22 August 2022 Internal T.I. 2019-0810061I7 - XXXXXXXXXX v MNR -220(3) and 152(7)

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 subsection 220(3) or subparagraph 152(4)(a)(i) can be used by a taxpayer to obtain a reassessment of taxation years that whose normal reassessment period has ended.

Position: No.

Reasons: Subsection 220(3) extends the deadline to file a return, but not its normal reassessment period. To allow a taxpayer to receive a reassessment beyond the normal reassessment period under subparagraph 152(4)(a)(i) simply because they neglected to file a notice of objection within the period specified under the Act would be against the scheme of the Act and inappropriate, as it provides a non-compliant taxpayer with access to a reassessment when a compliant taxpayer would not receive the same treatment.

									      August 22, 2022

Derek Gledhill								HEADQUARTERS
Senior Programs Officer							Income Tax Rulings
T2 Legislation Team, Corporate and 					Directorate
Speciality Returns Division
Assessment, Benefit and Service Branch 				Julia Clarkson
Compliance Programs Branch

									      2019-081006	

Subsection 220(3) and statute-barred taxation years

We are writing in reply to your request of May 24, 2019, in which you requested our comments on whether subsection 220(3) or subparagraph 152(4)(a)(i) of the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the “Act”) can be applied to allow a taxpayer to file an income tax return so that it can obtain a reassessment under subsection 152(4) of the Act after the end of the normal reassessment period.

All statutory references in this document are to the Act unless stated otherwise.

Facts and assumptions

This request has arisen as a result of a request made by XXXXXXXXXX. (“ACo”) to have its 2011 to 2013 taxation years reassessed. ACo’s taxation years were arbitrarily assessed under subsection 152(7) on XXXXXXXXXX, as, at that time, no returns had been filed. We have been advised that ACo paid the tax that was assessed. ACo eventually did file tax returns for these taxation years on XXXXXXXXXX. We have been informed that these tax returns contain deductions for additional operating expenses in each taxation year. They do not include transactions or amounts relating to partnership interests, foreign property, foreign affiliates, non-residents or other taxation years.

The CRA has not accepted these returns, or reassessed ACo, on the basis that the taxation years are statute-barred. The returns were filed more than three years after the end of their respective taxation years, and after the end of each taxation year’s normal reassessment period (footnote 1) (XXXXXXXXXX) and 90-day objection period (footnote 2) (XXXXXXXXXX).

ACo sought a judicial review of the CRA’s decision to not accept its income tax returns for the 2011 to 2013 taxation years and provide a reassessment for those taxation years. ACo is asking for the extension of the subsection 150(1) filing deadline for its 2011 to 2013 income tax returns under subsection 220(3) so that a reassessment of its taxation returns can be made to reverse its previously assessed tax liability of over $35,000.

Issues

In asking for this judicial review, ACo is effectively asking for two things:

1. An extension of the three-year filing requirement in subsection 164(1) to enable the Minister to be able to issue a refund, if there is one.

2. Reassessments of its 2011 to 2013 taxation years without having filed any Notice of Objection. The essential character (footnote 3) of the application is to ask the Federal Court to ask (or order) the Minister to allow a relieving provision to apply in order to obtain a reassessment of its tax liability to create an overpayment that can then be refunded.

Our comments

1. Extension to obtain refund

Subsection 220(3) states, “The Minister may at any time extend the time for making a return under this Act.” Therefore, subsection 220(3) can be applied to extend the time for when any return is required to be filed under the Act, including a return of income required to be filed by subsection 150(1). This agrees with the CRA’s use of this provision in the past to extend the filing deadline for income tax returns. (footnote 4)

In the decision for Bonnybrook Park Industrial Development Co Ltd v MNR (2018 FCA 136) (“Bonnybrook”), the Federal Court of Appeal concluded that a subsection 220(3) extension could enable a refund of tax under subsection 129(1). (footnote 5)

Subsection 164(1) states that the Minister may refund an overpayment to a taxpayer if “the return of a taxpayer's income for a taxation year has been made within 3 years from the end of the year…” It is our understanding that the CRA’s policy is to refund an amount to a taxpayer if the CRA has the authority to do so, unless the amount is to be applied to another liability owing by the taxpayer.

The wording in the preamble to subsection 164(1) is almost identical to the words in subsection 129(1) that were considered in Bonnybrook. However, there is no equivalent to subsection 164(1.5) in section 129. In our view, subsection 164(1.5) indicates Parliament’s intention with respect to when relief from the three-year limitation of subsection 164(1) can be granted. Therefore, if a taxpayer does not meet the conditions for relief under subsection 164(1.5), it is our view that no further relief under subsection 164(1) may be provided under subsection 220(3). In other words, the only relief from the three-year limitation in subsection 164(1) is to a “taxpayer is an individual (other than a trust) or a graduated rate estate for the year and the taxpayer's return of income under this Part for the year was filed on or before the day that is 10 calendar years after the end of the year”, the Minister cannot extend relief from the three-year requirement in subsection 164(1). For completeness, we note that for the same reasons, the Minister cannot extend the limitation period beyond ten years for taxpayers described in subsection 164(1.5).

