Adjusting Prior Filed Returns? Be Honest

Morton v. The Queen (2014) TCC 72. The Tax Court of Canada recently released reasons for judgment in a case regarding the imposition of penalties following the expiration of the normal reassessment periods.

The appeal by Mr. Morton was in regard to reassessments for the taxation years 1998-2001. The reassessments were made following his requests for adjustment to his income for those years after the expiration of the normal reassessment periods. The Minister of National Revenue (the Minister) normally has three years to reassess a taxpayer, but taxpayers have ten years to make an adjustment request and any re-determination, when requested by a taxpayer, is discretionary on the part of the Minister.

If the adjustments were made as Mr. Morton submitted, they would have generated refunds in excess of $202,000. But, the adjustments were dubious; they were not supported by any documentation and the facts surrounding them were vague.

During testimony, he admitted that he knew when he made the requests that he did not receive the income nor incur the expenses claimed. He blamed stress related to financial difficulties, marriage breakdown and the loss of access to his business books and records in 2007 and 2008 for the grossly incorrect and unsubstantiated claims.

The Honourable Mr. Justice Randall S. Bocock disagreed with all arguments proffered by the appellant’s counsel, including an argument that the absence of a refund or reassessment reliant upon the request by the taxpayer precludes a penalty under the Income Tax Act (the Act).

Justice Bocock stated that such an argument “lacks entirely an appreciation of this taxpayer’s intention, the intention and expectation of each taxpayer under the Act when filing a T1–Adjustment Request and the plain meaning of subsections 152(4) and 152(4.2)” of the Act.

It was held that because there had been fraudulent misrepresentation, the Minister had full discretion to reassess tax, interest or penalties and re-determine the amount to be paid on account of tax.

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