4 October 2024 Internal T.I. 2024-1013191I7 - Validity of 94(3)(f) 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. Whether the schedule of assets required to be filed by question 1 of the T3 Income Tax and Information Return (T3 Return) is substantive to the filing of the T3 Return such that the T3 Return would be considered invalid if the completed schedule was not filed.

2. Whether a paragraph 94(3)(f) election that is required to be filed with the T3 Return would be considered valid if that T3 Return was considered invalid.

3. Whether a paragraph 94(3)(f) election would be considered valid if it was filed with a T3 Return that was validly filed after a previously filed T3 Return for the same taxation year had been deemed invalidly filed.

Position: 1. It is a question of fact whether information is substantial to a return of income.

2. No.

3. Yes.

Reasons: 1. If the schedule of assets is considered substantive to the T3 Return of income of a deemed resident trust, a return of income that is missing that schedule, or information substantial to that schedule, could be considered invalidly filed, or not to have been filed at all.

2. If the paragraph 94(3)(f) election is filed with an invalidly filed return of income, it will not have met the requirement that it be filed with the return of income for the "first taxation year" in which the election could be made.

3. The subsequent return of income, being validly filed, would be the return of income for the "first taxation year" in which the election could be made.

      								October 4, 2024

      Ms. Renée Johnston, CPA, CGA				HEADQUARTERS
      XXXXXXXXXX							Income Tax Rulings Directorate
      								Julia Clarkson 

									2024-101319

Schedule of assets with respect to 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) to the date hereof, unless stated otherwise.

We are writing in reply to your request for our views on the validity of a paragraph 94(3)(f) election made by an “electing trust” (as defined in subsection 94(1)) in certain circumstances. More specifically, you would like our views on the following:

1. Whether the schedule of assets required to be filed by question 1 of the T3 Income Tax and Information Return (T3 Return) is substantive to the filing of the T3 Return such that the T3 Return would be considered invalid if the completed schedule was not filed.

2. Whether a paragraph 94(3)(f) election that is required to be filed with the T3 Return would be considered valid if that T3 Return was considered invalid.

3. Whether a paragraph 94(3)(f) election would be considered valid if it was filed with a T3 Return that was validly filed after a previously filed T3 Return for the same taxation year had been deemed invalidly filed.

We apologize for the delay in our response.

Our comments

Based on our review of the situations identified in your inquiry, we offer the following comments:

1. Schedule of assets substantive to the T3 Return

Section 32 of the Interpretation Act states:

“Where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form used.”

Information that impacts the substance of a prescribed form (which includes a return of income) is referred to as being substantial to that form. Whether information missing from a return of income is “substantial”, to the extent that the return of income is considered to be invalid, is a question of fact.

Section 32 of the Interpretation Act can be relied upon to avoid penalizing a taxpayer that has provided the substantive prescribed information with its filed T3 Return, but not on the proper prescribed form. Where that prescribed information has not been provided, in any form, section 32 of the Interpretation Act cannot assist the taxpayer in avoiding penalties resulting from the T3 Return missing information.

Although it is a question of fact whether the schedule of assets requested as part of the information required to be filed in the T3 Return is substantial to a T3 Return, we offer the following comments for guidance.

While not specifically required under the legislation addressing the making of a paragraph 94(3)(f) election, the schedule of assets is information required to be provided in a prescribed form (the T3 Return). As such, the failure to provide the information (schedule of assets) in a prescribed form may be subject to a penalty. It is our understanding that the schedule of assets assists in the determination of the resident and non-resident portion of the assets held by the trust, which is required to accurately assess tax payable for the year and to determine if the criteria for the paragraph 94(3)(f) election have been met. Therefore, it is reasonable to conclude that a schedule of assets supporting the amount of income subject to Canadian tax (or the non-resident portion that is not subject to Canadian tax) may be viewed as substantive to the T3 Return of a trust deemed resident under subsection 94(3).

If the schedule of assets, including any information within the schedule, is considered substantive to the filing of a T3 Return, in our view its absence from the filed return would cause the T3 Return to be considered invalidly filed, and therefore not filed at all. This view is consistent with jurisprudence, as noted below.

2. Validity of a paragraph 94(3)(f) election where T3 Return invalid

One of the main requirements of the paragraph 94(3)(f) election (stated in the subsection 94(1) definition of “electing trust”) is the election must be filed “with the trust’s return of income” for the “first taxation year” of the trust throughout which the trust is deemed by subsection 94(3) “to be resident in Canada for the purpose of computing its income,” and “in which it holds property that is at a time in the year part of its non-resident portion.”

