Made a mistake on your tax return? Here's how to change your Canadian tax return through the tax objections process

Introduction: The Tax Objections Process

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

Subsection 165(1) of Canada's Income Tax Act gives every taxpayer the right to object to a tax assessment or tax reassessment, subject to compliance with statutory time limits and other procedural requirements. A taxpayer can assert this objection right by means of filing a notice of objection. A notice of objection commences the Canada Revenue Agency's administrative dispute-resolution process, and the CRA's appeals division will assign an appeals officer to review the merits of the taxpayer's objection.

If the CRA's appeals officer renders an unfavourable decision, the taxpayer may continue the dispute by filing a notice of appeal to the Tax Court of Canada. But a taxpayer cannot appeal to the Tax Court without first filing a notice of objection. That is, even if the taxpayer wants to take the dispute directly to Tax Court, the taxpayer must still file a notice of objection with the CRA's chief of appeals first. This requirement speaks to how crucial it is for taxpayers to understand the tax objections process.

Canada's Income Tax Act imposes strict time limits on the right to object to a tax assessment. Generally, a taxpayer must object within 90 days from the date on the tax assessment or tax reassessment. If the taxpayer misses the 90-day notice of objection deadline, the taxpayer may apply for a deadline extension, but the taxpayer must apply for the extension within one year of the objection deadline, and the application must demonstrate (amongst other things) that the taxpayer had a bone fide intention to file an objection within the 90-day deadline.

A taxpayer who fails to object or apply for an extension within the statutory deadlines has thereby abandoned the right to dispute the impugned tax assessment. No relief from the resulting tax is available — even if the tax assessment is obviously incorrect. (Although the resulting tax can no longer be challenged, the taxpayer may still qualify for interest relief or penalty relief by filing an application under the CRA's taxpayer relief program.)

In the vast majority of cases, a taxpayer will file a notice of objection to dispute a tax reassessment stemming from a CRA tax audit.

But can you object to a tax assessment that resulted from — and reflects — your own tax return? And if so, why would you even want to object to your own tax return?

The right to object to your own income tax return

Canadian courts have long recognized a taxpayer's right to object to a tax assessment reflecting the taxpayer's own income tax return. In Delle Donne v The Queen, 2015 TCC 150, the Tax Court of Canada acknowledged that it "is well established that it is open to a taxpayer to amend his return through the appeal process."

Over a decade earlier, however, in The Queen v Imperial Oil Ltd, 2003 TCC 46; aff'd 2003 FCA 289, the CRA sought to extinguish this right. About 16 months after the taxpayer, Imperial Oil, a large multinational oil-and-gas company, filed its Canadian income tax return, the CRA finally issued a notice of assessment. Although the tax assessment reflected exactly what Imperial Oil's return had reported, the taxpayer filed a notice of objection.

Imperial Oil's tax objection notably claimed foreign-exchange losses that hadn't been claimed in Imperial Oil's tax return. The CRA's appeals division hadn't dealt with the objection within 90 days. As a result, the taxpayer had the option of advancing the dispute directly to the Tax Court, and that's exactly what the taxpayer did.

In response, the CRA filed a motion asking the Tax Court to strike Imperial Oil's entire appeal. The CRA argued that a taxpayer shouldn't be permitted to object to a tax assessment that accepted all the claims made in the taxpayer's income tax return. According to the CRA, the initial tax assessment (often called a "quick" or "desk" assessment), which is substantially based on a taxpayer's return, was not an "assessment" within the meaning of subsection 165(1) of the Income Tax Act. Therefore, alleged the CRA, a taxpayer cannot validly object to an initial tax assessment. The only assessment to which a taxpayer could object, continued the CRA, was a tax assessment resulting from a tax audit during which the CRA made adjustments contrary to the taxpayer's return.

The Tax Court had none of it. First, the Act makes no distinction between a tax assessment based on the taxpayer's own return and a tax assessment resulting from adjustments by the CRA after conducting a tax audit. Second, the Act contains explicit limitations on a taxpayer's right to object, and none of these limitations preclude a taxpayer from objecting to an assessment based on the taxpayer's own return.

After failing to persuade the Tax Court, the CRA pursued the issue before the FCA.

The FCA sided with the Tax Court's decision and reasoning. The appellate court also rejected the CRA's arguments that allowing the taxpayer to object to the taxpayer's own tax filings would be inconvenient for the CRA; that such objections would diminish the CRA's capacity to conduct tax audits; and that such objections deny the CRA the procedural advantage of relying on factual assumptions in tax litigation.

When dispatching these arguments, the appellate court noted the following:

• "Nothing in the Income Tax Act requires a taxpayer to delay an objection or appeal to accommodate the administrative convenience of [the CRA]."
• "The [CRA's] right to audit and to reassess within the statutory limitation periods exists regardless of any ongoing objections or appeals."
• "The fallacy of [the argument that the taxpayer's objection would deny the CRA's ability to rely on factual assumptions] is demonstrated by this very case, in which certain foreign exchange losses are claimed for the first time at the objection stage. The entitlement to those losses is now an issue in the Tax Court appeal. The [CRA] has stated in the reply to the notice of appeal that [it] has no knowledge of the foreign exchange losses and puts the [taxpayer] to the 'strict proof thereof.' The [CRA] can be in no better strategic position than that."

