In an earlier article ("Finalizing Tax Accounts: Limits on Reassessments," Tax for the Owner-Manager, October 2004), I dealt with some of the issues relating to statute-barred assessments that can arise by virtue of New St. James (66 DTC 5241 (Ex. Ct.)). In this article, I deal with some of the circumstances in which the CRA may generally reassess beyond the "normal reassessment period" pursuant to subparagraph 152(4)(a)(i). A related question is whether such a reassessment automatically attracts the 50 percent penalty imposed under subsection 163(2).
The "normal reassessment period" is defined in subsection 152(3.1) as three years after the earlier of the date of mailing of a notice of original assessment and the date of mailing of an original notification that no tax is payable. In the case of a mutual fund trust or a corporation other than a Canadian-controlled private corporation, this period is extended to four years. Rules are provided to extend the general limitation periods to take into account the carryback of losses, gifts, and tax credits; transactions with non-arm's-length non-residents; and other special circumstances.
Subparagraph 152(4)(a)(i) removes all limitation periods when a taxpayer "has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud" when filing a return or providing information. Subsection 163(2) allows the minister to impose a penalty equal to 50 percent of the tax payable when a person "knowingly, or under circumstances amounting to gross negligence, has made or has participated in . . . the making of a false statement or omission in a return [or] form."
College Park Motor Products (2009 TCC 409) serves as a reminder of two key points made in earlier cases in connection with subparagraph 152(4)(a)(i):
- The minister is not precluded from assessing outside the normal reassessment period even if the misrepresentation is due to the neglect of the taxpayer's accountant or other tax return preparer.
- The fact that the minister might have detected the error with a careful review is irrelevant.
The court in College Park Motor Products held that the failure to correctly answer relevant questions posed in the T2 income tax return, which led to the taxpayer erroneously claiming the small business deduction, met the standard imposed by subparagraph 152(4)(a)(i). Even though the taxpayer voluntarily disclosed the error when a director learned of it, the minister reassessed both statute-barred and non-statute-barred years, the former with the court's blessing. (For more on the College Park Motor Products case, see "Neglect Is Not Just Unreported Income," which follows this article.)
The court in Nesbitt (96 DTC 6045 (FCTD)) defined "any misrepresentation" more clearly. Citing earlier jurisprudence for support, it stated that an incorrect statement constitutes a misrepresentation and that that phrase includes both innocent and fraudulent misrepresentations. Therefore, it is clear that an incorrect statement in a return or form will allow the minister to reassess outside the normal reassessment period if the incorrect statement was made as a result of neglect or the other factors set out in subparagraph 152(4)(a)(i).
In Angus (96 DTC 1823 (TCC); confirmed by the FCA at 98 DTC 6661), the court made the important statement that a misrepresentation that brings subparagraph 152(4)(a)(i) into play is not necessarily a false statement. Therefore, the 50 percent penalty imposed by subsection 163(2) does not necessarily flow from a reassessment of a statute-barred year. In Snowball (97 DTC 512 (TCC)), the court stated that while the negligence of an accountant does not preclude a subparagraph 152(4)(a)(i) assessment, it may be a defence to a penalty under subsection 163(2). In Udell (70 DTC 6019 (Ex. Ct.)), a taxpayer successfully appealed a gross negligence penalty that was based on an error in his return. The taxpayer had supplied his accountant with detailed records of his income and expenses, but the accountant was grossly negligent in preparing the return. In the special circumstances of the case, the court held that the gross negligence of the accountant could not be attributed to the taxpayer. One of the reasons cited was that the taxpayer did not know of the accountant's omissions and errors.
Interestingly, the court in Angus commented that reporting the disposition of shares as a capital gain was a misrepresentation if the gain should have been reported as ordinary income; but such reporting was not, in the circumstances of that case, a false statement. This comment leaves open the possibility that in other (undefined) circumstances, merely taking the position that a gain is capital rather than ordinary income could lead to the imposition of the 50 percent subsection 163(2) penalty. One hopes that this would be the case only when the capital gain position was not really supportable--that is, the taxpayer was merely taking a shot in the hope that the CRA would not audit the transaction.
Truster Zweig LLP
Richmond Hill, Ontario