What is an Income Tax statute-barred period?
When taxpayers are initially assessed for income tax or GST, they are issued a “Notice of Assessment”. Only one Notice of Assessment will be issued at a time per tax year or reporting period. If any changes need to be made to a prior tax assessment or tax reassessment, the taxpayer will be issued a “Notice of Reassessment” which effectively overrides any prior tax assessments or tax reassessments. A taxpayer may be issued multiple Notices of Reassessment for the same tax year or reporting period.
The Canada Revenue Agency (“CRA”) has a prescribed period of time to reassess a given tax year or reporting period. This period of time is known as the ordinary or normal reassessment period. The length and start date of the ordinary reassessment period depends on whether the assessment is for income tax or GST/HST and it also differs for individuals and corporations. To issue a reassessment during the ordinary reassessment period, the CRA only needs to demonstrate a plausible error, even a minor one, with the taxpayer’s tax reporting. Once the ordinary reassessment period has passed, the tax year or reporting period is considered “statute-barred”.
The CRA can still reassess a statute-barred tax year or reporting period. However, to make such a tax reassessment the CRA must now demonstrate not only that the taxpayer made a reporting error but also that the error was caused by carelessness, neglect, wilful default or fraud on the part of the taxpayer. This additional requirement gives taxpayers an added avenue to prevent a reassessment. An experienced Canadian tax lawyer will argue that even if the taxpayer made an error, the error was not caused by carelessness, neglect, wilful default or fraud on the part of the taxpayer and thus no reassessment can be issued.
Since it is more difficult to successfully reassess taxpayers after the ordinary tax assessment period has passed, taxpayers are less likely to be reassessed or audited for tax years and reporting periods which are past the applicable ordinary reassessment period.
In College Park Motors Ltd. v. The Queen, the court explained the purpose of statute-barred tax years and reporting periods as follows:
“It balances the need for taxpayers to have some finality in respect of their taxes for the year with the requirement of a self-reporting system that the taxing authority not be foreclosed from reassessing in those instances where a taxpayer’s conduct, whether through lack of care or attention at one end of the scale, or willful fraud at the other end, has resulted in an assessment more favourable to the taxpayer than it should have been”
Statute-Barred Timing – Income Tax
Under section 152(3.1) of the Income Tax Act, the ordinary reassessment period is
- four years after the earlier of the mailing of the original notice of assessment or notification that no tax is payable for mutual funds and corporations which are not Canadian-controlled private corporations
- three years after the earlier of the mailing of the original notice of assessment or notification that no tax is payable for all remaining taxpayers.
Statute-Barred Timing – GST/HST
Under subsection 298 of the Excise Tax Act, the ordinary reassessment period is:
- For GST/HST, four years from latter of the deadline to file a return for a reporting period and the day the return was actually filed.
- For GST/HST rebates, four years from date of application for the rebate.
The ordinary reassessment period does not begin until the relevant return is filed.
Waiving of the Ordinary Reassessment Period for Income Tax
A taxpayer can choose to waive the ordinary reassessment period under the Income Tax Act explicitly by filing form T2029. This waiver can be rescinded. A taxpayer will generally file such a waiver where the resulting reassessment would give the taxpayer a benefit. For example, if a taxpayer discovers during a tax audit that he overstated income in a statute-barred year, he may waive the ordinary reassessment period to allow the auditor to adjust the overstated income downwards. The CRA may also attempt to argue the taxpayer implicitly waived the ordinary reassessment period as a means of allowing a tax reassessment beyond the ordinary reassessment period.
Pro Tax Tip: File Your Tax Returns to Take Advantage of the Statute-Barred Periods
When you file your tax return impacts the calculation of the ordinary reassessment period for both income tax and GST/HST. For income tax, tax assessments are not normally issued until the taxpayer files a tax return. As such, filing an annual tax return has the added benefit of triggering an assessment and starting the ordinary reassessment period running. Even those who may not be required to file a Canadian tax return should consider filing a tax return to start the ordinary reassessment period time period.
At first blush, for GST/HST, it may appear advantageous to simply not file a tax return since the ordinary tax reassessment period is four years from later of the deadline to file a return for a reporting period and the day the return was actually filed. However, the ordinary reassessment period does not start until a tax return is filed. An unfiled return may also lead to an arbitrary assessment wherein the CRA assesses the taxpayer based on its best guess of what the taxpayer should have filed. Generally, the tax resulting from arbitrary assessments is higher than what the taxpayer would have paid otherwise. The common way to deal with an arbitrary assessment is that the taxpayer prepares and files a tax return either through the ordinary filing process or through the objection process. This would result in the later of the two dates – deadline to file a return for a reporting period and the day the return was actually filed – being the day the return was actually filed. The day the tax return is actually filed may end up being years after the deadline to file the return thus extending the ordinary tax reassessment period far beyond the time period that would have applied had the taxpayer filed on time.
If the CRA has or is considering reassessing you for a period which is past the ordinary reassessment period, contact our experienced Canadian tax lawyers for assistance in disputing the reassessment.
"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."