Blog: Two False Beliefs About Objecting to an Income Tax Assessment

September 12th, 2016 GST/HST/QST and taxable benefits – The 2016 deadline is approaching

#1 The filing of a notice of objection precludes the tax authorities from enforcing the collection of outstanding tax debts.

It is generally true that a taxpayer does not have to pay an assessment while it is under objection, though interest will continue to accrue on the unpaid amount in spite of the objection. However, there are several exceptions to this general relief, such as those exceptions for amounts payable under a GST/HST/QST assessment, an assessment for income tax amounts that should have been withheld at source from employees or non-residents, or an assessment related to a donation tax shelter. One important exception that is often forgotten about is the one that applies to “large corporations”. When a taxpayer is a “large corporation”, the collection measures the tax authorities may implement to recover tax amounts owing are suspended for only 50% of the income tax amount under objection. Thus, the remaining 50% is payable immediately.

A corporation is generally considered a “large corporation” if its paid-up capital is $10 million or more. For Quebec tax purposes, the capital of each corporation is considered individually while for federal tax purposes, the corporation’s capital must be added to the capital of the corporations to which it is “related” within the meaning of section 181.5 of the Income Tax Act. A corporation can end up in a situation where it is a “large corporation” for federal purposes but is not for Quebec tax purposes.

#2 The filing of a notice of objection within 90 days of the date of the assessment will preclude the tax authorities from enforcing collection efforts, irrespective of the date when the objection is filed.

Although this is generally true, there is a significant exception which relates to compensation. For federal tax purposes, where a taxpayer is expecting to receive a refund, such as a GST/HST refund or a refund resulting from the carry-back/carry-forward of income tax losses from other years, the federal tax legislation allows the Canada Revenue Agency to withhold tax refunds as a set-off against tax amounts owing even if a notice of objection has been filed within the 90 days statutory filing deadline. This compensation can be done by the Canada Revenue Agency at any time once the tax debt is outstanding, including the 90 day period prior to the deadline to file the notice of objection.

For Quebec income tax purposes, the legal framework provides a different outcome. Compensation cannot be effected to pay tax debts if these debts have been objected to. Therefore, the timing of the filing of the notice of objection becomes important. For example, let’s assume that on August 15, 2016, a taxpayer requested a $100,000 Quebec tax refund in relation to its 2015 taxation year. On August 30, 2016, this taxpayer is reassessed $50,000 of Quebec income tax pertaining to its 2014 taxation year. The 2015 refund is accepted by Revenu Québec on September 15, 2016. On September 17, 2016, Revenu Québec advises the taxpayer that $50,000 of its 2015 refund is withheld to pay its 2014 liability and the other $50,000 will be refunded as requested. If the taxpayer had filed a notice of objection for its 2014 taxation year before September 17, 2016, the statutory framework would preclude Revenu Québec from applying the expected refund against the outstanding tax debt. If the objection was not filed before the date Revenu Québec implemented the compensation, Revenu Québec will be within its right to withhold the expected refund to effect compensation.

Should you require any assistance with respect to these matters, please contact your Crowe BGK advisor.

About the Author:

Isabelle Nadeau, B.C.L., LL.B., LL.M. Tax, is a Tax Manager at Crowe BGK.

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