26 September 1995 Internal T.I. 9517407 - wind-up of a trust - final return

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. where a trust has chosen a final windup date & filed a final return, will the dept accept a further "final return" based on actual wind-up date? does the issuance of a clearance certificate affect this issue?

2.will the dept accept a late filed 104(13.1) election?

Position:

1.yes.

2.no legislative basis but may be allowed on an administrative basis.

Reasons:

1.dept policy of treating a chosen date as a final return has no basis in law. & a clearance certificate merely releases an administrator from liability.

2.on an administrative basis this has been previously allowed provided the taxpayer is using up unabsorbed losses not doing retroactive tax planning ie. income splitting.

September 26, 1995

Firoz Ladha Trusts Section
A/Assistant Director L. Holloway
Client Assistance Division (613) 957-2104
Vancouver Tax Services Office

Att'n: T. Taylor (Section 471-11)
951740

XXXXXXXXXX

This is in reply to your (undated) letter concerning the above named estate, received in our office on June 30, 1995. We apologize for the delay in our response.

In your letter you asked for our opinion in the following situation:

1. XXXXXXXXXX A testamentary trust was created upon his death.

2.The trust filed T3 returns regularly to 1993 with a July 31 year-end.

3.The trust decided to distribute its assets and wind up on February 28, 1994.

4.A T3 return was filed for the period ending February 28, 1994, indicating that this was the final return of the trust. The return showed gains realized during this period that were allocated to the beneficiaries. This return did not include a subsection 104(13.2) designation.

5.The February 28, 1994 T3 return was assessed on April 29, 1994, confirming no taxes owing. Upon receiving the assessment the trustee signed an undertaking to distribute all of the property of the trust as soon as possible after receiving the clearance certificate in accordance with IT-282R.

6.The trustee requested a clearance certificate July 24, 1994, and received such a certificate on August 23, 1994. At this point in time, the trust had distributed approximately $XXXXXXXXXX worth of assets leaving only some $XXXXXXXXXX worth of assets in the trust.

7.On October 28, 1994, an amended T3 return was filed showing a July 31, 1994 year-end. This return has not been assessed.

Your Position

In your opinion the trust cannot amend the final T3 return (dated February 28, 1994) to now elect to retain some of the capital gains in the trust.

Taxpayer's Position

The trust claims the Minister did not have the authority to assess the February 28, 1994 T3 return. The trust maintains the Minister should reassess an amended T3 return with a July 31, 1994 year-end, and allow the subsection 104(13.2) designation on that return as the actual legal wind-up date of the trust is subsequent to even the July 31, 1994 year-end of the trust and because the Department's position is based on administrative concessions and has no basis in law.

Our Comments

The Departmental policy of treating an arbitrary date chosen by a trust as a final wind-up date as stated in IT-282R has no basis either in income tax or trust law. Rather per trust law, the final date of the trust would be the date that all the trust assets have been distributed. A clearance certificate issued in accordance with subsection 159(2) merely releases an administrator from being personally liable for the unpaid taxes and penalties of the estate or trust. Therefore, technically, reassessment of a return after the issuance of final clearance certificate is not prohibited by the Act. Support for your position of not reassessing a return after final clearance has been issued, can however be found in Regulation 5800(1)(g), as that paragraph specifically permits the destruction of all records, books of account and vouchers of a deceased taxpayer or trust on the day that the clearance certificate is issued.

We agree with your conclusion that there is nothing in the Act requiring the Department to accept a subsection 104(13.1) or (13.2) designation after the T3 return for the particular year has been filed. The representative's correspondence dated January 11, 1995, claimed that it was departmental practice to accept late filed subsections 104(13.1) and (13.2) designations and quoted the following excerpt from document number 912157 originating from Rulings dated September 24, 1991:

"The Division stressed that the adoption of any such practice...would be solely administrative in nature and would take into consideration the intended purpose of the late designation as well as any hardship that might be encountered by the trustee or beneficiaries if the late designation were not accepted. In the Division's view, the intended purpose of the designations was to allow trusts to absorb losses that they would otherwise not be able to absorb. The designations would be consequently be refused where the reason for the late filing was income splitting."

The letter quoted above was an internal document, as pointed out by the representative; however, it did not claim to be departmental policy. Rather this opinion was expressed by our Division to the Head Office Trust and SER Assessing Group in order to assist them in developing an administrative position. The representative, on the other hand, did not quote the resulting departmental position found in a memorandum to all District Offices, Taxation Centres and Regional Offices dated April 2, 1992, which stated that as a result of misleading statements made in the 1990 T3 Guide, late subsections 104(13.1) and (13.2) designations could be made for only 1990 and prior taxation years. This memorandum (directive number T3-92-A2) noted that the problem had been rectified in the 1991 Guide and the decision to process late filed designations should be made on a case by case basis only where returns were filed before the 1991 T3 Guide became available. By implication, similar late designations filed beyond the date the 1991 T3 Guide became available were not to be processed. As the representative realized that these designations could not be filed later than the original return, an additional return was filed claiming that the trust had not in fact been wound up as at February 28, 1994, and was thereby required to file returns up until the actual final date of distribution, that date being beyond the trust's normal July 31 year-end. While first availing themselves of our administrative position, they now argue that it has no legal basis in order to accommodate their error of omission.

On a technical basis, we are of the opinion that the Act would not preclude reassessment of a return after the issuance of a clearance certificate. In this case, as the trust is not engaging in retroactive tax-planning but merely claiming existing losses, we see no technical reason to object to any decision made to assess the July 31, 1994 T3 return, along with the subsection 104(13.2) designation filed (unless, of course, the legal wind-up date can be established to be February 28, 1994).

T. Murphy
A/Section Chief
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch