1 March 1991 Internal T.I. 902527 F - Foreign Affiliates

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.

Subject: Subsection 5907(2.6) of the Regulations to the Act (the "Regulations")

This is in response to your memorandum of September 18, 1990 wherein you request our opinion whether an election under subsection 5907(2.6) of the Regulations, filed after the deadline set by that provision, may be accepted by the Minister as a valid election.

You have submitted the following fact situation:

24(1)

24(1)

In our view an election filed after the date set by subsection 5907(2.6) of the Regulations is not a valid election.  We do not accept the view presented by the taxpayer's representatives that the word "if", as it is used in subsection 5907(2.6) of the Regulations is not exclusive.  The word "if" is also used in subsection 164(1) of the Act.  In that provision it is generally understood and accepted to mean "only if" (i.e. if the return is not filed within three years from the end of the relevant taxation year, the Minister has no power to make a refund).  In our view, the word "if" would have that same meaning in subsection 5907(2.6) of the Regulations.

We have reviewed the case Trynor and Boyd v. MNR, 1988 DTC 1294 (T.C.C.) ("Trynor") which was cited by the taxpayer's representatives in support of their view that the subsection 5907(2.6) election can be made in another form.  Trynor dealt with ITAR 26(7) of the Act which specifies that the provisions set out therein apply where an individual has elected in prescribed manner (i.e. where the election is made on a prescribed form).  The taxpayers had filed their income tax returns wherein they had clearly stated that they were electing under ITAR 26(7) but failed to use the prescribed form.  The judge in Trynor decided the case in favour of the taxpayers.  It was concluded that there was no reasonable or rational basis for the prescribed form to be mandatory because failure to use the prescribed form would not cause surprise, uncertainty or prejudice to the Minister.  Therefore on the basis of substance over form principle, the judge decided that in substance the taxpayers had complied with the Act in all material respects in making a valid and fully effective election under ITAR 26(7) of the Act.

In our view, the principle in Trynor would be inapplicable to this case because the mere fact that a taxpayer has included in the calculation of the exempt surplus of its foreign affiliate an amount computed, under subsection 5907(2.1) of the Regulations does not in any way portray to the Minister, that it has elected pursuant to subsection 5907(2.6) of the Regulations.  Even where there has been a subsection 93(1) election (which in this case was not filed on time for the purposes of subsection 5907(2.6) of the Regulations) this information is not evident because the subsection 93(1) election form (T2107) merely requires that the exempt surplus and taxable surplus balances, at the time of the election be reported therein.  No details as to how such balances are determined is required to be set out on that election form. Accordingly, in the absence of a formal election under subsection 5907(2.6) of the Regulations the fact that an amount has been included in exempt surplus pursuant to subsection 5907(2.1) of the Regulations does not become apparent to the Minister unless he undertakes to perform an audit of the relevant exempt surplus calculation.  As we will explain later, this may cause surprise, uncertainty and prejudice to the Minister and therefore the decision in Trynor cannot be considered as supporting the taxpayer's position in this case.

Your memorandum makes reference to the case Canadian Marconi Company v. Her Majesty the Queen in Right of Canada, 1989 DTC 5370 (F.C.T.D.) ("Marconi") which you feel may be relevant here.  In Marconi it was decided that the Minister at his discretion had the right to reassess a taxpayer after the statute-barred time limit if requested to do so by the taxpayer.  In Marconi it was decided that by virtue of subsection 152(8) of the Act, any assessment by the Minister is valid notwithstanding any error, defect or omission therein, provided the taxpayer does not object.  Accordingly, the Minister at his discretion could reassess in error, under paragraph 152(4)(a) of the Act at any time.  Provided the taxpayer does not object, the reassessment is valid.  We agree that this logic could lead to the conclusion that the Minister may, at his discretion, choose to assess a taxpayer with total disregard to the provisions of the Act provided the taxpayer does not object.  However, it is our view that it is clear that the judge in Marconi intended his decision to be restricted to situations where the Minister would otherwise be prevented from making a reassessment in the taxpayer's, favour by a provision of the Act that is in place specifically for the taxpayer's protection (i.e. subsection 152(4)).  This is not the case here.  As a matter of fact, in Marconi, the Crown presented to the judge a New Zealand case: Reckitt and Colman (New Zealand) Limited v. Taxation Board of Review, [1966] N.Z.L.R. 1032 (C.A.) ("Reckitt and Colman") which dealt with the authority of the Commissioner of Inland Revenue to waive strict compliance with the 30-day delay under the relevant statute within which the taxpayer may appeal from a Board of Review to a Supreme Court.  In turn, in Reckitt and Colman a Canadian tax case was cited as being on point and on the basis of the principle established in the Canadian case the New Zealand Court of Appeal found that the Commissioner of Inland Revenue could not lawfully waive the time requirement of the relevant statute.  The judge in Marconi admitted that the decision in Reckitt and Colman was consistent with Canadian jurisprudence.  However, in discounting the relevance of the findings in Reckitt and Colman to the facts in Marconi, the judge states "the case before me, however, is not whether the Crown can waive a statutory prescriptive period which a taxpayer has not met".  The case before us is exactly that.  Accordingly, we would maintain that the Marconi case may contain more material that supports our position on subsection 5907(2.6) of the Regulations than it does material that detracts from it.  In any case, the Department has appealed the judgement in Marconi to the Federal Court of Appeal on the basis that the judgement is erroneous in law.

