Section 221.2

Administrative Policy

20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.10

CRA is deliberating on how to relax its procedures for s. 221.2 re-appropriation requests

Is the CRA amenable to revisiting T2 reappropriation in light of Cybernius Medical and Pomeroy’s Masonry?

CRA noted that after a significant internal debate in 2011, it decided that it would need to accept applications. However, the personnel who were uncomfortable with that decision were the ones who authorized to write the procedures, which had the effect that the status quo of not re-appropriating funds was effectively maintained. However, in response to increasingly pointed comments from the bench, CRA has agreed that this status quo is unacceptable given that as a policy matter it has been determined that there should be viable solutions. There will be clarity in 2018 on this issue.

18 July 2013 External T.I. 2012-0463421E5 - Section 221.2

A Canadian resident subsidiary over-withheld Part XIII tax on dividends paid to its non-resident parent, and did not discover this error until after the limitation period for application by the parent for a refund under s. 227(6). Could a re-appropriation of the overpayment could be made pursuant to s. 221.2?

After noting that "where a non-resident has overpaid Part XIII tax, the amount overpaid may be an amount available to be re-appropriated to another debt of the payee," CRA stated:

unless the non-resident payee has tax liabilities from amounts payable arising from other sources, the non-resident payee will not have a debt that "is or may become payable" for the purposes of subsection 221.2.

4 March 2011 External T.I. 2010-0384921E5 - Overpayment of tax.

a corporation, which had unused SRED credits for its 2007 taxation year, carried those credits back to its 2004 taxation year along with instalment payments made in 2007. When the 2004 return was filed three years and 11 days after the 2004 year end, it showed that taxes had been overpaid. A refund claim for these taxes was barred by s. 164(1) as the return was not filed within three years.

CRA indicated that "the company could request that the tax, including instalments, which were overpaid in the 2004 taxation year be re-appropriated in full to another amount or amounts that are or may become payable in a subsequent year or years."

Subsection 221.2(1) - Re-appropriation of amounts


Referred Realty Inc. v. Canada (Attorney General), 2018 FC 59

CRA decision not to apply a credit under s. 221.2 based on the taxpayer’s slowness in filing returns was set aside

Incompetent record keeping by the office administrator came to light when the taxpayer’s accountants were preparing to file its T2 for the year-ended July 31, 2007, so that the taxpayer remitted its estimated income tax liability, but did not file the return. Efforts began to remedy the records, first with yet another incapable office administrator and then with an outside bookkeeper. In early 2012, the accounts were finally brought into a state where filing could be completed for the year-ended July 31, 2007 and then for subsequent periods through to July 31, 2011. These filings were completed by July 2012. On January 12, 2012, the Minister garnished $615,000 from the taxpayer’s bank account because of the taxpayer’s failure to file the required income tax returns and an ensuing arbitrary assessment of a tax liability of $155,000. In response, the taxpayer made a request to the Minister to exercise discretion under s. 221.2 to grant re-appropriation of statute-barred credits against future tax liability in the amount of $185,817.71, being the monies remaining from the garnishment after the payment of all outstanding taxes and late-filing penalties.

In setting aside the decision of the Minister’s delegate to deny the request, and referring the matter back for a redetermination, Campbell J stated (at paras 6, 7, 8, and 9):

In my view, the Delegate was required to state a clear and supportable justification to deny the Applicant’s re-appropriation request given the large sum of money under consideration.

… There is no evidence that the Applicant was intentionally neglecting or avoiding its responsibility to maintain proper records. To the contrary, the evidence establishes that the Applicant’s active efforts were directed to meeting its responsibility, and in the end result, upon professional advice, once the financial affairs were placed in order, all taxes and penalties were paid without objection or request for relief.

…[T]he Delegate made the statement that “the taxpayer did not demonstrate that sufficient action was taken to remedy this situation within a reasonable timeframe as returns continued to remain outstanding until 2012” without clarification of what “sufficient action” was expected, and what “reasonable timeframe” was expected.

… I find that the statement constitutes the delivery of a punishment to the Applicant for perceived failure to meet the Delegate’s unclear expectations. … [N]o argument was presented … that the finding is supportable in fact or law.

He also found (at para. 10) that the delegate's consideration of the taxpayer's GST-filing record was "an extraneous consideration."

Cybernius Medical Ltd. v. Canada (Attorney General), 2017 FC 226

Minister ordered to make a taxpayer-requested s. 221.2(1) transfer between two taxpayer accounts

The applicant (“Cybernius”) did not file income tax returns for its 2003-2005 taxation years and, in 2006, was assessed by the Minister for those years on the basis that it was liable for taxes, penalties and interest in an amount of $534,365.28 and in 2009 was reassessed for its 2003 taxation year. In December 2009, the Minister garnished $594,447.21 held by an escrow agent of Cybernius pursuant to a Requirement to Pay (RTP). In 2014, Cybernius filed notices of objection, which were initially rejected - but in 2015 the Tax Court of Canada issued a consent judgment that they were valid. In June 2015, the Minister issued notices of reassessment resulting in a $594,855 credit owing to Cybernius. Cybernius also was entitled to a $465,923 SR&ED tax credit. In September 2015, Cybernius requested that the Minister first set-off the $594,855 reassessment credit owed to Cybernius against $800,000.00 payroll source deductions owing by Cybernius, and that the $465,923 in SR&ED credits be applied to the remainder of the source deductions debt. The Minister refused on the basis that Cybernius’ T2 corporate income tax returns for 2013 and 2014 had not been filed – and that the credits also could not be used as Cybernius’ corporate income tax returns had not been filed within three years of the end of each relevant year. Cybernius then submitted a Form RC431 for reappropriation of the credits and, when the Minister refused, Cybernius brought this application, whose central issue was whether the exercise of discretion by the Minister not to re-appropriate $594.447.21 towards Cybernius’ source deduction liability was reasonable.

After finding that the Minister should not have retained the credit because there were outstanding notices of objection, McVeigh J further found (at para 48, 52, 53):

… I find the decision not to grant the re-appropriation to be further unreasonable given that the decision was part of a continuous course of conduct and Cybernius became fully compliant during this time.

Section 221.2(1) provides the Minister the discretion to re-appropriate amounts if the taxpayer does not have any outstanding returns. …

Given that Cybernius is fully compliant, it is unreasonable for the Minister not to exercise their discretion to ensure the collection of the payroll source debt by using an existing tax credit. It would be counter to the purpose of the ITA for the Minister to do so, especially given the importance of source deductions in a number of Acts of Parliament.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 225.1 - Subsection 225.1(2) valid notice of objection was still outstanding: garnishment amount to be returned 379

Clover International Properties Ltd. v. Canada (AG), 2013 DTC 5116 [at 6132], 203 FC 676

The taxpayer had an overpayment of tax in its 1996 taxation year, and did not file its T2 return within three years of the end of 1996. Although s. 164(1) would prevent the taxpayer from obtaining its 1996 refund, the taxpayer filed a request under s. 221.2(1) to have the Minister appropriate the 1996 payments to the taxpayer's 1999 taxation year. The taxpayer's argued that the phrase "may become payable" in s. 221.2(1) should be construed so broadly as to encompass even theoretical future liabilities - therefore, because it was always possible in theory that an amount "may become payable" in respect of 1999, under s. 221.2(1) the Minister should appropriate the 1996 overpayments to offset these theoretical liabilities. (No such liabilities were actually anticipated for 1999.)

Strickland J rejected the taxpayer's argument. Parliament is presumed not to make contradictory enactments, and the broad interpretation urged by the taxpayer would confer authority on the Minister to indirectly circumvent the refund restrictions in s. 164(1) (para. 59). She noted, however, that there is a possibility the taxpayer may realize the value of the 1996 overpayment, should the Minister determine that there is an amount that is payable or may become payable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(1) 185

Administrative Policy

8 September 2014 External T.I. 2013-0482991E5 - 15(2) and related provisions

no unpaid liability of non-resident to be reduced re appropriation of unrefunded s. 214(3)(a) tax

Debtco, a non-resident corporation which is connected to the non-resident wholly-owning parent (Parentco) of Canco, is indebted to Canco. Debtco repays its debt to Canco in the second year after the end of Canco's taxation year in which the debt arose - but Debtco does not apply for a refund within the time required under s. 227(6.1). May the amount that would otherwise be refundable under s. 227(6.1), had Debtco applied within the time required, be re-appropriated to a future amount of tax owing under s. 221.2(1)? CRA stated:

[T]he tax payable under Part XIII is that of Debtco (i.e., the non-resident) … . Therefore re-appropriation under subsection 221.2(1) in respect of the amount would be available to Debtco, not Canco, and only to the extent that Debtco were to have an amount that is or may become payable for the purposes of the subsection.

