Published: October 18, 2022
Last Updated: October 18, 2022
Introduction – Exploring the Normal Reassessment Period and “Statute-Barred” Tax Years for a Canadian Taxpayer Under the Income Tax Act
Every Canadian taxpayer is afforded a period of time following the issuance of an income tax assessment by the Canada Revenue Agency (“CRA”) for during which a reassessment of that tax year can be issued by the CRA. Subsection 152(3.1) of the Income Tax Act provides a Canadian taxpayer with a “normal reassessment period”, which begins counting from the earlier of:
- The mailing date of the original notice of assessment by the CRA; or,
- The mailing date of the notification from the CRA that no tax is payable.
The length of the normal reassessment period under subsection 152(3.1) can vary, depending on the type of taxpayer:
- For mutual funds and corporations other than Canadian-controlled private corporations, or CCPCs, the normal reassessment period is defined as four years;
- For all other individual taxpayers, as well as for CCPCs, the normal reassessment period is defined as three years.
The normal reassessment period under the Income Tax Act typically benefits Canadian taxpayers, because it prevents the CRA from reassessing a taxpayer’s tax assessments for a particular tax year once the normal reassessment period has passed. The Canada Revenue Agency has very limited means to reassess a taxpayer’s “statute-barred” tax years. One of the most common means is under subsection 152(4) of the Income Tax Act, where the CRA may reassess any tax year beyond the normal reassessment period only if it can demonstrate that there was “negligence, carelessness, or wilful neglect” by the taxpayer in filing taxes during those years, or where the taxpayer committed fraud. The CRA bears the onus of proof in order to reassess a taxpayer’s statute-barred tax years.
While subsection 152(3.1) of the Income Tax Act might often play in a taxpayer’s favour where the CRA engages in a tax audit of a taxpayer, it can also hurt a taxpayer looking to challenge an unfair assessment of taxes. Subsection 152(3.1) may similarly prevent the CRA from reassessing a taxpayer’s statute-barred tax years, where that taxpayer is seeking adjustments and has deliberately requested the CRA reassess those years, leaving the taxpayer out of luck.
The case of 6075420 Canada Inc. v M.N.R., 2020 FCA 194 (“6075420 Canada Inc.”) stands as a cautionary tale for any taxpayer who has been assessed unfavorably and waits too long to challenge that assessment. After a failed appeal to the Supreme Court of Canada in 2021, the taxpayer in 6075420 Canada Inc. has been left with a substantial and unnecessary tax bill which could have been corrected, had the taxpayer been more proactive and consulted an expert Canadian tax lawyer on a timely basis.
The Facts of 6075420 Canada Inc. v M.N.R.
The Appellant taxpayer was a corporation with a December 31 year end, and an obligation to file its tax returns by June 30 of the following calendar year. The Appellant’s 2010 return was not filed until September 2015, and its 2012 return until March 2018. In the interim, the CRA had issued arbitrary tax assessments (estimated tax assessments) for the Appellant’s 2010 tax year in April 2012, and for the Appellant’s 2012 tax year in May 2014. The CRA issued these assessments pursuant to subsection 152(7) of the Income Tax Act, which provides that the CRA may assess a taxpayer’s tax payable for a year even where a taxpayer fails to file a return. The Appellant did not respond until more than three years elapsed from the date on which the estimated tax assessments were sent. The taxpayer eventually did file returns, showing no tax payable for either year. The CRA refused to acknowledge the Appellant’s returns on the basis that subsection 152(4) barred the CRA from making a reassessment, as the normal tax assessment period of three years for the taxpayer had expired. The Appellant filed an application for judicial review with the Federal Court to have the CRA’s interpretation of the provisions of the Income Tax Act reviewed, on the basis that the normal reassessment period did not begin until the Appellant had filed the nil returns.
The Judgement of the Federal Court
On judicial review, the Canadian tax litigation lawyer for the Appellant argued that on a proper interpretation of subsection 152(4) of the Income Tax Act, the CRA was permitted to make a reassessment simply because the Appellant had filed a return. Subsection 152(4) reads that the CRA:
…may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if… [the rest of the section proceeds to name the condition under which the CRA can assess a taxpayer beyond the normal reassessment period].
The Appellant argued that the normal assessment period would not actually begin until a taxpayer themself filed the tax return. The Appellant proposed that the CRA’s estimated assessment were distinguishable from tax assessments made after a taxpayer has filed returns, and that the estimated tax assessments could not deprive the Appellant of the right to file and have assessed returns for a given tax year. In the Appellant’s view, the language of “any person” under subsection 152(4) would entitle the CRA to make a reassessment where a taxpayer files an absent return for a given tax year, and that combined with subsection 152(1) of the Income Tax Act (which requires the CRA to “with all due dispatch” examine a taxpayer’s returns and assess taxes payable), the CRA would be obligated to issue a tax assessment according to the Appellant’s filed returns and to vacate the estimated assessments.
The Federal Court rejected the Appellant’s argument on the basis that the Appellant had misconstrued subsection 152(4). The Federal Court adopted a standard of reasonableness to assess the CRA’s interpretation of the law, rather than a more stringent standard of correctness, under the principles of administrative law then-applicable to judicial review. The Federal Court concluded that the Income Tax Act does not differentiate between types of tax assessments, and that an estimated tax assessment issued by the CRA would be of the same force and effect as a return filed by a taxpayer for a given year, which would still trigger the normal period of reassessment. If the Appellant’s interpretation were correct, then the normal reassessment period for a tax year could be extended indefinitely as long as that taxpayer failed to file returns. The Federal Court concluded that this would ultimately defeat the purpose of the provision, and was an unreasonable interpretation of the law.
