20 September 2002 Internal T.I. 2002-0146627 - Statute barred limits, Section 216S. 216; S. 152(8)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Does a statute-barred assessment under Part I of the Income Tax Act (the "Act") resulting from a return filed under subsection 216(1) of the Act for a taxation year prevent the assessment under Part I of the Act of other sources of income for the same taxation year not previously assessed?

Position: No

Reasons:

The Part I return for amounts assessable under subsection 216(1) of the Act is separate and distinct from any Part I return for other sources of income taxable under Part I. The assessment of the subsection 216(1) return is also separate and distinct from the any assessment of such other income. Thus, the normal reassessment period in respect of the subsection 216(1) assessment should not apply to an assessment of such other income.

September 20, 2002

International Policy & Business HEADQUARTERS
Management Division Income Tax Rulings Directorate
Policy and Publications Unit I
S. Wong
Attention: Louis Green, A/Manager (613) 957-9231

2002-014662

Statute Barred Limits under Part I and Section 216 Returns

We are writing in reply to your memorandum dated June 11, 2002 in which you requested our comments on whether a statute-barred assessment under Part I of the Income Tax Act (the "Act") resulting from a return under section 216 of the Act for a taxation year prevents the assessment under Part I of the Act of other sources of income for the same taxation year not previously assessed in the following situation.

The Situation

1. A individual who was resident in Canada left Canada to take an overseas assignment. The individual considered himself to have ceased to be resident in Canada at the time he left Canada and not a resident of Canada during his overseas assignment.

2. The individual completed a Form NR73, "Determination of Residency Status (Leaving Canada)". Based on the information provided on that Form, a non-binding opinion was given by the Canada Customs and Revenue Agency (the "CCRA") confirming the individual's status as a non-resident of Canada during his overseas assignment.

3. While overseas the individual rented out his house in Canada. Part XIII tax was remitted on the rents.

4. Pursuant to subsection 216(1) of the Act, the individual filed a Part I return reporting only rental income. A notice of assessment was issued by the CCRA under Part I in respect of this return. More than three years have elapsed since the mailing of that notice of assessment.

5. During the overseas assignment, the individual received employment income from a Canadian employer. This income was not reported in Canada.

6. The relevant Tax Services Office (the "TSO") conducted an audit and determined that the individual was in fact a resident of Canada at all relevant times for purposes of the Act and any relevant tax treaty. The TSO intends to assess the individual on his employment income for the taxation year which has the statute-barred Part I assessment resulting from the return under section 216.

7. It is the TSO's and your view that while the Part I assessment resulting from the section 216 election is valid and binding based on subsection 152(8) of the Act, the fact that that assessment is statute-barred does not prevent the CCRA from assessing the individual on his employment income for the same taxation year. This is because, in your view, the Part I assessment resulting from the return filed under subsection 216(1) flows from a separate return and therefore has a statute-barred date separate and distinct from any statute-barred date for any assessment of the individual's income from sources other than those referred to in paragraph 216(1)(b) of the Act. The TSO and you are of the view that, as the individual has not filed a Part I return in respect of such other sources of income (specifically his employment income) for the taxation year in question, there has been no assessment of such income and the CCRA is not statute-barred from assessing such income.

Our Comments

Subsection 152(8) of the Act provides that an assessment (subject to being varied or vacated on objection or appeal under Part I of the Act and subject to a reassessment) shall be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or any proceeding under the Act relating thereto. Based on that subsection, we agree with your view that the assessment with respect to the return filed under subsection 216(1) of the Act must be considered valid and binding despite the fact that the taxpayer was resident in Canada at all relevant times and was not entitled to file the return under subsection 216(1).

Since more than three years (the normal reassessment period for the taxpayer as defined in subsection 152(3.1) of the Act) have elapsed since the mailing of the notice of assessment with respect to the subsection 216(1) return, the CCRA is prohibited from reassessing the taxpayer in respect of that return, unless one of the exceptions in paragraphs 152(4)(a) or (b) of the Act applies or unless the taxpayer made an application under subsection 152(4.2) of the Act. The issue is then whether this normal reassessment period also applies to the taxpayer's income for the same taxation year from sources other than those referred to in paragraph 216(1)(b) of the Act, such that the CCRA is statute-barred from assessing the taxpayer on such other income.

