12 Sep 2016
Statute-barred tax returns - Important issues
Written by: Dagmar Zanic, CPA, CA
Tax returns filed by individuals, Canadian Controlled Private Corporations (“CCPC”) and trusts become statute-barred after 3 years from the date of mailing of the original Notice of Assessment and those of non-CCPC’s and mutual fund trusts after 4 years.
There are many exceptions to these rules. For example, if the taxpayer has foreign reporting requirements, the statute-barred period may be extended. In addition, Canada Revenue Agency (“CRA”) has the ability to reassess statute-barred tax returns due to misrepresentation that is attributable to neglect, carelessness or willful default.
There are a number of implications that one should be aware of when dealing with statute-barred years:
- Reassessments do not extend the statute-barred date.
- A tax return or a tax form does not become statute-barred if it is not filed. Some of the examples are partnership returns (T5013) or trust returns (T3) that do not need to be filed (i.e. trust is inactive, partnership has an absolute value of worldwide revenues plus an absolute value of worldwide expenses of less than $2 million, or has less than $5 million in worldwide assets).
- CRA’s ability to attach assets transferred to non-arm’s length individuals of a tax debtor is never statute-barred.
- Carry-over amounts do not get statute-barred. Losses triggered in an earlier year but not applied, will not get statute barred until 3 years after the year in which those losses are ultimately used.
- CRA must reassess statute-barred returns to allow a loss carry-back from non-statute barred returns. Thus, a tax return for a non-CCPC claiming a loss carry-back becomes statute-barred after 7 years.
- If a taxpayer waits 3 years to declare a Capital Dividend (“CDA”), CRA cannot reassess that statute-barred year for additional taxes, but can deny the recognition of capital gain for CDA purposes, as a result of reclassifying the original capital gain as income. This applies even though CRA cannot go back and reassess the original capital gain as income on the applicable tax return.
- If an “arbitrary” assessment is issued without a return being filed, the statute-barred clock starts from the date of mailing of such Notice of Assessment.
- CRA can examine a statute-barred return to determine the cost of an asset for CCA claims in non-statute barred years.
- An unclaimed loss from a statute-barred year is still available. If a taxpayer finds a mistake that would have increased a loss in a previous year, he/she can recognize the increased loss as carried forward from the statute-barred year in the current year.
- The assessment of tax for the statute-barred year is deemed valid and binding notwithstanding any error, defect or omission in the assessment. However, it is valid and binding only for the year assessed. If an error was made in the assessment of the statute-barred year which affects another non-statute barred year, the Minister, in assessing the non-statute barred year, must follow the Act and if there was an error in law in a statutebarred year, that error would be corrected so that the assessment for the non-statute barred year “recognizes this adjustment”.
Dagmar Zanic, CPA, CA is a Senior Tax Manager and member of Manning Elliott's tax team. She advises our individual and corporate clients on a wide range of income tax planning and tax compliance matters. To contact Dagmar, feel free to call her at 604-714-3640 or email her at firstname.lastname@example.org
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.