[8]              As for the original assessment dated July 31, 2003, it is no longer possible for Mr. Hess to appeal this assessment because it was nullified when the reassessment was issued. It is only the [2006] reassessment that can be disputed.

…

[12]         It is not open to me to provide the relief that Mrs. Hess [the taxpayer’s agent] seeks. I have no doubt that Mrs. Hess tried her best to preserve her husband’s appeal rights, but this is not a sufficient reason to grant the relief sought. The time limits in the Act are strict and the Court is not permitted to waive them on grounds of fairness: Bormann v R, 2006 FCA 83 (CanLII), 2006 FCA 83, 2006 DTC 6147.

The Tax Court is a place where highly technical rules are applied in a highly technical manner. This makes Tax Court judges sound cold, and from time to time, in their judgments, one gets the distinct impression that they see themselves this way, and they don’t always like it. But this aspect of the system is, in part, the creation of taxpayers collectively and their advisers. The CRA will rely on highly technical rules to impose tax; but taxpayers in turn rely on those same rules to avoid it. The government responds with more and more technical rules to combat avoidance, and a plethora of technical rules seems to entail a technical approach to the adjudication of tax disputes without much regard for the individual enmeshed in the gears of the machine.

I used “seems” in the previous sentence because, of course, the Tax Court’s approach is also dictated by its jurisdiction. The Court is a statutory creature, and its jurisdiction over income tax matters is spelled out clearly in the Income Tax Act and the Tax Court of Canada Act. The Court has no jurisdiction to consider anything other than the black letter of the law. Does it have to be that way, though? What if the Income Tax Act permitted judges some discretion to depart from the black letter, to take into account individual circumstances? A taxpayer might be liable for tax under the black letter, but perhaps bad advice or other difficult circumstances did more than anything else to create that liability. Do we trust Tax Court judges to do the Right Thing in those circumstances?

The current answer is no, we don’t, and so they can’t. Taxpayers need to understand this basic fact about the tax dispute resolution system when fighting an assessment.

Valid Appeals

The Court explained the relevant provisions as follows:

[16] Subsection 152(4.2) of the Act is part of the “Taxpayer Relief” legislation formerly known as the “fairness” legislation and introduced on May 24, 1991 as part of the “Fairness Package”. That subsection as it now reads is intended to provide relief to an individual taxpayer who becomes aware, after the normal reassessment period, that he may be entitled to a refund or a reduction of an amount payable. The application for such a determination must be made within ten calendar years after the end of the taxation year. Notwithstanding a taxpayer’s right to object to an assessment under section 165 of the Act, subsection 165(1.2) precludes a taxpayer from objecting to an assessment made under certain provisions of the Act, including subsection 152(4.2). The reasoning behind that is that a reassessment under subsection 152(4.2) is made at the Minister’s discretion.

Subsection 169(1) of the Income Tax Act, which governs the filing of income tax appeals, does not expressly prohibit an appeal from a relief reassessment, but it is a condition of filing an appeal that the taxpayer first object. In Kubbernus, the taxpayer filed an objection despite the prohibition in subsection 165(1.2), and the Minister considered it. Did that matter for the purposes of the appeal to the Tax Court? The taxpayer argued that the Minister, by considering the objection, was estopped now from taking the position that the taxpayer couldn’t appeal. The Court disagreed.

[34] In the present fact situation, I do not believe that the appellant was misled by the Minister when he decided to file a notice of objection. In fact, it was he himself who set the wheels in motion by ignoring the prohibition set out in subsection 165(1.2) of the Act and referred to in the 2006 reassessment. As noted by Judge Bowman (as he then was) in Goldstein, supra, this Court has an obligation to decide cases (or motions) in accordance with the law. I am therefore not bound by erroneous representations or interpretations of the Act by CRA officials. Accordingly, no estoppel can be said to have arisen in the instant case if the representations were not in accordance with the law. The situation in the cases cited by the appellant differs from that in the instant case as, in those cases, they were in accordance with the law.

Valid Objections

In a post on objections, I wrote

There is no prescribed form for an income tax objection. The Income Tax Act (Canada) simply requires that the objection be in writing and that it set out “the reasons for the objection and all relevant facts”. The CRA has created a form for objections (the T400A), but the taxpayer need not use it. That said, we always do, if only because it makes the CRA feel better, and using the form helps to ensure that the objection will end up in the right CRA pigeon-hole.

