2 February 2005 Internal T.I. 2005-0113241I7 - Reassessment Beyond the Normal Reassessment Period

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: whether failure to file an amended return could be considered a misrepresentation

Position: generally no

Reasons: Courts have generally found that misrepresentation must be made at time that return is filed

February 2, 2005

Ms. Susanna Cheung Reorganizations and

Section 442-5-6 Resources Division
Verification and Enforcement Division Ted Harris
Toronto North Tax Services Office (613) 957-2114

2005-011324

Reassessment of Statute-barred Year

We are writing in response to your facsimile of January 26, 2005 wherein you requested our opinion as to whether a taxpayer's statute-barred return may be reassessed pursuant to subparagraph 152(4)(a)(i) of the Income Tax Act (the "Act") in the situation described below.

Facts

1. The taxpayer is a Canadian-controlled private corporation, within the meaning of subsection 125(7) of the Act, which held certain foreign investments.

2. The taxpayer's 1995, 1996 and 1997 income tax returns were reassessed to include an amount in its income for each of those years in respect of its foreign investments under subsection 94.1(1) of the Act on February 4, 2002.

3. The taxpayer's income tax return for its 2000 taxation year was initially assessed on June 6, 2001. Consequently, the taxpayer's normal reassessment period, within the meaning of paragraph 152(3.1)(b) of the Act, for its 2000 taxation year expired on June 6, 2004.

4. On or about July 20, 2004, the CRA received notification from the provincial tax authority concerning its reassessment of the taxpayer's 2000, 2001 and 2002 taxation years to include an amount in the taxpayer's income for each of those years pursuant to a provision in the provincial legislation that is similar to subsection 94.1(1) of the Act.

5. On or about December 17, 2004, your office proposed to reassess the taxpayer's 2000, 2001 and 2002 taxation years under subsection 94.1(1) of the Act based on the information provided by the provincial tax authority. The normal reassessment period for the taxpayer's 2001 and 2002 tax returns has not expired.

TSO Position

It is your position that, notwithstanding that the taxpayer did not make any misrepresentation at the time that it filed its tax return for the 2000 taxation year, the taxpayer had a responsibility to file amended returns once the reassessments for its 1995, 1996 and 1997 taxation years were issued and the taxpayer decided not to file an objection in respect of those reassessments. Furthermore, you believe that once the provincial tax authority reassessed the taxpayer's provincial tax returns for its 2000, 2001 and 2002 taxation years, the taxpayer should have known that its federal tax returns for those years should also be revised. In summary, you believe that by knowingly not requesting that its tax returns be amended, the taxpayer has made a misrepresentation such that the taxpayer's statute-barred return for its 2000 taxation year may be reassessed under subparagraph 152(4)(a)(i) of the Act.

In support of your view you have referred to the following court decisions:

a) M.N.R. v. Taylor 61 DTC 1139 (Exchequer Court of Canada) wherein Cameron J. stated at page 1144 thereof that:

"I have reached the conclusion that the words "any misrepresentation", as used in the section, must be construed to mean any representation which was false in substance and in fact at the material date, and it includes both innocent and fraudulent misrepresentations."

b) Foot v. M.N.R. 66 DTC 5072 (Supreme Court of Canada) which affirmed that the word "misrepresentation" is not restricted to fraudulent misrepresentation.

c) Nesbitt v. The Queen 96 DTC 6588 (Federal Court of Appeal) wherein Strayer, J.A. made the following comments at page 6589 thereof:

It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form.

d) Central Interior Incorporated v. The Queen 2005 DTC 144 (Tax Court of Canada) wherein Teskey, T.C.C.J. stated the following at paragraph 21 of the reasons for judgment:

The 1993 audit should have set off warning bells and Sam's ignoring of the problem is negligence and making no attempt to determine the cause of the problem and rectifying the same, is again, negligence on Sam's part. Thus, continuing the same bookkeeping system was also negligent.

