DISPUTING A CRA REASSESSMENT
Review, audits:
Before reassessing a tax return the CRA will usually send a letter requesting information or documents. The letter might focus on something specific. After an initial reply, further communications may follow.
The letter will be part of a “review”. The CRA has several types and levels of review.[1] After the review process if the CRA decides to make a change, for example the reduction or rejection of a business expense, then they will issue a Notice of Reassessment.
An audit is different than a review. It’s typically broader and involves a detailed examination of a taxpayer’s records. Audits can be conducted at the CRA’s office (“desk audit”) or at the taxpayer’s home or business (“field audit”).[2]
Objections:
If a person disagrees with the CRA’s reassessment they can file a notice of objection setting out the reasons for the objection and all relevant facts, and attaching all supporting documentation.
A notice of objection can be filed online through a CRA account and supporting documents can be uploaded. Look for the option to “file a formal dispute”. Alternatively you can file by mail using form T400A or GST159 and attach documents as necessary.
A notice of objection must be filed on or before the later of:
If an objection is not filed in time, an extension can be applied for, but the criteria is restrictive. If the CRA does not grant an extension one can apply to the tax court for an extension. Failure to file a notice of objection within the required time or within an extension period (if granted) will result in no ability to challenge the reassessment.
An objection should be organized, detailed but focused, and persuasive. It’s not advisable to just express bald disagreement with the CRA’s decision and hope for the best. Instead the objection should include a full explanation for why the reviewer’s conclusions are unreasonable. For supporting documentation, consider not just receipts and bank statements, but also emails, texts, contracts, calendars, statements from involved persons, and evidence of normal business practices. The filer needs to think of how their position can be corroborated. The intent is to persuade a CRA agent who may no nothing about the filer. If the filer claimed something that is unusual or seems inherently improbable, there is an even stronger need to present persuasive evidence.
Upon receiving a notice of objection, the CRA assigns the matter to an appeals officer who will review the objection, try to resolve the dispute, and issue either a reassessment or confirmation of the original assessment. The CRA is supposed to do this “with all due dispatch”, but typical resolution times are in the range of 4 months to well over a year depending on the level of complexity.[3]
Filing an objection does not suspend interest from accruing on the reassessed amount. Therefore it can be a good idea to pay taxes that the CRA asserts are due pending the outcome of the objection. Of course interest charges will be reveresed if the objection is successful.
Filing an objection will pause any CRA collections activity on the disputed amount.
What if a person disagrees with the appeal officer’s decision:
The CRA’s final reassessment can be appealed to the Tax Court of Canada by filing a Notice of Appeal with the Tax Court of Canada.
The CRA will be required to file a Reply to the Notice of Appeal stating the assumptions upon which the tax reassessment is based. The court will presume these assumption to be true unless persudaded otherwise by evidence. The appellant has the onus to show why the CRA’s assessment is wrong. At the end of the day, a judge will make a decision taking into account all the evidence presented, and it will make findings of fact based on a balance of probabilities. This requires the court to determine what is the likely truth.[4]
Since the Income Tax Act requires persons to keep records “in such form and containing such information as will enable the taxes payable under this Act… to be determined”, the court will expect an appellant to have the kind of records that business people customarily have or that are reasonable in the circumstances. However if an appellant doesn’t have recoreds they might still be able to meet their onus of proof by presenting credible oral evidence.[5]
The court doesn’t necessarily have to accept one side’s position or the other. Take for example the case of Lisa Dale v. HMQ (2010 Tax Court). A real estate agent claimed that 95% of her travel was for business, but she hadn’t keep a log book as she claimed it was too onerous given the nature of her business. The CRA assessed 55%. The agent presented alternate indirect evidence to support her calculation. The court was not fully persuaded by either side’s position, and issued a decision allowing 75%.
An appellance can elect an Informal Procedure if the disputed federal tax plus penalties for a taxation year are $25,000 or less, or where the disputed loss is $50,000 or less. There is no filing fee, and if an appellant loses they will generally not be required to pay the CRA’s costs. The Tax Court has locations in various cities including Toronto. A virtual hearing is possible.
References:
[1] CRA’s review programs include: Pre-assessment Review Program; Processing Review Program; Request Verification Program; Refund Examination Program; Supplementary Examination Program; Matching Program; Special Assessments Program; and Identity Protection Services Program.
[2] The Income Tax Act does not establish a separate statutory procedure called an “audit” as opposed to a “review.” The distinction is primarily a CRA administrative distinction, rather than two procedures created by different provisions of the Act. Audits are described in the CRA’s Audit Manual
[3] The CRA advises of average processing times on this webpage.
[4] See Hickman Motors Ltd. v. Canada (1997 SCC) which more or less establishes this principle, but see Yogeswaren v. HMQ (2021 Tax Court) and Eisbrenner v. Canada (2020 FCA) as examples of how the principle has been interpreted and worded subsequently.
[5] The Supreme Court of Canada said in Hickman Motors Ltd. v. R. (1997): “...credible oral evidence from a taxpayer is sufficient notwithstanding the absence of records” See also Benjamin v. The Queen (2006 Tax Court): “Whatever may be the policy of the CRA to require documentation to support an expense, a payment or a deduction, it is not the policy of this court, unless the taxing statute specifically requires it (as for example, in the case of charitable donations). If a taxpayer in court can demonstrate through credible oral testimony that a payment was made or an expense incurred, the court must make a finding based on that evidence and give effect to it.”