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. Please clarify what is considered to be the “day of the election” in subsection 185(2)? When does interest actually become payable in situations where the amount is not paid in full prior to the notice of assessment date?
2. Whether subsection 185(2) applies with respect to the calculation of interest on all elections with tax applicable (for example, Part II.1, Part III, Part V, Part X.3, Part XII, Part XII.1, Part XII.3, Part XIII)?
3. Currently, a corporation is able to file multiple elections on the same day. Is there legislation stating that multiple SERs of certain types can be filed on the same day, for the same business number? For example, Form T2054, Election for a Capital Dividend Under Subsection 83(2), might be filed for 10 or more elections on the same day, for same or different amounts. Is there a requirement to file individual elections or are these able to be combined into one election?
4. When considering refunds of statute-barred payments and credits, subsection 164(1) refers to the “return of a taxpayer’s income for a taxation year that has been made within 3 years from the end of the year...” Many of the elections are not returns, therefore what rules apply to them with relation to statute-barred payments and credits? Will the SERs elections follow the rules of the RC and RZ accounts as they relate to statute-barred payments and credits?
5. Currently, a large corporation’s amount under appeal remains payable at 50% throughout the appeal process. Will the tax assessments or penalties for SERs filed by large corporations follow these same rules?
Position: 1. Depends on the facts of the situation.
2. No.
3. Depends on the facts of the situation.
4. Yes.
5. Yes.
Reasons: 1. The legislation supports the date being the earlier of two days: the day the dividend became payable (or paid for a mortgage investment corporation ) or the first day on which any part of the dividend was paid.
2. Subsection 185(2) is only referring to an assessment of Part III tax.
3. In our view, where the legislation states that an election must be made in prescribed form, the prescribed form must be filed for the election to be valid. In contrast, if there is no prescribed form and an election is simply required to be made in a prescribed manner, or in writing in the form of a letter, the legislation does not appear to preclude numerous elections being presented in one letter, provided that all the necessary requirements are met.
4. The Act allows modified versions of sections 152 and 164 to apply to an assessment and refund of an overpayment for any of the items reflected in the provided list. Collectively, absent any administrative policies that have been adopted by the CRA, these provisions should support when an overpayment may be assessed and refunded to a taxpayer.
5. Subsection 225.1(7) applies for every part under the Act.
March 31, 2023
Business Accounting Systems Section HEADQUARTERS
Business Accounting Division Income Tax Rulings Directorate
Business Returns Directorate Julia Clarkson
Assessment Benefits and Services Branch
c/o Christine Arsenault 2021-088554 Interest and penalties for special elections and returns
All statutory references in this document are to the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the Act), unless stated otherwise.
We are replying to your request for our views on various legislative issues in your Special Elections and Returns (SERs) system related to due dates, penalties and interest. We apologize for our delay in our responding.
The SERs to which your questions relate are the following returns, forms or elections:
Part I
T2057, 85(1) election
T2058, 85(2) election
T2059, 97(2) election
T2060, 98(3)(a) election
T2107, 93(1) election
T2054, 83(2) election
T2012, 130.1(4) election
T2055, 131(1.1) election
15(2.11)(d)(i), PLOI election
Part II.1
T2141, 183.2(1) return
Part V
T2140, 189(1) Part V tax on non-qualified investment return
T2046, 188(1.1) Part V revocation tax return
Part X.3
T2152, 204.86(1) tax return
T2152A, 204.86(2) tax return and request for refund
Part XI.2
T913, 207.4(1) tax return
Part XII.1
T2096, 209(3) tax return
Part XII.3
T2142, 211.2 tax return
Part XIII
T2016, Reg. 801 non-resident insurer tax return
212.3(11)(c), PLOI election
212.3(3), Dividend substitution election
Part XV
T2184, (endnote 1) 184(3) election for separate taxable dividend
T2010, 66.7(7) or 66.7(8) resource expense election
T2027, 80.01(4)(c) deemed debt settlement election
20(24), undertaking future obligations election
More specifically, you request our views to the following questions:
1) Please clarify what is considered to be the “day of the election” in subsection 185(2)? When does interest become payable in situations where the amount is not paid in full prior to the notice of assessment date?
2) Whether subsection 185(2) applies with respect to the calculation interest on all elections with tax applicable (for example, Part II.1, Part III, Part V, Part X.3, Part XII, Part XII.1, Part XII.3, Part XIII)?
3) Currently, a corporation is able to file multiple elections on the same day. Is there legislation stating that multiple SERs of certain types can be filed on the same day, for the same business number? For example, Form T2054, Election for a Capital Dividend Under Subsection 83(2), might be filed for 10 or more elections on the same day, for same or different amounts. Is there a requirement to file individual elections or are these able to be combined into one election?
4) When considering refunds of statute-barred payments and credits, subsection 164(1) refers to the “return of a taxpayer’s income for a taxation year that has been made within 3 years from the end of the year...” Many of the elections are not returns, therefore what rules apply to them with relation to statute-barred payments and credits? Will the SERs elections follow the rules of the RC and RZ accounts as they relate to statute-barred payments and credits?
