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 paragraph 94(3)(f) election be filed by a non-resident trust whose activities are being examined by the CRA, and if so, in what manner?
2. Would a non-resident trust be prevented from filing a return of income that includes a paragraph 94(3)(f) election if an assessment has already been issued for the first taxation year in which it was a deemed by subsection 94(3) to be a resident in Canada?
Position: 1. Yes. The criteria of paragraph 94(3)(f) must be met. In that regard, the election must be filed by the taxpayer with the (initial) income tax return for a taxation year to be valid, i.e., it cannot be filed on its own separately
2. If a valid election is filed with a return of income for a taxation year that has not yet been assessed, the Minister must examine the return under subsection 152(1) and assess the taxation year accordingly.
If the election is filed with a return of income for a taxation year that has already been assessed under subsection 152(7), the Minister has the discretion to reassess the taxation year under subsection 152(4).
Reasons: 1. As required by paragraph 94(3)(f) and paragraph (c) of the definition of "electing trust" in subsection 94((1) of the Act.
2. The Minister has the discretion to reassess a taxpayer under subsection 152(4) unless the legislation prevents such a reassessment. For example, the Minister may not generally issue a reassessment where the normal reassessment period of a taxation year has expired unless one of the exceptions in subsection 152(4) is met. However, if the Minister exercises her discretion not to reassess in a manner that reflects the information provided by a taxpayer in a return of income, her decision would have to be well supported.
Field Audit Support Section III HEADQUARTERS
Audit Division Income Tax Rulings
High Net Worth Compliance Directorate Directorate
Compliance Programs Branch Julia Clarkson
c/o Maria Goldmaker
2021-089279
Acceptance of a paragraph 94(3)(f) election
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 whether a non-resident trust, deemed by subsection 94(3) to be a resident of Canada, is prevented from filing a paragraph 94(3)(f) election in certain circumstances. We apologize for our delay in responding.
In your enquiry, you describe a situation where the CRA has started examining the activity of a non-resident trust that has never filed a Canadian return of income and that has not previously been assessed or considered a taxpayer under the Act. As a result of its efforts, the CRA concludes that the non-resident trust is a deemed resident trust under subsection 94(3). You would like to know if, given the CRA’s examination, the non-resident trust is still able to make an election under paragraph 94(3)(f) for its “first taxation year,” (endnote 1) and if so, in what form it can be made.
Further, you describe a situation where the Minister determines that a non-resident trust is deemed by section 94 to be a resident of Canada for a particular taxation year (the “initial taxation year”) for which a return of income has not been filed, but an assessment has been made for that initial taxation year under subsection 152(7). You wish to know whether the Minister is obligated to accept the income tax return and election under paragraph 94(3)(f) for the initial taxation year, despite the fact that it has already been assessed.
Filing a valid subsection 94(3)(f) election
Under the circumstances described in subsection 94(3), paragraph 94(3)(a) will cause a non-resident trust to be deemed to be resident in Canada throughout a particular taxation year for the purposes of computing its income for that taxation year, among other things.
Paragraph 94(3)(f) provides the deemed resident trust with the option of making an election to deem a “non-resident portion trust” to be created that would be deemed to hold the non-resident portion of the taxpayer’s property. Such an election essentially enables the taxpayer (the electing trust) to reduce income that is taxable in Canada.
Paragraph (b) of the subsection 94(1) definition of “electing trust” governs that such an election would need to be made for the first taxation year throughout which the electing trust is deemed by subsection 94(3) to be resident in Canada for the purpose of computing its income and in which, at some point, it holds a non-resident portion of property. Paragraph (c) of the same definition states that the election must be made “in writing” and “filed with the Minister with the trust’s return of income” for that first taxation year.
In our view, a paragraph 94(3)(f) election cannot be filed separately from a return of income as to do so would not meet the necessary condition noted in paragraph (c) of the definition of “electing trust” in subsection 94(1).
A paragraph 94(3)(f) election would be considered valid if it is filed with the return of income for the “first taxation year” even if that return is filed past its due date. It is our view that, even if the CRA is proposing to assess that first taxation year, such a valid election could be filed by a taxpayer provided all the necessary criteria are met.
Assessing a subsection 94(3)(f) election
If a valid election is filed with a return of income for a taxation year that has not yet been assessed, the Minister must examine the return and assess any tax liability for the taxation year under subsections 152(1) and 152(4).
If a taxpayer has been arbitrarily assessed under subsection 152(7), in the absence of a return of income (and paragraph 94(3)(f) election) having been filed, the normal reassessment period for that taxation year would begin on the date the resulting notice of assessment was sent as described in subsection 152(3.1).
In our view, the information used as the basis to make an assessment of the taxation year under subsection 152(7) would not constitute the filing of an income tax return for the taxation year. A taxpayer’s requirement to file an income tax return under subsection 150(1) (and potentially penalized as an offence under subsection 238(1)) is not overridden by the fact that the taxation year may be assessed under subsection 152(7). (endnote 2) Therefore, the subsection 152(7) assessment does not necessarily prevent the taxpayer from being able to make a valid paragraph 94(3)(f) election by late-filing an income tax return and election for the taxation year.
If a valid election is filed with a return of income for a taxation year that has already been assessed under subsection 152(7), the return effectively represents a request for a reassessment of the taxation year. The Minister has the discretion under subsection 152(4) to reassess that taxation year unless the legislation restricts such a reassessment. For example, the Minister cannot generally reassess a taxpayer after the expiry of the normal reassessment period for the taxation year (as defined in subsection 152(3.1)) unless an exception in subsection 152(4) applies.
Subsection 152(7) provides that the Minister is not bound by any return or information provided by a taxpayer when making an assessment. However, if the Minister does not exercise her discretion to reassess using the information provided by a taxpayer in a return of income filed after a subsection 152(7) assessment has been issued, so that no reassessment is made, her decision would have to be well supported.
Given the fact that a non-resident that receives a letter containing proposed assessed amounts would almost certainly make a valid paragraph 94(3)(f) election before an audit assessment is actually issued, it appears unlikely that such a non-resident would ever be prevented from making a valid election. This result appears to be contrary to the intention of the Department of Finance, as noted in the explanatory notes for “electing trust”.
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
A/Section Manager
for Division Director
Administrative Law
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch
ENDNOTES
1 As described in subparagraph (b)(i) of the definition of “electing trust” in subsection 94(1).
2 See paragraph 45 of 6075420 Canada Inc. v MNR (2020 CAF 194) and internal interpretation E 2006-0198641I7.
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