Published: April 15, 2020
Last Updated: October 21, 2022
Unfiled Tax Returns and Arbitrary Tax Assessments – Canadian Tax Lawyer Analysis
Introduction–Arbitrary Tax Assessments
Canadians are generally accustomed to filing their income tax returns by the filing deadline each spring and later receiving a Notice of Assessment in the mail from CRA, which indicates that the tax return was assessed as filed by the taxpayer. However, CRA can issue tax assessments to taxpayers who have not previously filed a tax return. The Income Tax Act and Excise Tax Act each contain provisions that allow Revenue Canada to issue arbitrary tax assessments to taxpayers who fail to file income tax, payroll source deduction or GST/HST returns with CRA as and when required by the relevant tax act. Arbitrary assessments are CRA estimates of tax owing and are (unsurprisingly) almost always too high. Our expert Canadian tax lawyers can quickly identify arbitrary tax assessments, challenge them and can work with you to determine your tax filing obligations under Canadian tax law.
Understanding Arbitrary Tax Assessments
If you receive a tax assessment in the mail for a taxation year or reporting period for which you know for a fact you did not file a tax return with CRA, then it is probably an arbitrary assessment. Subsection 152(7) the Income Tax Act and subsection 299(1) of the Excise Tax Act provide the statutory authority for CRA to issue arbitrary tax assessments and the wording of each provision is nearly identical.The Income Tax and Excise Tax Acts also contain wording that makes it clear that all tax assessments are valid and binding notwithstanding any error, defect or omission in the tax assessment.
Arbitrary assessments are generally too high and often do not allow deductions or credits to which the taxpayer would otherwise be entitled. Because of this, receiving an arbitrary tax assessment can be quite shocking and our experienced Canadian tax law firm thinks of these tax assessments as a sort of indirect punishment for failing to file tax returns. CRA will estimate the tax liability using a variety of available information, including income reported in prior years or information obtained through third parties. If you receive requests or demands to file tax returns from CRA, our Canadian tax law firm can step in and represent you with CRA to prevent an arbitrary tax assessment from being issued, which is the common outcome of ignoring those tax filing requests.
Tax Tip – How to Respond to Arbitrary Assessments
The appropriate way to respond to an arbitrary tax assessment generally depends on the quantum of the tax assessment and the taxpayer’s own thoughts on whether or not it is incorrect and if so by how much. It is important to note that being issued an arbitrary assessment by CRA does not do away with a taxpayer’s obligation to file a return under the Income Tax Act.Prosecution for failure to file a tax return is not prevented by an arbitrary tax assessment.
If a taxpayer thinks that an arbitrary tax assessment is only slightly too high, they may decide to simply pay the amount owing and hope CRA does not demand that the return be filed, but the demand can always be issued in the future so it is not a good strategy. If the arbitrary assessment is for a quantum of tax that the taxpayer finds completely incorrect and/or unacceptable, he or she should file a Notice of Objection with CRA in order to protect their tax appeal rights and have a proper return prepared by an accountant. Taxpayers have 90 days from the date a Notice of Assessment or Reassessment is issued by CRA to file a Notice of Objection to challenge the validity of the tax assessment or reassessment. There is an additional one year period during which a taxpayer can apply to the Minister of Revenue for an extension of time to file a Notice of Objection to an assessment or reassessment. Once 91 days plus a year passes from the date a tax assessment is issued, the taxpayer’s options under the Canadian Tax Act for challenging the incorrect assessment become extremely limited and they may get stuck with the amount owing. Our Canadian Tax Lawyers prepare and file Notices of Objection on a daily basis and can make sure you tax dispute starts off on the right foot with all available information and legal arguments.
Conclusion – Unfiled Returns and Arbitrary Tax Assessments
If you fail to submit filings to CRA when required, they may do it for you and estimate your taxes owing. These arbitrary tax assessments are often too high, but they are nonetheless binding unless successfully challenged by the taxpayer. If the arbitrary assessment of tax is much too high, you should file a Notice of Objection with CRA. Speak with one of our leading Canadian tax lawyers to determine how you should respond to an arbitrary tax assessment.
"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."
If you want to file years of unfiled taxes, you can take advantage of CRA’s Voluntary Disclosure Program. The Voluntary Disclosure Program is a tax amnesty program that helps taxpayers settle their past tax dues without the repercussions of paying tax penalties, interest, and prosecution voluntarily disclosing inaccurate or incomplete information or disclose information not previously reported in their income tax filings.
The CRA has discretion as to how far back it will go to collect on unfiled tax returns. Where the CRA detects errors in financial records or suspects fraudulent activities with your tax returns, there are no limits on how far back your records can be audited.
The CRA will not forgive tax debt simply because enough time has passed. The CRA has rules for reducing or waiving interest and penalties on debt owing in extraordinary circumstances, but it has no authority to reduce the principal amount of debt.
Yes, you can dispute the CRA assessment. You can file a formal objection within 90 days if you are not satisfied with the penalties or amount of tax you receive.
When making a formal objective, you have to follow the step-by-step process. It can be online or by mail. You need to prepare the necessary documents to prove your dispute.
A large corporation that is objecting an assessment should pay at least 50% of the disputed amount. The corporation also needs to pay the full amount of taxes that is not in dispute.