File Tax Returns For Your Incorporated Firm On Time -- Or Risk Losing Your Refund
If your business is incorporated and it's owed a tax refund, you better be sure that your corporate tax return is filed on time. If it isn't, you risk permanently forfeiting your money. That was the harsh lesson learned in Tax Court earlier this year in a case involving numbered company 3735851 Canada Inc.
Under the Income Tax Act, if a corporation has not filed a tax return within three years of the end of its taxation year, it is precluded from claiming a tax refund for that year. Why would a company file late? Sometimes, it's due to simple oversight. Other times, it may be based on an assumption that no tax return was required if a refund was expected.
In the case of numbered company 3735851 Canada Inc., the firm successfully objected to a CRA assessment in court and was issued a "Notice of Reassessment," resulting in a corporate tax refund of more than $25,000. Yet the CRA refused to process this refund because the company's tax return for that year was not filed within three years of the deadline.
In an effort to get its refund, the company took the CRA to Tax Court, but the judge ruled that the court has no jurisdiction over refund issues since its mandate, under the Tax Act, is limited to considering the correctness of an assessment or reassessment. Since the company was successful in objecting to the original assessment, it had nothing to dispute. Therefore, the judge concluded that the court had no jurisdiction to order the CRA to issue the refund.
This recent case is not the first time that a taxpayer has been precluded by the CRA from collecting a refund by the three-year rule. In 1991, the Chief Justice of the Tax Court, who heard a similar case, was so frustrated by having to deny a taxpayer a refund due to this rule that he wrote: "I find it difficult to justify the fact that… in a so-called democratic society which purports to protect the civil liberties of its people a provision (such as this three-year rule) is still in force."
As a result, the Act was amended shortly thereafter to allow individuals 10 years to request a refund. Yet the three-year rule still exists for corporations. In 1993, however, corporations were granted the option of applying a refund to an amount owing for a previous or subsequent year.
But if no amount is owing, then the refund may hang in limbo indefinitely, making this recent case an important reminder to corporate taxpayers to file on time.