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 mistaken information on a notice of assessment is fatal to its legal effectiveness.
Position: It depends on the nature of the mistake, but generally, a tax liability is not affected by an incorrect or incomplete assessment.
Reasons: Subsections 152(1), (3), (3.1), (4).
July 27, 2010
Toronto Centre Tax Services Office HEADQUARTERS
Audit Division Income Tax Rulings
Directorate
Attention: Jonathan Smith, Team Leader Lindsay Frank
Aggressive Tax Planning Section (613) 948-2227
2010-037477
Notice of Assessment Bearing Mistaken Information
This is in reply to an email from Mandarin Chan. At issue is whether a notice of assessment citing an incorrect taxation year is legally effective in notifying a taxpayer of a particular assessment.
The taxpayer, a trust, became resident in Canada on July XXXXXXXXXX , 2005. When a trust immigrates to Canada, paragraph 128.1(1)(a) of the Income Tax Act deems its taxation year to have ended immediately before that time, and deems a new taxation year to have begun at that time. In other words, in the calendar year in which it becomes resident in Canada, a trust is assigned two taxation years. In this case, the first taxation year ran from January XXXXXXXXXX , 2005 to July XXXXXXXXXX , 2005, while the second taxation year ran from July XXXXXXXXXX , 2005, to December XXXXXXXXXX , 2005.
On March 31, 2006, returns were filed in respect of each of the two taxation years comprising the 2005 calendar year. The return for first taxation year declared that no tax was payable; whereas, the return for the second taxation year declared tax payable in the sum of $XXXXXXXXXX , which was paid on filing. On June 13, 2006, the return for the first taxation year was assessed as filed, mistakenly referencing December XXXXXXXXXX , 2005, as the period year-end. The return for the second taxation year is yet to be assessed, and the account shows a credit balance in the amount of $XXXXXXXXXX , which is the amount that was paid on filing. The trust has requested that the amount be returned, contending that the assessment it received indicates that no tax is payable. The trust further argues that that assessment can no longer be reassessed as more than three years have since elapsed, and accordingly subsection 152(4) applies.
As explained below, the error in the notice of assessment for the first taxation year is not fatal to the effectiveness of the assessment. With respect to the second taxation year, the Minister still has time to assess that year's return.
Subsection 152(3) provides that a tax liability is not affected by an incorrect or incomplete assessment. In the case of The Queen v. Simard-Beaudry Inc., 71 D.T.C. 5511 (F.C.T.D.), it was held that an assessment does not create a tax liability, but is at most a confirmation of its existence. The liability results from the Act. The liability comes into existence the moment income is earned notwithstanding that the assessment may be made one or more years after the taxable income is earned. A taxpayer's liability to pay tax remains the same, regardless whether a notice of assessment is mistaken or is not sent at all, see Riendeau v. M.N.R., [1990] 1 C.T.C. 141 (F.C.A.).
A taxpayer cannot hide behind any alleged shortcomings in an assessment, see Optical Recording Laboratories Inc. v. Canada, [1986] 2 C.T.C. 325 (F.C.T.D.). In M.N.R. v. Leung, [1993] 2 C.T.C. 284 (F.C.T.D.), it was held that the scheme of taxation presumes that a taxpayer will react to an assessment as would any reasonable person. In that regard, a reasonable person, on observing that something is amiss with the result of the return, would avail himself or herself of the administrative and formal processes and make inquiries or representations. A taxpayer is not expected, as in the instant case, to let the clock run out, and then make representation on the seeming discrepancy or invalidity of an assessment. In the case with which Ms Chan is dealing, the comments on the assessment made it clear that it was the first return that was assessed on June 13, 2006. But the trust has taken four years to react, apparently with the expectation that the Minister would be precluded from correcting the error. In view of the foregoing, the error contained in the assessment of the first taxation year can be corrected without causing any harm to the amount assessed.
The return for the second taxation year can still be assessed, see Riendeau above. Subsection 152(1) requires the Minister to assess a return with all due dispatch, but no specific time limitations are imposed. Under subsection 152(4), the Minister may make an assessment, reassessment, or additional assessment, provided that it is made within the normal reassessment period. There are exceptions to this provision, but they are not germane in this case. Pursuant to paragraph 152(3.1)(b), the period ends three years after the earlier of the mailing of the original notice of assessment for the particular year and the mailing of the notification that no tax is payable. Accordingly, the limitation does not start to run until the original assessment has been raised.
Should you have any questions or require additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
c.c. Mandarin Chan
Aggressive Tax Planning Section
Audit Division
Toronto Centre Tax Services Office
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