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Canada: Right to assess after the normal period

25 August 2014   (0 Comments)
Posted by: Author: Marlene Cepparo
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Author: Marlene Cepparo (KPMG LLP)

A recent internal technical interpretation (2013-0509051I7, June 5, 2014) clarifies that the CRA can assess a taxpayer for tax or penalties after the normal reassessment period even if gross negligence penalties were not assessed. The CRA says that in some circumstances a taxpayer’s misconduct is sufficient to assess a penalty for failure to file an information return under subsection 162(7), but not sufficient to assess a gross negligence penalty under subsection 163(2). The TI clarifies the CRA’s comments in a 2010 TI (2009-0333581I7, September 22, 2010) that were not consistent with its longstanding position on the issue.

Generally, for a non-CCPC the normal reassessment period is defined as the period that ends four years after the earlier of (1) the day on which a notice of an original assessment under part I for the year is sent and (2) the day on which an original notification that no tax is payable by the taxpayer for the year is sent (subsection 152(3.1)). For a CCPC and any other taxpayer, the limitation period is three years after the date of the original assessment or of the original notification.

The CRA is ordinarily not allowed to reassess a taxpayer after the end of the normal reassessment period for tax, interest, or penalties unless one of the conditions in subsection 152(4) applies (for example, a taxpayer’s representations were attributable to carelessness, neglect, or willful default or were fraudulent under subparagraph 152(4)(a)(i)). The penalty (a minimum of $100 and a maximum of $2,500) for failure to file an information return is $25 per day for up to 100 days under subsection 162(7).

The CRA may assess a penalty if a taxpayer knowingly, or in circumstances amounting to gross negligence, made or "participated in, assented to or acquiesced in the making of” a false statement or omission on a filed tax return (subsection 163(2)). That penalty is generally calculated as 50 percent of the tax on the amount of understated income (the minimum penalty is $100).

In the 2010 TI, the CRA said that if a gross negligence penalty was not assessed under subsection 163(2), then no penalty can be assessed under subsection 162(7). That TI involved a taxpayer who filed form T106 ("Information Return of Non-Arm’s Length Transactions with Non-Residents”) 10 years late.

In the 2014 TI, the CRA says that in reconsidering the 2010 TI, it believes that its comments were incorrect. According to its longstanding position, the level of culpability required to assess beyond the normal reassessment period under subparagraph 152(4)(a)(i) is lower than the level required for the assessment of gross negligence penalties.

The CRA supports its longstanding position with jurisprudence such as Venne (84 DTC 6247). In Venne, the FCTD concluded that the taxpayer had been sufficiently negligent to allow the CRA to assess taxes after the normal reassessment period, but it had not been sufficiently negligent for the assessment of a gross negligence penalty under subsection 163(2). The FCTD further said that gross negligence involved greater neglect than simply a failure to use reasonable care: gross negligence must involve a high degree of negligence that is tantamount to an intentional act, evidencing an indifference to whether the law was complied with.

The 2014 TI says that there may be circumstances in which a taxpayer’s misconduct was sufficient to permit the CRA to reassess the tax payable after the normal reassessment period under subparagraph 152(4)(a)(i) and to assess a penalty under subsection 162(7), even though the taxpayer’s misconduct was not sufficient to impose a gross negligence penalty.

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