Can CRA reopen statute-barred tax years?

In the Paletta case (Part 1 of 3), the Federal Court of Appeal ruled that Mr. Paletta’s activities were not of a commercial nature, as he had no intention of making a profit. So his losses of $37 million were rejected.

To remember, in 30 seconds:

• In 2014, CRA issued notices of reassessment to Mr. Paletta for his statute-barred tax years from 2000 to 2007;
• Paletta disagreed;
• The ruling determined that the CRA could assess Mr. Paletta because he had acted with indifference. Read on to find out!

In addition, the court also had to decide whether CRA had the authority to reopen and re-examine the tax years from 2000 to 2007 that were statute-barred. This is because Mr. Paletta’s reassessment notices were issued in 2014, i.e. beyond the three-year limitation period applicable to him.

In order to reconsider the prescribed assessments, CRA had to prove that Mr. Paletta had “made a misrepresentation, through negligence, carelessness or wilful omission, or committed fraud in filing the return or providing any information”.

The evidence presented at trial showed that Mr. Paletta and his son knew their plan was flawed. They knew it was tax avoidance and, without having obtained a formal legal opinion on the matter, deliberately decided to assume the risk. According to the Court, Mr. Paletta showed indifference or wilful blindness regarding the legal validity of his plan, and his sole objective was to satisfy his desire to avoid paying tax. So the criterion has been met. CRA was therefore entitled to reopen the seven statute-barred years.

Reference: Canada v. Paletta, 2022 CAF 86

To remember

The last chapter of this story has not yet been written. The decision of the Federal Court of Appeal has been appealed to the Supreme Court of Canada. If Mr. Paletta wins, it’s almost certain that Canada’s Finance Minister will quickly assess her legislative options. Stay tuned for the rest of this saga.