Filing Tax Returns -Starting Point in the Administration of Income Tax Law in Canada
Generally speaking, the starting point regarding the administration of income tax law in Canada is subsection 150(1), which states that a taxpayer must prepare and file an income tax return for each tax year without notice or demand from the Canada Revenue Agency (“CRA”). When the CRA receives a taxpayer’s income tax return, the CRA is required to review it and assess the taxpayer’s tax, interests, penalties, tax refund, and losses for the year pursuant to subsection 152(1) of the Canadian tax act. Once reviewed, the CRA will issue a notice of assessment to the taxpayer pursuant to subsection 152(2) of the Canada tax act. The CRA may issue a notice of assessment to a taxpayer even if he or she has not submitted a tax return (called an arbitrary tax assessment) pursuant to subsection 152(7) of the Canada tax act.
Filing a Notice of Objection: A Way to Object to a Notice of Assessment or Reassessment
According to subsection 165(1) of the Canada Tax Act, a taxpayer may object to an assessment or a reassessment by serving a notice of objection to the CRA in writing. This is the only way for the taxpayer to preserve their appeal rights and to challenge a tax assessment or reassessment. Ideally, the objection should explain the factual circumstances surrounding the controversial issue and the legal reasons why the taxpayer is objecting to the assessment or reassessment. The objection can only be made to the amounts of tax, penalty, and interest that makes up the assessment.
The notice of objection must be submitted on or before the later of:
- The day that is one year after the taxpayer’s filing due-date for the year, and
- The day that is 90 days after the date of the CRA mailed the notice of assessment or reassessment.
Filing an Extension of Time Application: The Only Way to Extend the Normal Time Limit to File a Notice of Objection
Where an objection to an assessment or a reassessment has not been filed within the time limits set out in section 165(1) of the Canadian Tax Act, there is a two-stage process for applying for an extension of time to file the objection. First, pursuant to section 166.1, the taxpayer who wishes to file a notice of objection beyond the normal time limit must apply to the CRA for an extension of time. Second, if the CRA does not grant the request made under section 166.1., the taxpayer may submit a further application to the Tax Court of Canada pursuant to section 166.2.
Failure to file a notice of objection within the original 90 day period or within the extension window means there is no ability to challenge the tax assessment or reassessment, even if it is completely wrong, and all amounts shown become owing and collectible and will be subject to CRA collection actions.
Section 166.1 Extension of Time Application Explained
The extension of time application to the Canada Revenue Agency must set out the reasons why the notice of objection was not submitted within the normal time limit. It should be addressed to the Chief of Appeals in a District Office or a Taxation Centre of the Canada Revenue Agency and delivered or mailed to that Office or Centre. The extension of time application also must be accompanied with a copy of the notice of objection.
When an extension of time application is received, the CRA must consider the application and grant or refuse it. If the application is granted, the notice of objection is deemed to have been served on the day on which the decision by the CRA is sent to the taxpayer.
There are some preconditions to the section 166.1 extension of time application. First, it must be made within one year of the expiration of the normal time limit for serving a notice of objection. Second, it must demonstrate that the taxpayer was unable to act or instruct another person to act or had a bona fide intention to object to the tax assessment. Third, it must show that allowing the extension of time would be just and equitable in the circumstances of the case.
Section 166.2 Extension of Time Application Explained
If the CRA refuses the section 166.1 extension of time application (or does not notify the taxpayer of the decision within 90 days after the submission of the application), the taxpayer may apply an application for an extension of time to file the notice of objection to the Tax Court of Canada pursuant to subsection 166.2(1). If the section 166.1 application was rejected, the section 166.2 extension of time application must be made within 90 days after which the decision of the section 166.1 application was notified to the taxpayer by the CRA. The section 166.2 application must be made by filing three copies of the application and three copies of the notification of the decision made by the CRA to the Registry of the Tax Court of Canada.
There are some preconditions to the section 166.2 extension of time application. These preconditions are substantially identical to the preconditions for the section 166.1 extension of time application.
What Happens When the Notice of Objection is Filed?
When a notice of objection is received by the Canada Revenue Agency, the notice of objection (and the auditor’s files if a tax auditor was involved) will be sent to an assigned appeals officer within the appeals division of the Canada Revenue Agency. The taxpayer may request the Canada Revenue Agency to provide the documents supporting the assessment or reassessment. These documents may include:
- Auditor’s working papers;
- The relevant court decisions and sections of the legislation relied on for the assessment or reassessment;
- Appraisal reports that the auditor may have relied on; and
- Any third party documents that were obtained to support the assessment or reassessment.
The expert Canadian tax litigation lawyer acting for the taxpayer will make detailed submissions to the CRA. The tax appeals officer may also ask for additional supporting documents from the taxpayer regarding the notice of objection. Once the appeals officer fully considers the taxpayer’s submission(s), the tax appeals officer may confirm the assessment or reassessment, or issue a new reassessment. If the taxpayer is still not satisfied with the assessment or reassessment, the taxpayer’s experienced Canadian tax litigation lawyer may file a notice of appeal to the Tax Court of Canada pursuant to subsection 169(1) of the Canada Tax Act.
A section 166.1 extension of time application is often granted by the CRA. However, section 166.2 extension of time applications are granted in relatively exceptional circumstances by the Tax Court of Canada. Therefore, in order to avoid losing your tax appeal rights and your ability to fight CRA collection officers, it is important to have your expert Canadian tax litigation lawyer file the notice of objection within the time limit whenever possible. There are cases in which extension of time applications have been denied where some of the aforementioned preconditions of the applications have not been met by the taxpayer. Therefore, if you have received a notice of tax assessment or reassessment that you do not agree with, contact one of our experienced Toronto tax lawyers to discuss your best options to object to the tax assessment.
Why is it Important for a Taxpayer to File Their Returns and Receive a Notice of Assessment From the Canadian Tax Authority?
It is important for the taxpayer to submit a tax return (and receive a notice of assessment) because the notice of assessment starts the statutory limitation period during which the CRA may audit and reassess, if necessary, a taxpayer. The statutory limitation period to go back and audit is 3 years after the date the initial tax assessment is sent. Therefore, if no return is submitted and no tax assessment is issued, the taxpayer is continuously at risk of tax audit since the statutory limitation period does not start.
Is There a Particular Form that Taxpayers Must Fill Out to File a Notice of Objection?
There is no form that a taxpayer must fill out. However, Canada Revenue Agency has created Form T400A Objection, which should be used by taxpayers to fill out their objections. This is no longer an official form or document that must be submitted in order to file a notice of objection – it is simply an aid for the taxpayers who wishes to file a notice of objection.
What Happens If You Fail to File an Extension of Time Application to Extend the Normal Deadline to File the Notice of Objection?
Failure to file an extension of time application within one year from the expiry of the deadline to file the notice of objection means there is no ability to challenge the tax assessment or reassessment. Therefore, it is crucial to file the notice of objection and the extension of time application within the allowable time.