Subsection 216(1) of the Act provides as follows:

"216(1) Alternatives re rents and timber royalties

Where an amount has been paid during a taxation year to a non-resident person or to a partnership of which that person was a member as, on account of, in lieu of payment of or in satisfaction of, rent on real property in Canada or a timber royalty, that person may, within 2 years (or, where that person has filed an undertaking described in subsection 216(4) in respect of the year, within 6 months) after the end of the year, file a return of income under Part I in the form prescribed for a person resident in Canada for that year and the non-resident person shall, without affecting the liability of the non-resident person for tax otherwise payable under Part I, thereupon be liable, in lieu of paying tax under this Part on that amount, to pay tax under Part I for the year as though

(a) the non-resident person were a person resident in Canada and not exempt from tax under section 149;

(b) the non-resident person's income from the non-resident person's interest in real property in Canada, timber resource properties and timber limits in Canada and the non-resident person's share of the income of a partnership of which the non-resident person was a member from its interest in real property in Canada, timber resource properties and timber limits in Canada were the non-resident person's only income;

(c) the non-resident person were entitled to no deductions from income for the purpose of computing the non-resident person's taxable income; and

(d) the non-resident person were entitled to no deductions under sections 118 to 118.9 in computing the non-resident person's tax payable under Part I for the year." (Emphasis added).

As you indicated in your June 11, 2002 memorandum, subsection 216(1) of the Act clearly states that the filing of a subsection 216(1) return does not affect the liability of the taxpayer for tax otherwise payable under Part I of the Act. In addition, under paragraph 216(1)(b), the taxpayer calculates income as though Canadian-sourced rents and timber royalties were the only sources of income. As a non-resident can also be subject to tax under Part I of the Act on other types of income pursuant to subsection 2(3) of the Act, it appears there should be a separate Part I return for these other types of income to be reported. Further, the time provided to file a subsection 216(1) return, 2 years after the end of the taxation year, is substantially longer than the deadline provided for under paragraph 150(1)(b) of the Act for other Part I income.

Accordingly, we agree with your view that subsection 216(1) contemplates the filing of a Part I return with respect to the taxpayer's income from sources referred to in paragraph 216(1)(b), that is separate and distinct from any Part I return in respect of income from other sources.

Subsection 152(2) of the Act provides that after the examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed. This suggests that an assessment is linked to a return. Paragraph 152(3.1)(b) of the Act defines the normal reassessment period for an individual taxpayer in respect of a taxation year to be the period that ends 3 years after the earlier of the day of the mailing of a notice of an original assessment under Part I in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year.

Since the Act contemplates a return filed under subsection 216(1) of the Act as being separate and distinct from any other return under Part I of the Act, an assessment in respect of a return filed under subsection 216(1) of the Act should be regarded as an assessment separate and distinct from any other assessment under Part I of the Act in respect of income from sources other than those referred to in paragraph 216(1)(b) of the Act. In this regard, although the tax liability in respect of income from sources referred to in paragraph 216(1)(b) and the tax liability in respect of income from other sources taxable under Part I are both Part I liabilities, separate returns are contemplated. Therefore, an analogy can be drawn with different Parts of the Act (for example, Part I and Part I.3 of the Act) which require the filing of separate returns resulting in separate assessments and separate normal reassessment periods (see, for example, technical interpretations 9804357 dated April 19, 1998 and 9811667 dated May 28, 1998).

Accordingly, we are of the view that the normal reassessment period for an assessment in respect of a return filed under subsection 216(1) of the Act should be separate and distinct from the normal reassessment period for any return in respect of other sources of income taxable under Part I of the Act.

Applying this conclusion to a taxpayer who is not a resident of Canada, we agree with you that it appears there would be a Part I return for amounts assessable under subsection 2(3) of the Act that is separate and distinct from the Part I return for amounts assessable pursuant to subsection 216(1). We therefore agree that where the non-resident did not file a return in respect of tax liabilities under subsection 2(3) of the Act, the Minister would not be statute-barred from assessing the non-resident in respect of such liabilities for a taxation year because of a statute-barred assessment in respect of a subsection 216(1) return for the same taxation year.

With respect to the individual described in the fact situation above who was in fact a resident of Canada at all relevant times, based on similar reasoning, the assessment in respect of the subsection 216(1) return, while valid and binding, should also be regarded as separate and distinct from any assessment of income from sources taxable under subsection 2(1) of the Act, other than those referred to in paragraph 216(1)(b). Thus, the normal reassessment period in respect of the subsection 216(1) assessment should not apply to an assessment of such income from other sources. Rather, this latter assessment should have a separate and distinct normal reassessment period. In the fact situation outlined above, since the individual has not filed any Part I return in respect of such income from other sources, specifically employment income, the normal reassessment period has not begun and the Minister is not statute-barred from assessing the individual on such income.

We trust that our comments have been helpful.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

Jim Wilson
Section Manager
For Director
International and Trust Division
Income Tax Rulings Directorate
Policy and Legislation Branch