The Federal Court of Appeal recognized not only that taxpayers have a right to object to their own tax returns, but also that taxpayers frequently do so as a matter of course without causing the administrative problems that the CRA alleged:

[I]t is reasonably common for taxpayers to file objections to assessments based on their own returns. This is routinely done, for example, if a taxpayer wishes to preserve the potential right of appeal while the Minister deals with a request to allow a deduction that the taxpayer simply forgot to claim. Alternatively, a taxpayer might choose to assert a controversial claim for the first time in a notice of objection because a negative outcome at that stage will not result in tax liability. Many such claims could be considered fairly without a complete audit.

The appellate court appreciated that the taxpayer had "purposefully chosen tactics that place[d] the [CRA] in an unfamiliar and unwelcome position." Yet the court refused to "accept the [CRA's] submission that a taxpayer that chooses to assert a statutory right to object to an assessment, and then to appeal, is abusing the process of the Tax Court."

In the end, the CRA had failed to extinguish the taxpayer's right to object to a tax assessment stemming from the taxpayer's own return.

Filing strategic tax objections to your own tax returns — Corrections, amendments & controversial claims

The Imperial Oil Ltd decision confirms that you have the right to object to your own tax return. But you may be wondering why you might want to. There are a number of reasons, ranging from simple to strategic.

First, you may simply want to correct an omission in your income tax return while preserving your objection rights and suspending CRA tax collection action. Suppose that you forgot to claim a tax deduction when filing your personal income tax return this year. You could attempt to correct that error by filing a T1-adjustment request claiming that tax deduction. But the CRA is not legally obligated to process a T1-adjustment request — much less obligated to process the request within a certain timeframe.

The problem, as we previously mentioned, is that the Income Tax Act imposes strict time limits on the right to object to a tax assessment. So, if you haven't filed a tax notice of objection, it's entirely possible that the CRA may ignore your T1-adjustment request until your objection rights expire, leaving you with no recourse. To prevent that outcome, your tax lawyer can object to the tax assessment arising from your own tax return while also submitting your T1-adjustment request. This preserves your objection rights while the CRA processes your T1-adjustment request.

Also, the CRA cannot enforce upon income tax debts until the tax objection has been resolved. So, in addition to preserving your tax objection rights, the filing of a notice of objection will also preclude the CRA's tax collectors from taking collections action (e.g., garnishments or liens) relating to the tax debt for the year under dispute. If the CRA processes the request without issue, you can abandon the tax objection. If, on the other hand, the CRA ignores your T1-adjustment request, you can still fall back on the tax objection, and take the issue to the Tax Court of Canada if necessary.

Another, more strategic, reason is that you may want extra time to consider whether to claim a tax deduction or tax credit. This is especially true for tax deductions, tax credits, or other tax benefits arising from recently enacted, complex tax legislation. You may require additional time to determine whether you qualify for tax benefits relating to novel, complex tax provisions. You risk incurring interest or tax penalties if you file your tax return late or if you prematurely claim the tax benefit only to later discover that you don't qualify. So, you can file your income tax return on time without claiming the tax benefit. When the CRA issues the initial tax assessment, your lawyer can then file a notice of objection, giving you the requisite additional time to consider whether you qualify for the tax benefits.

Similarly, by instructing your lawyer to object to your own tax return, you can raise a controversial tax claim without risk of incurring tax, interest, or penalties should your claim fail at the objection stage. By contrast, if you had claimed the controversial tax benefit in your income-tax return, you'd likely incur tax, interest, and penalties should the CRA audit and deny the claim. If you raise the tax claim for the first time at the tax-objection stage, there's no risk of incurring additional tax, interest, or penalties should the CRA's appeals division ultimately deny your tax objection.

Finally, the Imperial Oil Ltd decision illustrates how objecting to your own tax return can serve as a cogent tax-litigation strategy. By objecting to the taxpayer's own income tax return and accelerating the Tax Court appeal, the taxpayer managed to get the jump on the CRA's tax lawyers at the Department of Justice. Most tax objections follow a tax audit, during which the CRA's tax auditors wield significant power to gather information about the taxpayer, the taxpayer's business operations, and the taxpayer's finances. Moreover, during the tax-audit process and the subsequent tax-objection process, the CRA enjoys repeated low-stakes opportunities to hear out the taxpayer's arguments and develop strategies to rebut them. By the time that the dispute gets to the Tax Court, the CRA and its lawyers at the Department of Justice enjoy a notable informational and positional advantage. In Imperial Oil Ltd, the CRA was denied that advantage.

Before attempting to pursue these or any other zealous tax-litigation strategies, you should seek advice from an experienced tax litigation lawyer. As with other forms of litigation, tax litigation is subject to numerous procedural rules governing almost every aspect of the lawsuit, including specific deadlines, acceptable evidence, settlement negotiations, and the contents of pleadings. Aggressive strategies can backfire without a knowledgeable lawyer by your side.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Taxpage. Author photo courtesy Rotfleisch & Samulovitch P.C. Image by iStock.