The following article appeared in the latest edition of the Hamilton Law Association Law Journal.
The Income Tax Act (Canada) (the “Act”) contains numerous limitation periods that affect when the Canada Revenue Agency (the “CRA”) can issue an assessment to a taxpayer and when a taxpayer can and cannot dispute such an assessment. Understanding these limitation periods is an important pre-requisite for advising clients about a wide variety of legal problems, including, for example, the expiry period for representations and warranties in a share purchase agreement.
Limits on Assessments
The CRA normally has three years to mail a notice of reassessment to an individual for a taxation year. In the Act, this period is called the “normal reassessment period”. The three-year limitation period begins with the date of the initial notice of assessment for the taxation year (the notice responding to the filing of a tax return for the year). The CRA must issue an initial notice of assessment “with all due dispatch” after a taxpayer files a tax return. That is, the Act does not impose a time limit for the issue of the initial notice of assessment, and the Courts have been somewhat lenient about the meaning of “all due dispatch” in this context (see, for example, The Queen v. Ginsberg, 1996 CanLII 4062 (F.C.A.)).
As an example, if an individual’s original assessment for 2003 was dated July 15, 2004, then the CRA, if it had reassessed on July 15, 2007, would have met the limitation period. The CRA would have been late if it had reassessed or sent the reassessment on July 16, 2007.
Under the Act, the act of assessing or reassessing is synonymous with mailing the document that serves as notice of the assessment or reassessment. Accordingly, by mailing the document on or before the third anniversary of the original assessment, the CRA meets the three-year limitation period.
For corporations, the position is a little more complicated. For Canadian-controlled private corporations, the normal reassessment period is also three years. For any other type of corporation, the period is four years. The Corporations Tax Act (Ontario) gives Ontario one year beyond the federal normal reassessment period to issue provincial reassessments against a corporation.
Negligent Misrepresentation
The CRA can assess at any time if a taxpayer makes a “misrepresentation” on a tax return “that is attributable to neglect, carelessness or wilful default”. A “misrepresentation” is essentially any kind of error that results in a taxpayer’s income being under-reported. As for “neglect” or “carelessness”, the test has been described thus:
[I]t is sufficient for the Minister, in order to [reassess beyond the normal limitation period], to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. (Venne v. M.N.R., [1984] C.T.C. 223 at 228 (F.C.T.D.))
The CRA (the Minister) must prove negligence in order to be able to go beyond the normal reassessment period in issuing a reassessment. The tax courts, however, have sometimes applied a fairly low threshold in deciding what amounts to neglect or carelessness. Having one’s tax return prepared by a professional is not always of much help. In Estate of Herman Gebhart v. The Queen, 2008 FCA 206, aff’g 2006 TCC 572, an estates lawyer prepared a terminal return based on the T4RSPs in his possession. Unfortunately, he was missing another T4RSP, and so he did not realize that a payment he had received through a bank was from another RSP belonging to the deceased. The court found that the executor and the lawyer knew or ought to have known about the other RSP; it did not accept their explanation that they were confused about whether the other RSP existed:
The confusion that may have been present in Mr. Kohl’s [the executor’s] mind was whether there were, in fact, more RSPs than he and Mr. Lewans [the lawyer] had initially thought. This confusion could easily have been cleared up by a visit or telephone call to CIBC-Mankota, where Mr. Gebhart had conducted his financial affairs. It was not a difficult problem to sort out and, in my view, Mr. Kohl did not exercise reasonable care in authorizing the filing of the 1996 income tax return before the matter of how many RSPs Mr. Gebhart actually held at the time of his death had been clarified. It follows, in my view, that the evidence that was before the Tax Court Judge supports his conclusion that there was a misrepresentation attributable to neglect or carelessness on the part of Mr. Kohl in the filing of the 1996 income tax return of the Estate, as contemplated by subparagraph 152(4)(a)(i) of the ITA, that warranted the reassessment of the Estate in respect of its 1996 taxation year after the normal reassessment period for the Estate in respect of that taxation year.
A purchaser of the shares of a corporation will ask for representations and warranties respecting the tax affairs of the corporation to ensure that its tax returns as filed and the resulting assessments accurately quantify the corporation’s tax debts in respect of its operations before the acquisition of the shares. The vendor will often propose reps and warranties that “expire” after the end of the normal reassessment period. Sometimes the expiry period refers only to the federal period, which leaves open the possibility that Ontario could reassess after the expiry of the reps and warranties but before the expiry of the provincial limitation period.
The expiry date for the reps and warranties sometimes do not apply to errors on a tax return that result from “gross negligence” or the like. If a corporate taxpayer makes an error attributable to “gross negligence”, it might be exposed to gross negligence penalties, and the CRA will generally have little difficulty reassessing beyond the normal reassessment period. The reps and warranties, in theory, will allow the purchaser to seek indemnification from the vendor. The purchaser’s only remaining risk, then, relates to ordinary negligence, which, while it leaves the corporation open to reassessment beyond the normal reassessment period, does not necessarily extend the expiry date for the reps and warranties.
