A Guide to Appealing Your Taxes – Part I

Well after my post about what to do when you make an error on your taxes a reader contacted me about doing a guest post about appealing your taxes. So here is Raphael’s two part series on appealing your taxes in Canada.

The following information to help you, Mr. or Ms. Taxpayer, understand the tax process and your rights along the way. It is generalized and simplified information not intended to replace tax, accounting, or legal advice – if that’s what you need, consult a qualified professional. Rules change all the time, and there are always exceptions to various rules. This post is not authoritative in any way, shape, or form.

Before we look at how to appeal your taxes, it’s helpful to summarize how taxes work in the first place. The Income Tax Act governs federal income taxes, and it is the most ungodly, complicated piece of literature you’ll ever set your eyes on. Nobody can honestly say they understand each and every section of it. It has been said that it is written in neither of Canada’s official languages. It’s available online at http://laws.justice.gc.ca/en/I-3.3/index.html and it’s HUGE. Put simply: it’s bloody complicated.

The Federal Government, through Parliament, sets tax policy. This is an important point to keep in mind – the people that you deal with (the staff at the Canada Revenue Agency – CRA) do not set the rules. Their job is simply to apply and enforce them. To that end, it doesn’t make any sense to complain to CRA if you don’t like “the rules”. If you don’t like tax policies or some provision of the Income Tax Act, complain to your MP or the Finance Minister (currently Jim Flaherty).

At various times and for various reasons, the CRA will calculate the amount of income tax that you owe. They do this by “raising” an assessment, and they’ll send you a copy of it in the mail. The document is called a Notice of Assessment or a Notice of Reassessment. If you filed your 2007 taxes early, you’ve probably received one recently. A tax assessment sets out how much money the CRA thinks you earned, what deductions and credits the CRA thinks you’re entitled to, and as a bottom line the taxes the CRA thinks you owe. In most cases the CRA’s assessment will match the one you made when you sent in your tax return, which is why the tax system is considered to be a “self-assessment” system – you send in your tax return, and the CRA usually accepts you at your word unless they think you might be lying. The taxes owed are compared to the taxes already paid, and the result is either a bill or a refund.

In some cases, you might disagree with the assessment made by the CRA. You might, for example, think that you qualified for a deduction or credit that CRA disallowed. You might also think that the CRA miscalculated your income for the year, or made some other mistake.

The first step to take if you disagree is to contact the CRA (http://www.cra-arc.gc.ca/contact/menu-e.html) and ask for details. Ask them to explain the reasons for the decision, and ask them to give you exact references to the section(s) of the Income Tax Act and regulations that apply to their decision, if these weren’t listed on the Notice of (Re)Assessment. Look at those sections and try to decide whether you have a case worth fighting further.

Before deciding to “fight” the assessment, it’s a good idea to talk to a tax lawyer or tax accountant. They might tell you that you have no chance of winning, and that it doesn’t make any sense to pursue the matter. They might also be able to give you some helpful pointers, even if you don’t hire them to represent you.

Let’s assume that you honestly believe CRA made a mistake. The next step is to formally object to the tax assessment. The form for this, form No. T400A – Notice of Objection, is on the CRA web site (http://www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html). You can also send a letter to the “Chief of Appeals” at the CRA office listed on your Notice of (Re)Assessment. The Notice of Objection should set out the facts and reasons for the objection, and enclose copies of any relevant documentation that you have. There is a deadline to send in an objection. If you miss the deadline, it’s possible to ask that it be extended, but it’s less work if you can send in the objection on time.

The CRA publishes a good overview of the objection and appeal process – the brochure is numbered “P148” and is available at http://www.cra-arc.gc.ca/E/pub/tg/p148/p148-e.html.

One note about the process: if the assessment says that you owe taxes, then you owe those taxes until the CRA or the courts say that you don’t. Although the policy of the CRA is to not pursue collection action (i.e. garnishing your wages or seizing your property) on amounts that are under dispute through an objection or appeal to the Tax Court, interest will accrue on any amounts owed every single day until they are paid or the assessment is varied. For this reason, it can make sense to pay the amount owed in full. Paying the tax doesn’t mean that you’re “giving up” or that you are acknowledging that the CRA is “right” – it does, however, avoid the problem of winding up with a much larger amount to pay after pursuing every avenue of appeal, because of several months’ (or possibly years’) worth of compound interest. If you pay the amount owed and the assessment is later changed in your favour, you’ll get a refund of the overpayment, with interest.

The objection will be looked at by a fresh set of eyes at the CRA – staff that work in a different branch than the one that made the tax assessment in the first place. They’ll look at the information and documentation you’ve submitted, and decide whether the assessment was in error. In some cases, CRA will decide that you (the taxpayer) were correct, and the assessment was wrong. They’ll send out a new Notice of Reassessment with appropriate changes (allowing the deduction that you claimed for, for example). In some cases, though, they’ll decide that the assessment was correct, and send you a Notice of Confirmation, which confirms that the CRA think the assessment was correct.

Part II deals with going to Court and will be up tomorrow.

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