Amendment to tax law creates unintended consequences

  • October 24, 2016

To those of us who happily hand our income tax returns over to an expert, the wording of changes to tax law can sound like ancient Sumerian.

So it’s a good thing that others can speak that language.

In September the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada wrote to the Tax Policy Branch of Finance Canada to express its concerns with draft legislation that it believes is unnecessarily broad.

The proposed amendment to subsection 152(9) of the Income Tax Act was announced in the 2015 federal budget as a way to align with the ruling in The Queen v Last, which dealt with income tax assessments. The draft legislation was released at the end of July.

“Finance has issued the Proposed Amended so that, if the Minister issues an assessment $X and the taxpayer wins on one or more issues in court such that the amount owing is less than $X, then the Crown may raise a new basis for the assessment so that the total tax owing may be defenced up to $X,” the committee states in the letter, noting that there is case law to support this position.

But this creates unintended consequences, not least of which is a disruption in the “consistency, predictability and fairness” that the Act fosters in the Canadian tax system.

“By permitting the Minister to raise a new basis for assessment, the proposed amendment appears to allow the Minister to dispute items of income, deductions or credits after the expiry of the normal reassessment period even if the Minister did not dispute those items prior to the expiry of the NRP or even if they were not assessed at all and even if no waiver has been filed or no misrepresentation has occurred in respect of those items,” the committee says.

The proposed amendment would also seem to allow the Minister to assess a taxpayer on new matter even after a settlement had been reached on an old one, and isn’t limited to a period when there is live dispute.

 “The committee is concerned that the broad scope of the proposed amendment could therefore inadvertently (and inappropriately) eviscerate the NRP,” it writes.

Furthermore, the proposed amendment raises additional problems for large corporations because it limits a corporation’s ability to raise new bases for dispute while allowing the Minister to raise new bases at any time – including after a judgment is issued.

There is an easy fix, however – the committee recommends rewording the amendment, and says it is available at any time to discuss its suggestions.

Other tax-related submissions

The submission on income tax was just one of three tax-related submissions sent to government in September. The other two were:

  • response from the Commodity Tax, Customs and Trade Law Section to legislative and regulatory proposals on GST/HST – Proposed Drop Shipment Rules released for comment by the Finance Department in July; and
  • Another submission from the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, this one dealing with July 29 draft legislation on back to back rules.
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