Overview of Canadian Tax Dispute Resolution
When the Canada Revenue Agency (CRA) issues a notice of assessment or reassessment that a taxpayer disagrees with, the taxpayer may challenge it through an administrative objection process and, if necessary, an appeal to the Tax Court of Canada. The process involves strict procedural deadlines — missing the objection deadline is generally fatal to the appeal.
Notice of Objection: Section 165 ITA
The first step in challenging a CRA assessment is filing a notice of objection under s.165 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp).
Deadline for Filing
For individuals and testamentary trusts, the objection must be filed within the later of:
- One year after the filing due date for the return to which the assessment relates; or
- 90 days after the date of mailing of the notice of assessment.
For corporations and all other taxpayers, the deadline is 90 days after the date of mailing of the notice of assessment or reassessment.
The notice of objection must be in writing and must set out:
- The reasons for the objection;
- All relevant facts relied upon by the taxpayer.
Extension of Time to Object
Where the taxpayer misses the 90-day deadline, they may apply for an extension of time to file the objection. The extension application must be made within one year of the expiry of the 90-day period. The taxpayer may apply:
- To the CRA under s.166.1 — if the CRA refuses, the taxpayer may apply to the Tax Court within 90 days of the refusal;
- Directly to the Tax Court under s.166.2 within one year of the expiry of the 90-day objection deadline.
The court will grant an extension where: (a) the application was made as soon as circumstances permitted; (b) there are reasonable grounds for appeal; and (c) the taxpayer had a bona fide intention to appeal within the 90-day period.
CRA Appeals Division Process
After the notice of objection is filed, the file is assigned to a CRA Appeals Officer. The Appeals Officer reviews the objection independently of the auditor and may confirm, vary, or vacate the assessment. Many tax disputes are settled at the Appeals Division level without proceeding to court.
Taxpayers may negotiate with the Appeals Officer and submit additional documentation to support the objection. The CRA must respond to the objection and cannot simply leave it outstanding indefinitely — the taxpayer may appeal to the Tax Court after 90 days of filing the objection if the CRA has not responded.
Reassessment Limitation Periods: Section 152(4)
The CRA cannot reassess a taxpayer indefinitely. Under s.152(4) of the ITA, the CRA may reassess a return within:
- Normal reassessment period: Three years from the date of mailing of the original notice of assessment for most taxpayers; four years for mutual fund trusts and corporations (other than Canadian-controlled private corporations);
- Extended reassessment: Beyond the normal period where: (a) the taxpayer made a misrepresentation attributable to neglect, carelessness, or wilful default (in which case the CRA may reassess at any time); or (b) there has been a fraud, in which case there is no time limit.
A waiver under s.152(4)(a)(ii) signed by the taxpayer extends the normal reassessment period. Taxpayers should be cautious about signing waivers without legal advice.
Tax Court of Canada: Appeal Procedures
Filing the Notice of Appeal
After the CRA confirms the assessment, varies it, or issues a reassessment following the objection, the taxpayer has 90 days to file a notice of appeal with the Tax Court of Canada. Where the CRA has not responded to the objection within 90 days of filing, the taxpayer may also appeal directly.
Informal Procedure
The informal procedure applies where the aggregate of federal income tax (excluding penalties and interest) in dispute does not exceed $25,000 for any taxation year, or the appeal relates solely to a loss determination. Key features:
- Designed for self-represented taxpayers — less formal rules;
- Expedited hearings;
- The Tax Court cannot award costs against the taxpayer;
- The Tax Court's decision is final and binding (not a precedent);
- No right to appeal to the Federal Court of Appeal on questions of fact.
General Procedure
The general procedure applies to all other appeals. It uses the full rules of court:
- Examinations for discovery (oral and documentary);
- Pre-trial motions and interlocutory applications;
- Full trial with witnesses and documentary evidence;
- The Tax Court may award costs;
- Decisions are precedents and may be appealed to the Federal Court of Appeal.
Burden of Proof in Tax Appeals
In Canadian tax litigation, the Minister's assessment is presumed to be correct — the taxpayer bears the burden of proving that the assessment is wrong. The Supreme Court of Canada in Hickman Motors Ltd v Canada[1997] 2 SCR 336 confirmed that the taxpayer's burden is to "demolish" the Minister's assumptions of fact underlying the assessment with credible evidence. Once the taxpayer has met this initial burden, the onus shifts to the Minister to establish those facts.
For penalties under s.163(2) (gross negligence penalties) and for fraud reassessments, the Minister bears the burden of proof — the presumption of correctness does not apply to penalties.
Ontario Provincial Tax Disputes
Ontario's Taxation Act, 2007, S.O. 2007, c. 11, Sch. A generally harmonizes provincial income tax with the federal Income Tax Act. Ontario eliminated its separate provincial income tax return in 2012 — Ontario income tax is now assessed and collected by the CRA on behalf of Ontario. As a result, federal and Ontario income tax objections and appeals are generally handled together through the federal ITA objection and Tax Court process.
The Retail Sales Tax Act (for pre-HST matters) and employer health tax disputes under the Employer Health Tax Act are administered by the Ontario Ministry of Finance and follow separate objection and appeal processes through the Superior Court of Justice.
Practice Points for Ontario Tax Lawyers
- Calendar the objection deadline immediately when a client receives a notice of assessment — 90 days passes quickly, and extension applications are uncertain in outcome.
- File a protective objection for any assessment that could be challenged, even where the issue has not been fully analyzed — the objection can be withdrawn or narrowed; a missed deadline cannot be recovered.
- Assess whether the amount in dispute is under $25,000 per year to determine if informal procedure applies — the lack of a costs risk in informal procedure may affect the client's litigation strategy.
- For penalty assessments under s.163(2), remember that the burden is on the Minister — the CRA must prove gross negligence or wilful default, not merely carelessness.
- Preserve all documents related to the tax year under dispute — the taxpayer's ability to demolish the Minister's assumptions depends on credible documentary and testimonial evidence.