A GST/HST or income tax audit may result in an assessment that the taxpayer does not agree with. In this situation, it would be in the best interest of the taxpayer to object to a tax assessment by following these steps:
A tax audit on a specific subject can be short (an audit of the business promotional expenses and advertising) or if it is more general in nature, it can be longer (for example dealing with unreported income). During the audit stage, the taxpayer will be asked to provide documentary evidence, bank statements and explanations supporting his position in relation to the audited items. Many audits go well, however, some do not.
Generally, prior to the issuance of a notice of assessment following the audit, the auditor issues a draft assessment and invites the taxpayer to make representations prior to a predetermined date (usually 21 days). The taxpayer should take this opportunity to make representations explaining why he disagrees. It is preferable to make written representations and to submit any additional documents at this stage. It is wise to obtain professional assistance from an expert in the field to help with the representations during this period.
Following the representations on the draft assessment, it is possible that the Revenue agency (Quebec or Canada) will issue an assessment. Whether it is for income tax or GST/HST, this assessment carries interest at the prescribed rate starting on the day on the notice. Whether the taxpayer contests it or not, it is generally advisable to pay the amounts assessed in order to avoid an accumulation of interest. Furthermore, tax laws permit the imposition of costly penalties in certain circumstances, for example, gross negligence, which can form part of the assessment.
Filing an Objection
Following the issuance of an assessment, if the taxpayer wishes to contest it, he must file a notice of objection within the prescribed delay (90 days, which can be extended in some circumstances). The filing of an objection does not stop the interest from accumulating. However, in some cases, the objection prevents the revenue agency from taking certain collection measures (there are many exceptions – i.e. GST/QST assessment, an assessment of a large corporation, etc.).
In the notice of objection, the taxpayer must explain the reasons for his appeal. This is another opportunity to provide additional documentary evidence and make further representations. The taxpayer should also request access to the documents forming part of the audit file in his objection or by way of an access to information request, such as the auditor’s report and additional documents, report on penalties, summary of conversations between the auditor and the taxpayer, etc.
The taxpayer’s objection will be assigned to an objection officer usually within 3 to 12 months after the filing of the objection.
Notice of confirmation/new assessment
The objection officer will analyze the taxpayer’s representations and make a decision as to the validity of the assessment issued. The agent may confirm, modify or cancel the assessment. It is advisable to meet with the objection officer in person in order to present and explain the representations.
Notice of appeal to the Tax Court of Canada/Motion in Appeal to the Court of Quebec
Following the decision of the objection officer, if the taxpayer disagrees with the final determination, he must appeal to the Tax Court of Canada or to the Court of Quebec. A Notice of Appeal or Motion in Appeal (the “pleading”) must be filed with the competent court within the prescribed period of 90 days, which may be extended in specific circumstances. The taxpayer may draft the pleading himself, although I highly recommend that he consult a tax attorney. The pleading should list the chronology of events, the relevant facts, the reasons for the contestation of the assessment and the specific sections of the tax laws relied on, in a coherent manner. This is a crucial step in the appeal process.
After the filing of the pleading, an attorney for the revenue agency involved will reply to the taxpayer’s submissions by way of a document called a Reply or Defense which will indicate the revenue agency’s position on the issue. Following the Reply or Defense, the most common steps are the filing of a List of Documents/Exhibits, examination for discovery or examination before Defense, answering undertakings and the trial.
Out of Court settlement
In spite of the above, we suggest trying to settle the matter out of Court at each of the stages described above, if possible, in order to avoid additional costs. The hiring of a professional may help the taxpayer and save himself substantial time and money.
Nicolas Simard is a Partner with Fasken's Tax group based in Montreal and may be reached at 514-397-5288 or at firstname.lastname@example.org.
Nicolas Simard est associé du groupe de fiscalité de Fasken à Montréal et peut être joint au 514-397-5288 ou à email@example.com.