Principal Issues: Whether a transaction that is made pursuant to section 85, 86 or 51 becomes statute-barred and if not, how can such a transaction be subject to a statute of limitation period?
Position: Based on the facts provided, the normal reassessment period should apply to each scenario.
Reasons: Reassessment period applies to a taxation year not to a specific transaction.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 15
Share Exchange and statute of limitation
Questions to the CRA
a) Can the CRA indicate when the following transactions would normally be considered statute-barred for the purposes of the Income Tax Act for an individual, assuming that the individual had made a fair and reasonable effort to value the corporation’s shares and that the individual had not made a misrepresentation attributable to neglect, carelessness or wilful default or had committed any fraud in filing the return? In each situation, the contracts include a price adjustment clause ("PAC") in accordance with the terms set out in Income Tax Folio S4-F3-C1 (footnote 1).
i) The individual proceeded with a share exchange in the 2017 taxation year utilizing the provisions of section 85. Form T2057 was sent to the CRA within the time limits and the disposition of shares was reported on Schedule 3 of the individual’s return. The notice of assessment was received on April 15, 2018.
ii) The individual proceeded with a share exchange in the 2017 taxation year utilizing the provisions of section 86. The disposition of shares was reported on Schedule 3 of the individual’s income tax return. The notice of assessment was received on April 15, 2018.
iii) The individual proceeded with a share exchange in the 2017 taxation year utilizing the provisions of section 51. As there were no forms to be filed or share dispositions under that exchange, no information was provided to the CRA with respect to this transaction. The notice of assessment was received on April 15, 2018.
b) If the above transactions should never become statute-barred, what must a taxpayer do in order to engage the statute-barring period?
CRA Response to Question 15(a)
Notwithstanding the PAC, in each of the three particular situations, the CRA by virtue of paragraphs 152(3.1)(b) and 152(4)(a) will generally not be able to reassess the income tax for the individual's taxation year ending December 31, 2017 after the expiry of the normal reassessment period. To that end, in each of the three particular situations, according to the stated facts, the normal reassessment period should generally expire on April 15, 2021, three years after the day of sending of the notice of the original assessment.
However, the Minister may reassess the taxpayer's taxation year ending on December 31, 2017 at any time in two cases. The first case is where a taxpayer, or the person filing the return, made a misrepresentation that is attributable to neglect, carelessness or wilful default or committed any fraud in filing the return. The second case is where a taxpayer submits a waiver to the Minister during the normal reassessment period for the year.
It should be noted that paragraph 152(4)(b) allows the Minister to assess three years after the end of the normal reassessment period in certain special circumstances. For example, in the case of the exchange of shares by virtue of section 86 or 51, if the corporation whose shares are exchanged is a non-resident corporation with which the taxpayer is not dealing at arm's length and the assessment is made as a result of that exchange of shares, the Minister by virtue of subparagraph 152(4)(b)(iii) could have until April 15, 2024, i.e., three additional years after the end of the normal reassessment period, to reassess respecting income tax for the taxation year ended December 31, 2017.
The statute-barring period requirement relates to the determination of tax consequences for a particular taxation year and not to a particular transaction. In addition, the Income Tax Act has ancillary application and is applied to the effects arising from rights, obligations and contracts between the parties. Parties may decide to include a PAC in their contract (see Income Tax Folio S4-F3-C1 (footnote 2)) in order to modify the legal transactions and such changes may then have an effect on the tax treatment of those transactions. Thus, as soon as a transaction creates legal impacts in a taxpayer's taxation year that are not otherwise statute-barred, the resulting tax consequences may be determined by the Minister. Thus, we are of the view that a taxable attribute, such as the ACB of a capital property, that was determined by a taxpayer to give effect to a rollover that occurred in a statute-barred taxation year, but for which a valid PAC or deeming provision, such as paragraph 85(1)(c), applies, may be adjusted for a taxation year that is otherwise not statute-barred if it has an impact on the tax consequences for that year. On the other hand, although a valid PAC may have retroactive effect, it does not, however, permit the Minister to reopen an otherwise statute-barred taxation year, except where one of the exceptions listed above applies.
CRA Response to Question 15(b)
Apart from a case where a taxpayer, or the person filing the return, made a misrepresentation that is attributable to neglect, carelessness or wilful default or committed any fraud in filing the return, the only situation in the scenarios presented where the taxation year ending on December 31, 2017 would never be statute-barred would be if the taxpayer had filed with the Minister a waiver in prescribed form pursuant to paragraph 152(4)(a)(ii).
Sophie Larochelle
Nicolas Bilodeau
5 October 2018
2018-076886
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Income Tax Folio S4-F3-C1, Price Adjustment Clauses, 27 March 2013.
2 Id.