Auditing Old Tax Returns: CRA Abilities and Limitations
CRA may reassess the tax returns for CCPCs and individuals within three years from the sending of the notice of assessment. Returns for which this three-year period have expired are commonly referred to as being “statute-barred.” However, CRA may reassess a return beyond this period in certain cases, such as where:
• a waiver of the normal time limits has been timely filed, or
• the taxpayer has made a misrepresentation attributable to neglect, carelessness, or willful default or has committed fraud in filing the return or in supplying any relevant information.
Although there are restrictions on when a (re)assessment can be made, these limits do not apply to the periods that CRA may audit. In other words, while a taxpayer may believe that they cannot be assessed for periods beyond three years, CRA still has the ability to analyze those prior years and ask for information, as long as it is reasonable. Likewise, although taxpayers are only generally required to retain support for six years after last being applicable, CRA can still request older documents. If the older documents are available, they must be provided.
In a January 10, 2022 Federal Court case, the Court addressed an application for judicial review of CRA’s decision to expand its audit of the taxpayer and his professional corporation to encompass the 2003 to 2018 taxation years.
The audit, which was initially limited to the 2010 to 2016 tax years, was prompted by information obtained from Citibank and the Royal Bank of Canada under an unnamed persons’ requirement for information on transactions involving the Cayman National Bank. The information identified funds entering Canada, including bank drafts to car dealerships for vehicle purchases. CRA’s initial review identified a Cayman Islands corporation (“COG”) in which the taxpayer and a number of other Canadians, also screened for audit, were involved.
The Court noted the following:
• the taxpayer was involved in COG from its incorporation in 1996, eventually becoming its president and sole shareholder, but had never declared any offshore income;
• while it was true that records are generally only required to be retained for six years, COG’s general ledger for the 2003 to 2018 tax years was known to be on a USB key, so the records were known to exist and were accessible;
• the taxpayer’s long association with COG justified CRA’s requirement for accounting information for that entity; and
• the documents and other information sought were sufficiently detailed in CRA’s correspondence.
CRA’s requests were held to be reasonable, so the application for judicial review was dismissed
ACTION: Review document retention and destruction policies to ensure that they align with CRA guidance and the applicable law. CRA may review filings for years even though they appear to be statute-barred.