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. Where a taxpayer files a NIL or an incomplete return of income, whether the Minister can refuse to accept it. 2. Whether the Minister can assess penalties and, if so, which ones.
Position: 1. Yes. 2. Yes. Subsections 162(1) or 162(2) penalties for late-filing a return of income, and subsection 163(2) for gross negligence if applicable.
Reasons: 1. In situations where a taxpayer files a return of income such that the prescribed form is substantially incomplete, whether missing relevant information or required documents, the return of income may be considered to be not a valid return and the Minister can refuse to accept it. 2. Subsection 162(1) and (2) penalties can be assessed because the taxpayer did not file a valid return of income by the filing-due date. Subsection 163(2) penalty can be assessed if the taxpayer was grossly negligent.
June 11, 2014
Assessment and Benefit Services Branch HEADQUARTERS
T2 Strategy & Coordination Section Income Tax Rulings
750 Heron Road, Canada Post Place Directorate
Ottawa ON K1A 0L5 J. Ouimet, CPA, CA
Attention: Ms. Farbar 2014-051970
Filing of a NIL tax return to avoid late-filing penalties
We are writing in reply to your email of February 4, 2014, concerning whether the Minister can refuse to accept either a NIL tax return (that is, a tax return that does not report any of the taxpayer's transactions or income on which tax is payable) or a substantially incomplete tax return, filed under subsection 150(1) of the Income Tax Act (the "Act"). You indicated that in most cases where this occurs, the Canada Revenue Agency (the "CRA") cannot determine the validity of the initial return of income until the taxpayer files an amended return containing the prescribed information. At this point, it is too late to refuse to accept the initial return of income. You stated that in some instances, this is a repeated practice by the taxpayer.
In addition, you asked for our views on the application of the penalties in sections 162 and 163 of the Act in this situation.
In general, pursuant to subsection 150(1) of the Act, a taxpayer is required to file a return of income for each taxation year within certain time limits in prescribed form containing prescribed information. The prescribed information includes a calculation of income for the taxation year in accordance with the rules in section 3 of the Act and, pursuant to section 151 of the Act, an estimate of the tax payable. Therefore, in situations where all or some of the necessary and substantive elements on the prescribed form are missing, or incorrectly stated by a taxpayer, the return of income can be considered not to have been filed in prescribed form containing prescribed information. Accordingly, where a taxpayer files a NIL tax return or an incomplete tax return with the Minister, it remains our view that the CRA may refuse to accept the return, and may assess any applicable penalties. Further, even if the CRA has accepted the initial return of income and issued a notice that no tax is payable, late-filing penalties, such as subsection 162(1) or (2) may be assessed at the time the taxpayer files the amended tax return and it is identified that the initial return of income was not a valid return.
The case of Carlson et al v .The Queen, 73 DTC 5192 (FCTD) supports our views. In this decision the Federal Court held that late-filing penalties were properly assessed by the Minister in the situation where an incomplete tax return was filed and the taxpayer subsequently filed an amended return that was complete after the filing-due date. The Court stated:
"It is obvious that the Carlson brothers intended these later and complete returns to be the income tax returns on which they intended their assessment for income tax to be based.
I know of no principle which entitles a taxpayer to avoid the penalty for late filing by sending in a document which is not intended to be the taxpayer's income tax return but merely an intimation that a return will be filed at some later date."
In addition to the late-filing penalties in subsections 162(1) and (2), the penalty under subsection 163(2) of the Act may be applicable in these circumstances. This subsection levies a penalty if a person "knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year for the purposes of this Act". In our view, it is reasonable to infer that the filing of a NIL tax return or an incomplete tax return in these circumstances falls within the ambit of subsection 163(2) in that the taxpayer has knowingly made a false statement and/or an omission in a return. The penalty is determined with reference to the understatement of tax or the overstatement of amounts deemed to be paid on account of tax.
We are aware that a taxpayer may file a NIL tax return or an incomplete tax return in order to start the taxpayer's normal reassessment period. Subparagraph 152(4)(a)(i) of the Act permits the Minister to reassess at any time where the taxpayer filing the tax return has made a misrepresentation that is attributable to neglect, carelessness or wilful default. In our view, subparagraph 152(4)(a)(i) would apply to the filing of such a return in these circumstances. Therefore, even if the CRA has issued a notice that no tax is payable as a consequence of the NIL tax return, thus starting the taxpayer's normal reassessment period, the CRA's ability to reassess the taxpayer beyond the normal reassessment period would not be limited.
We trust our comments will be of assistance.
Terry Young, CPA, CA
Manager, Administrative Law Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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