What do you do if the Canada Revenue Agency issues you an income tax or GST Notice of Assessment (or Reassessment), and you believe the Agency is wrong and that you should not be paying so much?
The Canada Revenue Agency’s Role
As you may know, the Canada Revenue Agency does not create the law. The rules for our income tax system are set out in the Income Tax Act, as amended by parliament every year. Similarly, the GST rules are enacted in the Excise Tax Act.
The Canada Revenue Agency’s job is to administer and enforce the system. As such, the Canada Revenue Agency is bound by the law. However, sometimes the Agency’s interpretation of the law is different from that of taxpayers, and can successfully be challenged. More commonly, the Agency assessor or auditor may simply not have understood the facts of your case.
Objections and Appealing Within the Canada Revenue Agency
The first step is to make sure that you understand the rules of the Income Tax Act as they apply to your problem. Sometimes, even though the rules seem unfair, they are being correctly applied. If the rules are clear, then no matter how much you dislike paying the extra tax, you may have no choice.
Don’t hesitate to get professional advice at this stage. An hour spent with an expert tax lawyer or accountant will be well worth it, if as a result you can know whether the assessment is simply a clear application of the law, or whether you have a realistic chance on objection or appeal.
The next step is to contact the Canada Revenue Agency and request an adjustment. Sometimes a phone call or meeting with Agency Officials can help iron out your problem and clarify the issues, though you may wish to put your request in writing. You can also request adjustments online using www.cra-arc.gc.ca/myaccount.
You will have to file a Notice of Objection (see CRA Form T400A, for income tax objections) before the deadline for doing so expires. The deadline is 90 days from the date of mailing of the notice of assessment or reassessment to which you are objecting (or, for personal tax returns, one year from the original April 30 or June 15 deadline for filing the return in question, if that is later). The date showing on the Notice of Assessment is normally presumed to be the date of mailing (Income Tax Act, subsection 244(14)).
Even if you are negotiating a solution and Agency Officials have agreed orally or in writing to your position, you must file the Notice of Objection if the deadline is approaching and no reassessment has been issued to your liking. Otherwise, you lose your legal right to appeal. The Canada Revenue Agency’s promise to correct an assessment will not be binding until the reassessment is actually issued.
Within about 6-12 months after you file the Notice of Objection, your case will be reviewed by an Appeals Officer. This officer is internal to the Canada Revenue Agency but is independent of the Audit section which normally issues the reassessment. Thus you are assured that your case is being given a “fresh look” by someone who has no preconceptions as to the result. In fact, under the Agency’s administrative policy, the Appeals Officer is not even supposed to talk to or meet with the auditor without providing you with a copy of the minutes of any such discussion.
The Appeals Officer is required by Canada Revenue Agency administrative policy to give you a copy of the auditor’s working papers and other documents in the file (except confidential material relating to third parties, or any legal advice the Canada Revenue Agency has received that is protected by solicitor-client privilege).
You can also file a request for a copy of the entire file under the Privacy Act by writing to the Access to Information and Privacy Office of the Canada Revenue Agency. It can be very useful to get copies of all correspondence, memos, email and analysis engaged in by the auditor and other persons the auditor may have consulted. (If your business is incorporated, so that the taxpayer that was assessed is a corporation, the same information is available, for a small fee, under the Access to Information Act rather than the Privacy Act.)
You can meet with the Appeals Officer and try to convince him or her of the correctness of your position, or you can make your case in writing. The procedure is very casual; there is no formal “hearing.”
If the Appeals Officer agrees with you, the reassessment will be “vacated,” or will be “varied” to reflect your position (and a new reassessment issued), and that is the end of the matter. If not, the reassessment will be “confirmed.”
At this point you have exhausted your routes of appeal within the Canada Revenue Agency, and must resort to the courts.
Appealing To the Tax Court
You have 90 days from the day the confirmation of the reassessment is mailed to you to appeal to the Tax Court of Canada. If you miss the deadline, an extension of up to one year may be available, but only if certain conditions are met.
If the amount at stake involves less than $12,000 in total federal tax and penalties for any given taxation year, not counting interest, you may choose to use the Tax Court’s Informal Procedure. (Including provincial tax and interest, this typically covers disputes of up to about $20,000 – $25,000 per taxation year assessed.) Otherwise, unless you give up your right to appeal the excess, you are required to use the court’s General Procedure.
The Informal Procedure is informal in terms of paperwork, but there is still a formal hearing before a judge in a courtroom. In theory, you are supposed to receive a decision within 12 months of filing your appeal, but it often takes somewhat longer.
For the General Procedure, you should retain a lawyer. (Technically, you can act for yourself, but given the complex court rules and procedures involved, it is not advisable.) A case under the General Procedure can easily take two years or more to get to trial, and even longer before the judge issues a decision.
Do You Pay The Balance Of Income Tax And Interest Owing?
While your case is under objection or appeal to the Tax Court, you cannot be forced to pay the balance owing. Interest will continue to accrue on the unpaid balance, however; the current rate is 5%, compounded daily (the rate changes every quarter). This interest is non-deductible.
The Canada Revenue Agency has the right to withhold any refunds or rebates (income tax or GST) that you are entitled to, and apply them to the tax debt. Other than such “set-off,” however, the Canada Revenue Agency cannot take other collection action to enforce payment.
Should You Pay Anyway?
