Proposed changes to the Income Tax Act may sit on the table as “draft” legislation for years before being enacted. When the enactment of a particular provision is uncertain, on what basis should taxpayers file their tax returns?
The Canada Revenue Agency (CRA) has recently re-confirmed its expectation that taxpayers file on the basis of draft legislation when completing their income tax compliance filings. The CRA believes that filing on this basis reduces the administrative burden on the CRA and the compliance burden for the taxpayer. However, where a refund or rebate arises to a taxpayer from applying draft legislation, it appears that CRA takes the position that such amounts will not be paid until the legislation is enacted.
If an amendment is favourable and a corporation or inter vivos trust has not filed in accordance with the amendment, the CRA usually has no legal authority to adjust the tax return beyond the normal three- or four-year reassessment deadline. Corporations should therefore file a waiver before the deadline expires, so that once the change has been enacted they can ask the CRA to adjust for it. Individuals and testamentary trusts can request a change for up to ten years under the Taxpayer Relief measures.
Where taxpayers have relied on draft legislation to their benefit and the government later announces that it will not proceed with the proposals, the CRA takes the view that the taxpayer should immediately take steps to amend their filings. The CRA has indicated that it will consider waiving penalties and interest with respect to any additional taxes arising from such amendments if the taxpayer is sufficiently diligent in preparing the amended filings and paying any related taxes.
In some cases, a taxpayer will obtain a “comfort letter” from the Department of Finance indicating that a particular technical amendment will be proposed, though Finance cannot formally guarantee that Parliament will actually enact the change. The CRA has indicated that it will generally not reassess taxpayers who file on the basis of a comfort letter, provided the filings are in conformity with the comfort letter. These “comfort letters” are not public statements but tax publishers obtain them under the Access to Information Act and reproduce them for their subscribers. As a result, other taxpayers often rely on these letters.
Where taxpayers have not filed in accordance with draft legislation that is to their detriment and the legislation is subsequently passed, with retroactive effect, the CRA states that taxpayers should amend their filings to conform to the final legislation. Nothing in the Income Tax Act requires this, so some taxpayers take the position that they filed in accordance with the law as it stood on the date they filed their return, and thus they have no legal obligation to correct their return.
In these cases the CRA will reassess if the issue is discovered. In most cases the return can go “statute-barred” once three or four years pass from the initial assessment date. In some cases the “in-force” rules in the amending bill specifically permit the CRA to reassess at any time to give effect to the amendments.
Deciding what approach to take with respect to proposed legislation is difficult but important. Your TSG representative would be happy to assist.
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