Principal Issues: [TaxInterpretations translation] Can a reassessment be made after the normal reassessment period for the paragraph 118(1)(a) tax credit has expired?
Position: Only to the extent that it can be established, on the balance of probabilities, that the taxpayer or the person who filed the taxpayer's return of income for the prescribed year made a misrepresentation, whether through neglect, carelessness, wilful default or fraud, in claiming the credit under paragraph 118(1)(a) in respect of the taxpayer's spouse.
Reasons: The Act.
April 1, 2010Montreal Tax Services Office Headquarters Business and Partnerships Division Attention: Michel A. Robert, B.Comm. C.G.A Pierre-Luc Meunier
2009-035261
Application of subparagraph 152(4)(a)(i) of the Income Tax Act
This is in response to your email of December 22, 2009 requesting our views on the application of subparagraph 152(4)(a)(i) of the Income Tax Act (the "Act").
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Specifically, you are seeking our comments on the following hypothetical situation.
You presented the situation where the Canada Revenue Agency (CRA) reassessed a taxpayer after the normal reassessment period by relying on subparagraph 152(4)(a)(i) to add an amount of unreported income to the taxpayer's income. The taxpayer's spouse was also reassessed after the normal reassessment period.
Assuming that the taxpayer claimed the married or common-law partnership tax credit (the "Tax Credit") and assuming that the income of the taxpayer's spouse, after reassessment by the CRA, is such that the taxpayer was not entitled to the tax credit, you wish to know whether the CRA can reassess the taxpayer after the normal reassessment period has expired to deny the Tax Credit.
Our Comments
In order to comment on the application of the above provisions to a particular situation, we must be able to determine, inter alia, whether the taxpayer or the person filing the return made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in claiming the tax credit under paragraph 118(1)(a) in respect of the taxpayer’s spouse. This is a question of fact that can only be resolved in light of the particular circumstances of each situation.
Consequently, we are only able to make the following comments of a general nature.
By virtue of subsection 152(3.1), the normal reassessment period is the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year.
By virtue of subparagraphs 152(4)(a)(i) and 152(4.01)(a)(i), the CRA can issue an assessment or reassessment after the normal reassessment period if it can reasonably be considered that the assessment or reassessment relates to a misrepresentation by the taxpayer or person filing the taxpayer's return of income for the year that is attributable to neglect, carelessness or wilful default or as a result of any fraud committed by the taxpayer or that person in filing the return or communicating any information under the Act.
As a result, when the CRA issues a notice of reassessment for a taxation year for which the normal reassessment period has expired, relying on subparagraph 152(4)(a)(i), only adjustments attributable to a misrepresentation caused by neglect, carelessness, wilful default or fraud can be made by the CRA.
We are of the view that a taxpayer who claims for a taxation year the tax credit under paragraph 118(1)(a) in respect of the taxpayer’s spouse, where the income actually earned by the spouse for that taxation year would not qualify for the credit, is a misrepresentation for the purposes of subparagraph 152(4)(a)(i).
Once it has been established that a taxpayer has made a misrepresentation, it must be determined whether the misrepresentation was the result of neglect, carelessness, wilful omission, or any fraud committed by the taxpayer. In order to do so, and in order to be able to issue a notice of reassessment amending the amount of the tax credit provided under paragraph 118(1)(a), where a taxpayer's taxation year is statute-barred, the CRA has the onus of proving, on a balance of probabilities, either that the taxpayer was not acting in good faith when the taxpayer wrongly claimed this credit, or that a normally knowledgeable or prudent person would not have made such an error.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.