In our view an election pursuant to subsection 5907(2.6) is necessary to force a taxpayer to formally declare to the Minister that he has in fact made such an election.  Once made, the election in respect of a particular business of an affiliate is not revocable.  Subsection 5907(2.2) of the Regulations provides that the adjusted earnings amount of the affiliate is amended in the taxation year by the aggregate of the adjustments that would have been made in previous years under subsection 5907(2.1) of the Regulations when the affiliate was a foreign affiliate of the taxpayer or a corporation with which the taxpayer was not dealing at arm's length, had the election been made at the commencement of the relevant business.  Furthermore, where the shares of the affiliate are later sold by the taxpayer to a non-arm's length party, that non-arm's length party is deemed by subsection 5907(2.3) of the Regulations to have made an election.  Accounting depreciation is generally less than tax depreciation early in the useful life of a depreciable asset.  The reverse is generally true late in the useful life of an asset.

21(1)(b)

Draft Regulations proposed in 1985, extended the deadline for filing elections under subsection 93(1) of the Act and subsection 5907(2.1) of the Regulations in subsections 5902(5) and 5907(2.6) respectively to June 30, 1986.  It is our understanding that this date was chosen for subsection 5907(2.1) of the Regulations to allow an election to take into account the amendments made to subsection 5907(2.1) of the Regulations dated February 14, 1985 applicable in respect of elections made after 1983.  The deadline for the subsection 93(1) elections in subsection 5902(5) of the Regulations was later extended to December 31, 1989 to permit taxpayers to account for amendments to the Regulations affecting the calculation of exempt surplus that were not passed until after the original June 30, 1986 deadline.  Such considerations would not have been applicable to the subsection 5907(2.1) election.  Therefore, it is our view that the fact that there was an extension of the subsection 93(1) election deadline in subsection 5902(5) of the Regulations to December 31, 1989 does not indicate that the deadline set out subsection 5907(2.6) of the Regulations was overlooked.

The fact that the draft amendments to subsection 5907(2.6) of the Regulations were passed on March 2, 1989 is an indication that the legislators thought they were relevant and necessary.  In accepting the taxpayer's position that a valid election can be filed at any time, we would in effect be taking the view that such amendments were meaningless.  In light of this we feel that our position is in line with the intent of the legislation.

Our position would generally not create a great deal of hardship to a taxpayer.  As discussed earlier, subsection 5907(2.2) of the Regulations provides that all the benefits of having elected under subsection 5907(2.6) of the Regulations become available in the year of the affiliate for which the election is made as if the election had been made on the first day that the foreign affiliate became an affiliate of the taxpayer.  Accordingly, neglecting to file the election on time does not bar the taxpayer forever from the benefits otherwise enjoyed by it so long as it continues to hold the shares.  If the shares of an affiliate are sold to an arm's length party, the taxation year of the affiliate ending prior to the sale  would be the last year in which the exempt surplus of the affiliate in respect of the vendor would be relevant to that corporation. The need to file the election under subsection 5907(2.6) of the Regulations if there was a need, should be readily apparent at that time or least at the time of filing a T2 for the year of disposition and the time permitted thereunder to file the said election should generally be adequate.

Whether or not in a particular case a late filed election is accepted is not the decision of the Rulings Directorate.  The purpose of the above comments is to express our views on why certain arguments are not valid reasons for accepting a late filed election under subsection 5907(2.6) of the Regulations.

for DirectorRulings DirectorateLegislative and Intergovernmental Affairs Branch