How far back can the CRA go?
When you file your income tax return, and it gets processed, does it end there? Is that tax year behind you for good? Unfortunately, it isn’t. The Canada Revenue Agency is allowed to go back and look at your previous tax returns and perform reassessments, if they so choose. But, this power is restricted to certain time lengths depending on the situation.
For most taxpayers, the normal reassessment period is three years. This means that the Canada Revenue Agency (CRA) can reassess a tax return within three years of the date it issues a Notice of Assessment on that tax return. Typically, for any tax return or item within a tax return, a reassessment outside of this three year period is statute-barred; in other words, not allowed to be reassessed. However, the Income Tax Act provides exceptions to this three-year normal reassessment period.
Reassessing a Statute-Barred Year
The following exceptions give rise to an unlimited extension to the reassessment period, allowing for a reassessment of a statute-barred year.
Misrepresentation or fraud: If a taxpayer makes a misrepresentation attributable to neglect, carelessness or willful default or fraud in filing the return or supplying information, the reassessment period will be extended indefinitely for the income tax return in question. Typically, to open a statute-barred year using this exception, the CRA is required to prove “gross negligence,” which requires much more than a simple error or omission. If you honestly believed your income tax return was correct at the time of signing and sending the return into the CRA, then it is unlikely it would be classified as gross negligence.
Waiver: A taxpayer has an option to sign Form T2029, Waiver in respect of the Normal Reassessment Period. Filing this form with the CRA will extend the reassessment period for the relevant tax year until the waiver is revoked.
Court Request: A court can request that statute-barred years are opened for reassessment.
Time Period for Record Keeping
There are also rules in place for how long you are legally responsible for maintaining your financial records. These are different than those for statute-barred years. In the Income Tax Act, s. 230 states that you must retain all books and records for six years after the date the tax return is filed. So, although your tax returns are usually subject to a three-year window, you are still legally responsible for maintaining your records for an additional three years. This is to ensure that you hold on to your records a little bit longer, in case they are needed if a statute-barred tax year is reassessed.
Back Taxes and Reassessment Periods
So, how does this affect you and your back taxes? Back taxes (i.e. taxes owed from a previous reporting period) are your legal responsibility. You, the taxpayer, are completely liable for any underpayment of taxes regardless if it occurred intentionally or by accident. Typically, the CRA will only be able to reopen the past three years worth of tax returns regarding your back taxes; but, if they can establish one of the exceptions mentioned above (which can be as simple as getting court approval), they can reopen any and all of your tax return records. This could result in you not only having to pay the back taxes, but also being subject to interest, fines or even criminal prosecution.
So, don’t let taxes be a pain in your back! The tax professionals at Tax Doctors Canada can help you defend reassessment claims by the CRA and get your back taxes paid quickly with less financial consequences.
