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.

During its the taxation year ending September 30, 2000 ("2000 TY”), Bco paid its CCPC parent (Aco) a taxable dividend of $223,500, entitling it to a dividend refund ("DR") of $74,500, which reduced its total taxes payable for the year (otherwise $100,000 of Part I tax, payable on taxable capital gains) to $25,500. Aco received such dividend from Bco during its taxation year ended July 31, 2001 and, was required to pay Part IV tax equal to the DR.

For its taxation year ended September 30, 2001 ("2001 TY"), Bco had a net capital loss of $280,000, and obtained a refund of its federal tax paid for its 2000 TY by carrying back that loss.

After finding that, as a result of the carryback (which eliminated the Part I tax for the 2000 year and thus the RDTOH at the end of the year) s. 160.1(1) would apply so that Bco would be subject to interest on the DR amount from the date of its refund to that of its repayment, CCRA went on to address the interest consequences to Bco of the refund of the Part I tax for that year. It found that:

• Bco would be entitled to a refund pursuant to s. 164(1) of an "overpayment" of $100,000 for the 2000 year, consisting of the $25,500 in fact paid by it and the $74,500 to which it initially was entitled as a DR for that year.
• However, instead of refunding the $100,000 "overpayment" for the 2000 year, since Bco would owe $74,500, under s. 160.1(1), CCRA could apply the amount of the overpayment to be refunded against the amount Bco owed, pursuant to s. 164(2).

Furthermore:

Bco would be entitled to interest on the "overpayment" amount of $100,000 for the 2000 TY, whether it is reimbursed to Bco or applied against another amount for which it would be liable, under subsection 164(3). The amount of interest on the "overpayment" would be calculated at the prescribed rate … for the period from the latest of the days referred to in paragraphs 164(3)(a) to (e), taking into account paragraph 164(5)(d), to the day on which the amount is refunded or applied.

ACo’s 2011 to 2013 taxation years were arbitrarily assessed under s. 152(7). Eventually, it filed tax returns for those taxation years after the normal reassessment periods for those years, claiming additional deductions. ACo requested an extension of the s. 150(1) filing deadline for its 2011 to 2013 returns under s. 220(3) so that a reassessment could issue to reflect the increased deductions.

After noting that Bonnybrook had concluded that an s. 220(3) extension could enable a refund of tax under s. 129(1), the Directorate indicated that although the relevant wording of ss. 164(1) and 129(1) were almost identical, there was no equivalent to s. 164(1.5) in s. 129 and, in its view:

[S]ubsection 164(1.5) indicates Parliament’s intention with respect to when relief from the three-year limitation of subsection 164(1) can be granted. Therefore, if a taxpayer does not meet the conditions for relief under subsection 164(1.5), it is our view that no further relief under subsection 164(1) may be provided under subsection 220(3). In other words, the only relief from the three-year limitation in subsection 164(1) is to a “taxpayer is an individual (other than a trust) or a graduated rate estate for the year and the taxpayer's return of income under this Part for the year was filed on or before the day that is 10 calendar years after the end of the year”, the Minister cannot extend relief from the three-year requirement in subsection 164(1). For completeness, we note that for the same reasons, the Minister cannot extend the limitation period beyond ten years for taxpayers described in subsection 164(1.5).

The Directorate went on to indicate that the normal reassessment period could also not be extended in reliance on s. 152(4)(a)(i).

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.

If an election under s. 164(6) results in a refund, when does interest begin to accrue thereon?

CRA noted that given that the election shifts the losses available to be deducted from the graduated rate estate (“GRE”) to the final T1 return, it does not give rise to a refund to the GRE itself. The portion of any overpayment of the tax payable by a deceased taxpayer for a taxation year that arose as a consequence of the deduction of losses relating to such election is deemed to have arisen and, as a result, refund interest would start pursuant to s. 164(3) on the day that is 30 days after the latest of three dates:

• the first day immediately following the subsequent taxation year;
• the day on which the return of income for that subsequent taxation year was filed; and
• the day on which the amended return was filed under s. 164(6)(e).

