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Principal Issues: Whether the minister may, by virtue of subsection 165(3), vacate an assessment for the sole purpose of allowing, in accordance with the position described in question 2 of CRA document 2020-0874951I7, a change to the time when the first fiscal period of a taxpayer ends.
Reasons: For the purposes of subsection 165(3), an assessment can only be vacated following the submission of additional information or conclusive arguments, which CRA did not have when the assessment was made, and which can demonstrate that the assessment is either not valid, namely an assessment that is not made in compliance with the procedural provisions of the Act, or incorrect, namely an assessment in which the amount of tax assessed is not based on the applicable provisions of the Act, correctly interpreted and applied to the relevant facts.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2022
APFF CONFERENCE 2022
11. Change of year-end and time limit to object
When a company is newly incorporated, it can choose its fiscal period end for filing its tax returns, but without the fiscal period exceeding 53 weeks. Once this date has been set, it cannot be changed unless a request is made by sending a letter to the Tax Services Office stating the business reasons why the change is necessary. Indeed, under subsection 249.1(7), no change can be made to the time at which a fiscal period ends without the concurrence of the Minister.
In Technical Interpretation 2020-0874951I7, the CRA pronounced on whether or not the date of the end of the first fiscal period can be changed retroactively after the tax return for that year has been filed.
Based on that technical interpretation, we understand that if this request for a retroactive change is made after the tax returns have been filed, but before the initial notice of assessment for that year is issued, it will generally be granted. However, if this request for a retroactive change to the end date of the first fiscal period occurs after the notice of assessment for that fiscal period has been issued, it will be refused.
Pursuant to paragraph 165(1)(b), a corporation may object to an assessment no later than the 90th day after the date the notice of assessment was sent. Case law has even shown that a taxpayer can object to the taxpayer’s own return, i.e., the taxpayer can object to elements of a tax return that the taxpayer has filed. Upon receipt of the notice of objection, the Minister must, by virtue of subsection 165(3), with all due dispatch reconsider the assessment and vacate, ratify or vary it or reassess.
For example, consider the following situation. A corporation incorporated on June 1, 2021 initially chose December 31, 2021 as its fiscal period end and filed its tax returns accordingly. It was assessed by the CRA on February 20, 2022. With the benefit of hindsight, its first fiscal period end election was not optimal and it wishes instead to file its first period end tax returns for the period June 1, 2021 to March 31, 2022. This would change its fiscal period end to March 31 of each year, rather than December 31.
Depending on the date of the notice of assessment received from the CRA for the tax return filed on December 31, 2021, the corporation has until May 24, 2022 to file a notice of objection to request cancellation of the assessment issued on February 20, 2022. Once this assessment is cancelled, it would then be possible to file a tax return for the desired period, i.e. from June 1, 2021 to March 31, 2022. Subsequent years' tax returns would be filed for the period ending March 31 of each year.
Question to the CRA
Can the CRA confirm whether it is possible to file a timely objection to an assessment issued following the filing of the tax return for the first fiscal period, so as to request its cancellation and be able to retroactively change the fiscal period end date chosen?
For the purposes of subsection 165(3), an assessment may generally be vacated upon receipt of a Notice of Objection if a taxpayer submits additional facts or compelling arguments that were not before the Minister at the time the assessment was made and that demonstrate that the assessment is either invalid (i.e., it would not have been made in accordance with the procedural provisions of the Income Tax Act), or was unfounded (i.e., it assessed an amount of tax that was not based on the applicable provisions of the Income Tax Act as properly interpreted and applied to the relevant facts).
In the present case, we are of the view that there is nothing to suggest that the assessment of February 20, 2022 would be invalid or unfounded so as to justify its cancellation by the Minister under subsection 165(3) More specifically, the mere fact that the corporation wishes to change the timing of its fiscal period end after tax has been assessed for the year corresponding to the fiscal period, even if it is the corporation's first fiscal period, does not, in and of itself, invalidate or render unfounded the assessment of February 20, 2022.
[Editors' note: the following was deleted from this final version of the response (see preliminary response): It should be noted that once the taxpayer has filed the taxpayer’s return for the year, an election as to the fiscal period end has been made. In this regard, we are of the view that an amended tax return with a different fiscal period end, filed before a notice of assessment is issued, constitutes a request for a change of fiscal period end that must be accepted by the Minister.]
October 7, 2022
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2020-0874951I7, 24 December 2020.
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