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Canada: CRA’s position on late reassessments

26 November 2014   (0 Comments)
Posted by: Author: John A. Sorensen
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Author: John A. Sorensen (Gowling Lafleur Henderson LLP, Toronto)

In technical interpretation 2014-0525371I7 (July 9, 2014), the CRA considered whether a reassessment after the normal reassessment period may increase tax payable if the minister had previously issued an arbitrary assessment to a corporate taxpayer due to its failure to file an income tax return. Generally, the minister may only reassess a statute-barred year if within the normal reassessment period the taxpayer filed a waiver; made a misrepresentation attributable to neglect, carelessness, or wilful default; or committed any fraud in filing its return or in supplying information under the Act.

On the TI’s facts, a corporate taxpayer had tax payable and an obligation to file a return under subsection 150(1). The taxpayer failed to file a return, and the CRA issued an arbitrary assessment under subsection 152(7). The normal reassessment period under subsection 152(3.1) began on that assessment date. The taxation year became statute-barred three years thereafter. The taxpayer then late-filed a tax return that, if assessed, would increase tax payable.

The TI confirmed that an arbitrary assessment is an assessment for the purpose of the normal reassessment period. However, query whether the minister had jurisdiction to reassess a statute-barred year when no return was filed. The CRA reasoned that before an arbitrary assessment is issued, a taxpayer usually receives a demand to file an income tax return. Thus, the taxpayer would have been aware of its failure to file, which was therefore attributable at least to neglect, and the minister could therefore reassess the late-filed income tax return.

The TI said that the minister is not obliged to reassess a late-filed income tax return, and the decision to reassess in these circumstances is discretionary. However, if a taxpayer failed to file a return and the minister issued an arbitrary assessment based on incomplete information, it is inappropriate for the taxpayer to rely on a limitation period to avoid its obligations under the Act. The TI also considered an earlier TI (2012-0447401I7, September 21, 2012), in which the minister said that she would not reassess a late-filed return that showed a lower tax payable than the amount specified in the arbitrary assessment. It may be difficult to reconcile the outcomes in the two TIs: after the normal reassessment period the minister may reassess upward, but she may refuse to reassess downward in similar circumstances. The TI said that subparagraph 152(4)(a)(i) ensures that a misrepresentation does not prevent the minister from correctly assessing tax payable: thus, an upward reassessment of a late-filed tax return is justifiable. However, the TI says that a taxpayer cannot rely on a misrepresentation to reduce the amount of tax assessed. Further, even if the minister may reassess to reduce tax, a corporate taxpayer that receives an arbitrary assessment and does not file a return until after the statute-barred date should not be reassessed downward: a delinquent taxpayer should not enjoy an advantage that is not available to a compliant taxpayer who cannot refile to correct errors after a taxation year becomes statute-barred.

The TI seems sound from a policy perspective: a corporate taxpayer should not benefit from its own non-compliance. However, the text of subparagraph 152(4)(a)(i) may not support that analysis. That provision allows the minister to reassess a statute-barred year if the taxpayer or a person filing the return made "any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act.” The TI concludes that not filing a timely return after receiving a formal request amounts to a misrepresentation attributable to neglect. However, it is an open question whether that conclusion is supportable on the basis of the provision’s wording.

First, the provision applies to a "taxpayer or a person filing the return.” Case law confirms that the phrase "person filing the return” means a legal representative who stands in a taxpayer’s shoes rather than the tax preparer/accountant (Aridi, 2013 TCC 74). To be within the provision, a "person filing the return” seemingly must file a return. However, it would be surprising if the provision applied both to a "person filing the return” and to "a taxpayer” regardless of whether that taxpayer filed a return. There is no apparent reason why the standard of conduct applicable to a taxpayer would differ from that applicable to his or her legal representative. Thus, to be operative, the provision requires the filing of a return. The TI is silent on how one can interpret the provision so that it applies to a failure to file a return. The TI says that the minister normally requests a return, which means that the taxpayer would have been aware of the obligation to file, but that general observation does not address the question whether this particular taxpayer received a request to file. In any event, a taxpayer is assumed to know the law, and that knowledge should include an obligation to file a return.

Second, the TI does not satisfactorily explain how a failure to file is a misrepresentation. The word "misrepresentation” is not defined in the Act, but dictionary definitions confirm that a misrepresentation requires that false information be given with an intent to deceive. It thus appears that misrepresentation is a sin of commission rather than omission. The TI is silent on how an omission is tantamount to the commission of a misrepresentation.

Third, one of four types of misconduct (neglect, carelessness, wilful default, and fraud) must have occurred in the filing of the return or the supplying of any information under the Act. The provision does not contemplate that only fraud must have occurred in the filing of a return or the supplying of information under the Act, while other conduct (neglect, carelessness, or wilful default) is left untethered to a return or the supply of information.

Fourth, if Parliament intended that the provision apply to a failure to file a return or to supply information, it would have included specific language to that effect.

Finally, the TI arguably either represents a shift in CRA policy or highlights an inconsistency therein. A previously published TI (2005-0113241I7, February 2, 2005) concluded that "for an assessment under subparagraph 152(4)(a)(i) of the Act to be valid, any misrepresentation must be made at the time that the return was filed,” a position that does not seem consistent with that of the current TI. Furthermore, at the 2012 Atlantic Provinces Tax Conference, the CRA stated that a misrepresentation typically occurs in a tax return, but may also occur when one is supplying information under the Act related to filing a tax return (TI 2012-0465921C6, November 9, 2012). This statement does not explain how, if no tax return was filed, a misrepresentation can occur when one is supplying information under the Act related to filing a tax return. The July 9, 2014 TI is also silent on this point.

In summary, there are strong arguments that the minister technically does not have statutory jurisdiction to exercise her discretion to late-reassess a taxpayer that has not filed a return during the normal reassessment period. That conclusion applies whether a subsequently filed tax return increases or decreases the amount of tax arbitrarily assessed by the minister during the normal assessment period.

This article first appeared on ctf.ca.


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