DISPUTING A CRA ASSESSMENT

Review, audits:

Typically, before the CRA re-assesses a tax return, they will send a letter requesting information or asking questions. The letter might focus on something specific. After your 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 is finished the CRA will issue a Notice of Reassessment if they decide to make a change, for example the reduction or rejection of a business expense.

An audit is different from 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”).

The review can result in the CRA sending you a notice of reassessment. It could reflect, for example, a reduction or disallowance of an expense.

Objections:

If you disagree with the CRA’s reassessment you can file a notice of objection setting out the reasons for the objection and all relevant facts, and attaching all the supporting documentation you wish to rely on.^[2]  It should be organized, detailed but focused, and persuasive. Give your full explanation for why you believe the reviewer’s conclusions are unreasonable. For supporting documentation, think beyond just receipts and bank statements: emails, texts, contracts, calendars, statements, evidence of normal business practices. Think of how you can corroborate your explanation. Remember you are trying to persuade someone who doesn’t know you.

Before filing your objection, it may be helpful to ask the CRA reviewer for information if you were not given the basis for the reassessment, or don’t understand it.

A notice of objection can be filed online through your CRA account, or by mail. If by mail, use form T400A and attach documents as necessary.

A notice of objection must be filed on or before the later of:

• one-year after your filing due date (June 15th if reporting self-employed income)
• 90 days after the CRA’s notice of reassessment is sent.  

If an objection is not filed in time, you can apply to the CRA for an extension but the criteria is restrictive. If the CRA does not grant an extension you 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.

Upon receiving a notice of objection, your matter is assigned 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”^[3]

What if you disagree with the appeal officer’s decision:

You can appeal the final assessment to the Tax Court of Canada. Further appeals may be made to the Federal Court of Appeal and the Supreme Court of Canada.^[4]

In court, each of the CRA’s factual findings will be presumed true by the court unless you present evidence to rebut them. You have the onus to present evidence showing 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.^[5] 

If you assert something that seems inherently improbable, there is an even strong need to present persuasive evidence.

Remember that the Income Tax Act requires you 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 you to have documents that business people customarily have or that are reasonable in the circumstances. If you don’t have these documents, you should have a reasonable explanation for not having them.

The court doesn’t necessarily have to accept one 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%.^[6]

References:

CRA webpage - filing an objection