15 June 2022 STEP Roundtable Q. 2, 2022-0926761C6 - 104(4)(a)(ii.1) Election

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. Will the CRA accept a late-filed subparagraph 104(4)(a)(ii.1) election? 2. Can the election be made by a spouse or common-law partner trust, or a joint spouse or joint common-law partner trust?

Position: 1. The CRA will only accept an election made under subparagraph 104(4)(a)(ii.1) if it is filed with the trust’s return of income for its first taxation year. 2. No.

Reasons: 1. Subparagraph 104(4)(a)(ii.1) is not a prescribed provision listed in section 600 of the Income Tax Regulations. 2. The election can only be made by an alter ego trust, the terms of which are described in clause 104(4)(a)(iv)(A).

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 2. Subparagraph 104(4)(a)(ii.1) Election

In the 2021 STEP CRA Roundtable (footnote 1) , it was noted that an alter ego trust can effectively elect to have the 21 year deemed disposition rule apply, rather than having the deemed disposition occur upon the death of the taxpayer who created the trust. To do so, the alter ego trust must make an election in its tax return for its first taxation year, pursuant to subparagraph 104(4)(a)(ii.1) of the Act (footnote 2) .

One consequence of the election is that the property transferred to the alter ego trust will be deemed to be disposed of by the taxpayer at fair market value and not the adjusted cost base pursuant to subparagraph 73(1)(a)(ii), because the condition in paragraph 73(1.02)(c) will not be satisfied.

Given the above, we have two questions:

A. Will CRA accept a late election under subparagraph 104(4)(a)(ii.1)?

B. Can this election be made by other trusts to which a subsection 73(1) rollover would otherwise apply, such as a spouse or common-law partner trust, or a joint spouse or common-law partner trust? (footnote 3)

CRA Response

Part A

In making a determination on whether to accept an election provided for in a particular provision of the Act, the CRA would look to the specific language used in that provision. The Act contains a number of provisions that require certain elections to be filed with the return of income, while other provisions require certain elections to be filed by the “filing-due date” as that term is defined in subsection 248(1).

The courts have established that the meaning of the words “in the taxpayer’s return of income” are clear and unambiguous and therefore require that the election must be made in the return of income. For instance, in Rezek et al v The Queen et al (2005 FCA 227), the Federal Court of Appeal opined (in paragraphs 113–115) that where an election is required to be filed in the taxpayer’s return of income for the year, such an election would not be considered late-filed if the election was filed with a return of income for that year that was late-filed. As well, the courts have held that where an election that is required to be filed with the return of income for the year is not filed with the return of income, the election would be late.

Therefore, the CRA will accept an election filed under subparagraph 104(4)(a)(ii.1) only if it is made in the trust’s return of income filed for its first taxation year, regardless of whether the return is filed by the required filing deadline specified in paragraph 150(1)(c) of the Act.

Where the election is not filed with the trust’s return of income for its first taxation year, but rather is filed later, that election would be late and could not be accepted. As subparagraph 104(4)(a)(ii.1) is not a prescribed provision listed in section 600 of the Income Tax Regulations, the Minister has no discretion under subsection 220(3.2) to accept a late-filed election made under that provision.

Part B

Subsection 248(1) defines an “alter ego trust” for purposes of the Act as “a trust to which paragraph 104(4)(a) would apply if that paragraph were read without reference to subparagraph 104(4)(a)(iii) and clauses 104(4)(a)(iv)(B) and (C)”. In other words, an alter ego trust is described in clause 104(4)(a)(iv)(A) in conjunction with subparagraph 104(4)(a)(ii.1).

The election provided for in subparagraph 104(4)(a)(ii.1) is to have that subparagraph not apply. The election can only be made by a trust, the terms of which are described in clause 104(4)(a)(iv)(A). In other words, the election only applies to an alter ego trust and cannot be made by a spouse or common-law partner trust, a joint spouse trust, and a joint common-law partner trust which are described in subparagraph 104(4)(a)(iii), clause 104(4)(a)(iv)(B) and clause 104(4)(a)(iv)(C) respectively. The first deemed disposition for these trusts would occur on the death or the later death referred to in the respective provisions.

William King
2022-092676

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See 2021 question 13, CRA document 2021-0883051C6

2 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

3 For purposes of the transfer under subsection 73(1), these trusts are described in subparagraph 73(1.01)(c)(i), and clauses (c)(iii)(A) and (c)(iii)(B).