Income Tax Act subsection 164(1) unfairly prevents a corporation or trust from obtaining a refund if the return is filed more than three years after year end. \nFor corporations, the rule can cause hardship in one of two ways:\n\n Where a corporation prepays instalments based on its estimated tax for the year but, for some reason (e.g., ownership change), fails to file the return within three years after the year end, any overpaid instalments cannot be refunded — even if the corporation’s actual tax bill for the year was significantly lower than amounts prepaid.\n When corporations fail to file late returns after the CRA has made requests to file in writing, the CRA can issue an arbitrary assessment. Any assessed amounts paid by the corporation or seized from it in a collection action cannot be refunded — even if the corporation eventually files the return and the amount of tax owed is less than the amount arbitrarily assessed.\n\nBack in 1991, Chief Judge Couture of the Tax Court of Canada called for the provision to be removed from the books. He said the rule is “a sort of confiscation of the appellant’s property,” “regrettable” and an “abrogation of a taxpayer’s right of ownership.” He also found it “deplorable” that taxpayers are given only three years “to claim their property.\n\nAdditionally, because the rule applies based on the taxpayer’s year end, rather than when the return was due, the sanction bears no relation to the length of time that the return is actually late. For example, since corporate tax returns are due six months after the corporation’s year end, this means the provision kicks in when the return is only 30 months late.\nThe CRA has discretion to waive the provision for individuals. But no relief is allowed for corporations or, as of 2016, any trust other than a graduated rate estate. Due to recent CRA policy changes, a previous work-around that allowed for the transfer of refund balances to a later year is no longer allowed.\nIn a September 2015 submission to the Department of Finance signed by me and fellow tax expert David M. Sherman, LLM, we proposed replacing the provision with a penalty regime that would encourage timely filing by providing a clear cost for filing very late. To date, the Department of Finance has not responded.\nFurther, we understand that CRA and Finance officials have discussed the provision’s punitive nature and decided this is balanced by the provision’s alleged deterrent effect.\nImposing set fines to encourage compliance is one thing. Taking a taxpayer’s own money arbitrarily is quite another. I urge the Department of Finance to correct this unfairness.\nKeep the conversation going\nI want to hear from you. Have you encountered seizure of taxpayer funds as a result of this provision? What would be a better solution? You can keep the conversation going by posting a comment below.\nCPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues and their impact on those who practise tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.