One of the most popular questions I get asked this time of year is how long
does one have to wait for the government to reassess your tax return. Or, more
to the point, "How many years do I have until I can be sure I've gotten away
with it?" The truth is, it depends.
The general rule as set out in the Income Tax Act states that the government
has three years from the mailing date printed on your Notice of Assessment to
come back and reassess you.
For example, let's say Laura files her 2006 return this weekend using the
CRA's electronic NETFILE system, which is now back online. If she's owed money,
she should expect her tax refund to be deposited into her bank account in about
10 business days. Her Notice of Assessment would arrive in the mail shortly
If Laura's 2006 Notice of Assessment was mailed out on March 30, 2007, the
CRA would have until March 30, 2010 to reassess her 2006 return.
But that doesn't mean that on March 31, 2010, she can breathe a sigh of
relief about those questionable business expenses or the aggressive tax shelter
she claimed in 2006.
There are two special rules in the Tax Act that cover each of these
situations. The first rule states that if a taxpayer has made "any
misrepresentation that is attributable to neglect, carelessness or wilful
default, or has committed any fraud in filing," the CRA has unlimited time to go
back and reassess that person for tax owing.
As well, sloppy mathematical calculations, if material, could make you
susceptible to an unlimited reassessment period. A 1996 case of a "misplaced"
decimal had a taxpayer reporting a $711,394 capital gain instead of a $71,139.40
gain. The CRA didn't catch the error until four years later -- one year past the
normal three-year reassessment time frame.
The CRA successfully argued in court that the taxpayer would have known about
an error of this magnitude had he exercised reasonable care in reviewing his
return, notwithstanding the fact it was prepared by his accountant.
The second rule that exempts the CRA from the normal three-year reassessment
period is in situations involving a tax shelter investment financed by no
recourse debt. The rule, which came into force in 1995, has never been
challenged in court -- until this past December.
In 1997, Bert Tolhoek invested in a computer software tax shelter designed to
take advantage of favourable tax depreciation rules. His 1997 return was
assessed as filed in May, 1998. He was then reassessed in November, 2003, when
the CRA denied a portion of his tax shelter deduction.
The judge ruled that the CRA's reassessment was valid, concluding that one of
the purposes of the unlimited time frame for reassessment was "to combat
potential abuse by tax shelters."
Mr. Tolhoek has appealed the decision. - Jamie Golombek, CA, CPA, CFP, CLU,
TEP is the vice-president, taxation and estate planning, at AIM Trimark
Investments in Toronto.