9 July 2014 Internal T.I. 2014-0525371I7 - Assessments 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 an assessment or reassessment may be made beyond the normal reassessment period to increase tax payable where the taxpayer has failed to file a return of income and the Minister has issued an arbitrary assessment for the particular taxation year.

Position: Yes.

Reasons: Subparagraph 152(4)(a)(i) provides that the Minister may make an assessment, reassessment or additional assessment beyond the normal reassessment period where the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act. Whether the failure to file a return of income is attributable to neglect, carelessness or wilful default will depend on the particular facts. However, it is our understanding that, generally, the CRA will not issue an arbitrary assessment in these circumstances without first requesting the taxpayer file a return. In these circumstances, it is likely that the taxpayer would have been aware; therefore, the misrepresentation was attributable at least to neglect.

July 9, 2014

Compliance Programs Branch HEADQUARTERS
Small and Medium Enterprise Directorate Income Tax Rulings
Business Audit Division Directorate
G. Godson
Attention: Anne Wilson
2014-052537

Assessments beyond the normal reassessment period

We are writing in reply to your email of March 25, 2014, requesting our views on whether subsection 152(4) of the Income Tax Act (the "Act") provides the Minister with the discretion to make an assessment or reassessment beyond the normal reassessment period in circumstances where an arbitrary assessment pursuant to subsection 152(7) of the Act has been issued due to the taxpayer's failure to file the return of income.

In your inquiry you indicated that a corporate taxpayer failed to file a return of income for a particular taxation year and, as a result of the failure to file, the Minister issued an arbitrary assessment pursuant to subsection 152(7). The taxpayer has now provided the original return of income that, if assessed, will increase the tax payable from the amount arbitrarily assessed for the particular year. However, the return of income was received after the taxpayer's normal reassessment period. You would like our views on whether the Minister may accept the late-filed return and issue a reassessment beyond the normal reassessment period.

You have also referred to our document 2012-0447401I7, which provides our view that the Minister may not issue a reassessment beyond the normal reassessment period to reduce tax payable in similar circumstances.

Our comments

In general, subsection 150(1) of the Act requires that a return of income that is in prescribed form and that contains prescribed information be filed with the Minister for each taxation year. In the case of a corporation, the return of income is required to be filed if at any time in the year the corporation was resident in Canada, carried on a business in Canada, had a taxable capital gain, disposed of taxable Canadian property, or had Part I tax payable for the year.

Where a return of income has not been filed, the Minister may issue an assessment pursuant to subsection 152(7). Although this initial assessment is issued pursuant to subsection 152(7) and not as a result of a tax return filed by the taxpayer, it is still an assessment. As such, the initial assessment starts the normal reassessment period and the taxation year will be statute-barred from further assessments, reassessments or additional assessment after the normal reassessment period unless one of the exceptions in subsection 152(4) applies. Subparagraph 152(4)(a)(i) of the Act provides that the Minister may make an assessment, reassessment or additional assessment beyond the normal reassessment period where the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act. In particular, the courts have provided that negligence is established if it is shown that the taxpayer has not exercised reasonable care, and the care exercised must be that of a "wise and prudent person" (Venne v. The Queen, 84 D.T.C. 6247 (F.C.T.D.)). In the situation at hand, the taxpayer had Part I tax payable and pursuant to clause 150(1)(a)(ii)(A) of the Act, was required to file a return of income. If the taxpayer's failure to file a return of income was attributable to neglect, carelessness or wilful default, it is our view that subparagraph 152(4)(a)(i) would permit the Minister to reassess the taxpayer after the normal reassessment period to increase tax payable. Whether the failure to file a return of income is attributable to neglect, carelessness or wilful default will depend on the particular facts. However, it is our understanding that, generally, the CRA will not issue an arbitrary assessment in these circumstances without first requesting that the taxpayer file a return. Therefore, it is likely that a taxpayer who was assessed pursuant to subsection 152(7) would have been aware of its filing obligation.

Accordingly, it is our general view that in circumstances such as those outlined in your inquiry, the Minister may exercise her discretion under subparagraph 152(4)(a)(i) to make a reassessment beyond the normal reassessment period. Although the Minister is not obligated to make the reassessment, we are of the view that the Minister would likely find it is appropriate to do so. Where a taxpayer has not filed a return of income and the Minister issues an arbitrary assessment, the assessment, of necessity, is based on incomplete information. It would be inappropriate for the taxpayer to rely on the normal reassessment period to profit (i.e., underpay its taxes) from its failure to comply with the obligation to file a return.

With respect to our document 2012-0447401I7, we note that the circumstances were similar to the situation described above except that the taxpayer's return of income indicated that tax payable was less than the amount included in the arbitrary assessment. We offer these additional comments.

It is our understanding that the purpose of subparagraph 152(4)(a)(i) is to ensure that a taxpayer's misrepresentation (attributable to neglect, carelessness, etc.) does not prevent the Minister from assessing the correct amount of tax payable. In our view, a taxpayer who has made a misrepresentation cannot use subparagraph 152(4)(a)(i) to reduce the amount of tax assessed. However, even if the Minister could reassess the taxpayer to reduce tax payable in those circumstances, we are still of the view that it is correct not to reassess. Where a corporate taxpayer fails to file a return of income, is subsequently assessed pursuant to subsection 152(7), and does not file a return until after the end of the normal reassessment period (three or four more years), it is our view that it generally would not be appropriate for the Minister to reassess the taxpayer to decrease tax payable. By way of comparison, we note that where a corporate taxpayer has filed a return of income, the Minister is generally unable to reassess the taxpayer to decrease tax payable to correct an error beyond the normal reassessment period. In our view, a taxpayer who fails to comply with the requirement to file a return of income should not have a longer period of time to correct any errors in the amount of tax assessed than a taxpayer who attempts to comply with the Act.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CA, CPA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch