Once the Canada Revenue Agency (CRA) completes an audit of a taxpayer's taxation year, the CRA may change the amount of the income tax liability of the taxpayer and may also assess penalties and interest. Once the Minister of National Revenue (the Minister) issues a Notice of Assessment or Notice of Reassessment (the Notice of Reassessment), the taxpayer can file a Notice of Objection with the CRA Appeals and object to the change to the tax liability as well as to the assessment of interest and penalties.
While preparing a Notice of Objection might appear to be a relatively simple process, there are a number of technical provisions contained in section 165 of the Income Tax Act (Canada) (Act) and in case law of which taxpayers should be aware. Failure to comply with the requirements may deprive the taxpayer of appeal rights.
A taxpayer may object to a Notice Reassessment when:
- The taxpayer disagrees with the Notice of Reassessment; and
- Tax, interest and/or penalty is assessed.
A taxpayer may even object to its own filing position if the taxpayer subsequently determines that the filing position was incorrect. However, an objection to a "nil reassessment" is not a valid objection. A "nil reassessment" is one which shows no amount of tax, interest or penalties. Nevertheless, there may still be remedies available to a taxpayer who disagrees with certain aspects of a reassessment (e.g., denials of losses, denials of tax credits).
Time Limitations for Filing Notice of Objection
Pursuant to subsection 165(1) of the Act, an individual or a testamentary trust must serve a Notice of Objection on the Minister on or before the day that is the later of the day that is:
- one year after the taxpayer's filing-due date for the year; and
- 90 days after the sending of the Notice of Reassessment.
A corporate taxpayer must serve the Notice of Objection within 90 days after the Notice of Reassessment was sent. The date of sending of the Notice of Reassessment is usually the date printed on the Notice of Reassessment, though taxpayers should always compare the date on the Notice of Reassessment with the postmark reflected on the envelope transmitting the Notice of Reassessment.
Pursuant to subsection 166.1(1) of the Act, the Minister may extend the time for serving a Notice of Objection. The taxpayer must apply, to the Minister, for the extension of time and the application must be made within one year after the deadline for serving a Notice of Objection. The granting of an extension of time is at the discretion of the Minister. A taxpayer should not assume the extension is automatic. Among other things, there must have been a bona fide intention to dispute an issue before the expiry of the 90-day deadline. Recourse to the Tax Court is available should the Minister deny the extension of time.
Form and Content of a Notice of Objection
A Notice of Objection must be in writing though a taxpayer is not required to use the CRA's Notice of Objection form (the T400A Form). The Notice of Objection is generally signed by the taxpayer or an authorized representative. The Notice of Objection should set out the taxpayer's reasons for objecting to the reassessment along with all of the relevant facts.
More detail is required from a "large corporation". A corporation is a "large corporation" if the corporation's taxable capital, together with the taxable capital of related corporations, exceeds C$10-million. This can, therefore, include a corporation which has less than C$10-million on the right-hand side of its balance sheet if it has a controlling shareholding with more than C$10-million on its balance sheet.
A taxpayer which qualifies as a "large corporation" must:
- Describe each issue to be decided;
- Specify the relief sought; and
- Provide the facts and reasons on which the taxpayer relies on in respect of each issue raised in the Notice of Objection.
The relief sought by a "large corporation" must be expressed as the amount of change in the income, taxable income, taxable income earned in Canada or any loss of the corporation for the year or other amount payable by, refundable to or deemed to have been paid or have been an overpayment or a balance of undeducted outlays, expenses or other amounts.
A taxpayer may file one Notice of Objection for multiple years as long as the Notice of Objection meets the requirements of subsection 165(1) and, if applicable, subsection 165(1.1) with respect to each issue in each taxation year.
Where to File a Notice of Objection and To Whom It Must be Addressed
Pursuant to subsection 165(2) of the Act, the Notice of Objection must be addressed to the Chief of Appeals in a District Office or a Taxation Service Centre. The Notice of Objection may be mailed or delivered (e.g., by hand, including courier) to any one of the CRA's District Offices or to a Taxation Service Centre. In its publication, "Resolving Your Dispute: Objection and Appeal Rights Under the Income Tax Act", the CRA states that a Notice of Objection can also be served by using the CRA's online services in "My Account" for personal income tax and benefits or in "My Business Account" for corporation or payroll accounts.
Failure to address a Notice of Objection to the Chief of Appeals and/or deliver the Notice of Objection to the proper place can result in the objection being considered invalid. For example, in McClelland v. The Queen, a letter addressed to and delivered to a CRA Collection Enforcement Officer did not comply with the requirements of subsection 165(2) of the Act and, therefore, was not a valid Notice of Objection. In Mohammed v. The Queen, a Notice of Objection delivered to a CRA Taxation Service Centre was held not to be a valid Notice of Objection because it was not addressed to the Chief of Appeals.
The CRA's T400A Form for a Notice of Objection is addressed to the "Chief of Appeals" and contains instructions to insert the address shown on the taxpayer's Notice of Reassessment. The address shown on the Notice of Reassessment is the address of the Taxation Service Centre where the taxpayer's tax return is processed. Consequently, proper use of the T400A Form should ensure that a Notice of Objection is not considered invalid solely because of having been improperly addressed.
It is no longer necessary to send the Notice of Objection by registered mail. As a practical matter, taxpayers are no longer required to obtain registration receipts (e.g., double registered mail) for their records. However, a taxpayer should ask the CRA to confirm in writing the receipt of the Notice of Objection or, if delivered by courier, obtain an acknowledgement of courier delivery.
Subsection 165(6) provides that the Minister may accept a Notice of Objection notwithstanding that it was not served in the manner required by subsection 165(2). The power of the Minister under subsection 165(6) of the Act is discretionary. Subsection 165(6) does not provide the Minister with any discretion to waive the requirements of subsection 165(1) or subsection 165(1.1) of the Act.
