The Tax Dispute Process in Canada
For many individuals and small business owners in Canada, dealing with a CRA or IRS tax dispute can be an intimidating prospect.
Understanding some basics about the tax dispute process in Canada can help you to prepare yourself.
Both the Canadian and US tax systems are self-reporting which means the onus is on each taxpayer to do their best to accurately and honestly report their income, expenses and amount of tax owing each year.
The tax man then decides whether they find the information you reported to be accurate or not.
Review or Audit
The CRA may request that you submit more information for them to review, or they may audit you to gather further information regarding your income, expenses or tax obligations. A review or audit can be focused on a minor issue or two, or may be a full-scale global audit which reviews information related to every aspect of your business, and can even include your personal finances.
The examiner may decide that your tax return was accurate and agree with the information you provided, or they may not. If they disagree with your tax return, the examiner usually issues a proposal letter which outlines the basis for their disagreement and it provides some detail about how you will be reassessed. You usually have about 30 days to make further submissions to the examiner to satisfy the requirements in the proposal letter.
If you haven’t already done so, you should consider consulting your CPA at Clearly Accounting for advice and representation throughout the audit process to make sure you are communicating the correct information to the examiner and to ensure that the CRA examiner is treating you fairly within tax regulations.
Unless you can persuade the examiner to alter the proposed reassessment, you will receive a Notice of Reassessment telling you how much tax you owe. Now is definitely the time to consult your CPA to determine if there are grounds for an appeal. You will get 90 days to file a Notice of Objection to further dispute the amount of tax, interest or penalties owing as a result of the reassessment.
You have 90 days from the date of the Notice of Reassessment to file your Notice of Objection with the Chief of Appeals at the CRA. This is an important deadline so be sure to contact your CPA at Clearly Accounting promptly so we can prepare a comprehensive and persuasive Notice of Objection on your behalf.
If you miss the 90-day deadline, Clearly Accounting can apply for an extension to file late, however, only for one year after the original deadline, and only if there were some extremely extenuating circumstances preventing you from providing the required information by the deadline.
After a number of months, an appeals officer is assigned and often we have the opportunity to clarify, provide further supporting documentation, as well as build a case based on your legal rights.
The appeals officer then decides to “vacate” (cancel the reassessment), modify the reassessment or leave the reassessment alone (“confirm”). You will then be provided with a Notice of Decision. The Notice of Decision date is also an important date to be aware of.
Appealing to the Tax Court of Canada
You have 90 days from the date of the Notice of Decision to appeal the decision of the Appeals Officer by filing a Notice of Appeal with the Tax Court of Canada registry. Again, you can apply to extend your Notice of Appeal summation time to up to one year under extenuating circumstances.
The appeal process follows one of two streams: (1) the General Procedure; or (2) the Informal Procedure. Whether your appeal will follow the General Procedure rules or the Informal Procedure rules depends on the amount of federal tax in dispute. If your dispute is subject to the General Procedures, you may wish to supplement the services of your CPA tax accountant.
A Notice of Appeal sets out the relevant facts, the issues in dispute and the grounds for the appeal. The Notice of Appeal is served to the federal Department of Justice who represents the CRA. A Department of Justice lawyer is assigned to the appeal and they will draft a Reply to the Notice of Appeal.
Generally, the Notice of Appeal and the Reply set out the basis of the dispute and will form the structure for the rest of the appeal process.
It is important for your accountant and lawyer to organize all evidence relating to the tax dispute and to gather any documentation that may be relevant to the tax dispute. The Tax Court of Canada General Procedure rules provide for a process called discovery during which documents are exchanged by the Department of Justice and your tax accountant, and lawyer where warranted. Each side has an opportunity to verbally examine the other party on the record. The discovery process allows each party to learn about the other’s case which narrows the issues in dispute and facilitates settlement.
At this time, a date for a hearing of your case in the Tax Court is set. In a tax dispute, you have the right to call witnesses on your behalf. You have the right to introduce documents or receipts as evidence, and you get to provide your side of the story by testifying under oath.
At the hearing in Tax Court, witnesses are called and documentary evidence is entered on the record. Your Clearly Accounting CPA, and if necessary, your tax lawyer presents your position and argues that your position is correct and the CRA’s final assessment is incorrect. The CRA is represented by a government tax lawyer. A Tax Court of Canada judge then renders a decision regarding the case.
Appeals to the Federal Court of Appeal and Supreme Court of Canada
If you feel the Tax Court of Canada judge made a mistake in the judgment you have a limited right to appeal to the Federal Court of Appeal within 30 days of the Tax Court judge’s decision. If you are still unsatisfied, you have the right to apply to the Supreme Court of Canada for a further appeal, but this is more complex and much more expensive. The Tax Court of Canada judges specialize in tax disputes and are very knowledgeable and understanding. They are often much more sympathetic towards taxpayers than the CRA and they understand that the CRA can make mistakes.
These tight timelines mean that prompt action is essential.
This overview of the tax dispute system in Canada is very much abbreviated. It is intended to provide you with a basic framework of the process. We hope you find it helpful and informative. The tax dispute system in Canada is complex and is filled with pitfalls and tight deadlines. It is prudent to consult your tax specialist at Clearly Accounting as soon as possible if you find yourself in a dispute with the Canada Revenue Agency or Internal Revenue Service.
During a tax dispute is it best to consult with a CPA or a tax lawyer?
Most CRA staff is made up of accountants. In fact, when it comes to filing tax information, the professional that you will most logically need is an accountant. A professional accountant, a CPA from Clearly Accounting, is best equipped to present your position and save you the expense of two sets of professional fees: accounting fees and legal fees since a lawyer does not usually prepare financial statements and tax returns as part of their practice. So save your money, and wait to involve a lawyer if/when your case is ready to go to the Federal Court of Appeals, or the Supreme Court of Canada, where they are more likely to consider the arguments of your lawyer and accountant. Nonetheless, the Clearly Accounting CPA tax specialist assigned to your file will do everything possible to resolve the dispute quickly to maximize your tax savings, and minimize your professional fees.