March 2024 Newsletter

If you have invested in a tax shelter, or claimed some deduction or credit that you think the CRA might disallow, when can you stop worrying?

The normal rule is that the Canada Revenue Agency (CRA) can reassess you up to three years from your original assessment. The three-year clock starts running from the date shown on the Notice of Assessment that you receive shortly after filing your return. In most cases, if you haven’t been reassessed by the time the clock runs out, you are safe for that year. But not always!

Note, first of all, that the clock is not “restarted” by a reassessment. If the CRA reassesses you at some point during the three-year period, the time limit for any further reassessment is still three years from the original assessment date.

There are many specific exceptions to the three-year rule. The following are the most notable:

  • Fraud. If you have committed any fraud in filing your return or in supplying any information under the Income Tax Act, you can be reassessed at any time. The clock never runs out. If you go to court, the CRA must prove that you committed fraud.
  • Neglect, carelessness or wilful default. If you have made a misrepresentation that is attributable to “neglect, carelessness or wilful default”, you can be reassessed at any time. Again, the clock never stops running. If you go to court, the onus is on the CRA to prove that there has been neglect, carelessness or wilful default on your part. Note, however, that the term “carelessness” is quite broad. There is extensive case law interpreting the meaning of these words.
  • Tax shelters. If you’re involved in a tax shelter where you’re required to file a tax shelter information form with the CRA, and you don’t file the form, then you can be reassessed at any time. If you file the form late, that starts a 3-year clock for the CRA to assess you.
  • Not reporting sale of real property. If you fail to report a sale of real property — including a principal residence where the entire gain is exempt — then the CRA can assess you at any time for the gain or profit on that disposition. If you report the sale later, that starts a 3-year clock for the CRA to assess you on the disposition. This rule applies to sales in 2016 and later years.
  • Failing to file an accurate T1135. If you own foreign property with total cost over $100,000, and you don’t properly report all of it on Form T1135 with the level of detail the form requires, and you have any foreign income that you haven’t reported, then you can be reassessed up to six years from the original assessment date.
  • Not reporting a “reportable transaction” or “notifiable transaction”. We have written about the new “mandatory reporting” rules in recent Tax Letters. If you do not report a transaction that you are required to report, then the CRA can assess you at any time in relation to that transaction. If you report the transaction later, that starts a 3-year clock for the CRA to assess you. This rule applies to transactions in 2023 and later years.
  • Dealings with related non-residents. If the reassessment relates to a transaction between you and a non-resident with whom you “did not deal at arm’s length” (typically a family member, or a corporation or trust controlled by you or a family member), then the reassessment can be issued up to six years from the original assessment date.
  • Loss carrybacks. If you are carrying back a loss, which generally can be done to any of the three years preceding the loss, then your return will have to be reassessed to allow this. A reassessment resulting from any one of a large number of such carryback provisions can be done up to six years from the original assessment date. (Normally it’s to your benefit to have such a reassessment.)
  • Foreign tax credits. If your tax payable to another country changes (e.g., due to a reassessment by that country), your foreign tax credits may change. The CRA can reassess you to reflect these changes (which could be good or bad for you) up to six years from the original assessment.
  • Consequential assessments. If a reassessment is made to a return that is still open for reassessment, and as a result a “balance” changes which is carried over (forward or back) to another year, then that other year can be reassessed even if it would otherwise be past the deadline.
  • Waiver. If before the deadline expires you sign a waiver with respect to any taxation year, that year will remain “open” forever for the CRA to reassess on the issues listed in the waiver, unless you revoke the waiver (which requires six months’ notice). Usually you should only sign a waiver with respect to a particular, identified issue, rather than giving the CRA blanket power to reassess a given year. Also, remember that you are under no obligation to sign a waiver. If the deadline is approaching and you think it will expire before the CRA can get an assessment issued, you might choose not to sign a waiver.
  • Time spent contesting a demand for information. If the CRA makes a formal demand for information from you (via a Requirement for Information, or seeking a Compliance Order from the Federal Court), and you bring a Court application to try to have the CRA’s demand struck down, any time spent in that legal process stops the clock from running, so the deadline is extended.
  • Corporations that are not CCPCs. For a Canadian-controlled private corporation (CCPC), the limit is three years, as it is for individuals and most trusts. For any other corporation (or a mutual fund trust), the limit is four years. This would apply, for example, to a corporation controlled by a non-resident or by a public corporation. For such corporations, the limit is one year more than for individuals; thus, in the examples above where individuals have six years, it is seven years.
Last modified on March 1, 2024 12:00 am
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