519-646-2222Arbitrary Assessments
The Origin of Arbitrary Assessments:
Arbitrary assessments are made by the CRA when the taxpayer fails or neglects to file a proper tax return under Section 150 of the Income Tax Act. In effect arbitrary (or notional) assessments can be either, or both, a corrective or a punitive measure for non-compliant taxpayers.
The term “arbitrary assessment” (sometimes called a “notional assessment”) refers to tax assessments that are not based on factual information reported to the CRA, but rather some type of incidental “estimate” of taxes payable without any evidentiary information. The authority comes from Section 152(7) of the Income Tax Act.
Approaches that “could” be used by the CRA include using estimates based on previously filed returns then creating an assessment based on some inflationary adjustment. For example, if the income for 2019 was reported to be $35,000 on the tax return, one might expect that the CRA would use that information to create an arbitrary assessment for future unfiled returns, perhaps assuming an increase in income for each year that is equal to inflation.
However, that rarely appears to be the case, the CRA is well known for creating extremely high arbitrary assessments. Apparently as a scare tactic to get the wayward taxpayer’s attention and bring them into filing compliance.
Correcting an Arbitrary Assessment:
An arbitrary assessment may be corrected by “overwriting” with the filing of an actual return, or by appealing the arbitrary assessment. The appeal must be started within ninety days of receiving notice of the CRA’s assessment. There are also time constraints on the taxpayers’ right to file–over, or overwrite, with a new return, it appears the limit is three years after which time the CRA is not required to re-assess the return.
Our office was advised by one CRA agent that “it is the policy” of the CRA to allow a filing-over of an arbitrary assessment if within those time constraints. Nonetheless, even if the CRA does reassess the return it is not clear the policy is applied to the arbitrary assessment being overwritten – or set aside – with any consistency.
If the taxpayer is prepared to accept the arbitrary assessment but wishes to appeal based on some missed information for example a Disability Tax Credit (“DTC”) an appeal of that line item can be made. But again, any appeal must be made within 90 days of the date of the arbitrary assessment.
Arbitrary Assessment Conflation:
Unfortunately, penalties and interest will accrue on all past due tax accounts and arbitrary assessment accounts are no different. However, we have learned that the CRA will at times accept overwrite tax returns that are outside of the limitation period – but rather than allow the new assessment amount to prevail, they may simply add the results of the arbitrary assessment ledger to the actual assessment ledger.
If the actual assessment results in a refund they may allow the refund value to reduce the conflated value of the arbitrary and actual assessment ledgers. Although the CRA does have Ministerial discretion to allow a full overwrite of the arbitrary ledger, it appears that discretion is not always applied in an even-handed manner.
Admit Nothing – File Everything – Challenge when Appropriate:
The solution to the challenges of arbitrary assessments is to always file your returns on time, every year and for every applicable period. Be very careful of what you voluntarily disclose to collectors. We have seen at least one instance in which the tax Debtor advised the CRA collections department of their “intention” to file for bankruptcy.
In this particular instance the CRA hastily assigned an excessive arbitrary assessment, immediately prior to the bankruptcy filing, to the tune of tens of thousands of dollars. For the most part there is “no harm, no foul” – after all if the debt is to be discharged in a bankruptcy it makes little difference if it is for twenty dollars or twenty thousand dollars.
However, in this instance the CRA received a significant dividend based on the arbitrary assessment, which was unchallenged by the Bankrupt. Outstanding returns were filed late, and the resulting assessments showed that the arbitrary tax debt was entirely fictitious – had the returns been filed on time the debt would not have existed.
Instead of allowing an overwrite using the actual assessed returns the CRA conflated the arbitrary and actual assessments together – thereby creating a much larger debt than ever existed..
Canadian Tax Law:
It is well known that Canadian tax law is very cumbersome, and in some ways the recent movement towards the CRA automatically completing returns makes sense. However, the media has reported that the CRA is more interested in increasing its collection portfolios of working-class individuals than helping them out.
Ironically the CRA has been known to go to great lengths to allow wealthy tax dodgers off the hook while doggedly pursuing ordinary working people. This distinction should be as obvious as it is well documented and widely reported that the CRA will cut amazing deals for the very wealthy – think about the Panama Papers for instance. Such generosity is rarely extended to average citizens.
There are very few tax lawyers compared to specialists in other fields, and for good reason. Even tax accountants struggle with some of the nuances of the Income Tax Act – and that is only one Tax Act, there are others.
Bankruptcy & Insolvency Act (“BIA”):
The BIA is a very helpful tool for resolving all sorts of debt problems including tax debts, which may be reduced or eliminated through an insolvency filing. If you are having challenges with CRA collections, call the office at 519-646-2222 for a free consultation.
Canada Revenue Agency vs the US IRS
Canada’s behemoth bureaucracy employs some 59,000 people to service 42 million Canadians (32 million taxpayers) at a cost of around $8 billion (or $250 per taxpayer).
The US IRS employs some 84,000 people to service 335 million people (165 million taxpayers) at a cost of around $16 billion (or $95 per taxpayer).
Perhaps this disparity partly explains why it is so important for the CRA to hastily apply arbitrary assessments with a short tail, and an unclear path, for appealing.