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CRA's Reach Beyond Limitation Periods

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Voluntary disclosures (“VDs”) are permitted for Canadian tax purposes under the Canada Revenue Agency’s (the “CRA”) Voluntary Disclosures Program (the “VDP Program”), and their importance is highlighted by a recent case where the CRA reached back into history to assess a taxpayer prior tax exposure.

CRA Power to Reassess Beyond Limitation Periods

Typically, the CRA can reassess a taxpayer within four years for GST/HST matters and three years for income taxes:  see paragraph 298(1)(a) of the Excise Tax Act (the “ETA”);  see subsection 152(3.1) of the Income Tax Act (the “ITA”).

Beyond these periods, reassessments are generally barred unless the CRA can establish that, among other things, the taxpayer made a misrepresentation attributable to neglect, carelessness or wilful default:  see ETA 298(4)(a) and  ITA 152(4)(a).

Yadgar v. The King

In Yadgar v. The King, the CRA assessed the taxpayer for over $500,000 in unreported income, reaching back to 2006-2009 –alleging misrepresentation attributable to neglect and carelessness. 

Before the Tax Court of Canada (the “TCC”), the taxpayer, who had studied physics in university in Afghanistan before coming to Canada to work as a butcher, admitted that there were errors in his tax returns but argued that they were not careless or wilfully made because his accountant had prepared his returns. 

The TCC rejected the taxpayer’s argument, holding that (see paragraph 22) “the Appellant took no steps to confirm the accuracy of his returns” and did not even “ask any questions”.  In the result, the TCC found that the Appellant was NOT permitted to shield himself from liability for past taxes due, and that the CRA was permitted to assess.  The Federal Court of Appeal (the “FCA”) then upheld that decision.

VDs as a Protective Shield

Had Mr. Yadgar come voluntarily forward to disclose his liabilities, he might have found that VDs are an incredibly effective way in which taxpayers can deal with latent GST/HST and income tax liabilities.  If initiated on a voluntary basis and complete, the CRA will generally accept late tax filings and payments without pursuing additional penalties, including the gross negligence penalties and criminal prosecution.  In some instances, the CRA will also provide interest relief.

Takeaways

The CRA seems to be serving notice that it will pursue latent tax liabilities no matter how many years have passed.  In these cases, the TCC is holding taxpayers to extremely high standards, finding “carelessness” even in the face of professional and accounting advice.

The CRA is Canada’s largest law enforcement agency and has enormous audit resources.  Taxpayers with hidden tax liabilities ought to properly view them as potentially findable by the CRA, and assessable in due course.

Voluntary Disclosures could be a protective shield in these situations.

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