Every year around this time, I receive an increasing number of calls from prospective clients who have received assessments, requests for further information, or notices of audit from the Canada Revenue Agency. While all this correspondence needs to be dealt with in a timely manner, it's the assessments and reassessments that are the most sensitive because of the strict rules on how they can be challenged. Here are my top five things you should never do you if you hope to successfully contest your income tax (re)assessment.
1. Be Late in Objecting to the CRA
You only have 90 days from the date of the Canada Revenue Agency's Assessment or Reassessment to file an objection. While under exceptional circumstances you might be able to get an extension of that time, you can’t just ignore the deadline, or wait until you have gathered together all the information you think you might needed. Even if your objection is imperfect, file it anyway. You can always add additional information later.
2. Miss Your Appeal Deadline with the Tax Court of Canada
If you lose your internal objection to the CRA, you’ll only have another 90 days within which to file your appeal to the Tax Court of Canada. The Court is completely independent of the CRA (unlike the internal objection procedure), but there are still strict (but different) rules on how you must craft, present and file your dispute of your (re)assessment.
3. Hope Your Accountant or Tax Preparer Can Represent you Before The Tax Court
While you can appoint an accountant or tax preparer to represent you at the objection stage with the CRA, only a lawyer can represent you before the Tax Court. It can be any lawyer in Canada - there is no special sub-class of tax lawyers - but be aware that very few lawyers do work before the Tax Court because it has its own rules of procedure that are different from all other courts in Canada. The judges even wear purple sashes, which are very distinct from the usual red sashes of most courts in Canada.
4. Fail to Sufficiently Explain Why the CRA is Wrong
As the taxpayer, the Income Tax Act puts the full burden of proof and argument on you to dispute any CRA assessment or reassessment. The CRA is presumed to be right, and it is up to you to prove them wrong. This burden is completely the opposite of criminal proceedings, where the burden always falls on the police and Crown. It doesn’t matter if you think this unfair, this is the way Parliament set up the tax system.
5. Fail to Produce Compelling Evidence to Prove Your Case
Talk is cheap. What courts and the CRA objections branch like to see are documents. So saying you’re entitled to all sorts of deductions without any proof of your expenses, or saying all that money that flowed through your bank account isn’t taxable income even though you have no alternate explanation of where it came from, or arguing that your 10 million dollar mansion was acquired just by clipping coupons, without any proof of where you got the money to pay for it, won’t fly without hard proof.