Pursuant to the provisions of the Income Tax Act, the Canada Revenue Agency (“CRA”) has a three-year time frame within to reassess a taxation year, commencing with the date of the original Notice of Assessment. Beyond the three-year limit, returns are referred to as statute-barred.
Nevertheless, the CRA can always reassess if it can prove fraud or misrepresentation in the return filed, regardless of whether the return is considered statute barred or not. “Misrepresentation” can include neglect or carelessness as well willful default.
In a recent Tax court of Canada case, taxpayers withdrew significant funds from their registered retirement savings plans (“RRSP’s) and transferred those funds into a “high performance” investment but did not report the withdrawal from the RRSP’s as income. Apparently, the taxpayers relied on the promoter of the “high performance” investment for tax filing advice. Seven years later, the CRA assessed the taxpayers with income and therefore income taxes in the year of the RRSP withdrawal with interest and penalties.
At issue in court was whether the facts of the case constituted a form of misrepresentation such that the CRA could assess the taxpayers for a year that was statute-barred.
Unfortunately the answer was yes it could. The Court noted that to rely mainly on promoters, their agents, and co-workers who were not experts, was not prudent behavior. Further, the Court noted there were additional red flags that should have made the taxpayers suspicious of the information provided by the promoters. In addition, one of the taxpayers admitted to not reviewing their tax return. As such, the Court found that the taxpayers did not exercise the required degree of diligence. The CRA was permitted therefore to assess beyond the normal period.
In the current economic climate, many of us are reviewing our current personal retirement and estate planning strategies as well as assisting others such as family and friends with theirs. This case reminds us that there is no substitute for due diligence and for seeking professional help when presented with strategies or plans that appear to deliver better than expected results tax wise or not.