Section 164

In clarifying the indication in 2012-0468081I7 that "where a refund request is based on issues that are covered by a valid waiver, a refund may be issued notwithstanding that the refund request may have been made after the required time frame provided by paragraph 164(1)(b)," the Directorate stated:

[A] waiver does not extend the period within which a taxpayer may request a refund. Nevertheless, where…it is reasonable to conclude the waiver also contains an implicit request for a refund for the particular issue outlined in the waiver, the waiver may also be accepted as a request for a refund for the purposes of this paragraph. … [W]here a waiver does not identify the specific issue in dispute, and/or the specific issue may not result in an overpayment, the Minister would not issue a refund.

A non-resident corporation, which had not filed any T2 returns (notwithstanding having been subject to Reg. 105 withholding), was assessed under s. 152(7), paid the tax in order to cut off interest charges, and then (following the filing of late returns) successfully objected to the assessments on the basis that it did not have a permanent establishment in Canada, so that its earnings were Treaty-exempt.

In finding that s. 164(1) precluded CRA from now refunding the assessed tax (including that paid by the taxpayer following the arbitrary assessments), CRA stated:

Under section 164, no distinction can be made between the tax that was withheld pursuant to section 105 of the Regulations and the payment made by the Taxpayer upon receipt of the Notices of Assessment. … Since the Taxpayer did not file the T2 returns within [the] three-year limit, the Minister does not have the authority to refund the overpayment to the Taxpayer.

…[I]t is the taxpayer's responsibility to determine whether paying the amount in dispute is appropriate in their particular circumstances.

Does s. 164(1)(b) permit a refund to be made where a taxpayer has filed a valid waiver to allow a reassessment beyond the normal reassessment period but its request for a refund was made after the normal reassessment period? After noting that the taxpayer made the "request for a refund based on issues that are unrelated to those covered by the waiver," the Directorate stated:

[T]he Minister is not permitted to issue a refund in these circumstances. …[W]here a refund request is based on issues which are covered by a valid waiver, a refund may be issued notwithstanding that the refund request may have been made after the required time frame.

The corporate taxpayer requested that CRA exercise its discretion under any of ss. 220(2.1), 220(3) and 221.2(1) to refund an overpayment where the taxpayer had not filed its tax return within the three year time period specified in s. 164(1). In rejecting this request, CRA stated:

[T]the Ministerial discretion contained in subsections 220(2.1) and 220(3) is only applicable to provisions such as subsection 150(1). Accordingly…subsections 220(2.1) and 220(3) have no application to subsection 164(1).

Furthermore:

[S]ubsection 221.2(1) may not be used to re-appropriate an overpayment that cannot be refunded once the three year period contained in the preamble to subsection 164(1) has lapsed.

An individual becomes a bankrupt part-way through a year. In his return for his post-bankruptcy part year (commencing under s. 128(2)(d)(i) on the day of his bankruptcy), he miscalculates his tax liability and remits too much tax. Given that s. 67(1)(c) of the Bankruptcy and Insolvency Act (Canada) provides that the property vesting in the trustee in bankruptcy include income tax refunds owing to the bankrupt, the overpayment arising in this case should be paid to the trustee.

In disagreeing with the taxpayer's submission "that subsection 164(1.5) is not really a discretionary provision but essentially gives individuals and testamentary trusts an ‘as of right' entitlement to a refund to an overpayment if they satisfy the ten year tax return filing requirement," CRA referenced a further submission that "Jack Herdman Limited v. MNR 83 DTC 5274 and Amoco Canada Petroleum Company Ltd. v. MNR 85 DTC 5169… found that the use of the word ‘may' in the refund provisions of subsection 44(1) of the Excise Tax Act…was not permissive, but mandatory," before concluding:

[T]he legislator's use of the word "may" in subsection 164(1.5) can only be construed as permissive given the contrasting use of both "may" and "shall" in section 164… .

