Congratulations! You've survived tax season and filed your return by last
night's midnight deadline. What happens next?
Assuming there are no major "errors" with your return, you will receive a
Notice of Assessment from the Canada Revenue Agency indicating that your return
was "assessed as filed."
These assessments are electronically generated and mean that there were no
computational errors in your return nor were there amounts on your return (such
as employment income, income tax withheld, etc.) that disagreed with the CRA's
own records.
It does not, however, mean that the CRA has completed a full review of your
return and therefore has agreed with every deduction, amount or tax filing
position claimed therein.
Take, for example, the 2002 Federal Court of Appeal case of Dr. and Mrs. Paul
Satinder. During 1996 and 1997, the years subject to reassessment by the CRA,
the couple sold several bonds.
Since the bonds were sold before the actual coupon interest payment date,
they each received some accrued interest owing to them from the purchaser of the
bonds. They included the accrued interest received as part of the calculation of
the capital gain realized on the sale of the bonds, resulting in preferred tax
treatment since capital gains are taxed more favourably than interest income.
The law, however, is quite clear and requires accrued interest received upon
the sale of bonds to be included as interest income and not as part of the
calculation of the capital gain upon sale.
The Satinders tried to argue that since they had been claiming accrued
interest as capital gains each year from 1992 to 1995 and that since the CRA
actually audited those returns and "accepted them as filed," then the CRA should
be prevented from reassessing their 1996 and 1997 returns differently from their
returns for 1992 through 1995.
The court didn't buy that argument and found that in fact the CRA "erred in
accepting incorrect returns. Those errors, assuming they were made, cannot
justify the repetition of the same error in 1996 and 1997." As a result, the
Satinders lost their appeals and had to pay the tax owing.
The CRA has three years from the date of issuing the Notice of Assessment to
request more information, perform an audit and reassess your return if
necessary.
If you disagree with their assessment, it's probably best to try to resolve
the matter by discussing it with your local tax services office, as most issues
can be resolved either by phone or through informal meetings with the CRA.
If, however, you are unable to resolve the issue informally, you may file a
formal Notice of Objection, which must be in writing and must clearly set out
the reasons why you are objecting. The benefit of a formal objection is that the
CRA will generally suspend any collection procedures until the appeal is
resolved.
Finally, don't file an objection simply as a delay tactic as Victor Chin
found out in a 1996 tax case. In listing his reasons for objecting, his Notice
of Objection simply stated "the reason for the appeal will be explained when the
appeal is heard." The judge found that the appeal was a delay tactic and
assessed an further penalty of 5%.