What If Your Tax Return Is Reassessed?

More taxpayers are receiving a Notice of Reassessment than ever before.  A new tax assessment unit was set up last year that works from September to March to check for things that were missed in the first regular audit and compare returns to third party sources.

This new group focuses on specific areas such as:

  • Business expenses,
  • Car and residence used for business,
  • Child care costs,
  • Medical and moving expenses,
  • Income splitting,
  • Omissions in reporting income

You are responsible for errors

You personally are responsible for proving your information and/or correcting errors in any reassessment requiring you to pay more than you thought, regardless of who actually prepared your tax return.

Related: Smart Tax Planning Strategies

I have been reassessed three times in all my years of paying tax.  On two occasions the error was my own and the extra payments were quickly dealt with:

  • I used to claim my children’s tuition and educations amounts.  There was a $5,000 limit to the amount you could claim and I was slightly above that.  I didn’t read the instructions carefully.  My bad!  Here’s your 15 bucks.
  • Last year they claimed that I had not reported some dividend income.  I’m usually pretty careful about matching up my T-slips so I carefully combed through my records.  Perhaps one slip was not sent to me and I forgot about it.  In any case I remitted the $58 owing.

Related: Dividend Gross Up And Tax Credit

I did have a disagreement in one instance, which was actually my first assessment.  This is a bit of a story so bear with me.

When I worked for the bank one of the employee benefits was a 3% interest rate discount on consumer loans.  I took out a car loan at the discounted rate of 12% (this was in the early 80’s).  The discount was taxed as an employee benefit and I dutifully recorded it on my return.

The following year Revenue Canada sent me a notice claiming I had underestimated the rate benefit.

“Not so,” I said when I called to object.  “I took out a 3-year term loan at a fixed rate – a taxable benefit of 3% below regular consumer rates – and that’s what I claimed.  It’s not my fault that interest rates increased so much that the prescribed rate is now 20%.  And furthermore:

  1. If I would have had a regular fixed term consumer loan at 15%, it still would have been less than the prescribed rate, but I would not have had to claim it at all and,
  2. If interest rates had gone down during this time I still would have to claim my 3% benefit.”

Unfortunately for me, I soon learned I couldn’t argue with “The Man” in this instance and, since the amount was minor, I grudgingly remitted the money they wanted.

How do you file an objection?

If you receive a Notice or Reassessment and you disagree with the amount owing, you have a right to file an objection.

  • Often the matter can be resolved with a phone call.  They need supporting documents, are missing information, or they themselves may have made a clerical error.
  • Organize your documentation and fax it with your written objection to the CRA office.  Ask for the reply in writing so you get a name.
  • In about a week or two, call the office and speak to the appropriate person to see if they have any questions about the documentation and if they have determined a resolution to your claim.  Ask if they need any further documents.
  • If no acceptable resolution is made you then need to file an official objection (T400A) to have the appeals office review your case.
  • If the dollar value is sufficiently high you should involve the accountant who prepared your return, or a lawyer.

You must file the Form T400A – Objections within 90 days of the date the Notice of Assessment or Reassessment was mailed to you, or a year from the filing due date of your tax return.

A CRA appeals officer will start a review of your case and will try to negotiate an acceptable agreement with you.  If you are not satisfied, the appeals officer will tell you how to appeal to the Tax Court of Canada.

Keep a record of all your communications with them.

My reassessments involved minor errors or omissions that were quickly resolved (by my remittance of the money owing).  But when the CRA themselves are in error it can take time and considerable effort to clear up.

A writer in Canadian Money Saver detailed his saga with the CRA when he did a legitimate tax-free transfer of his wife’s RIF when she passed away.  Not only did it take several months of phone calls and faxes, his OAS payments were suspended and they are still demanding their interest.

Related: Do You Have A Locked-In RRSP?

Make sure your tax return is accurate

The CRA has three years to review your return.  Failure to report income on your 2011 return and any previous returns back to 2008 will result in 10% penalty of the amount you failed to report.

If you do have to pay more tax, make sure you remit it before the deadline specified on the notice.  Procrastination will cost you.  Any balance owing will be charged compound daily interest starting from May 1 of the year of the tax return.  The current rate is 5%.

Errors and adjustments can also affect benefits such as your GST/HST rebate and Child Tax Benefit.


10 Responses to What If Your Tax Return Is Reassessed?

  1. Joe says:

    Electronic record keeping is now so extensive, it’s laughable the government can’t present taxpayers with the amount it thinks we owe or it owes us.

    • Boomer says:

      @Joe: You would think there would be a program that would match up information from different sources. But then all the worker bees would be out of a job!

    • Echo says:

      @Joe – That’s not gonna fly with BIG accounting!

      • Joe says:

        ^this.

        And @Boomer, I really don’t think it’s about jobs as the Feds would love to find easy cuts from redundancy. It’s just literal broad incompetence at the CRA; same reason they can demand $ they’re not even owed without going to court when any other private entity would be deemed as engaging in harassing conduct. Luckily I haven’t dealt with any CRA wrath although I’m sure it’d make for an epic blog series.

  2. Boomer, nice summary. It should be noted that the 10% penalty is a Federal penalty and a corresponding 10% provincial penalty (depending upon your province of residence) could also be levied, making the penalty 20% in total if you miss reporting income a second time.

    • Boomer says:

      @Blunt Bean Counter: Thanks for the information. The penalty, plus interest on what’s owed, makes it pretty expensive to make a mistake – or be dishonest by under-reporting income.

  3. peachy says:

    appreciate the info. sort of. am back in canada less than 1 yr and having serious second thoughts. the quality of life does not offset the inexplicable costs/ taxation, and the spirit of pettiness and bureaucracy that runs through everything has begun to make me question the validity of conducting business here. in another 10 yrs when gen y is economically emeshed its only going to be worse. looking for the carrot…

  4. James says:

    We have a similar dread of the IRS tax audit here in the United States. Like the CRA, the IRS has three years to review taxes (unless there is a “substantial understatement of income” than they have six years). It can be a long and tedious process or it can be relatively painless. If you use and accountant or tax prep services often this is covered in their services and they handle it for you. Ultimately the responsibility is your own however. As long as you keep good records and receipts it can be relatively painless.

  5. Rosemary Wells says:

    We were able to claim moving expenses last year (moved from Toronto to eastern Ontario for a job). We got a sizable return from that (over $10,000). My husband wanted to buy something that we needed and I said no way…we are surely going to be audited in this so it is going into the bank to wait it out. Sure enough, we were audited, assessed and reassessed. Finally we received the final reassessment and to be sure, we called CRA to hear the voice of someone who said we could spend the money, the audit was completed satisfactorily. I finally spent the money yesterday. Don’t trust the system, it’s better to be safe than sorry, etc.etc.

    • fraser says:

      I have been audited a few times by CRA. They were desk audits, ie send in your auto expenses etc. Never an issue, all of the people we came into contact with were very fair and very polite.

      In 2006 we had a complete review of our tax returns completed by an accountant. I had submitted the returns in the past and knew that I had made mistakes…in my favour and CRA’s. Upshot was we refiled both of our returns back to 1999. The process was straightforward. We enjoyed a combined refund of $10K, net of paying our accountant.

      Just as in other businesses, I am certain that there are some ‘bad apples’ working at CRA. But our experiences have been positive-even when on the odd occasion when a re-assessment resulted in paying more tax.

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