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. Can a late-filed election under subsection 45(2) of the Income Tax Act be accepted by the CRA?
2. Can a late-filed designation of a property as a principal residence be accepted by the CRA?
Position: 1. If a late-filed election is required under a prescribed provision and the reason for the taxpayer's request falls under one of the taxpayer relief provisions provided under paragraph 56 of IC07-1, then the Minister has the authority to accept the late-filed election.
2. There is no legislative authority to accept a late-filed principal residence designation.
Reasons: 1. Subsection 220(3.2) of the Act in conjunction with Regulation 600 allows the minister to exercise a discretion to extend the time for making an election.
2. Subsection 220(3.21) and Regulation 2301.
February 13, 2013
SME Income Tax, Audit Division Ananthy Mahendran
Section 442-31, CEW-04, Sinclair 905-721-5204
VTSO
Attention: Theresa Ohene-Asante
A/Team Leader, Workload Development
2012-044839
Validity of Late-filed Principal Residence Election and Designation
This is in response to your correspondence dated May 15, 2012, and our telephone conversation on July 5, 2012 (Mahendran / Ohene-Asante), wherein you requested our views on the validity of the principal residence election and designation in the circumstances described in your correspondence. We also acknowledge receipt of the additional information sent to us by email on July 9, 2012, and our related conversation.
Briefly, we understand that a taxpayer sold a duplex in XXXXXXXXXX to a non-arms length party. The taxpayer filed his XXXXXXXXXX tax return on time without disclosing the disposition of his property. A taxpayer request (TPR) for amendment was received by the CRA in XXXXXXXXXX with a T1-Schedule 3 reporting capital gain for one half of the duplex. The other half of the duplex was designated as a principal residence from XXXXXXXXXX to XXXXXXXXXX. Both the principal residence designation form (T2091 (IND)) and the principal residence worksheet (T2091 (IND)-WS) were duly filed by the taxpayer with the TPR. This principal residence unit had a change in use in XXXXXXXXXX. However, a subsection 45(2) principal residence election was not filed with the XXXXXXXXXX return of income. The taxpayer owned and ordinarily inhabited in another property from XXXXXXXXXX to XXXXXXXXXX. He reported his rental income earned from the date of change in use till the date of disposition of the property (XXXXXXXXXX).
We also understand that as the subject disposition was not reported by the taxpayer until two years later and the filings of the necessary election and designation forms were not made within the required time frame, the SME Income Tax Audit, VTSO forwarded the TPR to the Fairness Committee for their review and recommendation on the validity of the principal residence election and designation. The Fairness Committee advised the Auditor to seek an opinion from the Income Tax Rulings Directorate.
Your Questions
1. Can a late-filed election under subsection 45(2) of the Income Tax Act (the "Act) be accepted by the CRA?
2. Can a late-filed designation of a property as a principal residence be accepted by the CRA?
In accordance with the Act, an election or designation cannot be late-filed, revoked, or amended unless there is a specific statutory provision allowing it. Subsection 220(3.2) of the Act, formerly called "fairness" legislation, allows the minister to exercise a discretion to extend the time for making an election or grant permission to amend or revoke the election.
Subsection 220(3.2) of the Act states:
"The Minister may extend the time for making an election or grant permission to amend or revoke an election if
(a) the election was otherwise required to be made by a taxpayer or by a partnership, under a prescribed provision, on or before a day in a taxation year of the taxpayer (or in the case of a partnership, a fiscal period of the partnership); and
(b) the taxpayer or the partnership applies, on or before the day that is ten calendar years after the end of the taxation year or the fiscal period, to the Minister for that extension or permission."
The prescribed provisions to which subsection 220(3.2) applies are outlined in section 600 of the Income Tax Regulations (the "Regulations").
Section 600 of the Regulations states:
"For the purposes of paragraphs 220(3.2)(a) and (b) of the Act, the following are prescribed provisions:
(a) section 21 of the Act;
(b) subsections 7(10), 13(4), (7.4) and (29), 14(6), 20(24), 44(1) and (6), 45(2) and (3), 50(1), 53(2.1), 70(6.2), (9.01), (9.11), (9.21) and (9.31), 72(2), 73(1), 80.1(1), 82(3), 83(2), 104(5.3) and (14), 107(2.001), 143(2), 146.01(7), 146.02(7), 164(6) and (6.1), 184(3) and 256(9) of the Act;
(c)
"Pursuant to subsection 220(3.2), the minister's discretion applies only to those elections specified under section 600 of the Regulations. However, effective June 22, 1995, as a result of the addition of subsection 220(3.21), certain designations are deemed to be an election under a "prescribed provision."
Specifically, subsection 220(3.21) of the Act states:
"For the purpose of subsection 220(3.2),
(a) a designation in any form prescribed for the purpose of paragraph 80(2)(i) or any of subsections 80(5) to (11) or 80.03(7) is deemed to be an election under a prescribed provision of this Act; and
(b) a designation or allocation under subsection 132.11(6) is deemed to be an election under a prescribed provision of this Act."
A designation prescribed in Form T2091 (IND) for the purpose of paragraph 54(c) in the definition of "principal residence" is not listed under subsection 220(3.21) of the Act and therefore, section 2301 of the Regulations is not a prescribed provision for purposes of subsection 220(3.2) of the Act.
Our responses to your specific questions are as follows:
1. Can a late-filed subsection 45(2) election be accepted by the CRA?
Pursuant to paragraph 220(3.2)(a) of the Act, the CRA is allowed to exercise its discretion in respect of those elections listed in section 600 of the Regulations. Since subsection 45(2) is listed in paragraph 600(b) of the Regulations, a subsection 45(2) election can technically be late filed providing the requirements under paragraphs 220(3.2)(a) and (b) of the Act are met. However, a late-filed election may be accepted by the CRA, as explained in paragraph 25 of IT-120R6, only under certain circumstances, one of which is that no CCA has been claimed on the property since the change in use has occurred and during the period in which the election is to remain in force. For further particulars on the acceptance of late-filed elections, see Information Circular IC07-1, Taxpayer Relief Provisions. According to IC07-1, a taxpayer request may be accepted in certain situations listed under paragraph 56; however, it will not be accepted in those situations listed under paragraph 57.
Based on the legislation and the administrative positions of the CRA, if a late-filed election is required under a prescribed provision and the reason for the taxpayer's request falls under one of the taxpayer relief provisions provided under paragraph 56 of IC07-1, then there is no authority for the CRA to deny the late-filed election.
The CRA interpretive position is also supported by the jurisprudence on late filed elections. In Irene Gjernes v. Canada Revenue Agency, 2007 DTC 5443, the CRA was ordered to reconsider its disallowance of a late-filed 45(2) election, but there were no "extraordinary circumstances" justifying a direction from the Court for a specific result.
Whether or not the conditions in IC07-1 are met in the situation under review are questions of fact that can best be resolved by taking into account all details and circumstances of the case. In this regard, we feel that your office is in a better position to ascertain the relevant facts and circumstances and advise the taxpayer as to whether your office would be prepared to accept the filing of a late election.
2. Can a late-filed principal residence designation be accepted by the CRA?
The rules for filing a principal residence designation are set out in section 2301 of the Regulations. According to section 2301, a taxpayer's designation of a property as a principal residence for one or more taxation years is to be made in his or her income tax return for the taxation year in which he or she has disposed of the property or granted an option to another person to acquire the property. In the case at hand, as the XXXXXXXXXX disposition of the property was not reported until XXXXXXXXXX, the filing due date for the designation has already expired.
Generally, the minister's discretion provided under subsection 220(3.2) of the Act applies only to certain elections, not to designations unless a designation is considered to be a deemed election under subsection 220(3.21) of the Act. Pursuant to subsection 220(3.21), a principal residence designation prescribed in form T2091 for the purpose of paragraph (c) in the definition of "principal residence" under section 54 is not considered to be a deemed election for purposes of the fairness provision. Therefore, subsection 220(3.2) will not apply to a late-filed principal residence designation. In our view, there is no legislative authority to accept a late-filed principal residence designation.
We trust that our comments will be of assistance.
Sharmini Ratnasingham
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013
Email this Content