In indicating that a non-resident's failure to post security under s. 240(6) of the ETA did not create a liability so that subsection 164(2) of the ITA would permit the Minister to apply an income tax refund to create security for a GST/HST liability, CRA stated that s. 240(6) "is not a charging provision, as it does not create a liability in the event that the non-resident fails to comply."

After the taxpayer's return for 2006 was assessed on April 27, 2007 on a basis that showed a refund was owing to the taxpayer for that year, the overpayment was retained for the purpose of applying it against a pending assessment of the taxpayer under s. 227.1. However, in October 2008, efforts to hold the taxpayer liable under this section were abandoned. Although information subsequently became available that indicated that in fact the taxpayer owed tax for 2007, it was too late to retain the refund as this information became available after the decision was made to abandon the potential s. 227.1 assessment.

After noting that in order to post security pursuant to 240(6) of the ETA, a non-registrant is required to complete and return Form GST 114 together with the requisite amount, CRA stated:

However, Form GST 114 is not a return. Therefore subsection 164(2.01) of the ITA cannot operate to preclude the issuance of an income tax refund where a non-registrant fails to post security for GST.

One of the beneficiaries (“Child 2”), of a Canadian estate holding stepped-up (per s. 70(5)) shares of A Co (a Canadian portfolio investment company) was a U.S. resident. A Co redeems a portion of its shares held by the estate, thereby giving rise to a deemed dividend and to a capital loss which can be carried back under s. 164(6) to partially offset some of the terminal year capital gain on the A Co shares, and such redemption proceeds are allocated and paid (less Part XIII withholding) by the estate to Child 2 through the issuance of a promissory note. The estate then engages in a conventional pipeline transaction for the benefit of its resident beneficiaries. Rulings on ss. 84(2), 84.1 and 245(2), but not 164(6) - but the summary indicates that the principal issue is "whether estate can elect under subsection 164(6) where there is a non-resident beneficiary."

The estate of an individual, who was resident in Canada for more than 60 months, was deemed to be resident in Canada under s. 94. At the time of his death, the deceased held shares of a taxable Canadian corporation which were not taxable Canadian property, and his Canadian principal residence. The estate was deemed by s. 84(3) to receive a dividend when shares of the corporation were redeemed, and also realized a capital loss on those shares. A capital loss also was realized on the disposition by the estate of the residence. The executor had elected under s. 164(6)(c) to carry back these losses to the terminal return of the deceased.

After having previously referred to the position in E9507245 that a non-resident trust may only carry back losses under s. 164(6) on shares that are taxable Canadian property, CRA stated (TaxInterpretations translation):

Since the Estate is deemed to be resident in Canada for the purposes of Division I (sections 150 to 168) of Part I of the Act, we are of the view that it has the right to make an election pursuant to paragraph 164(6)(c) in respect of capital losses incurred in its first taxation year, without distinction as to the nature of the property disposed of.

However, in order for the capital loss on the Residence to be eligible, it must not have been used primarily for the personal use or enjoyment of a beneficiary of the Estate or any person related to the beneficiary. It should also not be an inventory property. In this regard, we refer you to the files you mentioned earlier, files E2008-0280751E5 and E2002-0148955 [where CRA had stated that a capital loss from the disposition of a personal residence of the deceased was eligible under s. 164(6) if it was not personal use property to any beneficiary or a related person.]

"When the total of the capital losses that are the subject of an election under subsection 164(6) and capital losses otherwise realized by the deceased taxpayer in the year of death exceed the amount of capital gains realized by the deceased taxpayer in that year, paragraph 164(6)(f) limits the application of the resulting net capital loss to any other taxation year to the extent that the amount of the net capital loss can be considered to be in respect of the capital losses that were the subject of the election under subsection 164(6)."

Where an estate is a non-resident of Canada, only a capital loss arising on the disposition of taxable Canadian property is eligible for carryback pursuant to s. 164(6).

Re whether prior to (1) the anniversary of the death of the deceased and (2) the winding-up of the estate, the executor has the right to wind-up a corporation, thereby accessing the loss under s. 164(6).

