Written by: John Grummett, CPA, CA | Taylor Leibow LLP Accountants and Advisors
Subsection 164(1) of the Income Tax Act gives the Canada Revenue Agency (“CRA”) the ability to deny paying a refund where a tax return is filed more than three years after the applicable taxation year. This can result in some unforeseen tax consequences.
First, where a corporation is claiming a dividend refund (a refund of the refundable dividend tax on hand “RDTOH”) as a result of paying a dividend, this is considered to be a refund, even though it may be applied against taxes owing. Generally, the penalty for late filing a corporate tax return is based on the taxes owing. A shareholder of a corporation may not think that there is any penalty for late filing a return because there is no balance owing. However, where there are taxes payable that are offset by a dividend refund, the taxes payable will be assessed, but the dividend refund will be denied if the return is filed more than three years after the tax year end.
Also, the CRA has historically reduced the corporation’s RDTOH balance by the dividend refund even though the dividend refund was never received. After several challenges, the CRA’s position has now changed, and they will no longer reduce the RDTOH account where the dividend refund is denied.
The second significant effect of subsection 164(1) results when a corporation ignores a request to file a corporate tax return by the CRA. Where repeated requests to file a corporate return are ignored, the CRA may issue an arbitrary assessment. Often this arbitrary assessment results in taxes owing that are higher than what the actual assessment would be. If the arbitrary assessment is ignored, the CRA could then garnishee the corporation’s bank account. If this happens, and the corporation then files the actual tax return for the year in question and is due a refund of the amount garnished from their bank account, the CRA will deny such a refund because it relates to a tax year for which the return was filed more than 3 years after the year end.