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Demystifying the tax assessment mechanism.

In working with taxpayers over the years, I have discovered that understanding the tax assessment mechanism remains a low priority for most. However, the rules in this area are of paramount importance since they govern, for example, whether the taxpayer may still contest a specific assessment. In this month's column I will try to give you a brief overview of the tax assessment mechanism, with particular emphasis on the procedure for opposing such an assessment. For simplicity, the scope of this article is limited to taxpayers who are individuals.

Individuals are taxed on their income associated with activities spanning the normal calendar year. Here in Canada, the tax system is a so-called "self-assessing" system because it requires the taxpayers themselves to report their income and calculate their tax liability.

Individuals are required to file returns no later than April 30 of the following calendar year. Failure to do so results in a penalty equal to 5% of the balance due of a taxpayer's tax liability calculated as of April 30 plus 1% of this same amount multiplied by the number of complete months (to a maximum of 12) that filing is delayed. The penalty is generally doubled for a taxpayer who repeatedly fails to file. Of course, if no tax is owing, there is no penalty.

However, it is recommended to file on time to avoid unexpected "surprises" in the event that there has been an error in determining that no tax is payable. Also, the act of filing will trigger a refund cheque if an amount is owed by the government to the taxpayer (yes, this occasionally happens!). Note that refund interest only starts from the later of 45 days after the return is filed or mid-June, whichever is later. This rule was brought in by the 1992 federal budget, applicable to the 1993 taxation year and beyond.

Assuming that the individual has sent in his or her tax return on time, the minister of national revenue must examine the return and assess the tax, interest and penalties payable for that year "with all due dispatch". This typically takes a few months. The minister must then send a Notice of Assessment to the taxpayer informing the individual of the details of the assessment, i.e., whether the return was assess in the same way as filed by the taxpayer, or whether changes were made.


It may be that the taxpayer disagrees with the assessment by the taxation authorities, e.g., if a deduction or tax credit has been disallowed as claimed by the taxpayer on his or her return. If this is indeed the case and the individual has decided that the amount in question is significant enough or it is a matter of principle (yes, this virtue may still exist!), then he or she may object to the assessment by way of a written Notice of Objection delivered or mailed to a district office or taxation centre of the Department of National Revenue, Taxation.

This objection may only be made within 90 days of the date appearing on the Notice of Objection or within one year after the April 30 reporting deadline, whichever is more favorable to the taxpayer, i.e., later. The minister shall reconsider the assessment again "with all due dispatch" and must notify the taxpayer in writing by mail of the outcome of the reconsideration process. If the minister has a change of heart and agrees with the taxpayer, then there is no more problem.

However, if the taxpayer decides that it is necessary to bring the matter to court, he or she may institute an appeal to the Tax Court of Canada within 90 days from the day the notice of confirmation has been mailed to the taxpayer. Cases may be further appealed to the Federal Court of Appeal, and, finally, to the Supreme Court of Canada. Of course, both the taxpayer and the taxation authorities would like to resolve any disputes at the earliest step possible, in order to minimize court costs.


Let us assume that the minister assesses the taxpayer in the same way as originally filed by the individual. The minister may occasionally change his mind and reassess the taxpayer disallowing, for example, a deduction or tax credit that was originally permitted.

The rules mentioned above apply equally to reassessments as they do to assessments; i.e., the taxpayer may object to the reassessment within the delays provided. (Beware: This is necessary even though objections may be outstanding for the original assessment or previous reassessments, since the issuance of a Notice of Reassessment generally cancels all previously notices of assessment or reassessments and hence renders all original notices of objection null.) The three-year limitation, however, does not apply in cases where the taxpayer commits fraud. The taxation authorities may reassess at any time if this is the case.

Requests for adjustment of return

Administratively, taxpayers may also telephone or visit the enquiries section of the nearest district office or write to the taxation centre which processed their returns. This procedure is rather simple and is often effective to correct simple errors committed by the taxation authorities. This procedure is also recommended when the taxpayer must provide further information or documents in order for his or her return to be correctly assessed. However, taxpayers should note that this is not a legal recourse; as contrasted with objection procedure outlined above which is, since the latter may lead to appeals to the court system.


It is evident from the above that there are important deadlines to be respected in the complete process of filing your income tax return. Especially important are those relating to the contesting of an unfavorable assessment or reassessment. On account of the complexities involved in opposing such assessment or reassessment, the author recommends that the reader's tax advisors be consulted. However, the reader must be somewhat conversant with rules regarding the time limitations in order to instruct his or her advisor on time.
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Author:Yip, Douglas
Publication:Canadian Chemical News
Date:Jan 1, 1993
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