In fact the Tax Court is often quite lenient about what will constitute a valid objection, and this is well illustrated in Schneidmiller v. The Queen, 2009 TCC 354. In that case, the CRA reassessed the taxpayer, who called the CRA to complain that the reassessments were incorrect. The CRA sent the taxpayer T1ADJ’s, a “Request to Adjust”, which the taxpayer completed and sent to the CRA at its Surrey Tax Centre (cf my post on this point entitled “Arguing with the CRA While the Clock Ticks“). The CRA lost the forms and told the taxpayer as much 18 months later. The taxpayer resubmitted the forms. The taxpayer followed up two and a half months later, at which point the CRA told him to file an objection, which he promptly did. The CRA then informed the taxpayer that he was out of time for filing an objection! (Kafka couldn’t have made this up.)

Justice Beaubier responded as follows:

[2] The application was heard in Regina Saskatchewan on June 26, 2009. The Applicant was the only witness. He resides in Gull Lake, about 300 km west of Regina, a land of open range, where big farms meet big ranches and the deer and the antelope play and the skies are not cloudy all day.

Was it a slow day at the office?

Anyway, the Justice also wrote:

[9] An “Objection” or a “Notice of Objection” is not defined or described in either Section 165 or 248 of the Act. Nor should it be. It is a matter of substance, not form. The Shorter Oxford Dictionary, 3rd Edition, defines “Objection” as:

“The action of starting something in opposition to a person or thing… an adverse reason, argument or contention. Now often merely: An expression, or feeling, of disapproval, disagreement or dislike…”

[10] That is what the Applicant did when he sent his request respecting the 2002, 2003 and 2004 Reassessments of 27 April 2006 to CRA which they received on 12 May 2006. They constituted timely Notices of Objection.

[11] As a result, the Applicant does not need an extension of time in which to file Notices of Objection. He has done that.

[...]

[13] In these circumstances, this Application is dismissed because it is not necessary. Mr. Schneidmiller has the right to appeal these reassessments to the Tax Court of Canada now.

Uh, what about subsection 165(2), which states that “a notice of objection under this section shall be served by being 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 requirement respecting service on a Chief of Appeals is mandatory. I’m guessing the taxpayer didn’t meet this condition because he didn’t send the T1ADJs to the Chief of Appeals at the Surrey Tax Centre. Why would he, when the form itself doesn’t say anything about that requirement?

Anyway, it doesn’t appear that the Crown has filed an appeal from this decision. No doubt Mr. Schneidmiller had the full sympathy of the Court for obvious reasons, but any other taxpayer should think twice before emulating his example in dealing with a reassessment.

The Income Tax Act (Canada) (the “Act”) contains numerous limitation periods that affect when the Canada Revenue Agency (the “CRA”) can issue an assessment to a taxpayer and when a taxpayer can and cannot dispute such an assessment. Understanding these limitation periods is an important pre-requisite for advising clients about a wide variety of legal problems, including, for example, the expiry period for representations and warranties in a share purchase agreement.

Limits on Assessments

The CRA normally has three years to mail a notice of reassessment to an individual for a taxation year. In the Act, this period is called the “normal reassessment period”. The three-year limitation period begins with the date of the initial notice of assessment for the taxation year (the notice responding to the filing of a tax return for the year). The CRA must issue an initial notice of assessment “with all due dispatch” after a taxpayer files a tax return. That is, the Act does not impose a time limit for the issue of the initial notice of assessment, and the Courts have been somewhat lenient about the meaning of “all due dispatch” in this context (see, for example, The Queen v. Ginsberg, 1996 CanLII 4062 (F.C.A.)).

As an example, if an individual’s original assessment for 2003 was dated July 15, 2004, then the CRA, if it had reassessed on July 15, 2007, would have met the limitation period. The CRA would have been late if it had reassessed or sent the reassessment on July 16, 2007.

Under the Act, the act of assessing or reassessing is synonymous with mailing the document that serves as notice of the assessment or reassessment. Accordingly, by mailing the document on or before the third anniversary of the original assessment, the CRA meets the three-year limitation period.

For corporations, the position is a little more complicated. For Canadian-controlled private corporations, the normal reassessment period is also three years. For any other type of corporation, the period is four years. The Corporations Tax Act (Ontario) gives Ontario one year beyond the federal normal reassessment period to issue provincial reassessments against a corporation.