However, even if relief were available to a taxpayer under subsection 220(3), it would not result in a refund unless the taxpayer has an overpayment of tax for the taxation year.

A corporation’s overpayment is defined in paragraph 164(7)(b) as “the total of all amounts paid on account of the corporation's liability under this Part or Parts I.3, VI or VI.1 for the year minus all amounts payable in respect thereof.” In the case of a taxpayer whose original assessment reflects a tax payable amount, an overpayment will only arise if the Minister is able to reassess under section 152 and reduce the taxpayer’s tax payable to an amount that is less than the amount of tax paid on account of the taxation year by the taxpayer.

Therefore, even if a subsection 220(3) extension could be provided for the three-year limitation period in subsection 164(1), it will not assist a taxpayer in obtaining a refund unless the Minister is able to reassess tax payable under section 152 so that an overpayment exists.

2. CRA’s ability to reassess

As noted in more detail below, subsection 152(8) provides that an assessment is binding subject to being varied or vacated or subject to being reassessed. While arguably the validity of an assessment falls under the jurisdiction of the Tax Court of Canada, and not the Federal Court, the Federal Court has found that the Minister’s decision not to reassess tax can fall under the Federal Court’s jurisdiction. (footnote 6) This analysis will be made on the presumption that the latter finding is correct.

General impact of an extended deadline to file a return

A return required to be filed under subsection 150(1) is due based on the deadlines specified in paragraphs 150(1)(a) to (d). Paragraph 150(1)(a) of the Act requires a corporation to file a return of income (or income tax return) for a taxation year “within six months after the end of the year.”

The (re)assessment of a taxpayer’s tax liability for a taxation year is not dependant upon when its return of income is due. Subsection 152(1) states that the Minister shall, among other things, “examine” a return and “assess” tax for the year “with all due dispatch”. Subsection 152(2) provides that a taxpayer shall be sent a notice of assessment once its return has been examined. However, subsection 152(7) states that “The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.” In other words, an assessment of tax under subsection 152(7) can differ from the amount calculated on a return by a taxpayer, or it can be made if no return has been filed.

Subsections 152(1), (2) and (7) do not refer to section 150, or specify a fixed period of time to perform an assessment. Once an assessment has been made, subsection 152(8) states that it “shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.” (footnote 7) Further, as confirmed by the Federal Court in 6075240 Canada Inc. v MNR (2019 FC 642) (affirmed by the Federal Court of Appeal (2020 CAF 194)), where a taxpayer has failed to file a tax return, is assessed using subsection 152(7), and then files a tax return after the end of the normal reassessment period, subsection 152(1) does not compel the Minister to reassess the taxation year. Therefore, if there is no ability to reassess, object to and appeal an assessment under Part I of the Act, a taxpayer’s assessment will remain valid.

Put another way, in order for a taxpayer to be able to have a taxation year reassessed, the taxpayer must:

• have filed an objection to that assessment under subsection 165(1), section 166.1 or section 166.2
• have filed for appeal to the Tax Court of Canada under subsection 169(1) or section 167 (after having filed an objection) or
• meet the necessary conditions for a reassessment under section 152.

Impact of extended deadline on ability to object or appeal

Paragraph 165(1)(b) sets a corporation’s period to object to a notice of assessment in writing at no later than “the day that is 90 days after the day” it is sent. A request to extend the deadline to make a notice of objection may be granted under subsection 166.1(1), but only if the application is made “within one year after the expiration of the time otherwise limited by the Act for serving a notice of objection or making a request under subsection 245(6)” as stated in paragraph 166.1(7)(a). An extension of time to object may be granted by the Tax Court of Canada under subsection 166.2(1), but only if the one-year limit noted in subsection 166.1(7) was respected by the taxpayer, as required by paragraph 166.2(5)(a). Therefore, the ability of a corporation to object to an assessment is linked to the date of that assessment. An extension of the filing deadline for the return that the assessment relates to under subsection 220(3) will not extend this objection period (or extended objection period).

This conclusion is supported by the finding of the Federal Court of Appeal in MNR v ConocoPhillips Canada Resources Corp (2017 FCA 243) that the objection process is a “detailed regime” that is a separate process or scheme within the Act. Paragraph 46 of the decision states that “the clear statutory intent of the scheme is to provide conditions on the ability of taxpayers to invoke the objection process, including strict time limits for serving objections and seeking extensions of time.” The ConocoPhillips case considered whether subsection 220(2.1) could be utilized to allow a taxpayer to waive the requirement to file a notice of objection. The court ruled that “subsection 220(2.1) does not apply to notices of objection”, supporting its decision on the implied exception rule”, which in turn supports that “[t]the general waiver provision cannot be applied in this manner to override a more specific provision.” (footnote 8) Subsection 220(3), which, like subsection 220(2.1), is a general provision, cannot override the specific provisions contained within the objection regime in the Act.

Subsection 169(1) states that a taxpayer that “served notice of objection to an assessment under section 165…may appeal to the Tax Court of Canada …” A taxpayer that has not served a notice of objection is therefore not able to appeal because the conditions of subsection 169 have not been met. As previously stated, the objection period of a corporation is not impacted by an extended filing deadline for a return of income. (footnote 9)

As subsection 220(3) will not provide a corporation with the ability to serve a Notice of Objection for an assessment whose objection period and extended objection period have expired, the only option for a corporation that has not objected to have such an assessment under Part I changed (varied or vacated), such as ACo, would be to obtain a reassessment from the Minister.

Impact of extended deadline on ability to reassess

Jurisprudence concludes that “the Minister's obligation to assess with all due dispatch does not apply to a reassessment” (footnote 10) , and that “the Minister's obligation does not apply when subsection 152(4) prohibits the issuing of a reassessment.” (footnote 11) Therefore, in order to determine if a taxpayer’s assessment can be changed through a reassessment it is necessary to consider subsection 152(4).

The statutory interpretation of subsection 152(4) should be textual, contextual and purposive. As stated by the Supreme Court of Canada in Canada Trustco, (footnote 12) “When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role.”

Therefore, this review of subsection 152(4) will begin with the textual meaning of the relevant legislation. It will focus on the provisions that might allow a corporate taxpayer to obtain a reassessment of a taxation year that was previously assessed when the filing-due date and the expiry of the normal reassessment period and objection period for that taxation year are in the past.

Textual analysis of subsection 152(4)

The preamble to subsection 152(4) states “The Minister may at any time make an assessment, reassessment or additional assessment of tax…if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if…”

Subsection 152(4) then lists the exceptions that allow the Minister to reassess a taxation year beyond the “normal reassessment period”. Some of these exceptions are dependent upon the filing of a return; some are not. However, reassessments under subsection 152(4) are all discretionary given the use of the word “may” in the preamble. (footnote 13) This means that the first question is whether the Minister can reassess using subsection 152(4). If the answer to that question is ‘yes’, the next question is whether the Minister should reassess in a particular set of circumstances.

Subsections 152(3.1) defines a taxpayer’s “normal reassessment period” for the purpose of subsection 152(4). The normal reassessment period of a Canadian-controlled private corporation (“CCPC”) is defined to generally be “the period that ends three years after the earlier of the day of sending a notice of an original assessment…and the day of sending of an original notification that no tax is payable” (a “Nil Assessment”). (footnote 14) The normal reassessment period for a mutual fund trust or non-CCPC corporation would be one year longer. (footnote 15) Therefore, a taxpayer’s “normal reassessment period” depends on when an original assessment is sent to a taxpayer, not on the deadline to file the return of income.

Further support for this conclusion can be found in internal interpretation 2013-0487181I7, which states that the determination of the end of a normal reassessment period is not “based on the date the tax return is filed, but on the date that the initial Notice of Assessment or “Nil Assessment” is sent. Although the initial assessment was 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 started the normal reassessment period.” (footnote 16)

Therefore, even if subsection 220(3) applies to extend the deadline to file (or make) a return of income for a taxation year, it cannot extend the taxation year’s normal reassessment period.

Subsection 152(4) provisions with a specified time limit

When certain criteria are met, subsection 152(4) will allow the Minister to reassess “before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year…” Since this extended reassessment period is dependent upon the normal reassessment period of the taxation year, and not when a return of income is filed by a taxpayer, it is not impacted by any extension provided under subsection 220(3).

Subsection 152(6) states “Where a taxpayer has filed for a particular taxation year the return of income required by section 150 and…. by filing with the Minister, on or before the day on or before which the taxpayer is, or would be … required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer's tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed.” The reassessment to recognize a deduction listed in subsection 152(6) is not discretionary, as indicated by the use of the word shall. Based on this wording, the deadline for the income tax return for the particular taxation year and the subsequent taxation year (being the due date for the prescribed form) arguably could be extended under subsection 220(3).

However, paragraph 152(4)(b) states that a reassessment “required under subsection (6)” (footnote 17) or “made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection (6) of tax payable by another taxpayer” (footnote 18) can only be made before the day that is three years after the end of the normal reassessment period for the particular taxation year. Applying the “implied exception rule” to these two provisions results in paragraph 152(4)(b) (a discretionary provision) overruling subsection 152(6). (footnote 19) Therefore, even if a taxpayer receives an extension of the deadline to file the return of income or prescribed form needed to recognize a deduction listed in subsection 152(6) in a particular taxation year, such a reassessment can only be made within three years of the end of that year’s normal reassessment period. In addition, that reassessment could deny some or all of the deduction requested by the taxpayer. (footnote 20)

A review of paragraphs 152(4)(b.1) through (d) caused us to conclude that none of those provisions would be impacted by a subsection 220(3) extension as they are not dependent upon the filing of a return of income.

In addition, a waiver cannot be filed by a taxpayer under subparagraph 152(4)(a)(ii) if the normal reassessment period for the taxation year has ended. As previously noted, the normal reassessment period is linked to the date that the relevant assessment was sent, not to when the relevant return of income is filed.

Subsection 152(4)(a)(i) – no specified time limit

Subparagraph 152(4)(a)(i) states that the Minister may reassess the tax payable for a taxation year “at any time” after the normal reassessment period for that taxation year only if the taxpayer (or person filing the return) “has made any 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.”

There has been some debate in the past about the textual interpretation of subparagraph 152(4)(a)(i). (footnote 21) Regardless of the interpretation, the text of subparagraph 152(4)(a)(i) is clear that in order to make a reassessment, a misrepresentation (or fraud) must have been made. Given the facts surrounding ACo’s situation, it does not appear that fraud is a concern. Therefore this analysis will focus instead on the implications of a misrepresentation having been made by a taxpayer. (footnote 22)

The courts have found that the use of the word misrepresentation in subparagraph 152(4)(a)(i) is “construed to mean any representation which was false in substance and in fact at the material date, and that it includes both innocent and fraudulent misrepresentations.” (footnote 23)

Another requirement of subparagraph 152(4)(a)(i) is that the misrepresentation be attributable to neglect, carelessness or wilful default. (footnote 24) The CRA has concluded that the failure to file a return of income after being requested to do so under subsection 150(2) could be considered a misrepresentation of wilful default. (footnote 25) The court has found that “[a] wilful default requires a certain indifference or carelessness.” (footnote 26) This implies a certain level of disregard for the compliance required by the taxpayer under the Act. Such disregard would be higher than that for a simple error, such as a typo of a reported amount. Applying this higher level ensures that the strict limit imposed by Parliament through the definition of normal reassessment period is respected except in instances where the taxpayer’s conduct is egregious, blatantly offensive or unacceptable given the scheme of the Act for self-reporting. Applying this interpretation would, based on the text, appear to provide the Minister with the authority to reassess a taxpayer who has not filed a tax return under subparagraph 152(4)(a)(i).

Logically, one would conclude that a subparagraph 152(4)(a)(i) reassessment would be made in order to correct the impact the misrepresentation had on the previous assessment of the taxation year. Based solely on the text, such a corrective reassessment could be in the Minister’s favour (to increase tax payable) or the taxpayer’s favour (to decrease tax payable). This interpretation to use the provision in either party’s favour is discussed in paragraph 27 of Revera Long Term Care Inc. v MNR (2019 FC 239) (“Revera”):

“[27] On the facts of the case before me, both parties offered alternative interpretations of the provision... Furthermore, neither party commented on this Court's previous consideration of this issue in Abakhan:

‘[9] Further, I cannot conclude that Abakhan's application for judicial review runs contrary to Parliament's intent to confine late requests for reassessments to individuals. I very much doubt that Parliament turned its mind to the circumstances before me – where a corporate taxpayer requests a reassessment of its tax liability on the grounds that it exaggerated its own taxable income. There appears to be nothing preventing a company from making such a request and nothing standing in the way of an application for judicial review if the Minister refuses.’ ”

Summary of textual analysis of subsection 152(4)

Based on a textual analysis, the ability to reassess under subsection 152(4) is not reliant upon the filing date of a return of income. Therefore, using subsection 220(3) to extend the deadline to file a return of income will not assist a taxpayer in obtaining a reassessment under subsection 152(4).

However, subparagraph 152(4)(a)(i) appears to provide the Minister with the authority to reassess a taxpayer if the specified criteria for a misrepresentation or fraud have been met.

It should be noted that several provisions under the Act allow for a reassessment of a taxpayer “notwithstanding subsections 152(4) or (5)…” (footnote 27) Some, if not all, of these provisions allow for an assessment to be made at any time. Therefore, they are not reliant upon an extended deadline being provided by subsection 220(3). These additional reassessing provisions do not appear to apply to general operating expenses, and are considered to be irrelevant for the purpose of this analysis. However, the application of these provisions would restrict a reassessment (similar to the subsection 152(4.01) restriction to a subsection 152(4) reassessment) to the item(s) that caused the reassessment to be available. For example, a reassessment under subsection 69(12) could only recognize the results of a disposition deemed to have occurred at fair market value by subsection 69(11). This restriction would not provide the Minister with the authority to assess the contents of an entire income tax return.

Specific impact to ACo

If ACo does not obtain a reassessment, no further relief is available from the Tax Court of Canada. The courts have stated, “Once it has been found that the application for an extension of time was not made within the one-year limit imposed by paragraph 167(5)(a) of the [Act], this Court has no discretion to extend that time and the question of whether it would be just and equitable to grant an extension of time may not be raised.” (footnote 28)

The Federal Court does not have the authority to vary or vacate an assessment. (footnote 29) As the Tax Court of Canada is unable to vary or vacate ACo’s original assessment, it will remain valid in accordance with subsection 152(8) unless a reassessment is provided.

Applying this textual analysis to ACo’s 2011 to 2013 taxation years, subsection 220(3) will not assist ACo in getting a reassessment.

Given the facts that have been provided to us, none of paragraphs 152(4)(b) to (d) or the other reassessing provisions in the Act (outside of section 152) appear to provide the Minister with the authority under the Act to reassess ACo.

However, the fact that ACo did not file a tax return within three years of receiving its 2011 to 2013 assessments seems to be careless or negligent. Therefore, based on the text alone, reassessments might be able to be provided to ACo under subparagraph 152(4)(a)(i). As discussed above, this possibility was raised in Revera, but the court declined to interpret the subparagraph and returned the case to the Minister for redetermination. We have undertaken this analysis below.

Contextual and purposive analysis

Subsection 220(3)

Even though the textual analysis shows that subsection 220(3) cannot be used to extend the period within which the Minister can reassess, for completeness, we have included a few additional comments.

Section 152 comprises the assessment regime within the Act, and subsection 152(4) provides specific limitations on when an assessment or reassessment may be made by the Minister. Even if textually subsection 220(3) did impact the Minister’s ability to reassess under subsection 152(4), using a general relieving provision to override such specific limitations is contrary to the scheme of the Act and the intention of Parliament that there be some finality to the assessment (or reassessment) of a taxpayer. (footnote 30) It would also be contrary to the implied exception rule of statutory interpretation (as previously mentioned). (footnote 31) The court’s reference to the objection regime as a “detailed regime” that contained “specific limitation periods” could similarly be applied to the strict time limits mentioned in the assessment regime in section 152.

Essentially, ACo is trying to have its initial assessment changed in order to obtain a refund of taxes previously paid. It is not trying to avoid penalties for filing the return late. It is not trying to give effect to an election that was not timely filed. It is trying to change its tax liability. In the decision for MNR v J.P Morgan Asset Management (Canada) Inc. (2013 FCA 250), the Court stated, “If the "essential character" of the relief sought is the setting aside of an assessment, it must be struck.” (footnote 32)

Subparagraph 152(4)(a)(i)

As noted above, textually it appears that subparagraph 152(4)(a)(i) could allow the Minister to reassess a previously assessed taxpayer. There is no text in the provision specifically restricting the application of the provision to instances where a reassessment would cause the income tax liability of the taxpayer to increase. (footnote 33) However, because it is not clear, a contextual and purposive analysis is necessary to determine if the subparagraph can be used to reassess a taxpayer to reduce tax payable where a taxpayer makes the request after the end of the normal reassessment period. If the result of the textual, contextual and purposive analysis is that a reassessment can be issued in these circumstances, it would then be necessary to determine if the Minister should exercise her discretion to do so in a particular fact situation.

General comments

In paragraphs 50 and 51 of the decision for Jarvis v The Queen et al (2002 SCC 73), the Supreme Court of Canada has noted the following about the Canadian tax system:

• “[V]oluntary compliance and self-assessment” are essential to the Act’s regulatory structure, although the “system is ‘voluntary' only in the sense that a taxpayer must file income tax returns without being called upon to do so by the Minister.”
• The success of the administration of “the tax scheme's basic self-assessment and self-reporting characteristics…depends primarily upon taxpayer forthrightness.”
• The system includes “persuasive inducements to encourage taxpayers to disclose their income,” such as section 162 (footnote 34) being in place to promote “the scheme's self-reporting aspect” and section 163 (footnote 35) “to encourage care and accuracy in the self-assessment task.”

In short, the scheme of the Act is for a taxpayer to self-assess its income tax liability and report it to the CRA on an income tax return that is prepared with due care using complete and correct information.

In the context of the scheme of self-reporting, the filing of an income tax return provides the Minister with information to use to assess a taxpayer. When such information is not provided by the taxpayer, subsections 152(4) and (7) allow the Minister to arbitrarily assess a taxpayer using an estimation of the taxpayer’s income. An arbitrary assessment is more onerous on the Minister, as it requires additional resources to be used to obtain the necessary information to determine the taxpayer’s liability for the taxation year. Even more resources would be required to be used if a taxpayer has complex operations, such as foreign income sources.

A taxpayer that disagrees with an assessment, arbitrary or otherwise, has the ability to point out any errors it contains by putting “forth evidence of what the taxpayer’s taxable income actually is.” (footnote 36) The Act provides many ways to achieve this: requesting an amended return, filing a waiver, filing a notice of objection, and possibly making an appeal to the Tax Court of Canada.

However, since the Minister has limited resources available to administer the tax system, there is a need to finalize the assessment process at some point. Just as the Minister has a limited time to assess a tax liability, a taxpayer has a limited time to challenge that tax liability.

In paragraph 9 of the decision of 6075240 Canada Inc. v MNR (2019 FC 642), (footnote 37) the Federal Court stated that an objective of section 152 “is to ensure the finality of assessments by precisely setting out the circumstances in which a reassessment can be issued. To that end, Parliament has established the normal reassessment period…and established a detailed list of exceptions.” The Court also stated in paragraph 11 that “it is clear that the purpose of the normal reassessment period is to ensure the system's stability by, among other things, prohibiting the taxpayer from seeking a correction to an assessment after a certain number of years, for example, if the taxpayer finds an error in his or her returns for previous years.”

In the Nesbitt (footnote 38) decision, the Federal Court of Appeal concluded “that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns.” The Tax Court of Canada has noted that “subparagraph 152(4)(a)(i) has as its purpose the opening up of returns for statute-barred years where items of income, for a wide variety of reasons, are omitted or misstated,” (footnote 39) and that exception permits reassessment “in those cases in which the taxpayer has misled the Minister.” (footnote 40) Its purpose is to allow the taxation year to be assessed as if the omission or misstatement had not been made.

Such exceptions are not to be taken lightly. The courts have held that the Minister has the burden of proof to show that a reassessment under subparagraph 152(4)(a)(i) is valid. That burden of proof is generally met when it is proven that the taxpayer earned unreported income and no credible explanations were provided to justify discrepancies between the income reported by the taxpayer and the assessment. (footnote 41) In our view, this indicates that the courts recognize that the provision is only to be used by the Minister to increase assessed tax payable and not by a taxpayer to reduce tax payable. If a taxpayer claims that they were negligent and should have their tax payable reduced, does this mean that the taxpayer has to prove that they were negligent? Would the Minister be expected to try to show that the taxpayer was not negligent? If so, how would she do this? It is our opinion that this further shows that subparagraph 152(4)(a)(i) is not in the Act to allow taxpayers to reopen a statute-barred year.

Arguably, these comments by the courts to allow the correction of an omission or misstatement could be interpreted to allow a reassessment to reduce a tax liability, as well as increase one. However, in paragraph 20 of the decision of College Park Motors Ltd. et al v The Queen (2009 TCC 409), the Tax Court of Canada noted that subparagraph 152(4)(a)(i) “balances the need for taxpayers to have some finality in respect of their taxes for the year with the requirement of a self-reporting system that the taxing authority not be foreclosed from reassessing in those instances where a taxpayer's conduct, whether through lack of care or attention at one end of the scale, or willful fraud at the other end, has resulted in an assessment more favourable to the taxpayer than it should have been.” It is worth noting that the Court did not merely comment on the previous assessment being incorrect, but that it was overly favourable to the taxpayer.

As noted in internal interpretation E 2014-0525371I7, in our view, to allow a taxpayer who has made a misrepresentation to use subparagraph 152(4)(a)(i) to reduce the amount of tax assessed would be inappropriate. Where a corporate taxpayer fails to file a return of income for a taxation year, that year is subsequently assessed using subsection 152(7), and a return is not filed for that year until after its normal reassessment period has ended, it is our view that it generally would be against the purpose of the provision (and subsection 152(3.1)) for the Minister to reassess the taxpayer to decrease tax payable. The interpretation also notes, “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.”

Summary of contextual and purposive analysis

The reasoning in E 2014-0525371I7 with respect to subparagraph 152(4)(a)(i) is still applicable. A taxpayer that is arbitrarily assessed has already been non-compliant under the Act by not filing an income tax return. If such a taxpayer, or even a taxpayer that has filed a return of income that contains an error, disagrees with the assessment received but chooses not to comply with the objection or appeal process outlined in the Act, they should not be rewarded with another opportunity to argue their tax liability for that taxation year. A taxpayer should not be able to open a statute-barred year to obtain a more favourable reassessment because they were (or claim to have been) careless or negligent when they filed their tax return or failed to file a return at all. To do so would be contrary to the treatment of compliant taxpayers who exercised the reasonable care of a wise and prudent person when they filed their income tax return on a timely basis. (footnote 42) Granting such an extended opportunity to a taxpayer is especially offensive if the taxpayer’s argument could have been avoided had it been compliant under the Act by filing an income tax return in the first place.

Overall conclusion of analysis of subsection 152(4)

Based on our textual, contextual and purposive analysis of subsection 152(4), in our view the Minister’s ability to reassess a taxpayer is not impacted by any relief provided under subsection 220(3). In addition, it is our view that a taxpayer cannot rely on subparagraph 152(4)(a)(i) to obtain a reassessment that reduces tax payable.

Specific impact to ACo

The Act provides significant statutory powers that allow the Minister to identify incidents of non-compliance and to take corrective action. (footnote 43) However, there needs to be a balance between enforcement of the Act and “the temperance of justice.” (footnote 44) The provision of discretionary provisions within the Act attempt to authorize the Minister to relax the compliance requirements of the Act when it is just and equitable to do so.

ACo neglected to file an income tax return within six months of each of its 2011 to 2013 taxation years. It did not object to its assessments for those taxation years, or file a waiver with respect to any aspect of those assessments. Now that its options under the objection and appeal regimes of the Act have expired, it is trying to obtain a reassessment of those taxation years through the Federal Court and the filing of its income tax returns. In our view, “[a] taxpayer requested adjustment is not meant to provide a taxpayer with an alternative way to formally object to an assessment after the objection deadline under section 165 of the Act and the normal reassessment period have expired.” (footnote 45)

The circumstances of the new information provided on ACo’s tax returns do not appear to meet the conditions of subsection 152(4)(b) to (d) of the Act. While textually it could be argued that the Minister could reassess those taxation years to create a lower tax liability under subparagraph 152(4)(a)(i), as discussed above, based on a textual, contextual and purposive analysis of the subparagraph, it is our view that the Minister cannot do so.

Further, even if subparagraph 152(4)(a)(i) did permit the Minister to reassess ACo in these circumstances, whether to reassess is a discretionary decision of the Minister. To make such a reassessment would be contrary to the scheme of the Act, stated in paragraph 80 of the decision for The Estate of Stanley Vine v The Queen (2014 TCC 64) as being to “protect and balance the integrity of the system which is self-representing” and to provide “the certainty and finality offered by a limitation period.” It would also be contrary to the purpose of subsection 152(4) to encourage taxpayers to provide carefully and accurately prepared income tax returns, and would instead “discourage taxpayers from being diligent and taking reasonable care in the preparation of their returns.” (footnote 46)

The Tax Court of Canada cannot assist ACo in changing its assessments. The Federal Court is not authorized to change ACo’s assessments. If the Minister were to allow a reassessment, it would be rewarding ACo’s past non-compliance, not promoting honesty, integrity and compliance under the Act. In our view, this conclusion is consistent with the conclusions reached by the courts in 6075240 Canada Inc. v MNR (2019 FC 642) (affirmed by the Federal Court of Appeal (2020 CAF 194)), Letendre v The Queen (2011 TCC 577) and 2750-4711 Quebec Inc. v AGC (2016 FC 579).