… [T]here is no situation where re-appropriation under section 221.2 is available when the re-appropriation would result in the refund of an amount contrary to legislated time limits (such as in subsections 227(6) or (6.1) and section 164). In addition, there are currently no provisions of the Act or the Income Tax Regulations which divest the payor (e.g., Canco) of their obligations under section 215 … . It is, therefore, unclear to us the precise situation for which re-appropriation under subsection 221.2(1) could be granted… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.11) novation of pre-2012 loan 164
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.6) assignment of debt not its repayment 135

8 October 2008 Internal T.I. 2008-0269581I7 - statute-barred refund

request to re-appropriate

The corporate taxpayer requested that CRA exercise its discretion under 221.2(1) to appropriate the overpayment to a balance owing within the normal reassessment period where the taxpayer had not filed its tax return (for which a refund could have been claimed) within the three year time period specified in s. 164(1). In rejecting this request, CRA stated:

[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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(1.5) "may" establishes CRA discretion 116
Tax Topics - Income Tax Act - Section 164 - Subsection 164(1) request to extend filing deadline or re-appropriate 94
Tax Topics - Income Tax Act - Section 220 - Subsection 220(2.1) request to extend filing deadline 64
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3) request to extend filing deadline 64

Subsection 221.2(2)


Forbes Painting and Decorating Ltd. v. Canada (Attorney General), 2019 FC 160

CRA is required to consider financial hardship in s. 221.2 credit transfer requests

The taxpayer (Forbes) failed to file corporate income tax returns for its 2006 and 2007 years based on an alleged understanding that this was not required where it was generating a loss. The Minister then issued arbitrary assessments in late 2010, which it collected upon in late 2011 by way of garnishment. Forbes filed returns for the two years in 2012 that showed net tax owing, which could not be claimed because of the three-year limitation in s. 164(1).

The Minister’s delegate denied Forbes’ request that the statute-barred credits (SBCs) be reappropriated under s. 221.2(2) to its outstanding payroll account balance on the basis that there were no extraordinary circumstances that had prevented Forbes from filing its returns within the three years from its tax year ends and that Forbes had not demonstrated that it took any action to resolve non-compliance within a reasonable time.

Before returning the matter for redetermination by another delegate, Boswell J stated (at paras. 26-27, 32):

The ability of a corporate taxpayer to continue as a going concern, if raised in a request for re-apportionment under subsection 221.1(2) of the Act, is a factor that should be weighed by the Minister when assessing the re-apportionment of SBCs. …

When assessing a request for the re-apportionment of an SBC, the Minister should also have regard to whether denial of the request might possibly result in the Minister’s inability to collect outstanding tax arrears from a taxpayer. …

[T]he decision [is] unreasonable because it is not apparent or transparent that Forbes’ financial hardship was a factor in the decision-making process. The decision under review will therefore be set aside.

Pomeroy’s Masonry Limited v. Canada (Attorney General), 2017 FC 952

CRA failed to consider the taxpayer’s need to apply an income tax credit to pay HST arrears

For its 2006 to 2010 taxation years, the Applicant did not file corporate tax returns, resulting in assessments under s. 152(7), which CRA then collected through a combination of payments made by the Applicant and garnishing third parties. The Applicant filed the missing corporate tax returns in 2012, and Notices of Reassessment resulted in credits totaling most of the previously paid assessments. However, refunds were unavailable under s 164(1) since returns had not been filed within three years of the applicable taxation year-end.

The Applicant’s accountant issued written requests in 2014 to re-appropriate pursuant to s. 221.2(2) the credit balance from the Applicant’s corporate income tax account to its arrears of HST remittances. CRA declined this request on the grounds that the Applicant had not demonstrated exceptional circumstances explaining his delays in filing hits corporate income tax returns on a timely basis.

Southcott J allowed the application for judicial review and ordered that the matter be returned to the Minister for redetermination, stating (at paras 25, 27, 28, and 29):

[Cybernius noted] the importance of having tax debts paid. I agree that it is consistent with the overall purpose of the Act that s. 221.2(2) be interpreted such that the retirement of outstanding tax debts is a factor, and indeed an important one, to be taken into account in the exercise of the Minister’s discretion.

The Applicant’s written submissions… explained that … if CRA did not agree to allow the re-appropriation of the statute-barred credits to the company’s HST liability, Mr. Pomeroy would not be able to pay CRA and would face the possibility of declaring bankruptcy. … [T]he written submissions identified … the resulting possibility that the HST liability would not be paid.

…[T]he record demonstrates no consideration or weighing at all of the Applicant’s submissions as to the effect upon it, and its ability to pay its HST liability, that would result from its request being refused.

The failure to consider these factors may be attributable to the [User Guide – Re-appropriation of T2 Statute-barred Credits] Guidelines’ emphasis on consideration of whether there were extraordinary circumstances which prevented the filing of returns within three years from the applicable tax year end. However, the Guidelines’ … section entitled “Other circumstances”… states that the CRA may also apply ministerial discretion if a taxpayer’s circumstances do not fall within the situations described… . . In my view, it is the Minister’s failure to consider the other circumstances raised by the Applicant, particularly when viewed through the jurisprudential lens provided by Cybernius, which makes the decision unreasonable.