As noted above, if a return, such as a T3 Return, is not validly filed, it is considered not to have been filed at all. Jurisprudence supports the conclusion that a prescribed form that is missing substantial information is considered invalid, and therefore can not be processed. For example, see paragraphs 39 and 40 of Bullard Estate v The Queen (2004 TCC 249):

“[39] The limited information contained in this form makes it invalid. The Minister cannot be expected to speculate and assume. It is up to the taxpayer to elect in prescribed form for the provisions of this subsection to apply and that means the inclusion of sufficient and accurate information so that the Minister knows the taxpayer's intended tax treatment by reference to this form.

[40] Both the Appellant and Respondent referred to section 32 of the Interpretation Act and from my understanding of each of their references, they agree that this section basically states that defects in form are acceptable but defects in substance are not. They disagree however on which information in the T664 is substantive. I firmly believe that this section is meant to ensure that a form will remain valid where the deficiency relates to form only. However for the reasons given, the defects here go to the very heart of form T664 and affect it substantively. Where all or some of the necessary and substantive elements on a prescribed form are missing, or incorrectly stated by a taxpayer, the form will be considered invalid and ineffective under the appropriate provision.”.

The Bullard decision is referred to in internal interpretation E 2012-0458401I7, which also states:

“Subsection 162(5) applies in situations where the prescribed form is filed, but the form is missing information which does not affect the substance of the form. However, in situations where the prescribed form is filed within the required deadline, but the form is substantially incomplete, the applicable penalty would be provided by paragraph 162(7)(a) if a valid return is not received by the filing deadline. More specifically, paragraph 162(7)(a) is applicable in situations where the prescribed form is missing information or documentation to the extent that the form is considered to be invalid. Where a prescribed form received by CRA is considered invalid, it follows that it has not been filed as and when required by the Act.”

In addition, internal interpretation E 2014-0519701I7 provides relevant comments on the validity of a return of income:

“In general, pursuant to subsection 150(1) of the Act, a taxpayer is required to file a return of income for each taxation year within certain time limits in prescribed form containing prescribed information. The prescribed information includes a calculation of income for the taxation year in accordance with the rules in section 3 of the Act and, pursuant to section 151 of the Act, an estimate of the tax payable. Therefore, in situations where all or some of the necessary and substantive elements on the prescribed form are missing, or incorrectly stated by a taxpayer, the return of income can be considered not to have been filed in prescribed form containing prescribed information. Accordingly, where a taxpayer files a NIL tax return or an incomplete tax return with the Minister, it remains our view that the CRA may refuse to accept the return, and may assess any applicable penalties. Further, even if the CRA has accepted the initial return of income and issued a notice that no tax is payable, late-filing penalties, such as subsection 162(1) or (2) may be assessed at the time the taxpayer files the amended tax return and it is identified that the initial return of income was not a valid return.

The case of Carlson et al v .The Queen, 73 DTC 5192 (FCTD) supports our views. In this decision the Federal Court held that late-filing penalties were properly assessed by the Minister in the situation where an incomplete tax return was filed and the taxpayer subsequently filed an amended return that was complete after the filing-due date.”

Therefore, in a situation where a paragraph 94(3)(f) election is filed with an invalidly filed T3 Return for the “first taxation year” in which the election was possible, the election would not meet all of the conditions required to be a valid election under paragraph 94(3)(f). In particular, the election would not be considered to have been filed with the trust’s return of income for that first taxation year. It is our view that under such circumstances, the election would not be valid; it too would be considered to not have been filed.

3. Validity of a paragraph 94(3)(f) election filed with a subsequent T3 Return

If the taxpayer’s second attempt at filing a T3 Return for a taxation year is not missing substantive information, and considered validly filed, it will represent the return of income for the “first taxation” year in which the election could be made. Assuming all the other requirements of the paragraph 94(3)(f) election have been met, then in our view a paragraph 94(3)(f) election filed with that return would have been validly filed, even if it is filed after its filing deadline for the taxation year.

This view is reflected in CRA document E 2022-0924801C6, which states in the response to question 3 at the 2022 STEP Conference Round Table, “Where the particular return of income is late-filed, as long as the election is filed with the return of income, the election would not be considered late.” Further support of this view is found in paragraphs 113 and 114 of the decision for Rezek et al v The Queen (2005 FCA 2007).

We trust 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
Specialty Tax Division
Administrative Law Section I
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch