed valid. As illustrated in a CRA technical interpretation (2012-0465921C6), the CRA has broad scope to reassess an otherwise statute-barred year on this basis: the information must merely be incorrect at the time it is supplied to the CRA, even if arising from mere neglect or carelessness. As such, inadvertent error on the part of the taxpayer, as opposed to an intentional deception, could suffice. The standard to be applied by the CRA in this regard is whether the taxpayer failed “to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation”. By applying an objective standard that compares the actual taxpayer to a hypothetical one in comparable circumstances, for example, a housewife and a business owner could be held by the CRA to the same standard of care. This is disconcerting in and of itself but, rather than give further clarification as to the scope of this standard, the technical interpretation merely remarks that “determining acts of neglect and carelessness requires professional judgement” (i.e. “I’ll know it when I see it”).

More disturbingly, while the foregoing policy statement is essentially consistent with the law, in practice we’ve seen the CRA resort to allegations of misrepresentation with increasing ease and frequency in order to get around statute barring. However, it should be recalled that the CRA does not have unfettered discretion in this regard as it still has the onus of proving that the misrepresentation is rooted in neglect, carelessness, wilful default or fraud.

One should note that simply hiring a tax professional does not relieve a taxpayer of the obligation to act diligently with regard to tax filings, but if the taxpayer is reasonably diligent they can be saved from any negligence on the part of the tax professional. A recent decision of the Tax Court of Canada (Aridi v. The Queen, 2013 TCC 74) illustrates that a taxpayer’s reliance on the bad advice of a professional in filing a tax return does not necessarily meet the standard of “neglect” needed to reassess an otherwise statute-barred year if the taxpayer can show that he or she acted diligently, notwithstanding the professional’s own misrepresentation or neglect. The Court noted that only the neglect of the taxpayer in filing the return, and not that of the accountant in preparing it, can be used against the taxpayer in this regard. In this instance, it was found that the taxpayer had done nothing less than would be expected of a hypothetical “wise and prudent person” as he had consulted an accountant whom he had relied on for five years, he provided all necessary documents and information to the accountant, he asked questions regarding the (incorrect) advice and he reviewed the tax return; had the taxpayer blindly accepted the accountant’s advice the Court likely would have come to a different conclusion.

Fourth, in circumstances other than those addressed above, certain consequential reassessments may be permitted if made within three years after the end of the normal reassessment period (e.g. in order to allow various carrybacks to an earlier year). In that regard, it should be noted that for certain tax elections that are merely required to be filed with the tax return for a particular year (as opposed those that are due by a particular filing date), the CRA has stated (in technical interpretation 2013-0487871I7) that it will accept such an election without penalty where included with a late-filed return.

A final word of note with regard to the foregoing: the CRA’s views as to the application of the law are merely that. Only Parliament gets to make the law, while the courts are responsible for interpreting it and the CRA is responsible for administering it. Thus, the CRA’s administrative positions are not binding, as seen in Stemijon Investments Ltd. v. Canada, 2011 FCA 299, where the Federal Court of Appeal admonished the CRA for an administrative position which was narrower than that provided for under the law. However, while taxpayers are not bound by the CRA’s views as to the law, that doesn’t mean that the CRA is not bound by its own administrative positions. In the decision of the Federal Court of Appeal in Galway v. MNR (74 DTC 6355), it was held that the “Minister has a statutory duty to assess on the [facts]…in accordance with the law as he understands it”. Meanwhile, a more recent decision of the Federal Court of Appeal in Transalta Corporation v. The Queen (2013 FCA 285), confirms that the CRA is obliged to assess in accordance with its assessing policy (as set out in its interpretation bulletins and other documents) based on its understanding of the law.

Steven Sitcoff is a tax lawyer at Spiegel Sohmer who works on a variety of corporate and personal tax planning matters, as well as handling disputes with tax authorities. He has extensive experience in making voluntary disclosures to the federal and provincial tax authorities regarding offshore accounts.