10 July 1998 Internal T.I. 9805177 - CAPITAL GAINS 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.

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: An individual’s election made in respect of subsection 110.6(19) of the Act was invalid by virtue of subsection 110.6(20) of the Act. Subsequently, the individual filed a second election in November of 1997 on the basis that it could be regarded as an amended election pursuant to subsection 110.6(27) of the Act (at that time it was no longer possible to file a late election under subsection 110.6(26) of the Act). The basis for alleging this result are comments set out in a tax service. Was the Individual entitled to file a valid amended election under subsection 110.6(27) of the Act?

Position: Yes

Reasons: Subsection 110.6(28) of the Act deals with the circumstances where an election under subsection 110.6(19) of the Act cannot be amended or revoked and only refers to circumstances where the amount designated in respect of a property exceeds 11/10 of the fair market value of the property. The provision does not preclude the filing of an amended election in the circumstances under consideration. In addition, “B” in respect of the penalty calculation set out in subsection 110.6(29) of the Act includes wording which refers to the amount of the capital gain that would have arisen from the original election if the limitations in subsection 110.6(20) of the Act had not applied to the original election. Comments set out in technical notes (Dept. of Finance XXXXXXXXXX support the position.

		July 10, 1998

	T1 Adjustments Section  	HEADQUARTERS
	Carolyn Ritchie	M. Eisner
	Chief	(613) 957-2138
		980517

Capital Gains Election -XXXXXXXXXX (the “Individual”)

This is in reply to your memorandum of February 24, 1998 in which you asked us for our views on whether the individual has filed a valid amended election in relation to an initial capital gains election filed in respect of subsection 110.6(19) of the Income Tax Act (the “Act”) or simply a new election. This issue arises because if the amended election were considered to be a new election in accordance with subsection 110.6(26) of the Act, the new election would not be valid as it would not meet the time constraints concerning the filing of an election as provided by that provision. On the other hand, if the amended election could be regarded as being a valid amended election made under subsection 110.6(27) of the Act, it would satisfy the time limit for the filing of an amended election under that provision. We also acknowledge a telephone conversation (Eisner/Crocker) on June 21, 1998 in which we obtained clarification of the circumstances of your situation.

In your situation, the Individual included an election under subsection 110.6(19) of the Act with her 1994 income tax return which was filed prior to May 1, 1995 pursuant to paragraph 150(1)(d) of the Act. The election was not made in respect of a business. The election gave rise to a capital gain that was in excess of the Individual’s available capital gains deduction. In other words, the election was considered not be valid pursuant to subparagraph 110.6(20)(a)(i) of the Act. Consequently, a letter dated June 7, 1995 was sent to the Individual by the Sudbury Tax Services Office advising her to complete a new Form T664. As no reply was received within 30 days (the time frame set out in the letter), the Individual’s return was assessed on the basis that no election under subsection 110.6(19) of the Act had been filed by the Individual.

Near the end of 1997, the Individual’s legal representative (the “Representative”) sent a letter to the Department requesting that the amended election made in November of 1997 under subsection 110.6(27) of the Act be accepted by the Department for the purposes of subsection 110.6(19) of the Act. In response to this letter, the London Tax Services Office, in a letter dated January 29, 1998, indicated that the request could not be granted because the initial election was invalid and it was only possible for the Individual to have made a late filed election under subsection 110.6(26) of the Act in the Individual’s circumstances. However, a late filed election under 110.6(26) of the Act could no longer be filed as the time for the making of such an election had expired. In the situation at hand, the Individual could only have made a late filed election on or before April 30, 1997.

In response to the letter dated January 29, 1998, the Representative indicated that the Election was a valid amended election as it was made before 1998 pursuant to subsection 110.6(27) of the Act and was not a “new election” made under subsection 110.6(26) of the Act. As support for this position, reference was made to an excerpt from a tax service publication, which, in the Representative’s view, indicates that an amended election under 110.6(27) of the Act could be filed by the Individual.

You have requested our views on whether or not the amended election filed by the Individual is valid.

Our Comments

Under subsection 110.6(24) of the Act, the Individual was entitled to make an election under subsection 110.6(19) of the Act on or before the Individual’s “balance-due day” as defined in subsection 248(1) of the Act. In the case at hand, the balance-due day was April 30, 1995. Under subsection 110.6(20) of the Act, an election is generally only valid in the circumstances under consideration if (i) it results in an increase in the capital gains deduction that could be claimed under subsection 110.6(3) of the Act and does not result in an amount that is in excess of an individual’s available capital gains deduction or (ii) the amount designated in the election in respect of a property exceeds 11/10 of its fair market value at the end of February 22, 1994.

The following comments have been made on the assumption that (ii) above is not applicable to the original election filed by the Individual.

There are two possible positions with respect to the circumstances under consideration. The first position concerns the wording in the preamble of subsection 110.6(20) of the Act. In relation to the test described in (i) above, which was not satisfied with respect to the initial election filed by the Individual, subsection 110.6(20) of the Act states that “subsection (19) applies to a property or to a business, as the case may be, of an elector only if”. We recognize your argument that this wording, arguably, supports the position that the original election was invalid and that, accordingly, it was not possible to amend such an election under subsection 110.6(27) of the Act.

The second position essentially involves subsections 110.6(27), (28) and (29) of the Act. Subsection 110.6(28) of the Act deals with the circumstances where an election under subsection 110.6(19) of the Act cannot be amended or revoked and only refers to circumstances where the amount designated in respect of a property exceeds 11/10 of the fair market value of the property. In other words, this provision does not preclude the filing of the amended election in the circumstances under consideration. In addition, the variable “B” in respect of the penalty calculation set out in subsection 110.6(29) of the Act includes the phrase “where subsection (27) applies to the election, the total of all amounts each of which would, if the Act were read without reference to subsections (20) and (27), be the taxpayer’s capital gain for the year”. This wording refers to the amount of the capital gain that would have arisen from the original election if the limitations in subsection 110.6(20) of the Act had not applied. These comments support the position that a taxpayer who failed to file a valid election as a result of subsection 110.6(20) of the Act may be entitled to file an amended election under subsection 110.6(27) of the Act and, in our view is the better of the two positions. XXXXXXXXXX the position is consistent with the technical notes prepared by the Department of Finance in respect of subsection 110.6(20) of the Act which state that “Where an election is not effective because of subsection 110.6(20), the elector may have the opportunity to amend the election in accordance with the rules in subsections 110.6(27) and (28).”

It would follow that the Individual should be entitled to file an amended election in November of 1997 pursuant to subsection 110.6(27) of the Act.

If you require further technical assistance, we would be pleased to provide our views.

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

Jim Wilson
Section Chief
Business, Property & Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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