Principal Issues: [TaxInterpretations translation] Does the Canada Revenue Agency accept a late designation under section 44.1 of the Income Tax Act, including filing an amended income tax return to include the designation?
Position: In this case, yes, insofar as the late designation is made in the context of a reassessment to be issued by the Minister. Also, allowing a late designation must not defeat the purpose of section 44.1 or the intent of Parliament.
Reasons: The fact that section 44.1 of the Income Tax Act does not expressly allow a taxpayer to file a late designation creates a rebuttable inference that Parliament did not intend to grant the right to make a late designation in the circumstances covered by section 44.1. Thus, the Canada Revenue Agency will allow the taxpayer to make a late designation in the context of a reassessment to be issued by the Minister to the extent that the failure to include the designation in the return of income for the year is a good faith error by the taxpayer and the fact of wishing to make the designation late is not a case of retroactive tax planning.
April 8, 2008
Tax and Charities Appeals Directorate Headquarters Business and Partnerships Division
Attention: Suzanne Albert François Bordeleau, Advocate
2008-026781
Designation by virtue of section 44.1 of the Income Tax Act (the "Act")
This is further to your email of February 11, 2008 requesting our opinion regarding a designation made under section 44.1 with respect to eligible small business corporation shares.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
More specifically, you raised the situation of a taxpayer wishing to take advantage of the section 44.1 rollover. In the year of disposition of the eligible small business corporation shares, the taxpayer filed an income tax return but failed to include the designation under section 44.1. During a subsequent audit by the Minister of National Revenue (the "Minister"), the taxpayer suggested filing an amended income tax return for the year of disposition of the eligible small business corporation shares so as to include the designation. You wish to know whether the taxpayer can make this late designation.
Our Opinion
Section 44.1 allows for the deferral of capital gains realized on the disposition of eligible small business shares followed by the acquisition of replacement shares of an eligible small business corporation. Generally, the adjusted cost base of the replacement shares is reduced by the amount of the capital gain that is deferred. To qualify for the deferral, the shares being sold must have been common shares and generally held for at least 185 days. In addition, the taxpayer must designate the new shares as replacement shares on the taxpayer's income tax return for the year.
Generally, a taxpayer cannot file elections or designations late. However, some cases have determined that certain designations can be made late, despite the absence of provisions in the Act to that effect. In Nassau Walnut, [1997] 2 F.C. 279, the Federal Court of Appeal had to consider the paragraph 55(5)(f) designation that was required to be made in the income tax return for the year in which the dividend was received. In the Court's view, the fact that the Act did not grant the right to file a late designation created only a rebuttable inference that Parliament did not intend to grant that right. The Court concluded that the taxpayer could make a late designation under paragraph 55(5)(f) by filing a notice of objection to an issue related to the designation.
Whether this inference is rebutted for a particular provision is a question of fact. Generally, the inference will be rebutted if allowing such a designation would defeat neither the purpose of the provision in question nor the intention of Parliament. In the present case, and in light of the particular facts you have provided, we are of the view that late designation may be permitted in the context of a reassessment. However, the CRA should not accept this late designation if the desire to make the designation under section 44.1 represents retroactive tax planning and if the failure to make the designation on the original return of income is the result of an error other than a bona fide error by the taxpayer.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Randy Hewlett
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.