The Judgement of the Federal Court of Appeal
The Appellant appealed again to the Federal Court of Appeal, and argued that the CRA’s interpretation of the Income Tax Act was unreasonable. The Appellant argued that the CRA’s decision should be analyzed under the new framework for judicial review established by the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, which was decided after the Federal Court had heard the Appellant’s case. Vavilov adjusted the standard against which reviewing courts test the reasonableness of an administrative body’s decision under review. Under the Vavilov framework, the Federal Court of Appeal was tasked with considering whether the CRA’s reasoning process, in light of the delegate’s expertise, suffered a “failure of rationality internal to the reasoning process”, or whether the decision was “untenable in light of the relevant factual and legal constraints.”
Applying the Vavilov framework, the Federal Court of Appeal found once again that the CRA’s interpretation of the Income Tax Act was reasonable. Under paragraph 152(3.1)(b) of the Income Tax Act and as a Canadian-controlled corporation, it was irrefutable that the normal tax reassessment period for the Appellant would begin to run on the day of issuance for a notice of assessment for a given tax year, and not the filing date of a return. The Appellant’s proposed interpretation of 152(4) thus ignored the language of subsection 152(3.1), in trying to create a second applicable starting point for the normal assessment period.
The Federal Court of Appeal further agreed with the Federal Court’s conclusion that the Income Tax Act does not distinguish between estimated tax assessments issued by the CRA and self-filed tax assessments issued to taxpayers for purposes of subsection 152(3.1). Subsection 152(7), which provides a mechanism to prevent the CRA from being bound to a taxpayer’s return when assessing taxes under Canada’s self-reporting tax system or from being prevented in assessing a taxpayer where that taxpayer simply avoids assessment by refusing to file returns, makes no distinction between types of tax assessments by the CRA. As well, subsection 152(8) (which deems an assessment by the CRA to be valid subject to a taxpayer filing an objection or appeal) does not distinguish between the validity of assessments according to their origin.
It was therefore reasonable for the CRA to conclude that the estimated tax assessments triggered the normal tax reassessment period, and the Federal Court of Appeal rejected the Canadian tax litigation lawyer for the Appellant’s arguments. The estimated tax assessments were sustained.
Pro Tax Tip – Obtain Representation from a Professional Canadian Tax Litigation Lawyer as Soon as Possible Following a Problematic Assessment or Reassessment by CRA
Both the Federal Court and Federal Court of Appeal addressed that under the Income Tax Act, a taxpayer who fails to file a return may be assessed tax payable by the CRA in its discretion. The normal reassessment period runs following the mailing date of the CRA’s original notice of tax assessment, and for most taxpayers only extends three years. Following that deadline, the only recourse for a taxpayer would be to file a formal objection to that tax assessment or reassessment, which is always a time-consuming process. Even more, the Tax Court of Canada is not a court of equity and has very limited discretion to account for a taxpayer’s circumstances when hearing a taxpayer’s appeal.
Thus, once the limitation periods have expired to apply for a reassessment, a taxpayer’s legal means of challenging a tax debt (even if it does not reflect the economic realities of the taxpayer) become far more limited. It is vital that you obtain professional Canadian tax lawyer representation early in the process of challenging an unfair assessment or reassessment, by the CRA, to ensure you are not statute-barred from challenging those taxes owing.
FAQs:
- What are the normal reassessment periods under the Income Tax Act?
Under the Income Tax Act, subsection 152(3.1) provides statutory limitation periods for the CRA to reassess a taxpayer’s tax payable for a given taxation year. For mutual funds and corporations that are not Canadian-Controlled Private Corporations (“CCPCs”), the normal reassessment period is four years. For all other individual taxpayers and CCPCs, the normal reassessment period is three years.
- What was the outcome of 6075420 v M.N.R., 2020 FCA 194, at the Federal Court of Appeal?
The Federal Court of Appeal rejected the Appellant’s tax appeal and dismissed the Appeal. The Federal Court of Appeal concluded that the Federal Court was correct to find that the CRA reasonably concluded it could not reassess the Appellant’s 2010 and 2012 tax years, because those periods were statute-barred. An “estimated” tax return issued by the CRA could not be differentiated from a taxpayer-filed return for a relevant tax year for purposes of the Income Tax Act, and for beginning the Appellant’s time to file for reassessment.
- What can be done if I miss the tax reassessment period for my taxes?
The next step in objecting to your taxes assessed would be to file a Notice of Objection. There is a 90-day window following a reassessment in which a taxpayer is entitled to file an Objection, with a possible one-year exception where the taxpayer can satisfy certain conditions. Once the period to file a Notice of Objection has expired, the means for a taxpayer to challenge an assessed tax debt, fair or not, becomes extremely limited, and the courts will be unlikely to provide any recourse. This is exactly why you should always be proactive in obtaining expert Canada tax lawyer representation when CRA issues a reassessment of your taxes, or you otherwise object to how CRA has assessed your taxes.
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
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