One of the most disorienting moments for a non-filer is opening a notice that assesses tax for a year in which no return was ever filed. The figure is often large, it carries penalties and interest, and it appears to have come from nowhere. This is an arbitrary assessment — also called a notional assessment — and it is the Canada Revenue Agency (CRA) exercising a specific statutory power. Understanding where that power comes from, and how the assessment can be unwound, takes most of the alarm out of it.
The statutory basis: subsection 152(7)
Subsection 152(7) of the Income Tax Act provides that the Minister "is not bound by a return or information supplied by or on behalf of a taxpayer and, in assessing tax... may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable." In plain terms: the CRA does not have to wait for your return. If you have not filed, it can estimate your income and assess tax on that estimate. The companion power in subsection 152(8) gives that assessment a presumption of validity — it is "deemed to be valid and binding" notwithstanding any error in it, subject to your right to object and appeal.
That presumption of validity is the feature that surprises people. The onus is not on the CRA to prove its estimate is right. Once the assessment is issued, it stands as a valid, collectible debt until you take a positive step to displace it. Doing nothing does not make it go away; it makes it final.
How the CRA builds the estimate
Arbitrary assessments are usually constructed from the information slips the CRA already holds: T4 employment income, T5 investment income, T3 trust income, T5008 securities transactions, and similar third-party reporting. Because those slips report gross amounts, the assessment captures the income side in full while omitting almost everything that would reduce it — RRSP deductions, business expenses against self-employment income, the adjusted cost base on a securities disposition (so a T5008 sale can be assessed as if the entire proceeds were a gain), capital and non-capital losses, and personal credits beyond the basics. The structural result is that an arbitrary assessment is systematically higher than the tax a properly prepared return would show.
For the self-employed and for investors, the gap can be dramatic. A contractor whose clients filed T4As sees the full contract revenue assessed with none of the expenses that earned it. An investor with active trading sees gross proceeds on a T5008 treated as income with no cost base subtracted. The assessment is not a malicious guess — it is a conservative one built from incomplete information — but "conservative" here means conservative in the CRA's favour.
How to displace an arbitrary assessment
The remedy is almost always the same: file the actual return for the year. A correctly prepared return showing the real income, deductions, and credits gives the CRA the information subsection 152(7) was filling in by estimate. In the ordinary course, the CRA will reassess on the basis of the filed return, replacing the inflated notional figure with the real one. This is why an arbitrary assessment, however frightening on paper, is frequently reduced substantially — sometimes to nil or to a refund — once a genuine return is in front of the CRA.
Two procedural points matter:
- The objection window. You can formally object to an arbitrary assessment by filing a Notice of Objection, generally within 90 days of the date on the notice (with a possible one-year extension on application). But for a non-filer, filing the return itself is usually the cleaner and more complete remedy, because it supplies the correct numbers directly rather than litigating an estimate.
- Collections do not pause automatically. An arbitrary assessment is collectible while you prepare the corrective return. Where the assessed amount is large and collections action has started, it is worth communicating with the CRA so that enforcement does not race ahead of the reassessment that will reduce the debt.
Why the CRA issues them at all
It helps to understand the purpose behind the power. An arbitrary assessment is not primarily a revenue tool — it is a prompt. By assessing a conservative, deductions-free figure, the CRA creates a concrete liability that compels a non-filer to engage, because the only way to reduce an overstated assessment is to file the real return. In effect, the arbitrary assessment is the CRA's way of saying, "we know you had income, here is what we will assess unless you show us otherwise." Seen that way, the inflated number is less a final demand than an invitation to supply the missing return. That framing matters, because it tells you exactly what response the system is built to reward: filing, not arguing about the estimate in the abstract.
It also explains the conservative bias. If the CRA's estimate were generous to the taxpayer, there would be little incentive to file and correct it. The deliberately high figure is what makes filing worthwhile, and it is why the gap between the arbitrary number and the real tax is so often large.
Where the Voluntary Disclosure Program fits
Timing interacts with the Voluntary Disclosure Program (VDP) in an important way. The VDP requires the disclosure to be voluntary — made before the CRA contacts you about the issue. A demand to file, and in many cases an arbitrary assessment, can be the contact that ends voluntariness, closing the door to penalty and interest relief for that year. This is the central reason the VDP is described as a window that narrows over time: once the CRA has assessed you arbitrarily, the relief the program offers may no longer be available, and you are left with the ordinary route of filing to reduce the assessment while the penalties and interest stand. The VDP eligibility guide explains exactly where that line falls.
A worked example
The mechanics are easiest to see with numbers. Suppose a self-employed graphic designer did not file for a year in which her clients reported $90,000 of fees on T4A slips. Seeing the slips and no return, the CRA issues an arbitrary assessment under subsection 152(7) treating the full $90,000 as taxable income, with no expenses. The assessed federal and provincial tax, plus the late-filing penalty and arrears interest, might come to roughly $28,000. When she finally prepares the real return, it shows $34,000 of legitimate business expenses — software subscriptions, a home-office portion, contractor payments, equipment — bringing her net business income to $56,000. Add her RRSP contribution and a few credits, and the real tax is closer to $13,000. Filing the actual return does not just trim the arbitrary number; it can cut it in half or more, because the estimate was built on gross revenue with nothing subtracted.
The same dynamic appears with investment income. A T5008 reports the gross proceeds of a securities sale, not the gain. An arbitrary assessment can treat $200,000 of proceeds as though it were all income, when the shares cost $180,000 and the actual gain was $20,000 — of which only half is taxable. The corrective return supplies the adjusted cost base the CRA never had.
Why ignoring an arbitrary assessment is the worst response
Because the assessment is presumed valid under subsection 152(8), inaction is the one response that ensures the inflated number sticks. Several things harden over time. The objection deadline runs out, removing the formal appeal route and leaving only the application to file the return. Arrears interest keeps compounding daily on the overstated balance, so the debt the CRA is collecting grows even though the real tax is lower. And collections can begin in earnest — requirements to pay, set-off of credits and refunds, and liens — all directed at a figure that a corrective return would have reduced. None of this is irreversible while you act, but each passing month adds cost and narrows the options. Treating the notice as a prompt to file, rather than a final verdict, is what keeps the situation recoverable.
What to do if you have received one
A practical sequence for responding to an arbitrary assessment looks like this: first, do not ignore the notice or assume the number is correct — it almost certainly is not. Second, gather the slips and records needed to prepare the real return for that year (the CRA's own slip data, available through My Account or an authorized representative, recovers most of the income side). Third, prepare and file the actual return so the CRA can reassess on real figures. Fourth, if multiple years are involved or there is unreported income behind the non-filing, assess whether a voluntary disclosure is still available before submitting anything, because the order of operations affects the relief you can claim. Handled this way, an arbitrary assessment is far more often the start of a correction than the final word.
This article is general information about how the Income Tax Act and the Canada Revenue Agency treat unfiled returns and tax debts. It is not legal advice. If you have years of unfiled returns or a balance you cannot pay, the Voluntary Disclosure Program may apply, and a free initial consultation is the place to map your options. If you are weighing whether the VDP fits your situation, our step-by-step VDP eligibility guide walks through the four conditions.