Statute-Barred Tax Years And The Canada Revenue Agency's Powers To Reassess Tax Years: A Canadian Tax Lawyer's Guide

• Published date: 28 October 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction - What are Statute-Barred Tax Years?

The Canadian tax system is based on the principles of self-assessment, which requires that Canadian taxpayers perform their own due diligence and to report their taxable income to the Canada Revenue Agency ("CRA") for tax assessment. Under subsection 152(1) of the Canadian Income Tax Act, the CRA is bound to examine a taxpayer's filed tax returns "with all due dispatch" to assess that taxpayer for taxes owing or refund entitlements. The CRA is not bound by a taxpayer's return when assessing taxes payable and is entitled under subsection 152(7) of the Canadian Income Tax Act to assess a taxpayer in its discretion. It may do so in the case where a taxpayer reports taxable income incorrectly on a given return, or where a taxpayer fails to file a tax return. This rule exists to prevent taxpayers from abusing the tax system by misreporting income or refusing to file their tax returns, in order to avoid or escape their tax debts.

The CRA is also entitled to reassess a taxpayer's taxes payable if it discovers any issues with a taxpayer's return after it has issued an initial tax assessment. This power to reassess is not unlimited, however, and the Canadian Income Tax Act does aim to afford Canadian taxpayers with protection against unfettered and indefinite tax reassessments by the CRA. Subsection 152(3.1) of the Canadian Income Tax Act entitles the CRA to a "normal reassessment period" to reassess a taxpayer's tax year at its discretion once an initial tax assessment has been issued. This "normal reassessment period" is defined under subsection 152(3.1) of the Income Tax Act, and begins counting from the earlier of:

• The mailing date of the original notice of assessment by the CRA; or,
• The mailing date of the notification from the CRA that no tax is payable.
• The length of the normal reassessment period under subsection 152(3.1) will vary, depending on the type of taxpayer:
• For mutual funds and corporations other than Canadian-controlled private corporations, or CCPCs, the normal reassessment period is defined as four years;
• For all other individual taxpayers, as well as for CCPCs, the normal reassessment period is defined as three years.

Once the normal reassessment period has expired, that tax year is "statute-barred" from reassessments. The power of the CRA to issue a reassessment for that year is not an automatic right and must be justified under the applicable conditions of the Income Tax Act. Subparagraph 154(4)(a)(i) of the Income Tax Act provides one such condition...