Effect of Notice of Reassessment Issued Subsequent to Filing Notice of Objection for a Taxation Year
Sometimes the Minister will issue more than one Notice of Reassessment in respect of a taxation year. A new Notice of Reassessment will likely cancel and replace a previous Notice of Assessment or Reassessment when the reassessment relates to the same part of the Act as the earlier assessment or reassessment. In the event of cancellation, a new Notice of Objection must be served by the taxpayer with respect to any issue to which the taxpayer previously objected if the taxpayer wants the CRA Appeals to deal with that issue.
For example, assume that the Minister issues a Notice of Reassessment for the 2010 taxation year on January 10, 2012. In reassessing the taxpayer, the Minister disallowed the taxpayer's deduction of business expenses. The taxpayer disagreed with the Minister's action and served a valid Notice of Objection on the CRA Appeals. On June 20, 2012, the Minister issued a further Notice of Reassessment and also disallowed the taxpayer's deduction of capital cost allowance (CCA) in respect of certain assets but made no adjustment in respect of the previously disallowed business expenses. The taxpayer agrees with the disallowance of CCA but wants to keep the objection relating to the disallowance of business expenses "alive".
The Notice of Reassessment issued on June 20, 2012 automatically cancels and replaces the January 10, 2012 Notice of Reassessment. The taxpayer must serve a new Notice of Objection on the Chief of Appeals and "reobject" to the business expense deduction issue. If the taxpayer does not "reobject" within 90 days of the issuance of the June 20, 2012 Notice of Reassessment, the CRA Appeals will not further consider the business expenses issue.
Notices of Objection and Competent Authority
In circumstances where a reassessment of a taxpayer results in double tax, the taxpayer may invoke the procedure found in an applicable tax treaty and decide to ask the relevant Competent Authority to render assistance to relieve the double tax. There is no requirement that a taxpayer file a Notice of Objection with the CRA Appeals prior to requesting Competent Authority assistance. However, serving a Notice of Objection is necessary to preserve rights and forestall collection action in respect of all or some of the tax debt. The taxpayer will have no recourse to the CRA Appeals or the Canadian courts in the event the Competent Authority process is not successful if a Notice of Objection has not been served on a timely basis.
Once a Notice of Objection is served on the CRA Appeals, the taxpayer can request that the CRA Appeals hold the objection in abeyance until such time as the Competent Authority request is actioned. Should the Competent Authority decline to accept the taxpayer's case or reach an agreement unacceptable to the taxpayer, the taxpayer can then ask the CRA Appeals to reactivate and process the Notice of Objection. The taxpayer may decide, as a practical matter, to file a Notice of Appeal in the Tax Court of Canada given the unlikely prospect that the CRA Appeals will deal with the matter differently than the Competent Authority.
Taxpayers should always consider whether provincial Notices of Objections need to be filed. It is only necessary for a taxpayer to file a Notice of Objection in respect of the provincial portion of the reassessment when a non-agreeing province levies an assessment. Quebec and Alberta (corporate only) are the only remaining non-agreeing provinces for which the CRA does not administer the provincial income tax statutes.
With respect to Alberta, new tax rules for filing Notices of Objection by large corporations became effective September 1, 2007. Effective September 1, 2007, subsection 48(1.111) of the Alberta Act was repealed. Subsection 48(1.01) then became effective and requires Alberta "large corporations" to file a separate Alberta Notice of Objection within 90 days of the mailing of its Alberta Notice of Assessment.
Prior to September 1, 2007, a "large corporation" (same definition as the Act) that filed a Notice of Objection for federal tax purposes within the required timeline was deemed to have filed a similar Notice of Objection with Alberta under subsection 48(1.111) of the Alberta Corporate Tax Act (the Alberta Act).
When Ontario makes an adjustment based on a federal reassessment relating to taxation years prior to Ontario becoming an agreeing province, the Ontario Notice of Reassessment will likely contain the notation of "designated assessment". Where the taxpayer files a federal Notice of Objection and agrees to accept the outcome of a federal objection with respect to the particular issue for Ontario purposes, the taxpayer is not required to file a separate Ontario Notice of Objection. The taxpayer, however, must serve a separate Notice of Objection for any issues that it wants to contest provincially but which is not consequential to the federal reassessment.
Quebec has an administrative policy pursuant to which a taxpayer is not required to file a Notice of Objection with Revenu Québec in respect of an issue if the taxpayer has filed a federal Notice of Objection with respect to the same issue and the taxpayer agrees to accept the outcome of the federal objection for Quebec purposes. As this is an administrative policy, the taxpayer may decide to file a Quebec Notice of Objection. Once Revenu Québec has determined that a federal Notice of Objection has been filed, Revenu Québec will normally write to the taxpayer and request that the taxpayer sign and return an "Application to conditional withdrawal of a notice of objection". By signing and returning the application, the taxpayer will have a written record of its election to take advantage of the administrative policy.
Know the Facts and Position of the Tax Authorities
Before drafting a federal or provincial Notice of Objection, the taxpayer should review all the facts and documents available which relate to the disputed issue. For example, the taxpayer should obtain a clear understanding of the CRA's position in order to best contest the matter in issue. Important sources of information regarding the CRA's position are the T20 Auditor's Report, the T2020 Audit Notes, relevant position papers and the CRA proposal letters. The CRA's policy is that the CRA auditor should provide at least the T20 Auditor's Report, to the taxpayer, on request.
The taxpayer should also consider whether to file an Access to Information request to obtain additional information from the CRA files. Although such information may not be available prior to the deadline for serving a Notice of Objection, this information may be useful for purposes of the CRA Appeals process or the Tax Court litigation process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.