CRA finds that s. 152(4)(b)(vii) does not apply to extend the period for adjusting the income computation of a trust that filed as a s. 94 trust

A s. 94(3) trust reported a capital gain from the disposition of the shares of a foreign affiliate in its 2020 T3 return. In finding that s. 152(4)(b)(vii) did not authorize CRA to reassess the trust within three years of the expiry of the normal reassessment period to adjust the proceeds of disposition, the Directorate indicated:

• The relevant scoping condition in s. 152(4)(b)(vii) – that the assessment was “to give effect to the application of section 94” - meant “to cause section 94 to apply.”
• In this regard, s. 94 does not provide rules for computing the trust’s income which instead, in the case of capital gains, are set out in subdivision C of Part I.
• Accordingly, “a reassessment to adjust the proceeds of disposition of the foreign affiliate’s shares held by the Trust would not give effect to the application of section 94” so that s. 152(4)(b)(vii) could not apply to extend the normal reassessment period.

However, CRA stated:

Clause 152(4)(b)(iii)(B) may, however, have application depending on the circumstances.

S. 152(4)(b)(iii)(B) allows for the extended reassessment period where the assessment

is made

(A) as a consequence of a “transaction” (as defined in subsection 247(1)) involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length, or

(B) in respect of any income, loss or other amount in relation to a foreign affiliate of the taxpayer

The above CRA statement regarding s. 152(4)(b)(iii)(B) seems to imply CRA uncertainty as to whether a capital gain from an FA sale would be an “other amount in relation to” the FA. It also is noteworthy that there was no mention of s. 152(4)(b)(iii)(A), i.e., a sale of an FA may not be a transaction “involving” a person (the FA) with whom the taxpayer is relevantly not dealing at arm’s length.

Neal Armstrong. Summary of 28 October 2024 Internal T.I. 2024-1029911I7 under s. 152(4)(b)(vii).