CRA Arbitrary Assessments Under Subsection 152(7)
If you do not file a tax return, that does not prevent the Canada Revenue Agency (CRA) from assessing you.
Under subsection 152(7) of the Income Tax Act, the CRA can issue what is commonly referred to as an arbitrary assessment. Rather than waiting indefinitely for a taxpayer to file a return, the CRA can estimate the amount of tax owing and issue an assessment based on the information available to it.
The result can be a significant tax debt based on amounts that do not accurately reflect the taxpayer’s actual income.
What Is a CRA Arbitrary Assessment?
Subsection 152(7) allows the CRA to assess tax payable even where a taxpayer has not filed a tax return. The CRA may use information already in its possession to estimate the taxpayer’s income. This could include T4 slips, T5 slips, information from financial institutions, previous tax returns, or other information obtained by the CRA.
The assessment is not necessarily intended to determine the taxpayer’s income with precision. It allows the CRA to establish an assessed tax debt despite the missing return. This can result in income being overstated, deductions being omitted, or expenses not being recognized.
Why an Arbitrary Assessment Can Be Much Higher Than the Actual Tax Owing
The CRA generally does not have all of the information that would ordinarily appear on a properly prepared tax return. For example, the CRA may have information showing that a taxpayer received business income but have little or no information regarding the expenses incurred to earn that income.
An arbitrary assessment may therefore assess income without allowing legitimate deductions that would substantially reduce the taxpayer’s taxable income. Interest and penalties may also continue to accumulate on the resulting balance.
An Arbitrary Assessment Is Still a Real Assessment
A taxpayer should not ignore an arbitrary assessment simply because the amount is estimated or appears obviously incorrect. Once issued, the assessment generally has the same legal effect as any other assessment. The amount assessed becomes payable and the CRA may eventually take collection action.
There are also deadlines for challenging an assessment. If those deadlines are missed, correcting an inaccurate arbitrary assessment can become considerably more difficult.
How Can an Arbitrary Assessment Be Challenged?
The appropriate response will depend on the circumstances. In many cases, the taxpayer will need to prepare and file the outstanding tax returns using the correct income, deductions, expenses, and other relevant information.
A taxpayer may also need to file a Notice of Objection challenging the assessment. If the dispute is not resolved at the objection stage, an appeal to the Tax Court of Canada may be available. The important point is that an arbitrary assessment does not become correct merely because the CRA issued it. Taxpayers can challenge the assumptions and amounts underlying the assessment and provide evidence establishing the proper tax result.
Kirshen Tax Law Can Help
An arbitrary assessment can create a substantial tax debt even where the taxpayer’s actual liability is significantly lower. The longer the assessment remains unresolved, the greater the potential consequences, including accumulating interest and CRA collection action.
If you have received a CRA arbitrary assessment, Kirshen Tax Law can review the assessment, determine the appropriate procedure for challenging it, and represent you in dealing with the CRA.
Contact Kirshen Tax Law for a free consultation with a Toronto tax lawyer.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.