1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Unhappy Returns? The CRA Interprets Subsection 220(3) of the Income Tax Act

In CRA Document No. 2013-0487181I7 “Extension of the reassessment period” (July 12, 2013), the CRA was asked to provide its views on the operation of subsection 220(3) of the Income Tax Act.

Subsection 220(3) of the Act states,

220(3) The Minister may at any time extend the time for making a return under this Act. [emphasis added]

A corporate taxpayer failed to file a T2 return of income for a year. The CRA issued an arbitrary assessment pursuant to subsection 152(7) of the Act. Three years later, the taxpayer filed its T2 return, but the CRA refused to reassess as the “normal reassessment period” had expired (see subsection 152(4) of the Act).

In its technical interpretation, the CRA stated,

“Subsection 220(3) provides the Minister with the discretion to extend the time for making a return under the Act. However, such discretion must be exercised for a taxation year that has not become statute-barred.”

The CRA may be correct about the result in this particular case, but a few points should be clarified.

It is clear that the Minister’s discretion under subsection 220(3) is not subject to any limitation.

Practically, however, if the Minister exercises her discretion under subsection 220(3), certain other provisions relating to the Minister’s ability to assess the taxpayer’s return could be engaged. For example, the normal reassessment period does not run until the CRA issues an initial assessment. Or, the nature of the taxpayer could impact the CRA’s ability to reassess: Subsection 152(4.2) of the Act allows the Minister to reassess tax, interest and penalties for a taxation year at any time after the end of the normal reassessment period if the taxpayer makes a request for a reassessment within 10 years after the end of that taxation year. However, subsection 152(4.2) applies only to individuals and testamentary trusts.

In the present case, while the CRA could, pursuant to subsection 220(3), extend the time for filing a T2 return, the CRA could not reassess the return because the normal reassessment period had expired and another relieving provision – such as subsection 152(4.2) – did not apply.

In another case, the result could be different.

,

Unhappy Returns? The CRA Interprets Subsection 220(3) of the Income Tax Act

A pointed observation by the Federal Court of Appeal on the CRA’s approach to proposed legislation

The recent Federal Court of Appeal decision of Edwards v. The Queen (2012 FCA 330) includes an interesting observation dealing with the Canada Revenue Agency’s policy with respect to proposed legislation.

In Edwards, the taxpayer was involved in a charitable donation scheme. Essentially, the taxpayer was able to obtain a charitable donation tax credit in an amount greater than his outlay or gift. The taxpayer was one of approximately 8,000 taxpayers that had been reassessed, and Edwards was the lead case for eight other appeals.

In the Tax Court, the taxpayer brought a motion for an adjournment of the hearing pending the enactment of proposed amendments to the Income Tax Act. The proposed amendments would be retroactive to when they were first announced. They may have allowed the taxpayer to claim all or a portion of the denied credit.

The CRA had been applying the proposed amendments as if they were law. However, the CRA refused to apply the amendments in the taxpayer’s case. The CRA took the view that the rules did not apply in his situation. As this was an administrative position on proposed amendments rather than law, the taxpayer could not challenge this decision.

The Tax Court denied the taxpayer’s adjournment request (2012 TCC 264).

The Federal Court of Appeal held that the motions judge made no error in denying the application for adjournment. At the time of the hearing of the motion it was not clear if the amendments would be enacted. However, the amendments were subsequently included in a bill to amend the Income Tax Act that received first reading on November 26, 2012. The Federal Court of Appeal found that this new information was a sufficient basis for reversing the motions judgment and granting the adjournment.

In obiter, Justice Evans noted that “there seems something fundamentally unfair in the CRA’s administration of proposed amendments to the Income Tax Act for the past ten years as if they were already law.”

Another example is proposed section 56.4. It has been in draft form since 2005. The proposed rule governs the tax treatment of restrictive covenants. As a matter of existing statute and case law, until proposed section 56.4 is enacted, it is arguable that restrictive covenants should receive the tax treatment described in case law such as the decision of the Federal Court of Appeal in Manrell v. the Queen (2003 FCA 128).

However, advisors and clients – mindful that the proposals will likely become law with retroactive effect – instead find themselves complying with legislative proposals that change over time and impose compliance burdens that are not clear. Proposed section 56.4 includes election provisions referencing prescribed forms that have not actually been prescribed. Taxpayers must satisfy themselves that they have provided sufficient supporting information, a matter over which the CRA retains discretion.