Objecting to a Reassessment
A reassessment is deemed to be correct, and it definitively fixes a taxpayer’s debt to Her Majesty, unless the taxpayer disputes it. The taxpayer must begin a dispute with the CRA about a reassessment by filing a “notice of objection”. The notice of objection must be in writing, and it must be sent by mail or delivered by hand to the Chief of Appeals “in a District Office [Tax Services Office] or Taxation Centre”. The CRA has created form T400A for objections, but the Act does not prescribe this form, and so it is not necessary to use it (see, for example, Lester v. The Queen, 2004 TCC 179, where a letter was held to constitute a valid notice of objection). To avoid confusion, however, and to ensure that the objection is not misdirected somehow, it is advisable to use the CRA’s form.
The objection must be filed on or before the day that is 90 days after the day of mailing of the notice of reassessment or, in the case of an individual or a testamentary trust, on or before the later of (1) the day that is 90 days after the day of mailing of the notice of reassessment and (2) the day that is one year after the taxpayer’s filing-due date for the year for which the reassessment was issued.
Where the taxpayer misses the requisite deadline, section 166.1 of the Act allows him or her to apply to the CRA to extend the time for filing the objection. The taxpayer, however, among other things must make the application within one year “after the expiration of the time otherwise limited by this Act for serving a notice of objection.” David Sherman, in his notes on section 166.1 in The Practitioner’s Income Tax Act, states that in the year ended March, 2004, the CRA accepted 91% of all applications made under section 166.1, which corresponds with the writer’s experience with the section.
On the other hand, missing the one-year deadline provided by section 166.1 will mean that the taxpayer is completely out of luck: the case law is clear that the Tax Court has no jurisdiction to hear an appeal unless an objection is filed first, and an objection cannot be filed after the expiry of the one-year period in section 166.1 (see, for example, Cameron v. The Queen, 2006 TCC 588).
After receiving submissions from the taxpayer and considering the objection, the CRA will issue either a new notice of reassessment and T7W-C to vary or reverse the reassessment under objection or a notice of confirmation confirming that the reassessment under objection was correct as far as the CRA is concerned. If the taxpayer continues to disagree with the new reassessment or the confirmed reassessment, he or she must appeal to the Tax Court of Canada.
Time Limits for Tax Court Appeals
A taxpayer is entitled to file an appeal to the Tax Court of Canada if the taxpayer has filed an objection and more than 90 days has passed since the date of filing. In fact, a taxpayer can file such an appeal even if the CRA has not yet audited the return that is the subject of the appeal (The Queen v. Imperial Oil Ltd., 2003 FCA 289). Because the CRA usually takes 90 days just to assign an objection to an appeals officer, this entitlement means that a taxpayer can circumvent the CRA appeals process. Usually, a taxpayer will wish to use the appeals process if possible because it is relatively informal and cheaper than court. On the other hand, it is sometimes possible to predict with near certainty what the appeals officer will do with the file, in which case an appeal will save everybody the trouble.
Suppose the taxpayer does use the CRA objection process. As is noted above, a CRA appeals officer can dispose of an objection by reversing the reassessment, confirming it or varying it and issuing a new one. A taxpayer who wishes to continue to dispute the old reasessment that was confirmed or the new reassessment that varied the old one, can file a notice of appeal to the Tax Court within 90 days of the date of the confirmation or the new reassessment.
A taxpayer who misses the 90-day limitation period can apply for an extension of time within which to file an appeal. The taxpayer, however, must make the application within one year of the expiry of the 90-day limitation period.
Two-Year Limitation Period for Directors
In “Leaving a Sinking Ship: Resigning as a Director of a Corporation” (HLA Journal, August 2008), I discussed the two-year limitation period provided by subsection 227.1(4) of the Act. This subsection prohibits the CRA from assessing an individual who was a director of a corporation for unremitted source deductions more than two years after the individual ceased to be a director.
In Leger v. The Queen, 2007 TCC 322, “the Court held that, if a corporation that was dissolved is revived, the revival takes effect from the date of dissolution (cf subsection 241(5) of the OBCA). As a result, the corporation is revived and, in effect, so are its directors.”
Aujla v. The Queen, 2007 TCC 764, aff’d 2008 FCA 304, arrived at a different result, albeit in the context of company governed by a different statutory scheme. Mr. Justice Bowie decided that a company that had been dissolved while owing net GST could not have directors, and so the directors ceased to have that status upon dissolution (as required by subsection 227.1(4) of the Act). An order of the B.C. Supreme Court under the B.C. Company Act revived the company, but the order said nothing about putting the directors in the same position they would have been if the company had not been dissolved. The Court rejected the Crown’s submission to the effect that, if a company is revived, it must follow that the company’s directors have been resuscitated as well. For a more detailed discussion of this case, see blog.simpsonwigle.com/?p=273.
