Principal Issues: What is the administrative position taken by the CRA with respect to the late-filed designation under paragraph 88(1)(d) when the request is made many years after the winding-up of the subsidiary?
Position: Details provided with respect to the administrative position taken by the CRA.
Reasons: It depends on the facts of the particular situation and the decision to accept the request or not is at the CRA's discretion.
XXXXXXXXXX 2011-041688 Sylvie Labarre, CA
November 21, 2011
Dear Madam,
Subject: Late Designation - Subsection 88(1)(d)
This is in response to your e-mail of August 10, 2011 in which you asked us if a corporation can file a designation under paragraph 88(1)(d) of the Income Tax Act (the "Act") after the period provided for in that paragraph has expired. You indicated that in the situation before you, the time limit provided in paragraph 88(1)(d) of the Act expired more than eight years ago.
Unless otherwise stated, all statutory references are to provisions of the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Technically, a designation under paragraph 88(1)(d) must be made with the parent's income tax return for the taxation year in which the subsidiary was wound up. There is no provision in the Act or the Income Tax Regulations that allows for a late designation.
However, in certain circumstances, the CRA's position is to allow, on an administrative basis, a late designation by virtue of paragraph 88(1)(d) to the extent that:
1) the parent corporation agrees to allocate the excess calculated under paragraph 88(1)(d) proportionately among the capital properties eligible for a "bump" in their cost, based on the available limit as calculated under subparagraph 88(1)(d)(ii); or
2) the parent corporation accepts that the CRA will determine, at its discretion, how much of the excess will be added to the cost of which property.
Under no circumstances will the CRA accept late designation in the following cases:
- in the case of retroactive tax planning;
- the designation is part of a tax avoidance scheme; or
- it is necessary, in order to give effect to the designation, to issue a notice of assessment or reassessment for a taxation year for which the normal reassessment period, as defined in subsection 152(3.1), has expired .
By the latter exclusion, the CRA did not intend to eliminate all situations in which the taxation year, in which the subsidiary was wound up, is statute-barred. Indeed, the CRA will generally consider that it is not necessary to issue a notice of assessment or reassessment, to give effect to the designation, for a taxation year if the designation has no impact on the computation of the income of the parent corporation for that year. On the other hand, the CRA would consider that such a requirement generally arises in a taxation year that includes the disposition of the property. Consequently, the exclusion is intended to eliminate situations where the normal reassessment period (within the meaning of subsection 152(3.1)) expires for the taxation year in which the designation has an effect, for example, the taxation year in which the property to which the designation refers is disposed of.
Since paragraph 88(1)(d) provides that a designation is made in respect of each eligible property, it is important to consider the exclusions therein stated for each of those properties. Consequently, a designation in respect of a particular property may not be excluded, under the administrative position of the CRA, even if the reassessment period expires (within the meaning of subsection 152(3.1) for the taxation year in which the disposition of another property that was or could have been the subject of a designation made by virtue of paragraph 88(1)(d). It should be noted, however, that the designation should be made on the basis of one of the two conditions stated above respecting the allocation of the excess.
The CRA has not formulated its administrative position based on criteria referencing the number of years since the year in which the subsidiary was wound up. Thus, the fact that it has been more than eight years since the winding-up of the subsidiary will not, in itself, prevent the CRA from considering any late designation. However, in all cases, the CRA will have the discretion as to whether or not to accept a late designation, and the CRA's decision will be based on the specific facts of the taxpayer who makes the request.
The administrative position also applies, with the necessary modifications, with respect to a vertical amalgamation described in subsection 87(11).
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganization and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch