5 September 2012 External T.I. 2012-0445451E5 - Electronic filing by commercial tax preparer

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: 1. Is a paper return, filed by a tax preparer, still considered a validly-filed return for the purposes of the taxpayer?
2. Would a subsection 162(7.3) penalty apply in various scenarios involving a tax preparer that prepares a return for consideration, but for some reason, the taxpayer decides to file that prepared return or a different return in paper format?
3. Could an unfiled return result in the imposition of penalties pursuant to 162(7.2)?

Position: 1. Yes.
2. Yes
3. No.

Reasons: 1. Taxpayers are required to file a return of income in prescribed form which includes electronic and paper filing. For the purposes of subsections 150(1) and 162(1), a return filed using either of these methods is acceptable.
2. Subsection 150.1(2.3) states that the tax preparer must file “any return of income prepared by the tax preparer” electronically. Therefore the tax preparer could be liable to the subsection 162(7.3) penalty where the return is submitted in paper format.
3. It is our opinion that a subsection 162(7.2) penalty only applies in respect of tax returns that are, in fact, filed. In other words, in order for a subsection 162(7.2) penalty to apply, a tax return would have to be submitted in a method other than by way of electronic filing. The taxpayer may still be subject to late filing penalties pursuant to subsection 162(1).

XXXXXXXXXX
2012-044545
M. Gauthier
(613) 948-1143

September 5, 2012

Dear XXXXXXXXXX,

Re: Mandatory electronic filing by commercial tax preparer

We are writing in reply to your email of April 27, 2012 in which you asked for more information regarding Bill C-38, An Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures (“Bill C-38”).

On April 26, 2012, the Minister of Finance introduced Bill C-38, which proposed adding legislation that would require electronic filing by a “tax preparer”. Since receiving your email, the proposed additions have now received royal assent (June 29, 2012) and will apply to returns of income for the 2012 and subsequent taxation years that are filed after 2012.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended.

A “tax preparer” is defined in subsection 150.1(2.2) as a person or partnership who, in the year, accepts consideration to prepare more than 10 returns of income of corporations or more than 10 returns of income of individuals (other than trusts), but does not include an employee who prepares returns of income in the course of performing their duties of employment.

Subsection 150.1(2.3) requires a tax preparer to file any return of income prepared by the tax preparer for consideration by way of electronic filing, except that 10 of the returns of corporations and 10 of the returns of individuals may be filed other than by way of electronic filing. Additional exceptions are found in subsection 150.1(2.4), which states that subsection (2.3) will not apply if the tax preparer is not granted the authority to file by way of electronic filing, if the return is in respect of a corporation described in any of paragraphs 205.1(2)(a) to (c) of the Income Tax Regulations, or if the return is of a type that the Minister does not accept by way of electronic filing.

The penalty for the failure to file a return of income as required by subsection 150.1(2.3) is set out in subsection 162(7.3) and is equal to $25 for each failure in respect of a return of an individual and $100 for each such failure in respect of a return of a corporation.

Additionally, subsection 150.1(2.1) states that a prescribed corporation, as defined in subsection 205.1(2) of the Income Tax Regulations, shall file its return of income by way of electronic filing. Subsection 162(7.2) states that a prescribed corporation that fails to file a return of income for a taxation year as required by subsection 150.1(2.1) is liable to a penalty of $1,000.

You asked a number of questions that we have summarized as follows:

1. Where electronic filing is required by either subsection 150.1(2.1) or (2.3), is a paper return still considered a validly-filed return for the purposes of subsection 150(1) and the late-filing penalty in subsection 162(1)?

Our comments

Taxpayers are required to file a return of income in prescribed form, which includes electronic and paper filing. For the purposes of subsections 150(1) and 162(1), a return filed using either of these methods is acceptable. However, if the return is filed using a method other than by way of electronic filing, a corporation or tax preparer may be subject to a penalty pursuant to subsection 162(7.2) or (7.3), as applicable.

2. Would the subsection 162(7.3) penalty apply where a tax preparer prepares a return for consideration, but for some reason, the taxpayer decides to file that prepared return or a different return in paper format?

Our comments

Subsection 150.1(2.3) states that the tax preparer must file “any return of income prepared by the tax preparer” electronically. Therefore the tax preparer could be liable to the subsection 162(7.3) penalty where the return is submitted in paper format.

3. Would an unfiled return result in the imposition of penalties pursuant to 162(7.2)?

Our comments

You indicated that the phrase “as required by subsection 150.1(2.1)” may be interpreted to mean that an unfiled or late return may trigger a penalty under subsection 162(7.2). It is our opinion that a subsection 162(7.2) penalty only applies in respect of tax returns that are, in fact, filed. In other words, in order for a subsection 162(7.2) penalty to apply, a tax return would have to be submitted in a method other than by way of electronic filing. However, the corporation may still be subject to late filing penalties.

We hope this information is of assistance to you.

Yours truly,

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch