Principal Issues: An individual transferred an immovable to his corporation for non-share consideration only. Whether the CRA would accept a late filed election under subsection 85(7) where the election would be based on a contract that would be modified after-the-fact by the taxpayer and the corporation in order to include share consideration for the transfer of the immovable.
Position: No.
Reasons: CRA assesses on the basis of the legal documents and the legal rights that they create. Auditors have no choice but to assess on the facts present at the time of assessment or audit. The CRA does not have authority to amend contracts between parties. CRA's position is that it cannot agree to abide by after-the-fact changes to a contract to change the basis of an assessment without the benefit of a court order.
2008-029672 XXXXXXXXXX G. Gladu (613) 946-5344 April 30, 2009
Dear Sir,
Subject: Request for Technical Interpretation - Amendment of Terms of Transactions - Late Election under Subsection 85(7) of the Income Tax Act (the "Act")
This is in response to your letter of October 15, 2008, in which you requested our comments on the above subject in the context described below.
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be of assistance to you.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
1) The Particular Situation
a) During the 2004 taxation year, a taxpayer transferred an immovable (the "Immovable"), used in an active business, to a corporation (the "Corporation") of which he was the sole shareholder.
b) No election under subsection 85(1) was made by the taxpayer and the Corporation within the time prescribed by subsection 85(6) with respect to the transfer of the Immovable to the Corporation.
Following your telephone conversation with Mr. Maurice Bisson, Manager of the Corporate Reorganizations and Resource Industry Section, Income Tax Rulings Directorate of the Canada Revenue Agency (the "CRA"), on October 21, 2008, we obtained the following additional facts:
c) Under the terms of the initial contract for the transfer of the Immovable (the "Contract"), such transfer was made solely for consideration other than shares.
d) Following the issuance by the CRA of an assessment in respect of the taxpayer for the recapture of depreciation and capital gain resulting from the transfer of the Immovable, the taxpayer and Corporation have filed a late election under subsection 85(7) within the prescribed time limit. The election form that was filed indicated that preferred shares (the "Shares") were issued on the date of the transfer. The Shares purportedly issued formed part of the authorized capital stock of the Corporation.
e) The taxpayer and the Corporation wish to enter into a "deed of correction" regarding the transfer of the Immovable, so as to provide for the issuance by the Corporation of shares of its capital stock as consideration for the transfer of the Immovable.
2) Your Question
You wish to know our position as to whether the CRA would accept a late subsection 85(7) election made by the taxpayer and Corporation, if the above "deed of correction" is concluded.
3) Our Comments
As indicated in Income Tax Technical News No. 22, the CRA will assess based on the legal documents and the rights to which they give rise. Auditors have no choice but to assess based on the facts known at the time of the assessment or audit.
The CRA's general position is that it does not have the power to alter the terms of a contract entered into by the parties. In addition, the CRA will not accept changes to the terms of a contract made after the fact that have the effect of altering the basis upon which an assessment was made, unless a court order is made to that effect.
In light of the foregoing, we are of the view that even if the "deed of correction" of the Contract, as contemplated in the particular situation, were to be entered into between the taxpayer and Corporation, the CRA could not take it into account for the purposes of determining the tax consequences of the transfer of the Immovable. Consequently, the CRA would not be able to accept a late election filed by the taxpayer and the Corporation under subsection 85(7) since, based on the Contract initially entered into by the taxpayer and the Corporation, one of the conditions set out in subsection 85(1) (i.e., the issuance by the Corporation of share consideration) would not have been satisfied.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.