We are excited to introduce Tax Foresight’s new classifier: Assessment Period. The Assessment Period Classifier determines if a misrepresentation on an income tax return is attributable to neglect or carelessness, permitting the CRA to assess or reassess beyond the normal reassessment period, pursuant to subparagraph 152(4)(a)(i) of the Income Tax Act or paragraph 298(4)(a) of the Excise Tax Act.
An analysis of a recent case in this area, Gorev v. The Queen, 2017 TCC 85, follows. To try your own, login to Tax Foresight here.
Gorev v. The Queen, 2017 TCC 85
Mr. Gorev, a successful businessman in his native Russia, immigrated to Canada in 2001 and opened a rental business with the proceeds from the sale of his Russian interests. In 2010, the CRA commenced an audit of Mr. Gorev’s 2006, 2007 and 2008 taxation years and identified bank deposits totaling $1,354,422 that appeared to represent unreported income. Mr. Gorev and his accountant provided documents and submissions to show that many of the deposits under investigation were derived from non-taxable sources. In 2014, the CRA issued notices of reassessment for a significantly reduced amount totaling $63,203.80.
The court considered whether the Minister was entitled to rely on subparagraph 152(4)(a)(i) of the Income Tax Act to reassess Mr. Gorev after his normal reassessment periods for the taxation years in question.
In determining that Mr. Gorev made a misrepresentation, Justice Sommerfeldt relied on his earlier finding that the taxpayer had not satisfied his evidentiary burden to show that the disputed amounts were derived from non-taxable sources. The discrepancy between the amounts reported and the amounts determined by the CRA was sufficient for the court to conclude that there was a misrepresentation.
To determine whether the misrepresentation was attributable to neglect or carelessness, Justice Sommerfeldt examined whether the care Mr. Gorev exercised in completing his tax returns was that of a wise and prudent person. Mr. Gorev did not prepare his own tax returns, but had his bookkeeper supply his accountant with the necessary materials. Under cross-examination, Mr. Gorev acknowledged that his bookkeeper made several mistakes. Furthermore, Mr. Gorev admitted that he did not review the tax returns after his accountant prepared them for him. Considering Mr. Gorev’s failure to properly review the returns before signing them, Justice Sommerfeldt concluded that Mr. Gorev had not exercised the care of a wise and prudent person. Mr. Gorev's misrepresentation was attributable to neglect or carelessness and the reassessments were properly issued.
Gross negligence penalties were also issued by the CRA, but Justice Sommerfeldt ruled that the neglect and carelessness exhibited by Mr. Gorev did not rise to the level of gross negligence. See our Gross Negligence Classifier to learn more about gross negligence under subsection 163(2) of the Income Tax Act.
Tax Foresight Case Analysis
- Tax Foresight correctly predicts with 93% confidence that Mr. Gorev made a misrepresentation attributable to neglect or carelessness permitting reassessment after the normal reassessment period.
- If the taxpayer had carefully reviewed his tax returns prior to signing, Tax Foresight predicts that the misrepresentation would have been attributable to neglect or carelessness with 60% confidence.
- If the taxpayer provided accurate records for his accountant and carefully reviewed the tax returns before signing, Tax Foresight predicts with 79% confidence that the misrepresentation would not have been attributable to neglect or carelessness.
- Mr. Gorev communicated through a translator during the trial. If the taxpayer had spoken English or French with fluency, Tax Foresight predicts with 95%+ confidence that the misrepresentation would have been attributable to neglect or carelessness.
Assessment Period Insights
- 82% of assessment period cases have resulted in a finding that the taxpayer made a misrepresentation attributable to neglect or carelessness, permitting reassessment after the normal assessment period.
- 53% of assessment period cases involved a third party tax preparer. Where a tax preparer was used, 89% of the misrepresentations were attributable to neglect or carelessness. Where a tax preparer was not used, 75% of the misrepresentations were attributable to neglect or carelessness.
- Each time you run our Assessment Period Classifier, you apply the entire body of case law to your client’s situation.
- Want to make sure you are considering all the new assessment period cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.