Filing a Notice of Objection Could Result in Increased Assessed Tax Payable

Should clients be advised that there is little risk to filing a notice of objection because they cannot do worse than the amount of tax payable on the CRA reassessment? Advisers should be cautious about providing such advice to clients: the CRA Appeals Manual identifies several situations where “upwards adjustments” are possible. Most of these situations relate to new information coming to light as further CRA attention is given to the taxpayer. In addition, the decision of the FCA in Petro-Canada (2004 FCA 158) supports upward adjustments by the CRA so long as the adjustment is accomplished through a new reassessment within the applicable limitation period.

Section 4.22 of the CRA Appeals Manual 2013-09 (redacted version available through the CCH and Carswell tax services) sets out the circumstances in which a CRA appeals officer has the ability to resolve an appeal by increasing a disputed reassessment or decreasing a downward reassessment. Three examples are given:

  • An objection was received in respect of a portion of a moving expense that had been disallowed. The review of the file showed that the objector had moved to a new residence in Canada from a former residence in the United States. Therefore, the entire moving expense (not just the portion at issue on objection) was ineligible and would be disallowed.

  • An individual’s return was reassessed to disallow a business loss claimed on the basis that there was no reasonable expectation of profit. At the objection stage, the objector provided new documentation, which included sales receipts that were not included in the taxpayer’s gross income. As a result of these sales receipts, the loss would be converted to a net profit from business.

  • The processor of a reassessment failed to follow the instructions of the auditor to add subsection 163(2) penalties; this was not discovered until after a notice of objection had been filed.

Case law establishes the validity of an upward adjustment (or any other adjustment) made within the applicable reassessment period through the issuance of a new reassessment (Petro-Canada, 2004 FCA 158). The new reassessment would nullify the previous reassessment and any notice of objection filed against it (and therefore the notice of objection would have to be refiled). However, the validity of an upward adjustment within this period that results from the CRA’s internal appeals process has not yet been adjudicated by a court.

One argument against validity in the internal appeals situation is the well-known principle that the minister is not permitted to “appeal” its own reassessment to the TCC (Harris, [1964] CTC 562 (Ex. Ct.)). Although this principle was established in the context of appeals to the courts, it might be thought to carry some weight in preventing the CRA from taking a similar action through its internal appeals process. This principle is likely to be of particular value in preventing such upward adjustments beyond the normal reassessment period. In particular, Klemen (2014 TCC 244) held that reassessments outside of the normal reassessment period and through the internal appeal process cannot increase the taxpayer’s tax payable unless the subsection 152(4) circumstances (misrepresentation or fraud) apply (see also The Queen v. Anchor Pointe Energy, 2003 FCA 294; 943372 Ontario Inc. v. The Queen, 2007 TCC 294; and The Queen v. Geoffrey Last, 2014 FCA 129).

On the other hand, the CRA’s argument in favour of the validity of an upward adjustment would likely be that the adjustment is a matter of administrative law and completely separate from the legislatively sanctioned judicial process. The administrative-law argument suggests that the minister would be given a wide berth in devising internal procedures to be followed. Further, according to this argument, even if a taxpayer had a “legitimate expectation” that the CRA would not assess a higher amount, that expectation cannot bind CRA Appeals on the correct (legal) application of the statute to the taxpayer’s facts.

Amanda Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon

Canadian Tax Focus
Volume 4, Number 4, November 2014
©2014, Canadian Tax Foundation