5) Currently, a large corporation’s amount under appeal remains payable at 50% throughout the appeal process. Will the tax assessments or penalties for SERs filed by large corporations follow these same rules?
Response for Question 1
Subsections 185(1) and (2) of the Act provide for the assessment and payment of tax and interest payable under Part III of the Act. A taxpayer generally becomes liable to pay Part III tax when it has made an excessive election under subsection 83(2) with respect to a dividend deemed to be a capital dividend by paragraph 83(2)(a), or under subsections 130.1(4) or 131(1) with respect to a dividend deemed to be a capital gains dividend by paragraphs 130.1(4)(a) or 131(1)(a), respectively.
Where a corporation elects in respect of a dividend payable by it and that dividend exceeds its capital dividend account at that time, subsection 184(2) requires the corporation to pay a special tax. Subsection 184(2) states that such a taxpayer “shall, at the time of the election, pay a tax under this Part equal to 3/5 of the excess” amount of the election.
Based on the wording of these provisions, Part III tax arises at the time of the election, while the interest computed on any unpaid amount of that tax begins on the day of the election.
Paragraph 1.88 of the Income Tax Folio S3-F2-C1, Capital Dividends states the following:
“The liability for the Part III tax arises at the time that the excessive election is made under subsection 83(2). Unless the tax is paid when the excessive election is filed, interest at prescribed rates is added for the period from the date of the excessive election to the date of payment of the tax.”
CRA document F 2011-0412071C6 comments that subsection 184(2) technically applies when the dividend is payable or when the capital dividend election form is due. The document notes that the due date of the election has been interpreted to be the time of the election referred to in subsection 184(2). Subsections 83(2), 130.1(4) and 131(1) detail the due date of the election (prescribed to be on Forms T2054, (endnote 2) T2012 (endnote 3) or T2055, (endnote 4) respectively) to generally be the earlier of the time that the dividend becomes payable or the first day that any portion of the dividend is paid. For this purpose, a dividend becomes payable on the day specified by the resolution of the directors of the corporation declaring the dividend. (endnote 5)
The day of each election specified in subsection 185(2) will depend on the facts of the situation. Only the taxpayer can choose when to make an election under the Act. Note that Part III tax cannot be assessed unless the taxpayer has made an election, whether it was filed on time or filed late.
Each capital dividend election mentioned in subsection 185(2) essentially has the option of being made on the earlier of two days: the day the dividend became payable (or paid for a mortgage investment corporation (as defined in subsections 130.1(6) and 248(1))) or the first day on which any part of the dividend was paid. Each election must be made on a prescribed form that must be signed and dated. In our view, absent any evidence to the contrary, the date on a timely-filed election form, being the date that it is filed, is the day of the election.
If the election was filed late, the day of an election under subsection 83(2) will be deemed by subsection 83(3) to be the earlier of those two days, provided the conditions of subsection 83(3) are met. Similarly, an election under subsection 130.1(4) or 131(1) will be deemed by subsection 131(1.1) to be the earlier of those days provided the conditions of subsection 131(1.1) are met. Both provisions require that the late-filed election be submitted along with an estimate of the penalty in respect of that election, as governed by paragraph 83(3)(a) or 131(1.3)(b), respectively. That penalty, like any interest determined under subsection 185(2), will be calculated over a period that starts on the earlier of the two days mentioned above.
A Part III tax liability arises under the legislation of the Act. By sending a Notice of Assessment of the Part III tax owing, and related interest charged at prescribed rates from the deemed date of the excessive election to the date of the payment of the tax, the Minister is merely confirming the amount of the liability owing by the taxpayer.
Response to Question 2
Subsection 185(2) is only referring to an assessment of Part III tax. Therefore, it should not be relied upon when determining interest owing on unpaid tax assessed under another part of the Act.
Response to Question 3
In general, where the legislation indicates that the election must be made in “prescribed form” and “prescribed manner”, the Income Tax Regulations (Regulations) provide the details of the form and manner.
Specifically, subsection 83(2) of the Act (capital dividend election) provides for the due date of this election and section 2101 of the Regulations provides additional guidance as to the documentation to be filed together with the election (prescribed form). Section 2101 of the Regulations provides that “any election under subsection 83(2) of the Act in respect of a dividend payable by a private corporation shall be made by filing with the Minister the following documents:…”
However, each SER may have varying instructions provided by the legislation and/or the Regulations, therefore the response may differ depending on those particular instructions.
In our view, where the legislation states that an election must be made in prescribed form, the prescribed form must be filed for the election to be valid.
In contrast, if there is no prescribed form and an election is simply required to be made in a prescribed manner, or in writing in the form of a letter, the legislation does not appear to preclude numerous elections being presented in one letter, provided that all the necessary requirements are met.
Response to Question 4
In general, in order to receive a refund of tax, a taxpayer must first be assessed an overpayment of its liability under the Act. Once a taxpayer’s overpayment of a Part I tax liability has been assessed, the ability to refund that overpayment to the taxpayer will depend on the Act and the facts and circumstances of the situation. The ability to refund the overpayment to the taxpayer is generally governed by subsection 164(1).
Subsection 164(1) will prevent the Minister from providing a refund of an overpayment to a corporate taxpayer who has not filed their return of income within three years of the end of the taxation year that generates the refund unless relief is available under subsection 164(1.5). For a taxpayer that is an individual (other than a trust) or a graduated rate estate (as defined in subsection 248(1)), this three-year limitation period might be extended to 10 years under paragraph 164(1.5)(a). A partnership is not considered a taxpayer for purposes of subsection 164(1).
Additional restrictions on refunds of overpayments are authorized under the Act, including the following:
- Subsection 164(2.01), which generally prevents a refund if returns required to be filed under the Act and certain other statutes are outstanding.
- Subsection 164(2), which authorizes the Minister to apply the overpayment against another liability owing to His Majesty in right of Canada or in right of a province of Canada.
For the purposes of subsection 164(1), an overpayment is defined in subsection 164(7) as follows:
“In this section, "overpayment" of a taxpayer for a taxation year means
(a) where the taxpayer is not a corporation, the total of all amounts paid on account of the taxpayer's liability under this Part for the year minus all amounts payable in respect thereof; and
(b) where the taxpayer is a corporation, the total of all amounts paid on account of the corporation's liability under this Part or Parts I.3, VI or VI.1 for the year minus all amounts payable in respect thereof.”
If a penalty or interest is charged under a provision contained in Part I of the Act, it creates a liability under Part I of the Act. In our view, any overpayment of a tax, penalty or interest assessed under a provision of Part I of the Act would be subject to section 164.
When the Minister is able to make an assessment or reassessment of an amount of tax, penalty or interest under Part I of the Act is governed by subsection 152(4).
Other parts of the Act sometimes allow for an application of subsections 152 and 164, and possibly other provisions, with any necessary modifications being made as the circumstances require. For example, the applicable part of the Act could be modified to be Part II.1, rather than Part I, for the assessment of any tax or penalty under Part II.1 as provided for by subsection 183.2(2). The following are additional provisions that allow modifications of subsection 152 and 164, among other administrative provisions of the Act, to be applied to their respective Parts of the Act:
- Subsection 189(8) for Part V
- Subsection 204.87 for Part X.3
- Subsection 207.4(2) for Part XI.2
- Subsection 209(5) for Part XII.1
- Subsection 211.5(1) for Part XII.3
- Subsection 227(10.1) for the purposes of section 116, subsections 227(9), (9.2), (9.3) or (9.4), and any amount payable under Part XII.5 or XIII by any non-resident person.
In addition, subsection 220(3.7) provides that Divisions I and J of the Act apply to an assessment made under section 220 as if it had been made under section 152. Sections 152 and 164 are included in Division I of the Act.
Therefore, the Act allows modified versions of sections 152 and 164 to apply to an assessment and refund of an overpayment for any of the items reflected in the list provided by you. Collectively, absent any administrative policies that have been adopted by the CRA, these provisions should support when an overpayment may be assessed and refunded to a taxpayer.
Response to Question 5
Where the taxpayer is a large corporation within the meaning at subsection 225.1(8), a partial exception to the collection restrictions is provided by subsection 225.1(7), allowing the Minister to collect a portion of the amount that is subject to the taxpayer's outstanding objection or appeal.
Subsection 225.1(7) states:
“If an amount has been assessed under this Act in respect of a corporation for a taxation year in which it was a large corporation, or in respect of a particular amount claimed under section 110.1 or 118.1 where the particular amount was claimed in respect of a tax shelter, then subsections (1) to (4) do not limit any action of the Minister to collect
(a) at any time on or before the particular day that is 90 days after the day of the sending of the notice of assessment, 1/2 of the amount so assessed; and
(b) at any time after the particular day, the amount, if any, by which the amount so assessed exceeds the total of
(i) all amounts collected before that time with respect to the assessment, and
(ii) 1/2 of the amount in controversy at that time.”
Subsection 225.1(7) applies for every part under the Act. Therefore, in our view, if the taxpayer was assessed any tax, interest or penalty under any part of the Act during a taxation year in which it was a large corporation, subsection 225.1(7) could apply to the amount assessed.
We trust that these comments will be of assistance.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
Yours truly,
Gillian Godson
Section Chief
Administrative Law Section I
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch
ENDNOTES
1 No Form T2184 (or prescribed form under the Regulations) was found for a subsection 184(3) election.
2 Prescribed by section 2101 of the Income Tax Regulations (the Regulations).
3 Prescribed by section 2104.1 of the Regulations.
4 Prescribed by paragraph 2104(f) of the Regulations.
5 Paragraph 1.19 of Income Tax Folio S3-F2-C1, Capital Dividends.
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