Arbitrary Notice of Assessment: Why Late Corporate Filings Can Cost You More

For many small business owners, missing the filing deadline for a corporate income tax filing can seem like a minor oversight. In reality, even a simple delay can trigger a serious consequence: an arbitrary notice of assessment issued by tax authorities. When the Canada Revenue Agency (CRA) or Revenu Québec does not receive a required return, they may assess your corporation based on estimated income. This estimate relies on whatever data they have on file (slips, payroll summaries, banking information, historical activity) and does not account for your actual expenses, credits, or deductions.

The result is predictable: inflated amounts, daily interest charges, late-filing penalties, and in some cases, immediate collection measures.

In this article, you'll learn how an arbitrary assessment works, why it often exceeds your real tax liability, and how filing your overdue return after receiving an arbitrary notice of assessment can, in many situations, help correct the assessment.

What Is an Arbitrary Notice of Assessment?

Under the Income Tax Act, the CRA may issue an arbitrary assessment when a corporation fails to file its corporate income tax return on time. Revenu Québec applies a similar approach under the Tax Administration Act.

An arbitrary assessment is essentially a tax assessment issued without a return, built from incomplete or external data: third-party slips, industry comparables, payroll information, or other indicators of economic activity.
Because the tax authority does not have access to your actual expenses, depreciation, or supporting documents, they apply a conservative estimate that is often significantly higher than the true amount of tax payable for that fiscal year.

Why Do Tax Authorities Issue an Arbitrary Assessment?

The most common reason is simple: the corporate income tax return was not filed on time.
And contrary to a widespread misconception, even an inactive corporation must file a T2 federally, and a CO-17 in Québec.

Other factors can lead to an arbitrary assessment:

• no response during an audit or verification process;
• inconsistencies detected in information reported by third parties;
• a return that was filed but incomplete;
• a breakdown in communication with a CRA or RQ auditor;
• repeated late filings or chronic non-compliance

Ultimately, tax authorities have a mandate to enforce compliance — even if it requires issuing an estimate that is higher than reality. Additional assessments may also be issued if new information becomes available, especially in situations involving unfiled returns.

Financial Consequences for Your Business

Arbitrary assessments can place significant pressure on a corporation's cash flow. They generally include:

• daily interest charges, applied until a proper return is filed;
• late-filing penalties, which can reach 5% to 10% of the balance owing, plus 1% to 2% per month;
• collection actions, which can be immediate: bank garnishments, refund holds, or blocked tax credits.

Even if you dispute the assessment, certain collection measures may continue until the situation is corrected. This can create challenges in your business tax accounting, especially when an inflated balance affects cash-flow planning.

To illustrate, one SME that had fallen three years behind saw one federal year become non-reviewable due to the normal reassessment period. Revenu Québec adjusted the late years, but the CRA was no longer required to revise the original arbitrary assessment.

An arbitrary notice of assessment is not a minor administrative issue — it directly affects your cash flow, financial credibility, and tax compliance position.

Filing Your Return After an Arbitrary Assessment: Can It Fix the Situation?

In most cases, filing your overdue corporate return does allow the tax authorities to correct the estimate. Submitting the missing T2 and CO-17 is the first and most important step toward a reassessment.

What happens next depends on the normal reassessment period.

At the Federal Level (CRA)

• The normal reassessment period is 3 years, sometimes 4 years depending on the corporation.
• If your return is filed while the year is still "open," the CRA can adjust the arbitrary assessment based on your actual data.
• Once that period expires, the CRA is not obligated to revise the assessment — even if the estimate was clearly too high.

This means that, in some cases, excess federal tax amounts may become irrecoverable, even if the return is eventually filed. This is a frequent point raised by tax accountants and reflects the importance of filing on time.

In Québec (Revenu Québec)

Revenu Québec is generally more flexible and often agrees to revise late-filed years, even old ones if you file the CO-17 return. This difference between the two authorities explains why a corporation may have its situation resolved in Québec but not federally.

In all cases, the sooner the missing return is filed, the lower the interest and penalties — and the higher the likelihood of obtaining a reassessment.

What Should You Do After Receiving an Arbitrary Assessment?

1. Do not ignore the notice: Collection measures can escalate quickly without action.

2. File the missing corporate tax return immediately: This is the only way to obtain an assessment based on your actual numbers.

3. Submit a Notice of Objection within 90 days: This protects your rights if the arbitrary assessment is incorrect and is the formal way to file a notice of objection.

4. Prepare your supporting documents: Bookkeeping records, financial statements, invoices, contracts, bank transactions — the burden of proof rests on the corporation.

5. Request a payment arrangement if needed: Both the CRA and RQ offer plans adapted to your corporation's financial capacity.

Acting quickly significantly reduces interest, improves your chances of correction, and helps stabilize the situation.

An Arbitrary Assessment Is Reversible, but Timing Matters

Receiving an arbitrary notice of assessment can be stressful, but the situation is often recoverable through a proper late filing, a timely objection, and complete documentation. The sooner you act, the greater your chances of obtaining a favourable reassessment. But waiting too long can turn a simple administrative lapse into an unnecessarily large tax debt, especially if unpaid taxes accumulate interest.

If you need assistance filing a return after receiving an arbitrary assessment, acting promptly is key. T2inc.ca supports incorporated businesses across Canada with a corporate tax filings services and with regularizing their tax situation.

The information provided is general in nature and does not constitute personalized tax advice. Each situation is unique. For tailored guidance, consult a qualified professional.