Some time ago, I created a table outlining the Tax Court of Canada appeals process. But what about the process that precedes a Tax Court appeal? A Tax Court appeal is the third and final leg of the tax dispute resolution process. Most disputes with the CRA are resolved either at the audit or the objection stage. In fact, a taxpayer cannot file an appeal to the Tax Court until certain steps at the audit and objection are completed. It is important to understand the audit and objection stage, therefore, in order to understand the Tax Court process. To that end, this article summarizes the audit and objection processes.
An audit (or review) usually looks like this:
- A taxpayer files his or her return.
- The CRA usually issues an assessment without an audit or review. This initial assessment does not indicate that the CRA is satisfied with the return. The initial assessment does start the limitation period running. In general, absent a misrepresentation or fraud, the CRA cannot reassess an individual taxpayer more than three years after the date of the initial assessment.
- For reasons best known to itself, the CRA selects the taxpayer’s return for a review or audit. The CRA likely relies on statistics to determine whether a taxpayer has claimed, say, an unusually high deduction for certain expenses. Unusually high deductions of one sort or another will likely lead to a review or audit.
- The CRA auditor asks to see the taxpayer’s books and records, invoices and receipts, and the CRA asks questions about areas of concern. The auditor’s powers of discovery at this stage are quite broad. In general, almost any question or any demand for documentation, as long as it reasonably relates to the taxpayer’s liability under the Income Tax Act (Canada) (the Act), is fair game. The taxpayer, throughout the review or audit, has the opportunity to rebut any suspicions or concerns the auditor might have.
- The auditor issues a proposal letter, which sets out the auditor’s proposed reassessment. The letter generally gives the taxpayer 30 days to make submissions against the proposed reassessment.
- After reviewing the taxpayer’s final submissions, if any, the auditor prepares an audit report (usually called a “T20”) that provides the factual and legal basis for the proposed reassessment.
- The auditor’s team leader reviews and approves the T20.
- A notice of reassessment is issued to the taxpayer, usually with a form T7W-C that summarizes the adjustments made by the reassessment. The reassessment replaces the assessment originally issued to the taxpayer, and it fixes the taxpayer’s liability for tax under the Act unless the taxpayer successfully disputes it by filing an objection or, if that step is unsuccessful, by filing an appeal to the Tax Court.
To dispute a reassessment, a taxpayer must file an objection. The taxpayer cannot appeal directly to the Tax Court. The following describes the objection process.
- The taxpayer begins the process by completing a notice of objection in writing and sending it by mail or delivering it to the Chief of Appeals “in a District Office or Taxation Centre” (see subsection 165(2) of the Act). The CRA has created a form for objections (the T400A), but the Act does not prescribe this form, and so it is not necessary to use it (see Lester v. The Queen, 2004 TCC 179, where a letter was held to constitute a valid notice of objection). To avoid confusion 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 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 assessment and (2) the day that is one year after the taxpayer’s filing-due date for the year for which the reassessment was issued. Section 166.1 of the Act allows a taxpayer to apply to extend the time for filing a notice of 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.
- The CRA sends a letter to the taxpayer (with a copy to the taxpayer’s representative) acknowledging receipt of the notice of objection. In Hamilton, it can sometimes take the local “District Office” (Tax Services Office) months simply to send such a letter.
- The Chief of Appeals assigns the objection to an appeals officer for review. The appeals officer reviews the objection, the taxpayer’s submissions, the tax return in question and the auditor’s report and working papers. The appeals officer also reviews the provisions of the Act, case law and the CRA’s own publications on the law.
- The appeals officer usually asks the taxpayer for further submissions or additional documentation or information.
- The appeals officer usually sends a proposal letter outlining the CRA’s position.
- The taxpayer can make final submissions.
- The appeals officer prepares an appeals report (usually on form T401) setting out the officer’s conclusions on the facts and law and the disposition of the objection. The officer can reverse, vary or confirm the reassessment under objection.
- The appeals officer’s team leader reviews and approves the report.
- The CRA issues 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 wishes to dispute the new reassessment or the reassessment that was confirmed, the taxpayer can file an appeal with the Tax Court of Canada.
An amount of income tax or HST (including penalties and interest) that has been assessed or reassessed is due and payable as soon as it is assessed. I usually recommend to clients that they pay some or all of the assessed amount, even if they intend to dispute it. Making a payment will stop (non-deductible) arrears interest from accumulating on any amount that remains outstanding after the dispute is resolved. Where the client pays an amount in excess of what is finally determined to be owed, the CRA will pay interest on the excess. Making the payment is not an admission of liability, and neither CRA appeals nor the Tax Court takes note of any such payment when deciding the merits of a dispute.
That said, in general the CRA is not supposed to take collection action on income tax debts within 90 days of the debts being assessed or while they are under dispute via an objection or an appeal to the Tax Court. (The CRA can and does collect HST and payroll source deduction amounts, even if the taxpayer has filed an objection or an appeal. The CRA might also withhold refunds and apply it against an income tax debt. The taxpayer can request the release of the refunds, and the CRA will ordinarily comply with the request.)
If a CRA collections officer calls you about a tax debt, you should get the name, phone number and fax number of the officer, ask the officer to call your authorized representative (that is, to call me, if I’m your lawyer) and then provide the information to your representative so that he or she can follow up. It’s not wise to ignore a collections officer, but you need not engage with the officer personally: you can (and usually you should) respond through your authorized representative.