Negligent Misrepresentation

The CRA can assess at any time if a taxpayer makes a “misrepresentation” on a tax return “that is attributable to neglect, carelessness or wilful default”. A “misrepresentation” is essentially any kind of error that results in a taxpayer’s income being under-reported. As for “neglect” or “carelessness”, the test has been described thus:

[I]t is sufficient for the Minister, in order to [reassess beyond the normal limitation period], to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. (Venne v. M.N.R., [1984] C.T.C. 223 at 228 (F.C.T.D.))

The CRA (the Minister) must prove negligence in order to be able to go beyond the normal reassessment period in issuing a reassessment. The tax courts, however, have sometimes applied a fairly low threshold in deciding what amounts to neglect or carelessness. Having one’s tax return prepared by a professional is not always of much help. In Estate of Herman Gebhart v. The Queen, 2008 FCA 206, aff’g 2006 TCC 572, an estates lawyer prepared a terminal return based on the T4RSPs in his possession. Unfortunately, he was missing another T4RSP, and so he did not realize that a payment he had received through a bank was from another RSP belonging to the deceased. The court found that the executor and the lawyer knew or ought to have known about the other RSP; it did not accept their explanation that they were confused about whether the other RSP existed:

The confusion that may have been present in Mr. Kohl’s [the executor's] mind was whether there were, in fact, more RSPs than he and Mr. Lewans [the lawyer] had initially thought. This confusion could easily have been cleared up by a visit or telephone call to CIBC-Mankota, where Mr. Gebhart had conducted his financial affairs. It was not a difficult problem to sort out and, in my view, Mr. Kohl did not exercise reasonable care in authorizing the filing of the 1996 income tax return before the matter of how many RSPs Mr. Gebhart actually held at the time of his death had been clarified. It follows, in my view, that the evidence that was before the Tax Court Judge supports his conclusion that there was a misrepresentation attributable to neglect or carelessness on the part of Mr. Kohl in the filing of the 1996 income tax return of the Estate, as contemplated by subparagraph 152(4)(a)(i) of the ITA, that warranted the reassessment of the Estate in respect of its 1996 taxation year after the normal reassessment period for the Estate in respect of that taxation year.

A purchaser of the shares of a corporation will ask for representations and warranties respecting the tax affairs of the corporation to ensure that its tax returns as filed and the resulting assessments accurately quantify the corporation’s tax debts in respect of its operations before the acquisition of the shares. The vendor will often propose reps and warranties that “expire” after the end of the normal reassessment period. Sometimes the expiry period refers only to the federal period, which leaves open the possibility that Ontario could reassess after the expiry of the reps and warranties but before the expiry of the provincial limitation period.

The expiry date for the reps and warranties sometimes do not apply to errors on a tax return that result from “gross negligence” or the like. If a corporate taxpayer makes an error attributable to “gross negligence”, it might be exposed to gross negligence penalties, and the CRA will generally have little difficulty reassessing beyond the normal reassessment period. The reps and warranties, in theory, will allow the purchaser to seek indemnification from the vendor. The purchaser’s only remaining risk, then, relates to ordinary negligence, which, while it leaves the corporation open to reassessment beyond the normal reassessment period, does not necessarily extend the expiry date for the reps and warranties.

Objecting to a Reassessment

A reassessment is deemed to be correct, and it definitively fixes a taxpayer’s debt to Her Majesty, unless the taxpayer disputes it. The taxpayer must begin a dispute with the CRA about a reassessment by filing a “notice of objection”. The notice of objection must be in writing, and it must be sent by mail or delivered by hand to the Chief of Appeals “in a District Office [Tax Services Office] or Taxation Centre”. The CRA has created form T400A for objections, but the Act does not prescribe this form, and so it is not necessary to use it (see, for example, Lester v. The Queen, 2004 TCC 179, where a letter was held to constitute a valid notice of objection). To avoid confusion, however, and to ensure that the objection is not misdirected somehow, it is advisable to use the CRA’s form.

The objection must be filed on or before the day that is 90 days after the day of mailing of the notice of reassessment or, in the case of an individual or a testamentary trust, on or before the later of (1) the day that is 90 days after the day of mailing of the notice of reassessment and (2) the day that is one year after the taxpayer’s filing-due date for the year for which the reassessment was issued.

