8 October 2009 External T.I. 2009-0338861E5 - Backdating of a completed transaction

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether reassessment can be made based on retroactive change to a certain transaction

Position: General Comments provided

XXXXXXXXXX 						2009-033886
V. Srikanth
October 8, 2009					

Dear XXXXXXXXXX :

Re: Backdating of a Transaction

This is in response to your letter dated August 10, 2009, wherein you requested a ruling that a transaction, dated XXXXXXXXXX , in the books of the corporation, XXXXXXXXXX , now be backdated to XXXXXXXXXX .

The relevant facts can generally be summarized as follows:

You are one of the shareholders of XXXXXXXXXX . You loaned to the corporation, funds borrowed from your personal line of credit. On XXXXXXXXXX , a transaction was recorded in the books of XXXXXXXXXX to convert a shareholder loan of $XXXXXXXXXX to equity. Based on the information you provided, the Canada Revenue Agency (the "CRA") allowed you to deduct, as carrying charges, on your personal income tax return, an amount equal to the interest paid on the line of credit, from XXXXXXXXXX to XXXXXXXXXX .

You now request that the transaction that took place on XXXXXXXXXX , be backdated to XXXXXXXXXX , such that the interest paid and deducted by XXXXXXXXXX , for the period XXXXXXXXXX , now be allowed to be deducted on your personal income tax returns for that period and, the income you reported on your XXXXXXXXXX T1 returns be reassessed accordingly. You further request that the interest expense earlier allowed to XXXXXXXXXX , now be reversed and the non-capital loss of the corporation, for those years, be recalculated.

Our Comments

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advanced Income Tax Rulings. This Information Circular and other CRA publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Since your request relates to a completed transaction, we cannot provide you with an advance income tax ruling.

However, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not advance income tax rulings and we are prepared to provide you with the following comments.

There is no provision in the Income Tax Act (the "Act") that specifically deals with dating or amending documents retroactively. To determine the date a transaction takes place under the Act, reliance is generally placed on the legal documents and the legal rights they create. In our view, "backdating" or altering documents and records is clearly not permitted under any provision of the Act.

However, there have been situations where courts have issued rectification orders to reflect the true intention of parties versus the legal effect created by the original documentation. In such cases, the tax implications may alter significantly what the result would have been if the original documentation were used [AG (Can) v Juliar et al, 2001 4 CTC 45].

Therefore, as a general rule, the CRA cannot ignore legally valid documents entered into by parties to a transaction and the legal rights that they create in order to assess the tax consequences of such transactions. Auditors have no choice but to assess on the facts present at the time of assessment or audit. However, where the documents do not reflect the true intentions of the parties, the parties may be able to apply to the courts for a rectification order as discussed in Income Tax Technical News ITTN-22, which can be viewed on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/itnews-22/itnews-22-e.html.

Please be aware that a request to vary the income tax consequences of transactions that have already taken place will only be considered if such variance would amount to a rectification of an error and only if there is unequivocal evidence substantiating the fact that an error was made. Please further note that CRA does not encourage retroactive tax planning.

We trust our comments will be of assistance to you.

Yours truly,

R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch