Principal Issues: Whether a taxpayer is entitled to make a late-filed designation under paragraph 88(1)(d) and subsection 87(11).
Position: Technically no, but administratively yes, in certain circumstances. More precisely, the CRA would administratively accept a paragraph 88(1)(d) late-filed designation where: (1) the parent (or the corporate entity formed as a result of an amalgamation described in subsection 87(11)) agrees to make a pro rata designation of the bump amount (determined under paragraph 88(1)(d)) among all capital properties that are not "ineligible properties" (as defined in paragraph 88(1)(c)) based on the maximum bump that is allowed under subparagraph 88(1)(d)(ii); or (2) the parent (or the corporate entity formed as a result of an amalgamation described in subsection 87(11)) accepts that the CRA determines, at its discretion, what portion of the bump amount will be added to the cost of any property. The CRA will not accept a late-filed designation in cases of retroactive tax planning, if the designation is part of a tax avoidance scheme or if it is necessary, in order to give effect to the designation, to issue a notice of assessment or reassessment for a year that is statute-barred. In all cases, the decision to accept or not a late-filed designation will be based on the particular facts pertaining to the taxpayer's situation. A taxpayer should submit a written request for approval of a late-filed designation to the Director of the local Tax Services Office.
Reasons: CRA's administrative position.
XXXXXXXXXX 2008-028611 G. Gladu (613) 946-5344 January 7, 2009
Dear Sir,
Subject: Late designation - paragraph 88(1)(d) and subsection 87(11) of the Income Tax Act (the "Act")
This is in response to your e-mail of July 9, 2008 in which you asked us to clarify the position of the Canada Revenue Agency (the "CRA") regarding the above subject. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
1) Your Question
You asked for clarification of the CRA's position regarding a late designation under paragraph 88(1)(d) and subsection 87(11). You indicated that, in your view, there is no specific provision in the Act that allows for the filing of a late designation pursuant to paragraph 88(1)(d) and subsection 87(11). However, in your view, jurisprudence has indicated that certain designations may be filed late. In this regard, you referred to The Queen v. Nassau Walnut Investments Inc, 97 DTC 5051 (FCA).
2) Our Comments
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 their opinion. However, we are able to offer the following general comments that may be of assistance to you.
Subsection 87(11) of the Act provides that the cost to an amalgamated corporation of each capital property of each subsidiary acquired on the amalgamation is deemed to be the amount that would have been the cost to the parent corporation if there had been a winding-up of the subsidiary to which subsections 88(1) and 88(1.7) applied. In this regard, paragraph 88(1)(d) allows a corporation that has wound up a subsidiary on a winding-up described in subsection 88(1) to designate, in its return of income filed for its taxation year in which the subsidiary was wound up, the amount that would be the cost to the parent of the subsidiary if the subsidiary had been wound up, the portion of the excess determined under paragraph 88(1)(d), to "bump" the cost to the parent of certain capital property (other than "ineligible property" as defined in paragraph 88(1)(c)) of its subsidiary that were distributed to it on the winding-up.
As a technical matter, a designation pursuant to paragraph 88(1)(d) must be made with the parent corporation's return of income for the taxation year in which the subsidiary was wound up. In the context of a vertical amalgamation coming within subsection 87(11), the CRA's position is that such a designation must be made in the first return of income filed by the amalgamated corporation.
However, in certain circumstances, it is the CRA's position to allow, on an administrative basis, a late designation under paragraph 88(1)(d) to the extent that:
1) the parent corporation (or the amalgamated corporation where subsection 87(11) applies) agrees to allocate the excess calculated in paragraph 88(1)(d) pro rata to capital property that is eligible for an "increase" in cost, based on the available excess as calculated under subparagraph 88(1)(d)(ii) of the Act; or
2) the parent corporation (or the amalgamated corporation where subsection 87(11) applies) agrees to have the CRA determine, in its discretion, what amount of the excess will be added to the cost of which property.
Under no circumstances will the CRA accept a late designation if it is for retroactive tax planning purposes, if the designation is part of a tax avoidance scheme, or if 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.
In any case, the decision as to whether or not to accept a late designation will be based on the particular facts relating to the requesting taxpayer.
Taxpayers must submit a written request for late designation to the Director of their local Tax Services Office.
We hope that our comments will be of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.