The CRA sent a Canadian-controlled private corporation (Opco) a Notice of Assessment (First Assessment) for its taxation year that reflected that its tax liability was assessed as filed. In an audit of Opco's taxation year, the CRA made some adjustments to Opco's taxable income, which were reflected in another Notice of Reassessment (Second Assessment) for the taxation year. Opco did not object to this Second Assessment.
The CRA performed another audit of Opco before the end of its normal reassessment period (as defined in subsection 152(3.1)), and issued another Notice of Reassessment (Third Assessment) for the taxation year. The Third Assessment reflected adjustments to Opco's taxable income that were in addition to adjustments in the Second Assessment.
Opco filed a Notice of Objection for the Third Assessment (within 90 days of it having been sent by the CRA, under paragraph 165(1)(b)) that included objections to adjustments made by the CRA in the Second Assessment.
At issue is whether Opco's objection to the Third Assessment could include an objection to the adjustments that Opco had accepted when the CRA issued the Second Assessment.
The CRA auditor asked Rulings whether its response would be different had the Third Assessment been issued beyond the normal reassessment period, or if Opco was a large corporation (as defined in subsection 225.1(8)).
Rulings responded that, in opposing a reassessment, a taxpayer is opposing the tax liability established by the CRA, as well as any assessed interest and penalties. Rulings noted that the Income Tax Act does not limit a taxpayer's right to object to more elements than the CRA's adjustments in computing its income for the purpose of the reassessment.
Rulings referred to jurisprudence to support its comments. In Imperial Oil (2003 TCC 46), the CRA argued that a taxpayer could not object to a Notice of Assessment that fully reflected the taxpayer's submissions under subsection 165(1) (i.e., the taxpayer was assessed as filed). However, the Tax Court of Canada (TCC) rejected the CRA's argument, stating that:
There is no justification as a matter of common sense or as a matter of statutory interpretation to say that an assessment to which one can object or from which one can appeal must be an assessment based upon an audit ... or in which the [CRA] assesses in a manner that is inconsistent with the way in which the taxpayer has filed. If Parliament wishes to restrict the sort of assessment to which an objection can be filed or from which an appeal can be taken it is perfectly capable of doing so.
The Federal Court of Appeal agreed with the TCC Imperial Oil decision (in 2003 FCA 289), stating that the CRA's argument that a taxpayer cannot object to an assessment that makes no changes to the taxpayer's filed income tax return should be rejected because:
According to subsections 165(1) and 169(1) of the Income Tax Act, the right to object and appeal may be asserted when the Minister makes an assessment. These provisions make no distinction between an objection to an assessment that is inaccurate because of an act or omission of the taxpayer, and an objection to an assessment that is inaccurate because of an act or omission of the Minister, whether the result of an audit or not.
Finally, Rulings noted the Federal Court of Appeal's comments in Loewen v. The Queen ( 3 C.T.C. 6), that a reassessment includes the initial assessment as the "tax base — or foundation — of a reassessment [that] normally includes all the facts relating to the increase in taxable income of the taxpayer".
In the current situation, Rulings noted that, by objecting to the Third Assessment, Opco objected to the tax established by the CRA for the taxation year. Based on jurisprudence, the CRA believes that the Act does not limit the grounds for this objection, which may be related to factors other than the adjustments made in calculating Opco's income.
Rulings confirmed that its comments would be the same if the Third Assessment was issued beyond the normal reassessment period or if Opco was a large corporation.
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