For all the reasons stated above, it is our that opinion the Minister does not have the authority to reassess ACo’s 2011 to 2013 taxation years as requested by ACo. Further, since the Minister cannot reassess those taxation years, there are no overpayments that can be refunded.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
for Division Director
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 As defined in subsection 152(3.1).

2 As described in paragraph 165(1)(b).

3 See paragraph 50 of MNR v JP Morgan Asset Management (Canada) Inc. (2013 FCA 250): “The Court must gain "a realistic appreciation" of the application's "essential character" by reading it holistically and practically without fastening onto matters of form…”

4 For example, the CRA has applied this provision to allow taxpayers impacted by a flood or the Heartbleed virus to file their income tax returns late.

5 Paragraph 42 of the decision states “Subsection 220(3) of the Act provides the Minister with a broad discretion to extend the time to file a ‘return’.”

6 See paragraph 8 of Abakhan & Associates Inc. v The Queen (2007 FC 1327) and Revera Long Term Care Inc. v The Queen (2019 FC 239). Arguably, this decision seems flawed as in order to make a determination of whether the discretionary decision was reasonable, the Federal Court would presumably have to address whether a reassessment could be made, including all of the issues involved in that decision, which is beyond its authority.

7 This could be interpreted as meaning that the reassessment is required because of a change resulting from an objection or appeal, or that the reassessment replaces the previously issued assessment. The latter is the correct interpretation. It allows the issuing of a reassessment to be independent of an objection or appeal.

8 See paragraphs 48, 49 and 52 in MNR v ConocoPhillips Canada Resources Corp (2017 FCA 243). As stated in paragraph 49, the implied exception rule “was described in James Richardson & Sons, Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 614, 84 DTC 6325 at 6329, where the Court referred to the English decision of Pretty v. Solly (1859), 53 E.R. 1032:

The rule is, that wherever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply.”

9 Similar to the objection process, the appeal process in the Act is a separate regime or scheme within the Act. Subsection 220(3) cannot override the specific provisions contained within this appeal regime in the Act.

10 See Armstrong v Canada (2006 FCA 119) at paragraph 8, as cited in paragraph 11 of 6075240 Canada Inc. v MNR (2019 FC 642, affirmed in 2020 CAF 194).

11 Paragraph 11 of 6075240 Canada Inc. (ibid).

12 See paragraph 10 of Canada Trustco Mortgage Co. v Canada (2005 SCC 54).

13 See paragraph 76 of 9027-4218 Quebec Inc. and 3087-1883 Quebec Inc. v. Canada (2019 CF 785).

14 See paragraph 152(3.1)(b), which applies to taxpayers who are not mutual fund trusts and corporations that are not CCPCs .

15 Paragraph 152(3.1))(a) provides that mutual fund trusts and non-CCPCs generally have normal reassessment periods of four years.

16 Technically, an initial assessment can be issued under subsection 152(4) because subsection 152(7) allows such an assessment in the absence of a return of income having been filed by the taxpayer.

17 See subparagraph 152(4)(b)(i). Note the subparagraph 152(4)(b)(i) also allows a reassessment within the extended normal reassessment period if it would have been required “if the taxpayer had claimed an amount by filing the prescribed form referred to in the subsection on or before the day referred to in the subsection.” Note that the Tax Court of Canada has commented on this in 1455257 Ontario Inc. v The Queen (2020 TCC 64):

“[45] I am not persuaded by Counsel for the Appellant's argument to the effect that the filing of a prescribed form is optional. In my view, what is made optional by the use of the word "if" in reference to the filing of a prescribed form under subsection 152(6) is the taxpayer's option or right to choose how to allocate the losses of a particular year between prior and subsequent years. However, once the taxpayer has made the choice to carry back the losses, subsection 152(6) of the Act requires that they file a prescribed form.”

18 See subparagraph 152(4)(b)(ii).

19 As previously stated, when the general provision overrules a more specific provision, the latter must be applied and the general provision “must be taken to affect only the other parts of the statute to which it may properly apply.” If subsection 152(6) required the Minister to reassess every time a taxpayer filed a prescribed form to apply one of its paragraphs, subparagraph 152(4)(b)(i) would be meaningless.

20 See paragraph 40 of the decision for The Queen v Agazarian (2004 FCA 32), which states:

“[40] My conclusion as to the effect of the legislation is consistent with certain dicta of Rothstein J. (as he then was) in Greene v. Canada (Minister of National Revenue - M.N.R.), (1995), 95 DTC 5078, where the issue was whether the Minister was bound, following a request for a loss carry-back under subsection 152(6), to reassess the taxpayer so as to give effect to the loss carry-back. Rothstein J.A. decided that the Minister was only bound to consider the request for loss carry-back, and was not bound to grant the relief sought by the taxpayer.”

