Tax and accounting terms
Arbitrary Assessment Explained: When the CRA Estimates Your Tax
152(7)the subsection of the Income Tax Act that lets the CRA assess tax payable whether or not a return has been filed, and regardless of what a return says.
Sources checked October 20263 min read
How an arbitrary assessment comes about
The CRA's Non Filer Program starts after the filing deadline, when a required return is missing and tax appears to be owing. It usually begins with a letter asking for the return, and once you receive that request you are legally required to file. Phone calls and visits can follow. If the return still does not arrive, the CRA can assess the tax itself under subsection 152(7) of the Income Tax Act, which allows an assessment whether or not a return has been filed. Individuals, corporations and trusts can all be assessed this way.
Key points
- An assessment the CRA raises itself when a required return has not been filed
- It leaves out deductions you may have been entitled to and estimates business expenses
- It is a legal debt until replaced, and filing the actual return is how it is replaced
- Late filing penalties, a larger repeat penalty after a demand, and interest apply on top
Why it usually runs higher than the real tax
An arbitrary assessment is built from the information the CRA already has, such as slips and earlier returns. It does not include voluntary deductions you may have been entitled to, because those depend on facts the CRA cannot see, and business expenses are estimated as an average based on earlier filings. A business whose real costs were higher than average, or a person with deductions that only they can claim, ends up assessed for more than they owe.
It is still a legal debt. Interest runs on it, and the CRA can collect it like any other assessment.
Replacing it with the real return
Filing the actual return is the way out. The CRA reviews it to verify the income reported and the deductions claimed, then issues a notice of reassessment based on it. Expect questions about business expenses in particular, and file with the records that support them ready. Because an arbitrary assessment is an ordinary assessment, the usual objection rights and time limits also apply to it.
Penalties and interest on top
A return filed late with a balance owing attracts a late filing penalty of 5% of the unpaid tax plus 1% for each full month late, up to 12 months. If the CRA issued a formal demand and a late filing penalty was also charged in any of the three previous years, the repeat penalty is 10% plus 2% a month, up to 20 months. A GST/HST registrant that ignores a demand to file a return is charged $250.
Where events beyond your control prevented filing, relief from penalties and interest can be requested. Catching up on every outstanding return, rather than one year at a time, usually gives the clearest picture of what is really owed.
Quick answers
Can I just pay an arbitrary assessment?
You can, but it usually overstates the tax because it leaves out deductions and estimates expenses. Filing the actual return leads to a reassessment based on your real figures.
Does filing the real return cancel the arbitrary assessment?
The CRA reviews the return, verifies the income and deductions, and issues a notice of reassessment that replaces the estimated figures.
What is a demand to file?
A formal request from the CRA to file a return. Once you receive it you are legally required to file, and ignoring it exposes you to the repeat late filing penalty and, for GST/HST, a $250 penalty.
Related pages
Official sources
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.