Principal Issues: How to report an investment contract taken out in 1988 that matures this year (2004) and that was not T5'd every third year? What are the consequences to the issuer and to the taxpayer?
Position: Voluntary Disclosure procedures may be available for the issuer. Taxpayer can ask under the fairness legislation to have the tax returns reassessed in the years that are applicable. .
Reasons: Issuer was under the impression that the investment was in an RSP account.
2004-008261 XXXXXXXXXX C. Tremblay, CMA (613) 957-2139 July 22, 2004
Dear XXXXXXXXX :
Re: T5 Interest Reporting
This is in reply to your electronic letter of June 23 and further to our telephone conversations of June 23 and July 7, 2004 wherein you request information on a XXXXXXXXXX (the "Note") that was issued to one of your clients in 1988 and matured this year. XXXXXXXXXX (the "Bank") has recently been made aware that the Note was not registered as an RSP and as such, the Bank should have been reporting the interest on a T5 information slip. You ask for our help in dealing with this oversight.
Our Comments:
The circumstances outlined in your letter relate to a specific fact situation. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments, which may be of assistance.
In our view, the Note would be considered an investment contract as defined in former paragraph 12(11)(a) of the Income Tax Act (the "Act"), for the purposes of the interest accrual rules. These rules, which were introduced for taxation years commencing after 1981, and were still effective in 1988, required accrued interest on such contracts to be included in income to the anniversary date of the contract at least every third year. Accordingly, interest income should have been reported on a T5 information slip in 1991, 1994, 1997, 2000, and in 2003, with the balance of the interest income paid and not previously reported on a T5 information slip, in the year of maturity, that is in 2004.
We suggest that you attach a letter indicating the amount of interest your client should have reported in 1991, 1994, 1997, 2000, 2003 and 2004 and include on a T5 in 2004 the entire amount of interest earned by your client over the years. The client can then attach a copy of this letter to his 2004 income tax return and ask that his previous years returns be adjusted accordingly.
Section 201 of the Income Tax Regulations (the "Regulations") requires that a T5 information return made in prescribed form be issued in the above noted years in respect of the interest income payable on the investment contract. Since the CRA encourages taxpayers to voluntarily correct any omissions and provide the missing information, in our view, a voluntary disclosure to correct the information not previously reported, may be considered appropriate in this situation. We encourage you to write to the Voluntary Disclosures Officer of the Appeals Branch of the Toronto Centre Taxation Services Office at 1 Front Street West for approval. Information Circular IC 00-1R provides further information with respect to voluntary disclosures.
Your client can also request under subsection 220(3.1) of the Act to have interest and penalties waived by sending the request to the Appeals Branch of the Toronto Centre Taxation Services Office. The "fairness package" introduced in 1991, may provide relief to your client with respect to the interest and penalties that could result, should your client wish to be assessed in the taxation years that the interest should have been reported. We refer you to Information Circular IC 92-2 - Guidelines For The Cancellation And Waiver Of Interest And Penalties. These Guidelines indicate that, in certain circumstances, interest and penalties related to taxation years after 1984 can be waived. This can happen when they resulted from extraordinary circumstances beyond the taxpayer's control.
To support the request, the following information is required:
(a) Name, address and social insurance number of taxpayer;
(b) The taxation years involved;
(c) The facts and reasons why the interest or penalties that may be levied were primarily beyond the taxpayer's control.
We have contacted the Voluntary Disclosure Officer and the Chief of Appeals of the Appeals Branch in Toronto and have made them aware of your situation. Provided you are both within the residential boundaries of the Toronto Centre Services Taxation Office, they will look after both requests (the voluntary disclosure from the Bank and the fairness request from your client) as one case. You can, if you wish include all the information in one envelope. We also suggest you include a copy of this letter for their information.
We trust our comments are of assistance.
Yours truly,
Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch