9 May 2000 Internal T.I. 2000-0019687 - LATE FILED ELECTIONS FOR FPE

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: What are the reassessment actions that may be taken by the Agency when an individual reports income from a proprietorship based on a non-calendar fiscal period but failed to file an election to keep a non-calendar fiscal period as and when required under 249.1(4).

Position: If taxation years are statute barred, no reassessment actions may be taken unless subparagraph 152(4)(a)(i) or (ii) of the Act applies, i.e., fraud or misrepresentation. In any other case, the taxpayer should be reassessed to account for business income based on a calendar taxation year.

Reasons: For fiscal periods that begin after 1994, the fiscal period of a sole-proprietorship must end on December 31 (unless the business has ended in the year) pursuant to the definition of "fiscal period" in paragraph 249.1(1)(b) of the Income Tax Act. However, subsection 249.1(4) of the Acts provides an exception that allows an individual to elect to have an off-calendar fiscal period for his or her business if an election is filed on or before the due date of the individual's return for the taxation year that includes the first day of the first fiscal period of the business. Former paragraph 600(b.1) of the Regulations, which permitted elections under subsection 249.1(4) to be late-filed, has been repealed. To be valid, late-filed elections had to be filed on or before January 31, 1998.

		May 9, 2000

	Linda Smith	HEADQUARTERS
	Training and Learning Development	J. Gibbons
	Human Resources Branch	(819) 957-2135

2000-001968

Income Tax Consequences for Failure to File an
Election To Establish an Off-Calendar Fiscal Period

We are writing concerning your enquiry about the income tax consequences of a failure to file an election to have an off-calendar fiscal period. You describe the following situation:

1. A proprietorship ( the "client") commenced operations on July 1, 1996.

2. The client reported income based on fiscal period ending June 30.

3. The client did not file an election under subsection 249.1(4) to establish an off-calendar fiscal period.

4. The client reported $60,000 for the fiscal period starting July 1, 1996 and ending June 30, 1997, on the 1997 T1 return.

5. The client reported $80,000 from the fiscal period starting July 1, 1997 and ending June 30, 1998, on the 1998 T1 return.

In relation to the above scenario, you ask:

i) Can the auditor convert the client to a December 31 fiscal period end (FPE)?

ii) Which year does the auditor perform the conversion to a December 31 FPE ?

iii) If the client wishes to retain a non-December 31 FPE, can the auditor accept an election filed during the course of an audit?

iv) If the 1997 year was statute barred prior to commencing an audit and the auditor was auditing 1998 and 1999, is the auditor able to apply the actions listed in 1 to 3?

Our Comments

For fiscal periods that begin after 1994, the fiscal period of a sole-proprietorship must end on December 31 (unless the business has ended in the year) pursuant to the definition of "fiscal period" in paragraph 249.1(1)(b) of the Income Tax Act. However, subsection 249.1(4) of the Acts provides an exception that allows an individual to elect to have an off-calendar fiscal period for his or her business. Under this provision, the individual must file an election in prescribed form on or before the due date of the individual's return for the taxation year that includes the first day of the first fiscal period of the business. Pursuant to former paragraph 600(b.1) of the Income Tax Regulations, it was possible for an individual to file a late election provided the election was filed before January 31, 1998. Paragraph 600(b.1) of the Regulations has since been repealed.

Based on the foregoing, it is clear that the client must report his or her business income based on a December 31 FPE. An election under subsection 249.1(4) to keep an off-calendar fiscal period, now filed during the course of a current audit, is invalid since, as discussed above, late-filed elections had to be filed on or before January 31, 1998. Accordingly, the client's 1996 T1 return should reflect business income earned for the period from July 1, 1996 to December 31, 1996. Similarly, the client's 1997, 1998 and 1999 T1 returns should reflect business income earned from January 1 to December 31 of the particular year. However, if any of the client's affected taxation years are statute barred, they cannot be reassessed unless subparagraph 152(4)(a)(i) or (ii) of the Act applies. The former provision allows the Agency to reassess any taxation year if the client or person filing the return has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act. The latter provision allows the Agency to reassess at any time if the client has filed a waiver within the normal reassessment period in respect of the year.

In addition to our comments, you may wish to obtain comments from the Verification and Compliance Research Branch (VECR) if you have not already done so. They may have an administrative position that deals with the situation you described.

We trust that these comments will be of assistance.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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