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January 2023 Newsletter

What happens if you find a mistake in a past year’s tax return?

Mistake Where You Paid Too Much Tax

If you forgot to claim a particular deduction or credit, or over-reported your income, you can write to the Canada Revenue Agency and provide details of the amount you missed. You can file a Form T1-Adj (T1 Adjustment) to “adjust” your earlier return. It is easier, however, to use the CRA’s “My Account” online system and request the adjustment online.

You can also do this if you have determined that the CRA assessed you incorrectly, such as if you have realized since filing your return that you could have reported your income differently than you did.

If you are within the objection deadline for objecting to the assessment for that year’s return, then you may want to file a formal Notice of Objection to preserve your legal right to request these changes. The deadline for filing an objection is 90 days from the date of the last Notice of Assessment (or Reassessment) for the taxation year; or one year from the original filing deadline for the return, whichever is later.

So if you (or your spouse) carry on business and your filing deadline is June 15, then you can object to your 2021 assessment until June 15, 2023, even if that assessment was issued more than 90 days ago. If you do not carry on business and your filing deadline is April 30, then you can object to your 2021 assessment until April 30, 2023. (If you miss an objection deadline, a 1-year extension is possible in certain circumstances.)

Filing an objection is a good idea if the deadline is looming, even if you think that the CRA will routinely accept your request. It gives you the legal right to force the CRA to listen to you. Also, the Appeals Division (which handles objections) is often more pleasant to deal with, and more responsive and accountable, than the Client Services Division or Tax Centre which processes adjustments. This is because Appeals is much smaller and does not handle anywhere near the volume of transactions as Client Services or the Tax Centre. (The downside is that it may take 6 months or more for your objection to even be looked at by an Appeals Officer, while some adjustments, especially if filed online, are processed very quickly.)

Even if you are past the deadline for filing an objection and you just make an ordinary adjustment request, the CRA will normally review your request and accept it if it believes it to be correct. The CRA’s guidelines for making these changes are found in Information Circulars 75-7R3 (recent year changes) and 07-1 (changes requesting refunds for years that are otherwise beyond the 3‑year reassessment deadline). Notably, the CRA will not process a change that results from someone else succeeding in a Court case (unless you file a timely objection, which forces the CRA to deal with the issue). The CRA also does not allow retroactive tax planning. It has to be a claim that you clearly would have made at the time you filed the return, if you had been aware of it.

These changes can legally go back up to 10 years from the year in which you make the adjustment request. So, if you’re making a request in 2023, it can be for 2013 or any later tax year. If you request a change for an earlier year, the CRA has no legal authority to make the change, so even if it is justified, your request will be rejected. (This rule does not apply to objections — if for some reason you get a reassessment of your 2012 year today, you can file an objection to it on any valid ground.)

Mistake Where You Did Not Pay Enough Tax

What happens if you find that you inadvertently under-reported your income, or claimed a deduction or credit that you were not entitled to?

As with the case where you paid too much tax, you can file a T1-Adj adjustment form to report the correction, or you can make an adjustment request online using My Account.

If more than one year has passed since you filed the return, you may wish to make a voluntary disclosure to eliminate any penalties that may apply, and possibly reduce past years’ interest as well. See Information Circular 00-1R6 or tinyurl.com/vdp-cra. To be accepted, a disclosure must be “voluntary” in the sense that you are not currently under any audit or enforcement action that might discover the error; and it must be “complete” in that you must disclose all errors in your tax filings for all years.

You can only do a voluntary disclosure if there are penalties possibly involved. If you filed your return on time and were not “grossly negligent”, normal mistakes will usually give rise to a requirement to repay the tax with interest, but not penalties.

What if you do not feel like reporting the correction to the CRA?

As long as the reassessment period is open (normally 3 years after the date of your initial Notice of Assessment), you are subject to the risk of audit and reassessment, if the auditor finds the mistake. If that happens, you will have to repay the tax plus interest. Even past that deadline, the CRA can reassess you if the auditor is of the view that you were careless or negligent in not reporting the income in question, or in overclaiming an expense or credit.

(In practice, the CRA usually does not audit more than 2 years back, unless they have reason to be looking for a particular problem in a past year, such as where they are investigating a taxpayer’s past real estate sales.)

However, there is no legal obligation in the Income Tax Act to go back and adjust a past return when you discover a mistake.

Note also that the rules determining whether you made a misrepresentation that was careless or negligent, so that the 3-year reassessment limit does not apply, are based on whether you were careless or negligent at the time you filed your return. Similarly, penalties for gross negligence or fraud are determined based on your knowledge and information at the time you filed your return. Failing to report a correction is not itself grounds for penalties, as long as you are not currently providing misinformation to the CRA.

So, if you discover a mistake from a past year and don’t think you will be audited, you’re not legally required to notify the CRA. But you’re taking the risk of being reassessed, and penalties and interest applying, if the CRA does audit you and find the error.

Last modified on January 12, 2023 12:00 am
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