Introduction – The Legal Background & The Normal Reassessment Period Rules
Under the Income Tax Act, the Canada Revenue Agency ("CRA") is permitted to inspect and reassess a taxpayer's personal and or corporate tax returns for any reason. Subsection 152(3.1) of Canada's Tax Act provides that the period for doing so is three years from the date of an original assessment for individuals, and for certain corporations this is extended to four years. This period is often referred to as the "normal reassessment period". Once the normal reassessment period expires, the assessment for a relevant taxation year is said to be "statute-barred". However, in certain situations the CRA is allowed to reassess statute-barred years beyond the normal reassessment period. For example, subparagraph 152(4)(a)(i) in Canada's Income Tax Act allows the Minister of National Revenue (the "Minister") the ability to assess, reassess or make additional assessments with respect to taxation years after the normal reassessment period provided that the Minister can show that the taxpayer filed a return that included "a misrepresentation attributable to neglect, carelessness, or wilful default".
Subsection 152(4) outlines the limitation periods when the Minister can assess, reassess or make additional assessments after the normal reassessment period. This provision applies to taxpayers or persons including corporations. However, upon a taxpayer's request, subsection 152(4.2) allows the Minister to reassess an individual taxpayer's personal tax returns up to 10 years back, after the normal reassessment period. This provision applies only to individuals and trusts, not corporations. Thus, it is clear that while the Income Tax Act provides reassessment extensions to the normal reassessment period rules, there are statutory limits to the exemptions.
Revera Long Term Care Inc. v. Canada (National Revenue) is a case about misrepresentation attributable to negligence and whether the Minister acting reasonably in refusing to reassess the Applicant under subparagraph 152(4)(a)(i) of Canada's Tax Act due to her (the Minister's) belief of a lack of authority to do so. As a corporation, Revera was obviously incapable of asking the Minister to reassess under subsection 152(4.2). The Federal Court of Canada held that the Minister's decision was unreasonable and confirmed the Supreme Court of Canada's requirement to conduct "textual, contextual, and purposive analysis" in performing legislative interpretation, as per Canada Trustco Mortgage Co. v Canada.
Revera Long Term Care Inc. v. Canada (National Revenue) – The Facts
Between 2007 and 2013 the Applicant over reported its income by over $9 million each year. The Applicant received this income through government grants and incorrectly reported it in its taxable income when it should have been reported by one of its owners, Riviera Inc., which was a tax-exempt federal corporation under Canada's Tax Act. This led to the Applicant over-paying taxes.
Upon realizing this error, the Applicant requested the CRA to reassess its tax filings from 2007 to 2013 taxation years on the basis that such error was due to misrepresentation attributable to negligence and that such reassessments are permitted under subparagraph 152(4)(a)(i) of Canada's Tax Act. The CRA accepted the Applicant's request to reassess its returns for all years except the 2009 and 2010 taxation years because they were statute-barred.
The CRA held that subparagraph 152(4)(a)(i) should not apply to reassess the Applicant's requested adjustments in statute-barred years. The Respondent also argued that subparagraph 152(4)(a)(i) is not intended to allow taxpayers to extend the normal reassessment period at their discretion nor is it intended to be utilized to avoid statute-barred dates.
In regards to the 2009 and 2010 taxation years, the Applicant took a different approach. The time period under which the Applicant may request a reassessment under subparagraph 152(3.1)(b) of the Income Tax Act had expired. The time within which the Applicant can waive the normal reassessment period also expired. Further, the Applicant could not rely on subsection 152(4.2) of Canada's Tax Act as this provision does not apply to corporations. Therefore, the Applicant argued that subparagraph 152(4)(a)(i) allows the Minister to correct an error that is attributable to negligence, even where correcting such error benefits the taxpayer or the error is brought forward by the taxpayer, as it was in this case. The Applicant also challenged the Minister's interpretation of subparagraph 152(4)(a)(i) and filed for judicial review of the Minister's decision to not reassess statute-barred years due to her (the Minister's) purported lack of legal authority.
Revera Long Term Care Inc. v. Canada (National Revenue) – The Issue
The issue before the Federal Court of Canada was the CRA's refusal to reassess the Applicant and decrease its income from its tax returns for years that were statue-barred.
Federal Court of Canada – Analysis and Decision
With respect to jurisdiction, the Minister argued that since the matter related to a taxpayer's dispute over assessment, the proper avenue for deciding this matter was the Tax Court of Canada, and not the Federal Court of Canada. The Federal Court of Canada confirmed its jurisdiction on this matter and held that the issue is not with respect to assessments but with the Minister's decision to reject the Applicant's request for reassessment. The Federal Court of Canada also confirmed that the standard of review is reasonableness, as per the Supreme Court of Canada's leading decision, Dunsmuir v New Brunswick.
As previously mentioned, where the taxpayer or person filed tax returns that included any misrepresentation that is attributable to "neglect, carelessness, or wilful default", subparagraph 152(4)(a)(i) of Canada's Tax Act allows the Minister discretion to reassess the taxpayer after the "normal reassessment period". The Applicant argued that the reported errors should be adjusted as they occurred due to an accountant's gross negligence when filing the original returns. The Applicant also argued that the Minister misinterpreted subparagraph 152(4)(a)(i) of the Income Tax Act contrary to its meaning, language and purpose. In contrast, the Minister argued that subparagraph 152(4)(a)(i) cannot be applied for taxpayers' benefit. The Minister also argued that the Court should give deference to the Minister's interpretation of subparagraph 152(4)(a)(i) of the Income Tax Act which interpreted the provision "both in isolation and in harmony with the scheme of the Act as a whole".
The Federal Court of Canada held that the scope of the Minister's discretion under the Income Tax Act is determined by conducting "a textual, contextual and purposive analysis" of the relevant provisions "to find a meaning that is harmonious with the Act as a whole", as required by the Supreme Court of Canada in Canada Trustco Mortgage Co. v Canada. The Federal Court of Canada explained that there was nothing on the record before it that indicating that the CRA undertook "a textual, contextual and purposive analysis" when making its decision. In fact, the only source of reasoning cited by the Minister with respect to the interpretation of the relevant provisions was an opinion letter provided by a CRA officer within its Legislation Application Section (the "LAS Officer"). The Federal Court of Canada further explained that the LAS Officer's letter lacked any real analysis pertaining to the Minister's scope of discretion and whether it includes the "legal authority to reassess statute barred years". The Federal Court of Canada held that a limitation period analysis is required to determine whether the exception to statute barred dates in subparagraph 152(4)(a)(i) could be applied in this case.
In conclusion, the Federal Court of Canada held that the Minister's decision was unreasonable and sent it back to the Minister for redetermination. The Federal Court of Canada also refused the Applicant's request to the Court to "interpret the provision and provide guidance for the Minister".
Tax Tips – Misrepresentation & Errors in Reported Income
Understanding the statutory exceptions with respect to reassessments and requesting relief from certain limitation periods under the Income Tax Act is crucial and advantages for taxpayers. If you are reassessed outside the normal reassessment period, it is crucial to investigate the reasons for reassessment. A taxpayer reassessed outside the normal reassessment period may be successful in arguing that the assessment is invalid and therefore it should be vacated. If you have questions regarding a notice of reassessment issued after the normal reassessment period, or for inquiries regarding misrepresentation and errors in previously filed returns, please contact our office to speak with one of our experienced Certified Specialist In Taxation Canadian tax lawyers.