30 Apr 2017
The Canada Revenue Agency (CRA) needs methods to enforce compliance. When applied even-handedly, financial penalties play an important role. But a tax provision that’s been on the books since 1951 goes too far.
Income Tax Act subsection 164(1) unfairly prevents a corporation or trust from obtaining a refund if the return is filed more than three years after year end.
For corporations, the rule can cause hardship in one of two ways:
- Where a corporation prepays instalments based on its estimated tax for the year but, for some reason (e.g., ownership change), fails to file the return within three years after the year end, any overpaid instalments cannot be refunded — even if the corporation’s actual tax bill for the year was significantly lower than amounts prepaid.
- When corporations fail to file late returns after the CRA has made requests to file in writing, the CRA can issue an arbitrary assessment. Any assessed amounts paid by the corporation or seized from it in a collection action cannot be refunded — even if the corporation eventually files the return and the amount of tax owed is less than the amount arbitrarily assessed.
Back in 1991, Chief Judge Couture of the Tax Court of Canada called for the provision to be removed from the books. He said the rule is “a sort of confiscation of the appellant’s property,” “regrettable” and an “abrogation of a taxpayer’s right of ownership.” He also found it “deplorable” that taxpayers are given only three years “to claim their property.
Additionally, because the rule applies based on the taxpayer’s year end, rather than when the return was due, the sanction bears no relation to the length of time that the return is actually late. For example, since corporate tax returns are due six months after the corporation’s year end, this means the provision kicks in when the return is only 30 months late.
The CRA has discretion to waive the provision for individuals. But no relief is allowed for corporations or, as of 2016, any trust other than a graduated rate estate. Due to recent CRA policy changes, a previous work-around that allowed for the transfer of refund balances to a later year is no longer allowed.