Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. What considerations go into the determination of whether or not there has been a misrepresentation?
2. Are only those issues arising from a misrepresentation in an otherwise statute-barred year subject to reassessment or may other issues be reassessed?
3. Would a tax avoidance arrangement generally be considered a misrepresentation?
Position: 1. In accordance with subparagraph 152(4)(a)(i), a misrepresentation must be "attributable to neglect, carelessness or wilful default" or it must involve the commission of fraud in order for the CRA to reassess the particular tax return beyond the normal reassessment period.
2. Only an item that "can reasonably be regarded as relating to . . . any misrepresentation made by the taxpayer or a person who filed the taxpayer's return of income for the year that is attributable to neglect carelessness" et cetera may be reassessed after the expiry of the normal reassessment period.
3. Tax avoidance arrangements would generally require a careful review of the facts of each case in order to determine whether a misrepresentation exists which would allow the issue to be reassessed beyond the normal reassessment period.
Reasons: 1. Based on wording of subparagraph 152(4)(a)(i). 2. Subsection 152(4.01) modifies the application of paragraphs 152(4)(a), (b), and (c). 3. The GAAR Committee requires that all submissions to the Committee identify the years to be assessed and will not authorize an assessment of an otherwise statute-barred year unless there are compelling reasons provided which meet the negligence threshold.
2012 CTF Atlantic Conference
November 9-10, 2012
Question 5 - Statute-Barred Years
Information requests in respect of otherwise statute-barred years and the reassessment of such years on the basis of alleged misrepresentations appear to be on the rise.
1. What considerations go into the determination of whether or not there has been a misrepresentation?
2. Is it the position of the CRA that only those issues arising from a misrepresentation in an otherwise statute-barred year may be reassessed or are all issues in that year subject to reassessment once the year has been opened up?
3. There is a perception that the fact situations leading to assessments proposed by Aggressive Tax Planning (formerly Tax Avoidance program) often extend to what might otherwise be considered statute barred years. Would a tax avoidance arrangement generally be considered a misrepresentation?
Responses by CRA
1. What considerations go into the determination of whether or not there has been a misrepresentation?
Background information
A misrepresentation usually occurs in a tax return, but a misrepresentation could also occur when supplying any information under the ITA in respect of filing a tax return. The misrepresentation can be made by the taxpayer, or it can be made by a person filing the taxpayer's return.
Nature of a misrepresentation
In the CRA's view, a misrepresentation is any representation that is false in substance and in fact at the time of filing the return. There is no requirement that the person providing the information intended to deceive the CRA in respect of the information. The misrepresentation may be innocent; the information simply has to be incorrect at the time it is supplied to the CRA.
A misrepresentation that allows a statute-barred return to be reassessed
In accordance with subparagraph 152(4)(a)(i), a misrepresentation must be "attributable to neglect, carelessness or wilful default" or it must involve the commission of fraud in order for the CRA to reassess the particular tax return beyond the normal reassessment period.
Evidence of negligence or carelessness
In the CRA's view, "neglect" and "negligence" deal with the failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation. Carelessness means the absence of care, and it may be synonymous with neglect.
Determining acts of neglect and carelessness requires professional judgement.
2. Is it the position of the CRA that only those issues arising from a misrepresentation in an otherwise statute-barred year may be reassessed or are all issues in that year subject to reassessment once the year has been opened up?
The law on this matter is clear. Subsection 152(4.01) modifies the application of paragraphs 152(4)(a), (b), and (c). Only an item that "can reasonably be regarded as relating to . . . any misrepresentation made by the taxpayer or a person who filed the taxpayer's return of income for the year that is attributable to neglect carelessness" et cetera may be reassessed after the expiry of the normal reassessment period. Assuming that the taxpayer has not filed a waiver under paragraph 152(4)(a)(ii), the CRA will only reassess issues arising from a misrepresentation in an otherwise statute-barred year, a misrepresentation in respect of that item that is due to negligence or carelessness.
Statute-barred returns that are opened up to reassessment may involve serious false statements or omissions, where the 50% gross negligence penalty under subsection 163(2) would be applied, or a misrepresentation arising from neglect or carelessness but not gross negligence, where no subsection 163(2) penalty would be levied.
Response provided by Aggressive Tax Planning:
3. There is a perception that the fact situations leading to assessments proposed by Aggressive Tax Planning (formerly Tax Avoidance program) often extend to what might otherwise be considered statute barred years. Would a tax avoidance arrangement generally be considered a misrepresentation?
Tax avoidance arrangements would generally require a careful review of the facts of each case in order to determine whether a misrepresentation exists which would allow the issue to be reassessed beyond the normal reassessment period. There is no general presumption that entering into a tax avoidance arrangement would automatically allow the CRA to conclude that there was a misrepresentation.
The CRA has previously stated at the 2011 Ontario Tax Conference that, although statute-barred years were assessed in project files like "Ontario Fincos", "Quebec Truffles" and "Broken Amalgamations", in general the reassessment of statute-barred years where GAAR is the assessing authority should be rare. The GAAR Committee requires that all submissions to the Committee identify the years to be assessed and will not authorize an assessment of an otherwise statute-barred year unless there are compelling reasons provided which meet the negligence threshold.
Michel Gauthier
2012-046592
November 9, 2012
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