Taxpayer's Representations

In his letters of January 10 and 19, 2005, the taxpayer's representative, XXXXXXXXXX (the "Representative") has argued that in view of the fact that at the time of filing its tax return for its 2000 taxation year in November 2000 the potential application of subsection 94.1(1) of the Act to the taxpayer's foreign investments had not been resolved, the taxpayer has not made any misrepresentation to the CRA that was attributable to neglect, carelessness or willful default. The Representative also submits that at the time of filing its tax return for its 2000 taxation year, the taxpayer had reasonable grounds to believe that subsection 94.1(1) of the Act did not apply to its foreign investments that had been acquired prior to 1984 allegedly for investment purposes. The Representative also makes reference to certain statements made by the Department of Finance in the February 16, 1999 federal budget materials to the effect that subsection 94.1(1) of the Act as it applied prior to that date had rarely been applied due to difficulties in enforcing the provision.

The Representative also submits that the fact that the taxpayer did not file a notice of objection to the February 4, 2002 reassessments did not signify that it agreed with the CRA's position. The representative alleges that due to the anticipated cost of pursuing this matter to the courts and the expectation that the revised foreign investment entity legislation proposed in the 1999 budget would soon be enacted, the taxpayer decided not to file an objection to the reassessments. The taxpayer has, however, filed its tax returns for its 2002 and subsequent taxation years on the basis that subsection 94.1(1) of the Act is applicable to its foreign investments.

Finally, the Representative has submitted that the taxpayer's situation is analogous to that considered by the Federal Court - Trial Division in Regina Shoppers Mall Limited v The Queen, 90 DTC 6427, which was subsequently affirmed by the Federal Court of Appeal [91 DTC 5101].

Our Comments

We have reviewed your submission and those of the Representative and have reviewed the jurisprudence referred to in those submissions. We have also reviewed the jurisprudence where the Regina Shoppers Mall case has been cited, as we believe that it is the one that most closely resembles the facts of this case.

Based on our review of these decisions, we believe it is quite clear that for an assessment under subparagraph 152(4)(a)(i) of the Act to be valid, any misrepresentation must be made at the time that the return was filed. This view is supported by the following case citations:

In the Nesbitt decision referred to in your submission, Strayer, J.A. stated at page 6589:

Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed.

In Regina Shoppers Mall, MacGuigan, J. of the Federal Court of Appeal found at page 5102:

The Trial Judge correctly identified the issue as follows (Appeal Book II at 326):

The determination of the issue of whether the reassessment for 1979 is in fact statute-barred as being over four years after the date of the original assessment, depends entirely on whether the plaintiff, in filing its T-2 return for that year, made any misrepresentation attributable to either neglect, carelessness, wilful default or fraud. (Bold added)

In your letter of January 12, 2005 addressed to the Representative, you acknowledge that you do not allege that the taxpayer made any misrepresentation at the time that it filed its tax return for its 2000 taxation year. However, you believe that the taxpayer should have filed an amended return once it decided not to appeal the reassessments for its 1995, 1996 and 1997 taxation years.

In our view, the failure of the taxpayer to file amended returns would not, in and by itself, be considered to constitute a misrepresentation. As concluded by Addy, J. in Regina Shoppers Mall at page 6429 thereof:

Furthermore, it is not the duty of the reporting taxpayer to alert the Department to a situation as to which any reasonable person would believe the latter is fully aware. There was at the time a fundamental and serious ongoing and unresolved dispute between the parties on that very issue. There was no reason whatsoever for the plaintiff to believe that the Department would somehow overlook it.

On appeal, MacGuigan, J. cited these comments with approval.

With respect to your reference to the Taylor and Foot decisions, we agree that "misrepresentation" as used in subparagraph 152(4)(a)(i) of the Act is not limited to fraudulent misrepresentation; however, any misrepresentation must be made at the time that the return was filed. Also, although the decision in Central Interior suggested that a prior audit "should have set off warning bells" these comments must be read in context. In that case the prior audit had been finalized and it did not involve a dispute over whether a specific provision of the Act had application. The prior audit involved the taxpayer's bookkeeping system. Furthermore, the misrepresentation was made at the time the appellant filed its tax returns.

In summary, since you have accepted that the taxpayer had not made any misrepresentation at the time that it filed its tax return, we believe that a court would apply the reasoning in Regina Shoppers Mall to this situation.

We trust that our comments will be of assistance.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch