Section 249.1

Does s. 249.1(7) provide the Minister with the discretion to allow a taxpayer’s request to change the taxpayer’s fiscal period end (“FPE”) where the taxpayer’s return has been assessed, or if the taxpayer has filed the return but it is still not assessed? After indicating that where a taxation year has already been assessed on the basis of a fiscal period end, the Act does not have any provision that allows a reassessment to change the FPE, the Directorate went on to state:

[T]he … [preamble] wording of subsection 249.1(1) indicates that the purpose of specifying a particular period of time as a fiscal period is that a corporation can choose, within the parameters specified under the subsection, a FPE for preparing its accounts for the purposes of assessment. In general, where a corporation has filed its first income tax return, but an assessment is still to be made, the provisions of the Act do not appear to prevent the corporation from sending an amended tax return with a new FPE.

In 2012-0438481E5, a corporation with a February 28 year end was not entiled to file on the basis of a February 29 year end in a leap year. Is it CRA's practice to require re-filings where a historical February 28 year-end is filed with a February 29 year end in leap year? CRA responded:

We use the history of the taxpayer's filing pattern to determine the taxpayer's intent with respect to their year-end:

• If the taxpayer has always filed with a February 28 year-end, even in leap years, and then decides (in a leap year) to file with a February 29 year-end, the IT Rulings Document referenced above would apply as their filing history would indicate that they had originally picked "February 28" as their year-end, and are now trying to change it.
• If historically the taxpayer has always filed with a February 28 year-end in non-leap years, and with a February 29 year end on leap years, we acknowledge that the taxpayer intends to have picked the "last day of February", and not the specific date "February 28" as their year-end.

After indicating that the s. 134.2 election affects only the electing corporation's current taxation year and has no effect on its "fiscal period,” the Directorate stated:

Thus, if Canco has a fiscal period ending November 30, 2002, and elects pursuant to subsection 134.2 with an effective date of October 31, 2002, the following consequences will result:

(a) Deemed taxation year-end of October 30, 2002 pursuant to paragraph 134.2(2)(a);

(b) Start of a new taxation year deemed to begin on October 31, 2002 pursuant to paragraph 134.2(2)(b);

(c) The new taxation year deemed to begin on October 31, 2002 will end on November 30, 2002, in accordance with the fiscal period elected by the corporation pursuant to section 249.1; and

(d) If the corporation fails to change the date of its fiscal period pursuant to subsection 249.1(7), its taxation years subsequent to the one ended November 30, 2002 will begin on December 1 and end on November 30.

Where a corporation holding real estate acted as bare trustee for its beneficial owner, which was another corporation acting for a group of co-owners of the real estate, s. 249.1(1)(b) would apply if some of the co-tenants were individuals or other entities described in s. 249.1(1)(b).

In the situation where a corporate general partner of the partnership has no entitlement in the particular year to profits of the partnership because of a preferential share of the individual limited partner with the threshold above which the general partner is entitled to participate not having been exceeded, the corporate partner nonetheless would be considered to have a share of the income of the partnership for purposes of s. 249.1(2), so that the election in s. 249.1(4) would not be available. Before so concluding, CRA stated:

[S]ubsection 249.1(2) has been added to allow a person - who leaves a partnership during a fiscal period in a situation where the partnership no longer allows the person, by reason of that departure, to receive a share of the income or loss of the partnership for what would have been the fiscal period of the partnership had it ended at the end of calendar year in which it began - to not be considered as partner.

The partners (all individuals) of a partnership (an SENC) carrying on a professional business each transferred their interest in the SENC to a newly incorporated professional corporation (or, alternatively, an existing corporation), following which the SENC was wound up under s. 98(5). After noting that the professional corporation is required to adopt December 31 as its fiscal period end even though it was a partner in the SENC for only one day before the SENC winding up, CRA then addressed the question as to whether s. 249.1(2) deemed the professional corporation not to be a member of the SENC for s. 249.1(1)(b)(iii) purposes where no income of the SENC was allocated to it, and stated:

Where a partner transfers the partner’s interest in a partnership to a professional corporation, it is our view that the partner also transfers the partner’s entitlement to a share of the partnership's income. …

[S]ubsection 249.1(2) would not apply to this type of transaction. The professional corporation has … received on the transfer of the partners' interests in the SENC the right to the income attached thereto such that the professional corporation is not in a position where no share of the income or loss of the SENC would accrue to it. The fact that the SENC did not in fact allocate any income to the professional corporation does not change our position.

The Directorate noted that since, under s. 249.1(3), “it is not possible to change the commencement date of a fiscal period without changing the time at which the previous fiscal period ends,” a taxpayer request to retroactively change by one day the date on which a fiscal period commenced entailed a request to change the year end for the previous fiscal period.

Regarding a corporation's fiscal period that began on December 29, 1996 and ended on January 3, 1998, CRA stated:

[T]he corporation's fiscal period can run from December 29, 1996 to January 3, 1998 - a period not exceeding 53 weeks - and … the subsequent fiscal period of the corporation's business or property begins on January 4, 1998. …

[S]ubsection 249(3) does not affect the length of the fiscal period of a corporation's business or property. Instead, the deeming rule in subsection 249(3) has certain consequences, including the following:

• An unpaid amount that is otherwise subject to the provisions of subsection 78(4) must be paid no later than 180 days after the deemed year-end determined under subsection 249(3);
• The tax return will be required to be filed within six months of December 31, 1997;
• Subsection 15(2.6) requires that a loan to a shareholder made on January 3, 1998, be repaid on or before December 31, 1998 rather than January 3, 1999 in order to avoid including the debt in the shareholder's income for 1998.

An LP between two individuals has elected under s. 249.1(4) to have a non-calendar year end, say April 30, and now wishes to change to a September 30 year end for tax and accounting purposes to conform with the September year end of a related group of corporations. CRA stated:

Since an election under subsection 249.1(4) was made by SENC1, and SENC1 is not subject to the provisions of paragraph 249.1(1)(b)… an application to the Minister to change the time at which its fiscal year-end ends is still available under subsection 249.1(7). Any such change is, however, subject to the concurrence of the Minister and will generally only be accepted where a serious business reason exists.

…[W]here SENC1 [instead] did not make an election under subsection 249.1(4) within the prescribed time period…it would no longer be possible to avoid the application of paragraph 249.1(1)(b) so that SENC1 could not change the end of its fiscal year.

After noting the time limitation for making the s. 249.1(4) election, CRA described the procedure for making the election:

The election under subsection 249.1(4) should be filed with the Minister with the partner's return of income under Part I of the Act, using Form T1139…. As required by paragraph 96(3)(a), to be valid, such election must be made by a partner having the authority to act for the partnership and must be made in the name of the partner and each other person who was a member of the partnership during the fiscal period,

Partnership A, all of whose members are individuals who have elected under s. 249.1(4) since 1995 to have an off-calendar fiscal period end of June 30 for Partnership A, incorporates Aco which forms Partnership B with professional corporations that deal at arm's length with Partnership A's members. Could Partnership A retain its off-calendar fiscal period end under s. 249.1(4)?

CRA responded:

[T]he requirement in subparagraph 249.1(4)(b)(ii) is that "the partnership is not a member of another partnership". Accordingly…Aco becoming a member of Partnership B would not preclude Partnership A from retaining its off-calendar fiscal period end under subsection 249.1(4).