Where the taxpayer misses the requisite deadline, section 166.1 of the Act allows him or her to apply to the CRA to extend the time for filing the objection. The taxpayer, however, among other things must make the application within one year “after the expiration of the time otherwise limited by this Act for serving a notice of objection.” David Sherman, in his notes on section 166.1 in The Practitioner’s Income Tax Act, states that in the year ended March, 2004, the CRA accepted 91% of all applications made under section 166.1, which corresponds with the writer’s experience with the section.

On the other hand, missing the one-year deadline provided by section 166.1 will mean that the taxpayer is completely out of luck: the case law is clear that the Tax Court has no jurisdiction to hear an appeal unless an objection is filed first, and an objection cannot be filed after the expiry of the one-year period in section 166.1 (see, for example, Cameron v. The Queen, 2006 TCC 588).

After receiving submissions from the taxpayer and considering the objection, the CRA will issue either a new notice of reassessment and T7W-C to vary or reverse the reassessment under objection or a notice of confirmation confirming that the reassessment under objection was correct as far as the CRA is concerned. If the taxpayer continues to disagree with the new reassessment or the confirmed reassessment, he or she must appeal to the Tax Court of Canada.

Time Limits for Tax Court Appeals

A taxpayer is entitled to file an appeal to the Tax Court of Canada if the taxpayer has filed an objection and more than 90 days has passed since the date of filing. In fact, a taxpayer can file such an appeal even if the CRA has not yet audited the return that is the subject of the appeal (The Queen v. Imperial Oil Ltd., 2003 FCA 289). Because the CRA usually takes 90 days just to assign an objection to an appeals officer, this entitlement means that a taxpayer can circumvent the CRA appeals process. Usually, a taxpayer will wish to use the appeals process if possible because it is relatively informal and cheaper than court. On the other hand, it is sometimes possible to predict with near certainty what the appeals officer will do with the file, in which case an appeal will save everybody the trouble.

Suppose the taxpayer does use the CRA objection process. As is noted above, a CRA appeals officer can dispose of an objection by reversing the reassessment, confirming it or varying it and issuing a new one. A taxpayer who wishes to continue to dispute the old reasessment that was confirmed or the new reassessment that varied the old one, can file a notice of appeal to the Tax Court within 90 days of the date of the confirmation or the new reassessment.

A taxpayer who misses the 90-day limitation period can apply for an extension of time within which to file an appeal. The taxpayer, however, must make the application within one year of the expiry of the 90-day limitation period.

Two-Year Limitation Period for Directors

In “Leaving a Sinking Ship: Resigning as a Director of a Corporation” (HLA Journal, August 2008), I discussed the two-year limitation period provided by subsection 227.1(4) of the Act. This subsection prohibits the CRA from assessing an individual who was a director of a corporation for unremitted source deductions more than two years after the individual ceased to be a director.

In Leger v. The Queen, 2007 TCC 322, “the Court held that, if a corporation that was dissolved is revived, the revival takes effect from the date of dissolution (cf subsection 241(5) of the OBCA). As a result, the corporation is revived and, in effect, so are its directors.”

Aujla v. The Queen, 2007 TCC 764, aff’d 2008 FCA 304, arrived at a different result, albeit in the context of company governed by a different statutory scheme. Mr. Justice Bowie decided that a company that had been dissolved while owing net GST could not have directors, and so the directors ceased to have that status upon dissolution (as required by subsection 227.1(4) of the Act). An order of the B.C. Supreme Court under the B.C. Company Act revived the company, but the order said nothing about putting the directors in the same position they would have been if the company had not been dissolved. The Court rejected the Crown’s submission to the effect that, if a company is revived, it must follow that the company’s directors have been resuscitated as well. For a more detailed discussion of this case, see blog.simpsonwigle.com/?p=273.

Unfortunately, the accountant did nothing with the assessment until May, 2007, when he filed a request for an extension of time within which to file the objection, which the CRA rejected. The taxpayer filed an appeal to the Tax Court in May, 2008.

The Court granted a motion by the Crown to dismiss the appeal for want of jurisdiction. No valid objection had been filed, and so the Court had no jurisdiction. The Court questioned whether the assessment had ever been validly issued because it had been sent to the wrong address (although the CRA, until the date of the motion had taken the position that the assessment was validly issued). The Court referred to The Queen v. 236130 British Columbia Ltd., 2006 FCA 352, in this regard. Nonetheless, the Court found that it could not address that question because the matter was not properly before it.