If you believe that your case is likely to lose, or if you have the funds available, it is usually a good idea to pay the balance. That will stop the non-deductible interest from accruing in the event you lose. And if you win, you will receive refund interest (currently at a rate of 3% compounded daily) when the over paid balance is refunded to you.
Paying the balance has no effect on the outcome of the case. Neither the Appeals Officer nor the Tax Court will consider it an admission of liability. In fact, neither the Appeals Officer nor the Tax Court will normally even be aware of whether you have paid or not. Collections and Appeals are quite separate departments within the Canada Revenue Agency.
Note that if you have a GST assessment, or an assessment relating to source deductions (such as payroll) which were withheld and not remitted, there are no restrictions on Canada Revenue Agency collection action, and the Canada Revenue Agency will normally take action to collect the balance even while the assessment is under objection or appeal. (It is possible to get Collections officers to use their discretion to hold off on collection action, if you appear to have a good case and it appears that you will still have assets after the case is resolved.)
Beyond the Tax Court
After the Tax Court of Canada has given its decision, either you or the Canada Revenue Agency can appeal to the Federal Court of Appeal. Appeals can only be taken on matters of law; you cannot appeal the judge’s findings of fact (such as whether any evidence you gave was credible).
It typically takes about a year from the time an appeal is filed until the Federal Court of Appeal gives its judgement.
In rare cases, an appeal from the Federal Court of Appeal will be heard by the Supreme Court of Canada. That Court accepts appeals only on matters it considers to be of national importance, and typically considers only four or five tax cases a year.
Administrative Appeals – The “Taxpayer Relief Package”
There is one set of rules that are within the Canada Revenue Agency’s discretion, and for which you cannot file a Notice of Objection or appeal to the Tax Court. These are part of the Agency’s “Taxpayer Relief package.”
The “Taxpayer Relief package” has a number of components. One of them allows the Canada Revenue Agency to reopen your return and issue a reassessment to reduce your taxes for any past year, going back up to 10 years from when you apply. If, for example, you discover that you neglected to claim a credit or deduction that you could have claimed several years ago, you can apply to the Canada Revenue Agency to reassess your return for this purpose. Once 90 days have passed from the original assessment, and one year has passed from the original due date for the return, you cannot file a Notice of Objection and so you cannot force the Canada Revenue Agency to do this. But in many cases the Agency will honour your request, particularly where the failure to make the claim was a result of an oversight on your part. (Your request will generally not be allowed if what you are doing is considered to be retroactive tax planning.
Another element of the Taxpayer Relief package allows the Canada Revenue Agency to waive interest and penalties, again provided you apply within 10 years of the taxation year from which the interest is calculated. Interest is automatically added to payments of tax or instalments that are not made on time, and is compounded daily. Penalties are also applied in certain cases. Grounds for waiver include:
- a serious illness or accident that prevented you from filing or making a payment on time
- serious emotional or mental distress, such as caused by illness or death in the immediate family
- disasters such as a flood or fire
- civil disturbances or disruptions in services, such as a postal strike
- processing delays that resulted in you not being informed, within a reasonable time, how much was owing
- incorrect information that you received from the Canada Revenue Agency
- “financial hardship,” your inability to pay the total owing due to the amount of accrued interest
Note that the Canada Revenue Agency cannot waive the amount of tax you owe; the waiver applies only to the interest and penalties.
A request for Taxpayer Relief can be made on Form RC4288, available at www.cra-arc.gc.ca/forms or simply by writing a letter to your local Canada Revenue Agency Tax Services Office. See Information Circular 07-1 for more about the process.
If you are unhappy with the Canada Revenue Agency’s decision on a “Taxpayer Relief” issue, you can ask for a “Second Level Review,” which is undertaken by more senior officials within the Canada Revenue Agency. If you are still unhappy with the decision, you can apply to the Federal Court for “judicial review” of that decision. This can be done on your own, though it would be wise to consult a lawyer.
However, the Federal Court will normally not substitute its judgment for that of the Canada Revenue Agency. If will only grant relief if you can show that the Canada Revenue Agency’s decision was unreasonable – for example, the Canada Revenue Agency irrelevant information into account, or did not act with procedural fairness. Even then, the best the Federal Court will normally do it to send the matter back for a further review by different Canada Revenue Agency Officials (though the Court has the right to order that the Canada Revenue Agency reach a particular result).
If you are considering a Federal Court application, note that the time frame for filing the application is very short – normally 30 days from when the Canada Revenue Agency issues its second-level decision (Federal Courts Act, section 18.1).
By law, neither the Canada Revenue Agency no the Courts can cancel tax that is legally owing. However, there may be unusual circumstances where it is unfair for you to have to pay.
For example, one such situation might be where you relied on Canada Revenue Agency misinformation to your detriment, and tax became payable as a result where it would otherwise not have been payable.
In rare cases, it is possible to obtain a remission order that cancels tax. A remission order is actually an Order-in-Council passed by the federal Cabinet.
To obtain a remission order, you apply to the Director of your local Tax Services Office. If your request meets the Canada Revenue Agency’s Remission Guidelines and local officials (at several levels) approve it, it will be forwarded to Ottawa for consideration by a committee; if it still passes, it will go up the chain, eventually reaching the Commissioner of Revenue, then the Minister of National Revenue and finally the Cabinet. The process is a slow one, and usually takes several years. Only a few remission orders are passed each year.
As a taxpayer, you have many options to consider. If you wish to discuss your particular situation with Joe Truscott, please call Joe at 905-528-0234 or email Joe at [email protected].