The Greene decision states:

“At first blush it seemed to me that the words "shall reassess the taxpayer's tax for any relevant taxation year... in order to take into account the deduction claimed" in subsection 152(6) meant the Minister must allow the deduction claimed. However, upon considering the interpretation given to the words "take into account" in the jurisprudence, and the scheme of section 152 and of reassessments under the Act generally, I have concluded that the words "take into account" in subsection 152(6) mean only that the Minister must consider the deduction claimed and reassess by allowing such portions of the deduction claimed, if any, as he considers appropriate.”

21 See Ross et al v The Queen (2013 TCC 333) and paragraph 43 of the decision in Estate of Stanley Vine v The Queen (2015 FCA 125).

22 Based on The Law Dictionary (featuring Black’s Law Dictionary Free Online Dictionary, 2nd Edition), English law has three types of misrepresentation: innocent, negligent and fraudulent. In addition, all acts of fraud are a type of misrepresentation, but not all misrepresentations are fraud.

23 See paragraph 34 of D’Andrea v The Queen (2011 TCC 298) (citing paragraph 24 of Taylor v MNR (Exchequer Court).

24 See paragraph 30 of Ibrahim Aridi v The Queen (2013 TCC 74), which is referring to Boucher v. Canada (2004 FCA 46) and Venne v. Canada ([1984] F.C.J. No. 314 (QL)).

25 See internal interpretation F 2014-0526451I7. Note that the term “omission voluntaire” is the French translation of wilful default.

26 See paragraph 20 of Chaumont v The Queen (2009 TCC 493).

27 These provisions include subsections 12(2.2), 21(5), 67.5(2), 69(12), 86.1(5), 118.1(11), 127(17), 143.2(15).

28 See paragraph 10 of Ghyslain Gauthier v The Queen (2019 TCC 115), citing paragraph 11 of Moon v The Queen (2010 TCC 393).

29 See paragraph 17 of Newton v MNR (2018 FC 343) and paragraph 93 of MNR v J.P Morgan Asset Management (Canada) Inc. (2013 FCA 250).

30 See paragraphs 9 and 10 of 6075240 Canada (supra). Note also that in a previous version of paragraph 152(4)(b), the ability to reassess was seven years from the day a notice of objection was sent to a taxpayer.

31 As previously mentioned; 2017 FCA 243. See also paragraph 42 of Friends of Oldman River v Canada (Minister of Transport) ([1992] 1 S.C.R. 3), in which the Supreme Court stated “there is a presumption that the legislature did not intend to make or empower the making of contradictory enactments”, as cited in paragraph 59 of Clover International Properties (L) Ltd. v AGC (2013 FC 676).

32 See paragraph 92 of the decision, which is citing Optical Recording Corp. v Canada ([1991] 1 FC 309).

33 Paragraph 27 of the decision for Revera Long Term Care Inc. v The Queen (2019 FC 239) cites paragraph 9 of Abakhan & Associates Inc. v The Queen (2007 FC 1327):

“I very much doubt that Parliament turned its mind to the circumstances before me – where a corporate taxpayer requests a reassessment of its tax liability on the grounds that it exaggerated its own taxable income. There appears to be nothing preventing a company from making such a request and nothing standing in the way of an application for judicial review if the Minister refuses.”

34 Section 162 is applied when a person fails to file an income tax return.

35 Section 163 is applied when a person repeatedly fails to report required amounts, or is complicit or grossly negligent in the making of false statements or omissions.

36 See paragraph 3 of Bigayan v The Queen ([2000] 1 CTC 2229).

37 As previously noted, this case was affirmed by the Federal Court of Appeal (2020 CAF 194).

38 See Nesbitt v The Queen (FCA, 96 DTC 6588).

39 See paragraph 17 of Robichaud v The Queen (2016 TCC 19), which is citing paragraph 26 of Farm Business Consultants v The Queen (95 DTC 200, [1994] 2 CTC 2450).

40 See paragraph 55 of Ross et al v The Queen (2013 TCC 333), which is citing paragraph 8 of Hans v Canada (2003 TCC 576).

41 Cases relying upon this concept include Boucher (supra), Lacroix v The Queen (2008 FCA 241) and Bordonaro v The Queen (2019 TCC 130).

42 This concept is supported in the decision for Sukhwinder Grewal v AGC (2022 FCA 114), which states:

“[13] In our view, the appellant's submissions, if accepted, would place this taxpayer in a better position than that of other taxpayers who did not avail themselves of the VDP. When a taxpayer makes use of the VDP, the taxpayer can still be audited and the taxpayer's filings can still be assessed like those of any other taxpayer. Additional tax, interest, and penalties arising from the failure to disclose income may be due.”

43 See paragraph 2 of eBay Canada Limited et al v MNR (2008 FCA 141), which is referring to R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627.

44 See paragraph 15 of MNR v Cicarelli et al (2018 FC 644).

45 See internal interpretation 2010-0374531I7.

46 See paragraph 44 of Estate of Stanley Vine v The Queen (2014 TCC 64).