What remedy might the taxpayer have? Justice Boyle noted, rather ominously, “It may also be that Ms. Corsi’s remedy may be in another court, if any of her several professional advisers did not properly advise her or represent her.”

What more could the accountant have done? He didn’t receive the assessment dated June, 2004, until October, 2005, so that the CRA—given the position it took respecting the validity of the assessment and its date of mailing—was bound to reject any objection he filed or any application he might have made to extend the time for filing an objection.

With hindsight, especially in light of Justice Boyle’s comments, it seems that the accountant should have filed an objection anyway and then, when the CRA purported to reject it, he could have filed an appeal to the Tax Court. At the Tax Court, the taxpayer could have taken the position that the assessment wasn’t mailed until it was sent to the accountant and that, therefore, her objection was in time and her appeal was properly before the Court.

Subsection 225.1(5) of the Income Tax Act (Canada) provides as follows:

(5) Notwithstanding any other provision in this section, where a taxpayer has served a notice of objection under this Act to an assessment or has appealed to the Tax Court of Canada from an assessment and agrees in writing with the Minister to delay proceedings on the objection or appeal, as the case may be, until judgment has been given in another action before the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada in which the issue is the same or substantially the same as that raised in the objection or appeal of the taxpayer, the Minister may take any of the actions described in paragraphs 225.1(1)(a) to 225.1(1)(g) for the purpose of collecting the amount assessed, or a part thereof, determined in a manner consistent with the decision or judgment of the Court in the other action at any time after the Minister notifies the taxpayer in writing that

(a) the decision of the Tax Court of Canada in that action has been mailed to the Minister,

(b) judgment has been pronounced by the Federal Court of Appeal in that action, or

(c) judgment has been delivered by the Supreme Court of Canada in that action,

as the case may be.

The upshot? If taxpayer 1 appeals to the Tax Court and taxpayer 2′s objection is held in abeyance pending the outcome of that appeal, taxpayer 2′s tax debt will become collectible if taxpayer 1 loses the appeal at the time the appeal is lost even if taxpayer 1 appeals the decision to the Federal Court of Appeal or, arguably, taxpayer 2 might be entitled to file his own appeal because taxpayer 1′s appeal is not determinative.

Dray v. The Queen, 2005 TCC 797, does a pretty good job of explaining a bizarre rule. As the Tax Court judge says “This is a concept which taxpayers may have difficulty understanding.” That’s an understatement.

The Justice continued:

[4] When the Minister assesses no tax then there is no appeal from it. In Liampat Holdings Limited v. The Queen, (1995) 96 D.T.C. 6020 (F.C.T.D.) at page 6021, the Court said: “There is a long line of jurisprudence that no appeal lies from a nil assessment. In Okalta Oils Ltd. v. M.N.R. (1955), 55 DTC 1176 (S.C.C.), one of the earliest cases dealing with nil assessments, where Fauteux, J., writing for the Court, observed that “assessment” meant the actual amount of tax which a taxpayer was called upon to pay. If no amount was claimed, there was no assessment therefore, no right of appeal. …”

[5] Further the Court said, “The case law is clear and, in my view, this Court has no jurisdiction to consider the plaintiff’s 1982 nil tax assessment, even if the loss would have an effect on a subsequent loss determination. However, the taxpayer is not left without alternatives. Subsection 152(1.1) provides that a taxpayer may request that the Minister determine the amount of the taxpayer’s loss.” It reads as follows:

152(1.1) Where the Minister ascertains the amount is a taxpayer’s non-capital loss, net capital loss, restricted farm loss or limited partnership loss for a taxation year and the taxpayer has not reported that amount as such a loss in his return of income for that year, the Minister shall, at the request of the taxpayer, determine, with all due dispatch, the amount of such loss and shall send a notice of determination to the person by whom the return was filed.

[6] Further the Court said, “According to Interpretation Bulletin IT-512: Determination and Redetermination of Losses, this provision was put in place specifically to deal with situations where a taxpayer has no right of appeal because of a nil assessment. I have not found any time limitations for seeking a loss determination and counsel for the plaintiff, in his written submissions did not direct me to such a provision. Accordingly, the plaintiff will not be unfairly prejudiced by the conclusion that I am without jurisdiction to consider the appeal from the 1982 assessment on its merits.”