Sometimes the administration of proposed law for long periods of time becomes itself the subject of legislative proposals. For example, for close to a decade there were proposed changes to section 94.1, which deals with certain offshore investments. Ultimately, the proposed changes were withdrawn. Ironically, this has caused the need for new proposed legislation to provide a mechanism for relief for taxpayers who had complied with the unenacted original proposals.

Worse still, taxpayers and advisors must sometime rely only on press releases describing proposed legislation in arranging their tax affairs. For example, recent changes to rules respecting “stapled securities” were announced on July 20, 2011, with intended effect for some taxpayers one year from that date. The proposed legislation itself was released mere days after the intended effective date on July 25, 2012. To echo Justice Evan’s comments there seems to be something “fundamentally unfair” about the proposed laws a taxpayer must comply with being released days after compliance must begin.

It is hoped that the rather pointed remarks by Justice Evans lead to a review by the Department of Finance and the Canada Revenue Agency of this unsatisfactory state of affairs.

, , ,

A pointed observation by the Federal Court of Appeal on the CRA’s approach to proposed legislation

No Medal for CRA’s Questionable Treatment of Canadian Olympic Medalists

On August 13 I came across this article in the Globe and Mail outlining how CRA treated prizes received by Canadian Olympic Medalists.

Gold medalists receive a $20,000 prize from the Canadian Olympic Committee, Silver medalists $15,000 and Bronze medalists $10,000. The CRA asserts that those amounts are taxable. The CRA’s position is based on what can only be described as a questionable interpretation of Income Tax Regulation 7700:

7700. For the purposes of subparagraph 56(1)(n)(i) of the Act, a prescribed prize is any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered.

This regulation is directly related to the Nobel Prize in Chemistry awarded in 1986 to Dr. John C. Polanyi of the University of Toronto. There was considerable public sentiment that Dr. Polanyi not be subject to income tax on this prize. As a result the Income Tax Act was amended to introduce the concept of a tax exempt “prescribed” prize. It is one of the most straightforward provisions in Canadian tax law. All that is required is:

    1. recognition of the prize by the general public; and
    2. that the prize is awarded for meritorious achievement in the arts, the sciences or service to the public (I am intentionally omitting the irrelevant language about compensation for services).

Surprisingly, the CRA has concluded that Canada’s Olympic medalists were not being awarded for “service to the public”:

I must clarify that the media reports you refer to dealt not with the value of the medals themselves but with the prize money the Canadian athletes who won medals at the Games. Paragraph 56(1)(n) of the Income Tax Act states that the total of all amounts received in the year as, or on account of a prize for achievement in a field of endeavour that the taxpayer ordinarily carries on should be included in the taxpayer’s income. This provision of the Act would not normally apply to your example of a lottery winner; however, paragraph 56(1)(n) is sufficiently broad as to apply to a prize awarded to an athlete for winning an Olympic medal.

I note that the Act provides an exception to this rule for a prescribed prize. For purposes of this exception, section 7700 of the Income Tax Regulations defines a “prescribed prize” as any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences, or in service to the public. Although winning an Olympic medal may be an internationally recognized achievement and could indirectly promote a sense of nationalism, such a prize is not awarded in recognition of service to the public and therefore would not be a prescribed prize and would not fall within the exception.

CRA Document 2008-0300071M4 “Olympic medals” (26 June 2009)

Since it first participated in the games of 1900, Canada has won 278 medals in the Summer Games (an average of 11 per Games) and 145 in the Winter Games (an average of 7 per Games). It is astonishing that the CRA and the Department of Finance would regard the taxation of these awards as material. To suggest that these young men and women who spend years of their lives training for the chance once every four years to put the Canadian flag and anthem on display for the entire world to see and hear are not engaged in service to the Canadian public is not only unsupportable in light of the text, context and purpose of the provision, but serves to undermine the federal government’s own financial support of amateur athletics and best and brightest of Canada’s Olympic athletes. It is hoped that the CRA sees the light sooner rather than later and changes its position accordingly.

, , , ,

No Medal for CRA’s Questionable Treatment of Canadian Olympic Medalists