A corporation makes an advance payment in anticipation of a reassessment, with CRA subsequently refunding a portion of such amount pursuant to s. 164(1). After indicating that Whether the CRA generally is required to pay refund interest on such amount pursuant to s. 164(3) of the Act. However, the Directorate went on to note that the practice of accepting such an advance payment extended “only in respect of a genuine possibility of reassessment.”

At the 2019 APFF Provincial Roundtable, Revenu Québec indicated that it is possible to claim the capital loss, realized by a graduated rate estate in its first taxation year and that is subject to the Quebec equivalent of the s. 164(6) carryback election, directly on the deceased's final TP-1 return, without a requirement to proceed with an adjustment, since the capital loss is already known at the time the two tax returns are filed. Would CRA be prepared to apply the same approach? CRA responded:

While there is no provision in the Income Tax Act that prevents the taxpayer's amended T1 Final Return (including the election under paragraphs 164(6)(c) and 164(6)(d)) from being filed before the T3 Return is filed, it is the CRA's administrative practice to assess the T3 Return before the reassessment giving effect to the election can be processed. That practice ensures that the loss claimed and any resulting reduction in tax payable or refund is substantiated.

Relaxing CRA's procedures and any administrative policy in that regard would require a thorough review … . That said, it would be highly unusual for the CRA to allow a loss to be applied to a tax return before the return giving rise to the loss has been assessed.

Would CRA allow more time for the application of s. 164(6), given that delays in the probate process may delay the timing of the disposition of the estate’s properties? CRA responded:

[F]or [s. 164(6)] to apply, the legal representative must dispose of the capital property of the estate or all of the depreciable property of a prescribed class … within the first taxation year of the estate. …

Furthermore …[t]he COVID-19 Time Limits Act temporarily enables the Minister responsible for the application of a federal Act … to suspend or extend certain time limits … for a maximum of six months, by order. The specified Acts of Parliament and regulations are identified in the schedule [thereto]. Although certain provisions of the Act are mentioned therein, no reference is made in this schedule to subsection 164(6).

As such, while we understand that delays in the probate process may delay the timing of the disposition of the properties of an estate, the CRA is unable to extend the time limit for the dispositions in subsection 164(6) of the Act beyond the first taxation year of the graduated rate estate.

S. 164(6) requires that there be a disposition within the first taxation year of the graduated rate estate. Would CRA be prepared to recommend and work with the Department of Finance to offer affected taxpayers more relieving conditions in utilizing s. 164(6), for example, an expanded 3 year limitation could be introduced along with an elective disposition rather than an actual disposition? CRA stated:

CRA has the authority [under Reg. 600(b)] to accept a late filed subsection 164(6) election, should it agree to do so. It should be noted that this does not change the requirement that the losses to which this election applies must have been incurred in the first taxation year of the estate.

… Any proposed changes to tax policy or amendments to legislation, such as that suggested in the Joint Committee submission, are the purview of the Tax Policy Branch at Finance.

Accordingly, CRA is prepared to work with Finance should they seek our views on this issue.

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.]

S. 164(6) is available to a non-resident estate, but only regarding property that is taxable Canadian property (so that it would not be available for shares of a private corporation that do not derive most of their value from Canadian real property, etc.)

"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.

Before concluding that the posting of security under s. 220(4.5) for departure tax can generate a refund of instalments paid in excess of regular tax (i.e., the Part I tax that would be payable but for the departure tax under s. 128.1(4), CRA stated:

[T]he refund of overpayments, as defined in subsection 164(7), is generally governed by section 164. Thus, for example, an excess of instalments for a year over the amount for which a taxpayer is liable may be refunded by the Minister under subparagraph 164(1)(a)(iii). …

In this respect, the provision of sufficient security does not constitute a payment. Thus, we have concerns with the technical treatment of the amount of sufficient security provided for the purposes of section 164 because of the wording of subsections 164(7) and 220(4.5) to 220(4.54). It should be noted that the presumption in paragraph 220(4.5)(b), providing in certain circumstances that the amount for which sufficient security is accepted is a paid amount, does not apply for the purposes of subsection 164(7).