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How Far Back Can The CRA Go To Reassess You?

In Canada, the CRA can reassess your tax returns for up to three years from the date that they were initially assessed. However, certain circumstances allow for reassessment past the statute barred year period is over if errors, negligence, or misrepresentation can be proven.

In a recent case, a taxpayer died and the terminal return was filed a few times, each time attempting to correct an error on the previous version. The court observed that the valuator was negligent, the accounting firm’s errors were significant, and the son-in-law, as executor, did not review the returns, but relied on the accountants. CRA reassessed the return more than three years after the initial assessment. Generally, the Minister will be permitted to make a reassessment that falls outside the normal reassessment period provided that, on the evidence, the taxpayer in his return misrepresented the facts through neglect, carelessness, or wilful default. The onus of burden of proof is on the Minister.

The court, citing from an earlier case, defined a misrepresentation (whether innocent or not) to have occurred “if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment…” The court then considered who made the alleged misrepresentation: “The person filing the return for the taxpayer is distinct from the person who prepares the return, in this case the accounting firm of {the accountants}. As a result, I am concerned only with potential neglect or carelessness of the executors, not of {the accountants}” – whom the judge concluded were “either neglectful or careless.”

In concluding that the executors failed to establish that they had taken even a bare minimum of attention and care, the judge observed: “The care that he exercised in dealing with the return consisted of quickly flipping through it, if in fact he looked at it at all… He did not review it, as it meant very little to him. There was no evidence that he tried to understand it, asked any questions about its content or reviewed the properties that would be included in such a return.” He also said, “the standard requires that the taxpayer’s conduct and actions exhibit a deliberate attempt to complete a review and inquiry with the knowledge they have. It is the standard of a reasonably prudent person, not that of a tax expert.

It would seem that on complex files where you have the desire to rely on a statute barred date, you will need to document the review by the client of the tax returns, and possibly the issues covered.

 

When Can You Claim Expenses?

Most expenses must be claimed when incurred (some items like donations are creditable when claimed). Recently, CRA was asked if a taxpayer could claim interest in a year subsequent to payment (presuming expense was missed on filing). CRA responded that interest is deductible only in the year paid or payable in respect of that year (depending on regular taxpayer method). CRA stated that you had to request a reassessment of appropriate year. Certainly, that is the prudent approach; however, if for some reason it is not practical, there is case precedent (25 years old) for claiming an expense in a subsequent year. In that case, the judge phrased the issue: “Specifically, the issue is whether the Income Tax Act permits a taxpayer to claim expenses of another year in situations where there has been an accounting error or whether it requires the taxpayer to adjust its former returns.” Based on the facts that the accountant “testified that she had acted in accordance with GAAP {to expense a non-material amount in the wrong period} when she discovered the accounting error in 1984 and deducted the expenses in that year although they in fact related to the 1982 taxation year,” the expenses were deductible as claimed based on following GAAP.

 

Are You A Canadian With A U.S. Pension Plan?

Canadian resident taxpayers can have U.S. pension arrangements from having worked or lived in the U.S. in years when they resided in the U.S., which can lead to complexities in estate planning. Distributions after death are subject to U.S. estate tax, and receipts from pension plans or estates are included in the taxable income of the recipient resident in Canada.

CRA is of the position that a recipient may rely on the Canada-U.S. Treaty and exclude the receipt from income to the extent that U.S. estate taxes have been paid and the payment is directly from the retirement account. However, if the funds flow through the estate, they lose their character and become regular income to the recipient – with no treaty relief available for U.S. estate taxes paid. That means special attention to estate planning is required for clients who have lived or worked in the U.S.

This might be simplified by the fact that distributions from U.S. IRAs (like RRSPs) or 401Ks (like pension plans) can be “rolled” into RRSPs. Transferring the funds would simplify planning and for some taxpayers (e.g. those who can exclude salary income from U.S. taxable income), this might be an economical approach if implemented incrementally over several years.

 

Advisor Civil Penalties – Are You Exposed?

Tax practitioners should be mindful of third party civil penalties. In 2008, CRA commented that they had assessed 12 cases of third party penalties. Of the 12 cases, 2 penalties were imposed for misrepresentation in tax planning arrangements, and 10 for participating in a misrepresentation. Also, of the 12 cases, 6 related to unsupported or fictitious expenses, 3 related to deceptive or fictitious journal entries, and 1 related to offensive tax planning.

In Guindon vs. The Queen, the Minister had assessed Ms. Guindon with penalties amounting to $546,747 for false statements made in a charitable donation program. The Federal Court of Appeal upheld the assessment of penalties. It will be interesting to see what the Supreme Court decides on this matter. Other examples of what CRA deems to justify applying civil penalties to include:

  • Where the accountant knows that family members have provided no services to FamilyCo, but proceeds to prepare financial statements and tax returns for FamilyCo with salaries paid to them.
  • Where the accountant shows indifference regarding personal expenses claimed as business expenses.
  • Where a client advises the accountant of a charitable donation made, but presents no receipt, the quantum of the deduction is so disproportionate to the client’s apparent resources as to defy credibility, and the accountant proceeds unquestioningly in this situation.

 

RRSP Tid Bit

Annuity payments from RRSPs qualify as “Pension Income”, which are eligible for the pension income tax credit. Annuity payments include “an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise”. Voluntary withdrawals cannot qualify – as the courts recently confirmed. You need a contract!

 

 

 

Michael Fromstein, CPA, CA, TEP, MSC, MBA, brings more than 30 years of experience to his role as tax associate at Sloan Group. The main areas Michael focuses on are owner-manager tax issues, estate planning, designing and implementing cross-border tax strategies, and working with clients to expand their business relationships in Israel. In addition, Michael brings his expertise of income tax to his role as an instructor at Ontario Institute of Chartered Accountants (OICA) and a tutor at Canadian Institute of Chartered Accountants (CICA).

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