13 October 2011 Internal T.I. 2011-0393101I7 - Transitional Tax Debit/Credit Calculation

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: Whether the election provided in variable "I" of the calculation of the "total federal balance" under subsection 48(4) of the Taxation Act, 2007 (Ontario) can be filed late or amended.

Position: No

Reasons: Taxation Act, 2007 (Ontario) does not specifically provide for the filing of a late or amended election.

							October 13, 2011

	Loretta Prior  				Income Tax Rulings Directorate
	Training Facilitator			Ontario Corporate Tax Division
         	Toronto Centre TSO		Julie White

            					905 721 5202

							2011-039310

Late filed SR&ED election for transitional tax debit

This is in response to your email dated January 10, 2011 in which you requested our opinion on whether, in determining the "total federal balance" for purposes of the transitional tax debit/credit calculation, a corporation can amend or late file the election under subsection 48(4) of the Taxation Act, 2007, S.O. 2007, 11, Sched. A (the "TA") to defer the portion of the total federal balance relating to SR&ED expenditures.

Your email contains examples of when a taxpayer may request that the CRA accept an amended or late filed election as follows:

1. The federal SR&ED pool balance changes as a result of an audit. For example, a taxpayer who had previously filed the 2009 tax return with a transitional tax credit has as a result of an audit a transitional tax debit. The taxpayer would not have known that they had a debit balance until after the audit.
2. Taxpayers who do not have complete information when they file their 2009 T2 and schedule 506 and, consequently, do not file their SR&ED claim until one year after the T2 has been filed.
3. Taxpayers who are not aware of the election at the time they file the 2009 tax return as the transitional tax rules are new.

It is not uncommon for SR&ED performers to have a federal SR&ED pool balance that greatly exceeds their Ontario SR&ED pool balance at their transition time, due in part to SR&ED performers using federal ITCs to reduce their federal income tax rather than claiming their federal SR&ED pool balances. Unless the SR&ED performer elects to carve out and defer a portion of the SR&ED balance at the transition time from its total federal balance, it will have a transitional tax debit. Where an election is made the SR&ED performer can reduce or eliminate their transitional tax debit.

There is no provision in the TA that permits a corporation to amend or file the election late. Subsection 129(1) of the TA provides that section 220 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp), (the "ITA") applies for the purposes of the TA. Section 220 of the ITA contains the taxpayer relief provisions. Specifically, subsection 220(3.2) of the ITA provides that the Minister of National Revenue may extend the time for making an election if the election was required to be made under a prescribed provision on or before a day in a taxation year of a taxpayer and the taxpayer applies on or before the day that is ten calendar years after the end of the taxation year to the Minister for the extension. Regulation 600 of the Income Tax Regulations, C.R.C., c. 945 (the "Regs") provides the provisions for which subsection 220(3.2) applies. Since the election under subsection 48(4) of the TA is specific to the TA only and is not an ITA election, subsection 220(3.2) is not applicable.

The courts have found that where an election does not specify a due date and only that the election be filed with the corporation's tax return, as is the case at hand, where the tax return itself is filed late, the election is still valid. In the case of Hayes v. R., [2005] 3 C.T.C. 241 (F.C.A.) the Minister argued that the return, which contained the ITA subsection 39(4) election, was filed late and as a result invalidated the election. The Court disagreed, and held that,

It is correct that paragraph 150(1)(d) provides that returns are to be filed on or before April 30 of the year following the taxation year. If they are not, penalties may apply. However, returns are not invalid if filed late. Neither subsection 39(4) nor paragraph 150(1)(d) provide that if a return in which an election is included is filed late, that the election is invalid. Where the Act prescribes sanctions for late filing, those sanctions will apply. Where it does not, the Court will not read into the Act sanctions that do not appear. That is the case here.

However, in cases where a taxpayer has made a request to make a late filed election, the courts have held, in the absence of an express provision to the contrary, that a taxpayer is not entitled to do so. In Miller v M.N.R., [1993] 1 C.T.C. 269 (F.C.A.), where the taxpayer sought to file a late forward averaging election under subsection 110.4(1) of the ITA, the Court held that,

As for the taxpayer having the right to amend an election after assessment or reassessment of his relevant tax return, it is not, in my opinion, a question of a limitation period. There were, in 1982, several provisions for late elections in the Act. No such provision was made for a forwarding averaging election; it had to be made no later than the date on which the relevant tax return was required to be filed and it had to be filed with the return. The intention of Parliament is, in my view clear; the taxpayer was entitled to make the election on the basis of his circumstances as they existed, and only he could know, at the time he filed the return. The Act did not contemplate the election being made on the basis of changed circumstances which might result from an assessment or reassessment.

To allow amendment of the election, either by the Minister as part of the assessment process or the taxpayer after assessment, would, in my opinion, require an inadmissible reading into the Act of words that were not there. I would allow the appeal and restore the assessment.

In the case of Nassau Walnut Investments Inc. v R., [1998] 1C.T.C. 33 (F.C.A.) the Court found that the taxpayer was permitted to make a late filed designation of safe income under paragraph 55(5)(f) of the ITA. Paragraph 55(5)(f) requires the taxpayer to make the designation at the time it filed its tax return for the year and nothing expressly permits a late filed designation. The Court, however, distinguished between a designation and an election under the Act:

In contradistinction to a designation, and as a general proposition, when an election is to be made the taxpayer must make a decision to forego one option in favour of another on the basis of an assessment of tax risks which may or may not materialize depending on uncertain events. In addition to this qualitative difference, the Act itself implicitly recognizes that a designation and an election are not one and the same.

Income Tax Information Circular IC-07-1 Taxpayer Relief Provisions dated May 31, 2007 sets out the CRA administrative guidelines for accepting late, amended or revoked elections. Paragraph 47 of that circular provides that the elections for which a request can be made under the taxpayer relief provisions are found in Regulation 600 of the Regs. Administratively, there is no requirement that the CRA extend the taxpayer relief provisions to elections other than those listed in Regulation 600.

Since the TA does not specifically provide for the filing of a late or amended election under subsection 48(4), it is assumed that the legislators did not intend that late or amended elections be permitted. As such, since the CRA is administering the TA, the policies applicable to those elections that are not listed in Regulation 600 should be extended to the elections under the TA. Therefore,

• as determined by jurisprudence an election filed with a late 2009 tax return will be considered valid, and
• as determined by jurisprudence the law does not provide for a late or amended election to be filed as a result of an audit adjustment.

In response to the specific situations raised by you we can offer the following:

i Where a taxpayer files the 2009 tax return with a calculated transitional tax credit, and on audit the transitional credit is revised to a transitional debit, there is no provision which will allow the taxpayer to file a late election to defer any of the transitional debit.

ii SR&ED claims must be submitted, in accordance with subsection 37(11) of the ITA, before the day that is 12 months from the taxpayer's filing deadline. For example, expenditures in respect of a December 31, 2008 taxation year should be filed before June 30, 2010. This is also the filing deadline for the December 31, 2009 taxation year in which schedule 506 and the election should be enclosed. Since the 2008 SR&ED pool balance will be determined by June 30, 2010, a taxpayer should be able to determine whether an election needs to be filed when schedule 506 is submitted with the 2009 tax return.

iii Although taxpayers may not be aware of the election at the time they file the 2009 tax return, there is no provision that would allow them to file the election late when they do become aware of the election.

Roger Filion CA
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch