“How far back can the government go"? This is a common question that we hear. Recently, we had an individual contact us about his audit. Canada Revenue Agency (CRA) was auditing his personal tax return. He operated a business for about ten years, and CRA was reviewing his expenses. CRA wanted to examine approximately the last eight years worth of expenses.
Normal Reassessment Period
There is a term in the Income Tax Act called the “Normal Reassessment Period”. Subsection 152(3.1) defines the term Normal Reassessment Period. This is defined (for individuals) as the period that ends three years after the earlier of the day of mailing of an original assessment and the day of mailing of an original notification that no tax is payable for the year. The period after this time is considered statute-barred i.e. barred from reassessment.
For example, if you file your 2007 personal tax return and receive your original notice of assessment in May 2008, the government is not allowed to audit your 2007 personal tax return after May 2011. The return becomes barred from review – statute-barred.
However, subsection 152(4) of the Income Tax Act (ITA) states that CRA can always reassess if it can prove fraud or misrepresentation in the return you filed. Misrepresentation can include neglect, wilful default or carelessness. CRA would most likely have to prove “Gross Negligence” for the statute barred years to be opened. Making a simple mistake or omission on your tax return would not constitute gross negligence.
As a result of explaining these sections to CRA, thet only examined the records of the three year normal reassessment period for the client, not eight years.
Books and Records
Don’t get the three year rule confused with the obligation to keep books and records. Subsection 230(4) states that the taxpayer must keep his/her books and records for six years. You need to keep your records for six years in case they open a statute-barred year for one of the above reasons.
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