Introduction – Objections and Appeals by Large Corporations
If your business is subject to a tax audit by the Canada Revenue Agency ("CRA") and you think the results of the audit are incorrect you can dispute the result. The first step in disputing the results of a tax audit is to file a notice of objection with the CRA with respect to the tax reassessments issued due to the tax audit, usually by retaining an experienced tax firm. The notice of objection must be filed within 90 days of the date the reassessments are issued. Eventually the Canada Revenue Agency will assign an appeals officer to your file who will consider your reasons for disagreeing with the reassessments. That appeals officer will consider your notice of objection and also any subsequent written or oral submissions your Canadian tax lawyer makes. The appeals officer will then decide whether to confirm, vary, or vacate the tax reassessments.
If you are not satisfied with the decision of the appeals officer your knowledgeable Canadian tax litigation lawyer can appeal to the Tax Court of Canada. It is also possible to skip interacting with an appeals officer and appeal directly to the Tax Court of Canada if 90 days have elapsed since you served your notice of objection without an appeals offer notifying you that the CRA will be confirming, varying, or vacating your reassessments.
When a large corporation decides to use this process to dispute tax reassessments it is subject to special procedural restrictions which must be navigated to have its case considered properly. Large corporations are also more exposed to collections action by the Canada Revenue Agency when they are disputing income tax amounts owing than other taxpayers.
What is a "Large Corporation" – Objections and Appeals by Large Corporations
A "large corporation" for the purposes of the Income Tax Act is a corporation with taxable capital employed in Canada of greater than 10 million dollars at the end of its tax year. The taxable capital employed in Canada has a highly technical definition. The basic intuition behind the definition is that a corporation's taxable capital is the sum of its debt and shareholder's equity minus the debts owed to the corporation by other persons and the equity interests in other businesses owned by the corporation. Taxable capital employed in Canada is then the corporation's taxable capital pro-rated for the portion of its income that was earned in Canada. A corporation is also a "large corporation" if it is part of a group of related corporations with a combined taxable capital employed in Canada of greater than 10 million dollars. If you have questions regarding determining the taxable capital employed in Canada of your corporation it is essential to consult an expert Canadian tax advisor.
Some types of corporations are exempt from large corporation status even if they would otherwise qualify. The list of exempt types includes:
- corporations that were non-resident owned investment corporations throughout the year,
- corporations that were bankrupt at the end of the year,
- corporations that were tax exempt throughout the year (e.g. non-profit organizations, registered charities, municipalities),
- deposit insurance corporations, and
- cooperative corporations whose principal business was marketing natural products belonging to or acquired from its members or customers.
Notices of Objection for Large Corporations – Objections and Appeals by Large Corporations
When a taxpayer objects to a reassessment, the notice of objection that the taxpayer files is supposed to set out the reasons for objection and all the relevant facts. If the taxpayer is a large corporation, the notice of objection prepared by the Canadian tax professional on behalf of the taxpayer is subject to additional requirements. The notice of objection filed by a large corporation is required to:
- reasonably describe each issue to be decided,
- specify in respect of each issue, the relief sought, expressed as the amount of a change in a balance of tax or taxable income, or a balance of undeducted outlays, expenses or other amounts of the corporation, and
- provide the facts and reasons relied on by the corporation in respect of each issue.
It is sometimes possible for a large corporation to fix some aspects of its notice of objection after it has been filed. If the CRA believes the large corporation has failed to properly specify the relief sought for each issue or to properly provide the facts and reasons for each issue, the Canada Revenue Agency may send a letter to the large corporation requesting the missing information. If that information is provided to the CRA in writing within 60 days of when the Canada Revenue Agency made its request then the large corporation will be deemed to have met the corresponding requirements. The Income Tax Act does not provide for a method to fix a notice of objection made by large corporation that failed to include an issue to be decided. The Canada Revenue Agency is also not required to write to the large corporation with respect to missing information.
Limitations on Appeals and Subsequent Objections – Objections by Large Corporations
Failing to comply with the notice of objection requirements above does not invalidate the large corporation's notice of objection, but it does effectively remove the large corporation's ability to pursue any issues that were not described in the manner specified above.
When a large corporation's notice of objection fails to comply with the requirements mentioned above with respect to an issue, then the that issue may not be included in the large corporation's appeal to the Tax Court of Canada. The issues that were adequately described in the large corporation's notice of objection can still be appealed.
If an objection made by is resolved by the appeals officer by a issuing a new reassessment to vary the reassessment that the large corporation objected to, it is possible to object to that newly issued reassessment. However, the large corporation can only pursue issues that were raised in the large corporation's previous notice of objection and only pursue relief up to the amounts specified for those issues in the large corporation's previous notice of objection.
There is an exception to these restrictions however. If CRA issues a reassessment as a result of an objection, and that reassessment incorporates an issue that was not a part of the assessment that was the subject of the original objection, then the restrictions described above for both appeals and objections do not apply with respect to that issue.
Enhancement to CRA Collections – Large Corporations
The Canada Revenue Agency has extensive powers to take legal action to collect outstanding income tax owed by taxpayers. Normally the CRA cannot take collection action in the first 90 days after an assessment for income tax was issued to a taxpayer. Similarly, when a taxpayer has objected or appealed an assessment of income tax, CRA's ability to take legal action to collect the amounts owing is suspended until after the resolution of the objection or appeal. Note that this protection is for ordinary income tax, not the obligation that employers have to remit income tax withheld from employees or the obligation to remit non-resident withholding tax.
Large corporations only enjoy a more limited form of this protection. In the 90 days following the date an income tax assessment is issued, the suspension of collection powers only applies to half of the amount assessed to the large corporation. In addition, the if the large corporation objects or appeals the assessment, the suspension of collection powers only applies to half of the amount of income tax in controversy.
Tax Tips – Objections and Appeals by Large Corporations
If your business is operated by corporation which may be a large corporation then it is important to retain our experienced certified specialist in taxation Canadian tax lawyer to assist you with any tax disputes before the objection is filed to ensure that you meet all of the CRA requirements. Determining whether a particular corporation is a large corporation can be a difficult exercise that requires specialized tax expertise. If your corporation is a large corporation, you need expert tax assistance in any tax disputes because large corporations are held to a high standard, and failure to meet that standard right from the beginning of a dispute can result in permanent damage to your corporation's tax appeal.
If your large corporation is involved in a tax dispute it is very important for your expert Canadian tax advisor to correctly identify all of the potential issues and incorporate them into your notice of objection. Missing an issue can permanently remove your ability to pursue that issue with the CRA or in court. If there is uncertainty about the amount involved in a particular issue, it may be wise to use a high estimate of the amount of relief you are entitled to avoid restricting your ability to get relief.
When engaging in any significant transaction, it is worth connecting tax planning to consider whether that transaction will transform any of your corporations into a large corporation. Financings, acquisitions, amalgamations, and reorganizations can all effect whether a corporation is a large corporation for the purposes of the Income Tax Act. It is also worth noting that a corporation with low taxable capital employed in Canada may nonetheless be a large corporation if it is related to other corporations which have larger taxable capital employed in Canada.