Published: December 19, 2024
In Lewis v The King, 2024 TCC 127, the Tax Court of Canada examined whether a taxpayer’s 2012 and 2013 tax returns contained misrepresentations attributable to neglect under subparagraph 152(4)(a)(i) of the Income Tax Act. This provision allows the Minister of National Revenue to reassess a taxpayer beyond the normal reassessment period if such misrepresentations are due to carelessness, neglect, or willful default. The Minister argued that misrepresentations attributable to neglect were present in the taxpayer’s returns, justifying reassessment after the standard three-year period. After reviewing the facts and evidence, the Tax Court of Canada agreed with the CRA’s position.
The Taxpayer Relied on a Professional Tax Preparer to Complete Her Tax Returns
The taxpayer, a retired personal support worker, relied on a professional tax preparer (LM) to complete her 2012 and 2013 tax returns, as she thought she lacked sufficient knowledge to handle them herself. In 2016, she ceased using LM’s services upon learning of disputes between LM’s clients and the Canada Revenue Agency (CRA).
The taxpayer’s 2012 and 2013 tax returns were initially assessed on November 12, 2013, and November 10, 2014, respectively. On March 12, 2019, the Minister issued reassessments for these years, denying claims for rental losses, employment-related motor vehicle expenses, and charitable donation credits.
During the hearing, the Minister conceded that the taxpayer had indeed made the charitable donations claimed and had incurred certain household expenses tied to her rental claims. However, the Minister maintained that misrepresentations regarding rental and motor vehicle expenses constituted neglect, warranting reassessment beyond the normal period.
The Core Issue is Whether the CRA Could Reassess the Taxpayer Beyond the Normal Reassessment Period
The issues were as follows:
- Were the reassessments for 2012 and 2013 valid despite being issued beyond the normal reassessment period?
- Was the taxpayer entitled to deduct motor vehicle expenses in 2012 and 2013?
- Was the taxpayer entitled to deduct rental expenses in 2012 and 2013?
The Tax Court Found There was Misrepresentation in the Taxpayer’s Tax Returns
After examining the facts and evidence, the Tax Court of Canada determined that the 2012 and 2013 tax returns contained misrepresentations:
- 2012 Tax Return: The taxpayer claimed an amount for basement renovations as a rental expense. Under cross-examination, she admitted she had not provided this figure to LM, indicating it was incorrect. The Court concluded that she would have recognized this error had she reviewed her return before submission.
- 2012 and 2013 Tax Returns: The taxpayer claimed motor vehicle expenses for employment purposes. She admitted she was unaware of the tax rules regarding these expenses and did not know the actual mileage figures. LM had estimated the mileage. The returns effectively implied exclusive business use of the vehicle, which the Court found “highly questionable,” reasoning that the taxpayer likely used the vehicle for personal purposes as well.
Misrepresentations Attributable to Neglect
The Tax Court defined “neglect” as a lack of reasonable care and referenced prior jurisprudence, including Gore v The Queen, which held that failing to review a tax return before signing it could constitute neglect. The taxpayer admitted she did not review her 2012 and 2013 returns before signing them, believing she would not understand them. The Court found this behaviour negligent, concluding that the taxpayer would have identified the misrepresentations if she had exercised reasonable care.
Application of Subparagraph 152(4)(a)(i) of the Income Tax Act
The Tax Court ruled that the misrepresentations in the taxpayer’s 2012 and 2013 returns were attributable to her neglect. As a result, the reassessments for these years were valid despite being issued after the normal reassessment period. The Court referred the reassessments back to the Minister for reconsideration and adjustment, taking into account the concessions regarding charitable donations and rental expenses.
Key takeaway from the case – Taxpayers should always review their tax returns
- Duty of Care: Taxpayers must exercise reasonable care when filing tax returns. This includes thoroughly reviewing returns prepared by tax professionals to ensure accuracy.
- Consequences of Neglect: Failure to review and correct obvious errors in a return can expose statute-barred years to reassessment.
- CRA’s Burden of Proof: While the CRA bears the burden of proving misrepresentations attributable to carelessness, neglect, or willful default, courts have consistently held that neglect can include a failure to review a return.
The judgment in Lewis v The King aligns with established jurisprudence, reinforcing the principle that subparagraph 152(4)(a)(i) of the Income Tax Act is not punitive but serves to ensure accurate tax assessments where taxpayers fail to meet their responsibilities. Taxpayers should diligently verify all factual information on their returns, regardless of whether they use a professional tax preparer, to avoid the risk of reassessment.
FAQ:
What is the CRA’s normal reassessment period?
The CRA can usually reassess a return for a tax year within three years of the date it sent the original notice of assessment for the tax year.
When can the CRA reassess a taxpayer beyond the normal reassessment period?
Under subparagraph 152(4)(a)(i) of the Income Tax Act, the CRA may reassess a taxpayer’s statute-barred tax years due to “neglect, carelessness, or wilful default” or fraud. However, the CRA bears the initial onus of proof so it must establish, on the balance of probabilities, that:
- The taxpayer made a misrepresentation; and,
- That the misrepresentation was attributable to neglect, carelessness, or wilful default; or, that the taxpayer committed fraud in filing a return or supplying information.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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