25 January 2012 External T.I. 2011-0426331E5 - Late filed T2 and late filed RDTOH

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 subsection 220(3) of the Act provides the Minister with the discretion to extend the three-year filing requirement in subsection 129(1) of the Act, and therefore allow the CRA to issue a dividend refund. 2. Whether the CRA would consider due diligence with respect to a dividend refund in situations where the corporate tax return is filed beyond the three-year filing requirement provided in subsection 129(1).

Position: 1.No. 2. No.

Reasons: 1.Pursuant to subsection 129(1) the return of a corporation's income must be made within three years of the year end in order for the Minister to permit a dividend refund. The Ministerial discretion under subsection 220(3) which provides for the extension of the time to make a return does not extend to subsection 129(1). 2) The Income Tax Act does not provide for the consideration of due diligence with respect to late filed returns.

XXXXXXXXXX
				2011-042633
				G. Godson

January 25, 2012

Dear XXXXXXXXXX :

Re: Due Diligence and the Application of Subsection 220(3) to Subsection 129(1)

We are writing in reply to your email of October 19, 2011, concerning the payment of a dividend refund to a private corporation. We also acknowledge our telephone conversation of January 6, 2012 (XXXXXXXXXX /Godson). In your inquiry you have asked whether subsection 220(3) of the Income Tax Act (the "Act") provides the Minister with the discretion to extend the three-year filing requirement in subsection 129(1) of the Act and, therefore, allow the Canada Revenue Agency (the "CRA") to issue a dividend refund. In addition, you have inquired whether the CRA would consider due diligence when considering whether to exercise this discretion.

Corporations are generally required to file their return of income within six months after the fiscal year end pursuant to paragraph 150(1)(a) of the Act. Pursuant to subsection 220(3), the Minister is provided with the discretion to extend the time for making a return under the Act. The discretion provided by subsection 220(3) is applicable to the requirements to file returns of income under subsection 150(1). Accordingly, this provision would allow the Minister the discretion to accept a corporation's T2 return after the deadline required under paragraph 150(1)(a).

Although subsection 220(3) of the Act provides the Minister with the discretion to extend the time for making a return of income, this discretion does not extend to the filing deadline in subsection 129(1) of the Act. Subsection 129(1) provides that a private corporation may receive a dividend refund of all or part of the income tax that it paid in respect of certain investment income and capital gains where it has paid taxable dividends to its shareholders, provided it meets the requirements of the subsection. One of the requirements is that the corporation files its return of income within three years of the end of the corporation's taxation year. Subsection 220(3) does not alter or affect whether a corporation has factually filed its return of income within the period required under the Act. In addition, there is no provision within section 129 to permit the Minister to extend the time period. As a result, the granting of an extension of time to make a return pursuant to 220(3) of the Act does not have the effect of extending the three-year period in subsection 129(1).

Consequently, the CRA cannot consider due diligence submissions with respect to a request for a dividend refund where the corporation's tax return for the year was not filed within the three-year limit required by subsection 129(1).

In a recent court case, Tawa Developments Inc. v The Queen [2011 TCC 440], the court held that subsection 129(1) contains an unambiguous condition that a tax return be filed within a three-year time limit, and when this condition is not met, the dividend refund cannot be obtained.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CA
For the Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch