7-912157
Re: Subsection 104(13.1) Designations
This is in reply to your memorandum of August 7, 1991 concerning designations by a trust under subsections 104(13.1) and (13.2) of the Act to be taxed on certain of its income paid or payable to the beneficiaries.
Your concern relates to the requirement that the designation in respect of the trust's income for a particular year is to be made by the trust "in its return of income under this Part" for the taxation year. It is therefore your view that the designation must be made in the original return of income for a taxation year and there are no provisions for it to be made at a later time, nor is there any provision for revocation of the designation.
A number of trustees have requested permission to file designations subsequent to the filing of the T3 return on the basis that they have difficulty in determining, at the time of filing the return, each beneficiary's share of the income of the trust. They feel you should accept such designations as long as they are made within the 3-year period set out in subsection 152(4) of the Act. You have been informing the trustees that the designation was not intended for tax planning purposes but was intended to allow the trust to absorb losses. You are therefore not sympathetic to their requests for an extension of time and ask for our comments on whether or not you would be correct in law in refusing to accept such late filed designations. In particular, you feel that subsection 152(4) cannot be relied upon to justify the acceptance of late filed designations.
Our Comments
We agree that there is nothing in the Act, including subsection 152(4), requiring the Department to accept a subsection 104(13.1) or (13.2) designation after the T3 return for the particular year has been filed. Nor is there anything in Information Circular 75-7R3 suggesting that the Department will reassess a return to accommodate a designation made subsequent to the filing of the original return.
There are several provisions of the Act that contain the requirement that the relevant designation (or election) is to be made in the return of income for the particular year (e.g., 45(2), 55(5)(f), 60(j)(iii), 87(9)(c) and 104(21)). A research of our files indicates that unless there is a provision in the Act specifically providing for the acceptance of a late-filed designation; e.g., subsection 194(7), we normally refuse to confirm that the Department would accept a designation made subsequent to the filing of the return for the year, where the relevant provision states that the designation is to be filed with that return. We note, however, that with respect to the paragraph 55(5)(f) designation, the following practice was expressed at the June 1990 Canadian Petroleum Tax Society Conference:
"The Act does not contain any provision which provides for the late-filing of such designations or for the filing of amended designations. However, it is our practice to accept a designation under paragraph 55(5)(f) which is filed before the time has expired for filing a notice of objection in respect of the initial assessment for the year in which the dividend is received."
This indicates that the Department will adopt a practice of accepting late-filed designations where warranted, notwithstanding that the Act would otherwise seem to preclude such acceptance.
Any decision to adopt a practice of accepting late-filed subsection 104(13.1) or (13.2) designations would be administrative in nature and presumably would take into consideration the intended purpose of the designation and any hardship that might be encountered by the trustee or beneficiaries should such a practice not be adopted. In this regard, we agree that the intended purpose of the subject designations is to allow trusts to absorb losses that they otherwise might not have been able to absorb, rather than to split income to take advantage of different tax rates. We therefore support your refusal to accept late-filed subsection 104(13.1) and (13.2) designations where income splitting is the reason for the late filing.
for DirectorFinancial Industries DivisionRulings Directorate