What is an Income Tax Statute-Barred Period?
When taxpayers are initially assessed for income tax or GST/HST, they receive a Notice of Assessment. If changes are needed to a prior assessment, the CRA issues a Notice of Reassessment, which overrides earlier assessments. Taxpayers can receive multiple Notices of Reassessment for the same tax year or reporting period.
The CRA has a limited timeframe, called the ordinary reassessment period, during which it can reassess a given tax year or reporting period. Once this period ends, the year or reporting period becomes statute-barred. However, the CRA can reassess beyond this period if it demonstrates that errors were caused by carelessness, neglect, willful default, or fraud.
The purpose of the statute-barred period is explained in College Park Motors Ltd. v. The Queen:
“It balances the need for taxpayers to have some finality in respect of their taxes for the year with the requirement of a self-reporting system that the taxing authority not be foreclosed from reassessing in those instances where a taxpayer's conduct...has resulted in an assessment more favorable to the taxpayer than it should have been.”
Statute-Barred Timing for Income Tax
Under section 152(3.1) of the Income Tax Act:
- Four years: For mutual funds and corporations that are not Canadian-controlled private corporations (CCPCs).
- Three years: For all other taxpayers.
The reassessment period starts after the CRA mails the original Notice of Assessment or notification that no tax is payable.
Statute-Barred Timing for GST/HST
Under subsection 298 of the Excise Tax Act:
- GST/HST Reporting Periods: Four years from the later of:
- The deadline to file a return.
- The day the return is actually filed.
- GST/HST Rebates: Four years from the date the rebate application is submitted.
The reassessment period only begins once the relevant return is filed.
Waiving the Ordinary Reassessment Period for Income Tax
Taxpayers can explicitly waive the ordinary reassessment period by filing Form T2029. This waiver can later be rescinded. Taxpayers often waive the period if a reassessment would result in a benefit—for example, correcting an overstated income from a statute-barred year during an audit.
In some cases, the CRA may argue that a taxpayer has implicitly waived the reassessment period. Professional guidance can help ensure waivers are used strategically and appropriately.
Pro Tax Tip: Filing Tax Returns to Trigger Statute-Barred Periods
Income Tax: Filing a tax return triggers an initial assessment and starts the clock on the reassessment period. Even if you are not required to file a return, submitting one ensures that the ordinary reassessment period begins. Without filing, the CRA can audit indefinitely.
GST/HST: Avoid the temptation to delay filing. While the reassessment period starts after filing, not submitting returns can lead to arbitrary assessments, where the CRA estimates taxes owed. These assessments often result in higher tax liabilities than what the taxpayer would owe with accurate filing.
Timely filing minimizes exposure to extended reassessment periods and provides taxpayers with greater certainty regarding their tax obligations.
Challenging CRA Reassessments After the Statute-Barred Period
If the CRA attempts to reassess after the ordinary reassessment period, it must prove that the error resulted from carelessness, neglect, willful default, or fraud. Taxpayers can challenge such reassessments by demonstrating that:
- The error was minor and unintentional.
- There was no fraudulent or negligent conduct.
Consulting with an accountant can help prepare a robust defense against statute-barred reassessments.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.
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