A taxpayer departed a partnership in respect of which he had been annually deducting a reserve from income on December 31, 1995 to join another existing partnership that performed similar services and which had a March 31 fiscal period end. After noting that that former s. 34.2(3) likely permitted the taxpayer to continue claiming the reserve, and in connection with finding that the taxpayer had not been permitted to file an election under s. 249.1(4) to have a non-calendar fiscal period of March 31 in respect of the income from the business of the partnership he had joined, but that this did not matter because the election had already been made by the second partnership, the Directorate stated:

Where a partner leaves a partnership to join another partnership, subsection 34.2(3) with respect to the meaning of "business" does not apply for the purposes of sections 34.1 (alternative method) and 249.1. … This means that where a partner joins an existing partnership, the fact that the partner previously carried on another business has no bearing on the determination of the fiscal period end of the business of the partnership being joined.

…[T]he taxation year that includes the first day of the first fiscal period of the business that begins after 1994 for purposes of paragraph 249.1(4)(a) is not the taxation year of his business carried on in the first partnership for which a timely election had not been made, but rather the taxation year of the business of the partnership he joined for which an election under subsection 249.1(4) had already been made by the members of that partnership at the time that business commenced.

Furthermore, despite the fact that the taxpayer was not a member of the partnership, which he joined, during the fiscal period in which the election under subsection 249.1(4) was made by one of the partners who had the authority to act on behalf of the other partners as stipulated in subsection 96(3) … the taxpayer cannot do otherwise than to comply with the election that is still in effect at the time of his joining the partnership.

The individual, as a member of a partnership carrying on a business, had filed an election pursuant to s. 249.1(4) to have the fiscal period of the partnership end on May 10, so that its first fiscal period began on August 21, 2002 and ended on May 10, 2003. The partnership sold its business on October 1, 2003, but at the end of 2003, it had not yet been dissolved or wound up.

In finding that the individual should include the partnership's business income for its fiscal period beginning May 11, 2003 in the individual’s 2003 taxation year (as well as the income from the partnership’s first fiscal period), CRA stated:

Subsection 249.1(4) requires that the partnership business be carried on throughout the period that began at the beginning of the fiscal period and ended at the end of the calendar year in which the fiscal period began in order for paragraph 249.1(1)(b) not to apply. Since the partnership's business ceased before the end of the calendar year, paragraph 249.1(1)(b) applied in this situation notwithstanding the election made pursuant to subsection 249.1(4). Paragraph 249.1(1)(b) provides that the fiscal period of the partnership cannot end beyond the end of the calendar year.

Subsection 34.1(1) does not apply in 2003 in this situation because the fiscal period of the partnership did not end after the end of the 2003 year.

… [I]n 2002, the partner did not elect to add back income from that business pursuant to subsection 34.1(2). Had the partnership business not ceased during 2003, the partner would have been taxed on the actual income for the fiscal period ending May 10, 2003 and on the additional income calculated under subsection 34.1(1) also covering a period in excess of 12 months.

Where a proprietorship has not filed an s. 249.1(4) election, the fiscal period of the business will always be from January 1 to December 31 of any calendar year. Where an individual proposes to incorporate a proprietorship, the individual could request (pursuant to s. 249.1(7)) a change in the fiscal period of the business to end immediately before the time of the transfer of the business (so that the proprietorship can claim capital cost allowance for the (shortened) fiscal period that would end immediately before the transfer.

Where the income from a rental property held in co-ownership by a corporation, an individual and a trust has been reported based on a June 30 fiscal period, the corporation will not be required to recognize any additional amount for the six-month period ending on December 31, 1995 notwithstanding the application of s. 249.1 to the individual and trust.

2020-0874951I7 indicated that if a request for a retroactive change to a taxation year is made after the corporate tax returns are filed but before the first Notice of Assessment for that year is issued, it will generally be granted – but not if such request is made after such issuance.

Suppose that a corporation incorporated on June 1, 2021 initially chose December 31, 2021 as its fiscal period end, and such calendar taxation year was assessed by CRA on February 20, 2022. With a view to having its first taxation year end instead on March 31, 2022, it files a timely Notice of Objection to the assessment. Once such assessment was cancelled, a tax return could be filed for the desired (June 1, 2021 to March 31, 2022) period.

In rejecting this approach of filing a timely objection to the initial assessment of the first taxation year in order to request the cancellation of that year end, so as to be able to retroactively change it, CRA stated:

For the purposes of subsection 165(3), an assessment may generally be vacated upon receipt of a Notice of Objection if a taxpayer submits additional facts or compelling arguments that were not before the Minister at the time the assessment was made and that demonstrate that the assessment is either invalid (i.e., it would not have been made in accordance with the procedural provisions of the Income Tax Act), or was unfounded (i.e., it assessed an amount of tax that was not based on the applicable provisions of the Income Tax Act as properly interpreted and applied to the relevant facts).

[Here] … there is nothing to suggest that the assessment of February 20, 2022 would be invalid or unfounded so as to justify its cancellation by the Minister under subsection 165(3) More specifically, the mere fact that the corporation wishes to change the timing of its fiscal period end after tax has been assessed for the year corresponding to the fiscal period, even if it is the corporation's first fiscal period, does not, in and of itself, invalidate or render unfounded the assessment of February 20, 2022.

After indicating that where a taxation year has already been assessed on the basis of a fiscal period end (“FPE”), the Act does not have any provision that allows a reassessment to change the FPE, the Directorate went on to state:

[W]here a corporation has filed its first income tax return, but an assessment is still to be made, the provisions of the Act do not appear to prevent the corporation from sending an amended tax return with a new FPE.

Following a split up butterfly and winding-up of a corporation (DC1) for which DC2 had been a holding company, DC2 is held by three corporations, TC1, TC2 and TC3. DC2 then effects s. 84(1) deemed dividends on a pro rata basis to the three TCs, which is ruled to result in a full refund of its RDTOH. There then is a single-wing split-up butterfly for the distribution of a pro rata portion of DC2’s three types of property to TC1 (including the right to the dividend refund, viewed as near-cash asset).

This single-wing butterfly concludes with the payment of a s. 84(3) deemed dividend to TC1 only (paras. 78-79). The above ruling is predicated on the taxation year of DC2 terminating before the single-wing butterfly, so that all of the dividend refund is generated before the second deemed dividend going only to TC1. The ruling letter states (para. 69.1):

Upon receipt of this Rulings letter in respect of the Proposed Transactions, if not earlier, DC2 will submit a request to the relevant Tax Services Office of the CRA to have a change of year-end. All proposed steps described in Paragraph 70 onwards [respecting the single-wing butterfly] will occur in the next taxation year of DC2.

Where a partnership between individuals has elected under s. 249.1(4) to have a non-calendar year end, say April 30, and now wishes to change to a September 30 year end for tax and accounting purposes to conform with the September year end of a related group of corporations (i.e., changing to a new non-calendar year end), such change can be made with CRA’s permission - although such application “will generally only be accepted where a serious business reason exists.”

The proposed transactions contemplate (in para. 24) respecting a spin-off of real estate by Opco to newly-incorporated Realtyco that "Opco will make an advance request to the CRA to change its fiscal period end in order to close off the latter before the transfer of the depreciable assets so that Opco will claim capital cost allowance for the current fiscal period up to the amount permitted by the Act and Regulations." (Per para. 17, "the fiscal period of Realtyo will be fixed at a date which will permit the avoidance of Part IV tax circularity.")

A top-tier partnership, where the lower-tier partnerships have calendar fiscal periods as required by s. 249.1(1)(c), will have a loss from a given source up to the transfer date for the sale by a partner of his interest but not necessarily for its calendar fiscal period. Would CRA grant a hypothetical request to change the partnership's fiscal period end from December 31 to the day before the transfer date to ensure that the former partner can be allocated a loss based on the shortened fiscal period? CRA stated:

[R]equests for changes in fiscal periods … [must] be demonstrated to be prompted solely by sound business reasons other than obtaining tax benefits. Additionally, neither the personal convenience of the taxpayer nor the saving or deferment of income taxes is accepted as a sound business reason. …[T]he request to have the fiscal period of the partnership end before the transfer date is to ensure that the former partner can be allocated a loss based on the shortened fiscal period. Accordingly … it would seem unlikely that the Minister would concur with such a request. Further, granting a request to change the fiscal period end of a partnership in a multi-tier partnership structure that results in the fiscal period ends of the partnerships becoming misaligned would be contrary to the underlying rationale of paragraph 249.1(1)(c).

The two 50% partners of a calendar-year partnership (both individuals), transfer their respective interests on August 1 of Year 1 on a tax rollover basis to a corporation. After the rollover, the partnership is owned 99% by the corporation and 1% by an inter vivos family trust. Would CRA allow the partnership to have a July 31 fiscal period end in Year 1 and a June 30 fiscal period end beginning with the next fiscal period?

After noting that since the partnership had an individual (the trust as a member), s. 249.1(1)(b)(ii) provided that the partnership fiscal period could not extend beyond the end of the calendar year in which it began, the Directorate stated:

[I]t is possible that the Minister would approve a year-end change for Year 1 as long as the request is made for serious business reasons. However, because of the rule in subparagraph 249.1(1)(b)(ii), the partnership's subsequent fiscal period would have to end on December 31 of Year 1, so that unless the partnership agrees to have more than one fiscal period end in the same calendar year, we would consider the partnership's fiscal period to be the calendar year.

Must a corporation, having a floating year-end (e.g., the fiscal period ending on the Sunday closest to December 31), seek approval under s. 249.1(7) to set a different year-end date each year? The Directorate responded that, per IT-179R, para. 12, such approval would not be required, but went on to note that the fiscal period could not exceed 53 weeks, and that ‘[s]ubsection 249(3) would apply, for example, if a corporation had a fiscal period from December 29, 2008 to January 2, 2010, to deem a taxation year-end to be December 31, 2009.”

A corporation, that was incorporated on February 2, 2007, filed an income tax return for the fiscal year beginning March 1, 2007 and ending February 29, 2008, and did not file a return for the period of inactivity from the time of incorporation to February 28, 2007. In 2009, it filed a s. 85(1) election respecting a transfer of property to it by a shareholder on February 28, 2007, and is now seeking a commencement date of the fiscal year ending February 29, 2008 be changed to February 28, 2007, thereby reducing the penalty under s. 85(8).

After noting that, in light of s. 249.1(3), this entailed a request for an amendment retroactive to the end of the previous fiscal year ending February 27, 2007, the Directorate stated:

In general, a request for a change of fiscal year will be approved if it can be shown that the request is motivated solely by valid business reasons … .. [T]he reduction of a penalty for late filing of an election, calculated under subsection 85(8), is not a valid business reason. In addition, no retroactive changes are normally permitted. Consequently, we do not believe it is appropriate to allow the corporation's first fiscal period to end before February 28, 2007, to reduce the amount of a penalty payable.

s. 249.1(8) requires that the particular day that may be elected to end the fiscal period of a partnership must be after March 22, 2011 and before the day on which that fiscal period would otherwise end. Accordingly, where the partnership fiscal period otherwise would end on August 31, 2011, the members of the partnership may not elect to make a single-tier period alignment to end the partnership fiscal period on October 31, 2011 (the year end of such members).

Where three corporations with calendar year-ends were members of Partnership X with a calendar fiscal period end, and one of the corporations and Partnership X were the members of a bottom-tier partnership (Partnership Y) with a fiscal period end of January 31, it would be possible for the members of Partnership X to make a multi-tier alignment election under s. 249.1(9) so as to cause the first aligned fiscal period of Partnership X and Y to end on January 31, 2012 (with Partnership X thereby having a one month stub fiscal period), provided the other conditions of s. 249.1(10) were satisfied.