Where an executor requests a clearance certificate based on the return filed for the executor's year and that return is the only one to be filed for the trust, the return will generally be considered to be the final return and the trust will be considered to be wound-up during the executor's year, even where the actual distribution occurs shortly thereafter.

Discussion of when shares are capital property of the estate as opposed to the beneficiaries, including a finding that a flow-through of dividends to beneficiaries does not demonstrate that the beneficiaries had beneficial ownership of the shares.

The phrase "notwithstanding any other provision of this Act" does not exclude the application of s. 85(4) or similar stop-loss rules. Accordingly, if an estate transfers property to a corporation that, immediately after the transfer, is controlled by the estate or by a group of persons that controls the estate, s. 85(4) will apply to deny the capital loss in respect of which an s. 164(6) election might otherwise be made.

Where property is held in joint tenancy and one of the joint tenants dies, the surviving joint tenant is not entitled to make the election under s. 164(6) in respect of a subsequent disposition of the property because the property passed to him by operation of law and not from the estate of the deceased.

After noting that s. 7(1)(e) did not apply if a deceased employee held unvested stock options because such options had no value immediately after his or her death, CRA went on to comment generally:

…Subsection 164(6.1) is intended to provide relief where a stock option is exercised, expires, or is otherwise disposed of within the first taxation year of the deceased taxpayer's estate and the value of the stock option has declined since the employee's death, such that the benefit realized by the deceased's estate is less than the benefit deemed by paragraph 7(l)(e) to have been received by the deceased taxpayer. If the legal representative of the deceased elects in prescribed manner, an amount [under s. 164(6.1)(a)] is deemed to be a loss from employment of the deceased taxpayer for the year of death. …

The query noted that when an estate elects under subsection 164(6) to apply a capital loss to the terminal return of the deceased, it is possible to create "circularity" under 164(6), when the estate carries back a loss but then realizes a capital gain on other assets in its first taxation year. CRA stated:

We…agree… that it is possible for a circularity issue to arise. If the estate realizes capital gains during its first taxation year, those gains must be applied against the loss on the share disposition, in accordance with the requirements of subsection 164(6), in order to determine the amount that can be carried back. Where this occurs, the application of 40(3.61) will result in an amount of loss stopped pursuant to subsection 40(3.6), which in turn will reduce the amount available for the 164(6) election, and the circular nature of these provisions becomes an issue….

We suspect that the incidence of this potential circularity issue is likely quite limited….

After noting that a deceased employee would be deemed under s. 7(1)(e) to dispose of unexercised stock options at fair market value on death, and that the estate would be treated by CRA as having acquired the options (under s. 69(1)(c)) at a cost equal to the same amount, CRA then addressed the possibility that the shares in question could decline in value following the death, and stated:

Subsection 164(6.1) is intended to provide relief in such situations and applies where a stock option is exercised, expires, or is otherwise disposed of within the first taxation year of the deceased taxpayer's estate. Where the legal representative elects in prescribed manner, the amount is deemed to be a loss from employment of the deceased taxpayer for the year of death. ...

If a deduction was claimed under paragraph 110(1)(d) in respect of the amount included in the deceased's income in the year of death under paragraph 7(1)(e), the amount of the loss that may be carried back is reduced by the deduction claimed pursuant to paragraph 110(1)(d). However, as a result of the amendment to subparagraph 110(1)(d)(i) that requires a taxpayer to acquire shares under the stock option agreement, a deduction pursuant to paragraph 110(1)(d) may not be available in circumstances where paragraph 7(1)(e) applies after March 4, 2010.

CRA stated:

Where an employee stock option provides that the option is automatically cancelled on death of an employee, the value of the option immediately after death will be nil with the result that no amount will be included in the deceased's income in accordance with paragraphs 7(1)(e) and 6(1)(a).

In a situation where the stock option provides that the deceased's estate may exercise the option within a limited period after the employee's death, paragraph 7(1)(e) may result in an income inclusion. Subsection 164(6.4) is intended to provide relief in such situations.