The Federal Court of Appeal's ("FCA") ruling in Vine Estate v. Canada (2015 FCA 125) ("Vine Estate") reminds taxpayers of the importance of filing their original tax return correctly and applying the appropriate degree of care in the process. The FCA ruled that an amended return under para. 164(6)(e) of the Income Tax Act ("ITA") cannot cure a misrepresentation in the original filing. The ruling clarifies the scope of loss carry-back provisions for estates in ss. 164(6). However, taxpayers should be aware that an amended return for an estate can include information enabling the Canada Revenue Agency ("CRA") to reassess past the normal reassessment period. In Vine Estate, the taxpayer's amended return drew the CRA's attention to a misrepresentation in the original return. The FCA held that the CRA's reassessment was permitted by ss. 152(4) based on the failure of the estate of Stanley Vine ("Estate") to exercise the required degree of care in reviewing the original final return prepared by its accountants.
In Vine Estate, the Estate appealed a reassessment of the deceased's final tax return that was issued after the normal reassessment period. In the original return, an accounting firm did not include an amount in income for recaptured capital cost allowance in relation to the deceased's deemed disposition of an interest in property located at 3000 Victoria Park ("Victoria Park Recapture"). While the deceased directly held a one-half beneficial interest in the property, the firm treated the property as if it were held by a partnership in which the deceased was a partner.
In the year following the assessment and filing of the final return on June 7, 2004, the Estate realized a capital loss. To have the capital loss deemed to be the capital loss of the deceased in his final taxation year, the Estate filed an amended final return for the deceased as required under para. 164(6)(e). The amended return also reported the Victoria Park Recapture that the accounting firm had omitted from the originally filed final return.
Based on the amended return, the CRA reassessed the Estate under ss. 152(4) to include the Victoria Park Recapture in the deceased's net income. Although the Estate appealed this reassessment, the appeal was unsuccessful at both the Tax Court of Canada ("TCC") and the FCA with respect to the Victoria Park Recapture. The FCA held that an amended return cannot place an expiration date on the reassessment period under ss. 152(4), stating that the Estate's argument that an amended return filed under para. 164(6)(e) would nullify the misrepresentation in the original return was "without merit". The amended return is contemplated in para. 164(6)(e) to give effect to the rules in paras. 164(6)(c) and 164(6)(d) and not to remedy a misrepresentation in an original return. This helpfully clarifies the scope of amended returns in the loss carry-back provisions for estates.
The FCA also held that the purpose of ss. 152(4) is to preserve the CRA's right to reassess a taxpayer where the taxpayer has denied the CRA the opportunity to assess correctly all of the taxpayer's liability under the ITA in the first instance. On the facts of Vine Estate, the FCA determined that the omission of the Victoria Park Recapture in the Estate's initial return was a misrepresentation. In effect, the taxpayer was trying to have its cake and eat it too, by filing to take advantage of para. 164(6)(c) yet protesting when the CRA deduced from the amended filing that the Estate's original filing contained a misrepresentation.
However, in writing for the FCA, Justice Webb's obiter comments on the interplay of paras. 152(4)(a) and 164(6)(e) bear scrutiny. First, Justice Webb applied a contextual, textual and purposive analysis to suggest that the phrase "attributable to neglect, carelessness, or wilful default" in para. 152(4)(a) may apply to the misrepresentation and not to the person filing the return. Consequently, "a misrepresentation is 'attributable to neglect, carelessness or wilful default' regardless of whether the person filing the return or someone else was negligent, careless or wilfully in default in making the misrepresentation." With respect, such an interpretation would not address the verb "made" in para. 152(4)(a), whose subject is restricted to either the taxpayer or the person filing the return. It may be argued that attaching the phrase "attributable to neglect, carelessness or wilful default" to the misrepresentation only would inappropriately expand the scope of the CRA's reassessment powers beyond the limits of the two persons specified in para. 152(4)(a) as the subject of the verb "made": the taxpayer or the person filing the return. If there is no requirement for the taxpayer or the filer to engage in culpable conduct under ss. 154(2), the mere fact of a misrepresentation could extend the limitation period, making the test in subpara. 152(4)(a)(i) too broad.
In Vine Estate, the TCC found that the Estate did not exercise the required degree of care in reviewing the original final tax return for the deceased. The FCA did not interfere with that finding. Therefore, the FCA did not have to rule on whether para. 152(4)(a) applies when a misrepresentation is made and the taxpayer remains unaware of it due to an accountant's error, despite not having been negligent, careless or wilfully in default when reviewing and filing a return. This question remains an unsettled issue for another court to decide.