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Jim Maroney

:: Notice of Assessment not binding if CCRA should subsequently find an error or fraud

:: In the normal scheme of things, when a personal or corporate income tax return is filed, CCRA will conduct a preliminary review geared primarily at finding glaring problems such as calculation errors. If this review indicates no errors in the return and no further information is required, CCRA will mail a Notice of Assessment to the tax filer.

Notices of Assessment are not binding and should CCRA subsequently discover an error, a Notice of Reassessment will be issued. Under “normal” circumstances CCRA can issue a reassessment at any time within three years from the date shown on the original Notice of Assessment.

This three-year window of opportunity will be tossed aside and the door opened wide if CCRA can prove fraud or misrepresentation of the part of the taxpayer. In this case, misrepresentation includes neglect, carelessness and wilful default.

The issue of misrepresentation was the subject of a recent Tax Court of Canada case that saw the taxpayer assessed beyond the three-year limitation period. The case also shed some light on the methods employed by CCRA to catch misbehaving taxpayers.

In the case at hand, the taxpayer, a stockbroker, failed to file tax returns for the years 1986, 1987 and 1988. Repeated requests to file the delinquent tax returns fell on deaf ears. Fed up with the taxpayer’s stonewalling, the Minister of National Revenue, exercised its powers under the Income Tax Act and raised assessments for the years in question.

Not surprisingly, the fight was on with the taxpayer filing Notices of Objection in early 1991 followed by amended 1986, 1987 and 1988 personal tax returns reporting significant losses from her stock trading activity.

In September 1990 the Globe and Mail and the National Post ran articles describing how the taxpayer had removed funds from the trading accounts of her clients. Later on in 1991, two articles appeared in Toronto newspapers stating that the Investment Dealers Association had banned this same stockbroker for life for some pretty serious stuff – misappropriating funds from clients’ accounts, falsifying documents and making unauthorized trades.

Evidently when the articles appeared in the newspapers, auditors at the Department of National Revenue (now known as CCRA) were asleep at the switch. According to the case, it wasn’t until 1995 when the Department “received” copies of the two newspaper articles – an event that triggered the assignment of an investigator who conducted a further review of the taxpayer’s affairs.

The Department obtained documentation from the brokerage house that employed the taxpayer and determined that the taxpayer had removed some $320,000 from the trading accounts of two clients. This was accomplished by the taxpayer requisitioning cheques from the brokerage firm payable to either one of the two clients, forged the signatures as the client payee and deposited the cheques into her own personal bank account. Cheques were then written from the taxpayer’s personal bank account to her personal trading account to cover off her stock losses. Cheques were also written to clients’ trading accounts to cover unauthorized transactions.

Even though the funds were obtained by illicit means, the taxpayer still had an obligation to report such amounts as income. During her discussions with the Department, the taxpayer failed to disclose the ill-gotten funds despite the significance of such amounts in comparison to her T4’d income of $42,725 for one of the years in question.

Ignorance was also no excuse in this case given the taxpayer was a lawyer who had been called to the Manitoba Bar in 1973. Later on she worked for the Department of Justice Legislation Branch drafting, none other than, tax legislation and regulations and interpretation of legislation for the Privy Council before moving on to the Commercial Law Branch.

In 1996, the Department issued Notices of Reassessments for the years in question despite the fact such years were technically statute-barred. The taxpayer sought to have the Reassessments set aside by invoking the three-year limitation. The taxpayer also sought to avoid the imposition of penalties assessed for making false statements or omissions.

In his analysis of the facts, the judge expressed little sympathy noting the taxpayer “was quite prepared in her direct testimony and in cross-examination to leave out pertinent facts so that the Court might draw the wrong conclusion on the evidence.”

Tossing out the taxpayer’s appeal, the judge noted the “limitation period is lost when a taxpayer has made “any representation” that is false”. Dealing with the imposition of penalties, the judge upheld the Department’s position stating the taxpayer “was quite prepared to say nothing and if National Revenue did not discover the misappropriated money when looking for her claimed losses, that was quite satisfactory”.

This case highlights the fact that CCRA can reassess tax returns outside of the statutory limit. Furthermore, taxpayers in receipt of income, no matter what the source, are expect to report the amounts received on their personal tax returns. The case also reveals that CCRA does act on third-party information such as newspaper articles, television news stories anonymous letters and so on. Finally, once a less-than-honest taxpayer is flushed out, playing coy with the facts won’t help their cause.

...for more Canadian Tax Information

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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