2014-0539401I7 REQUEST FOR RETROACTIVE CHANGE IN FISCAL PERIOD

Principal Issues: 1. Whether the Minister can or should concur where a corporation makes a request to retroactively change its fiscal period under subsection 249.1(7) in order to obtain a tax benefit after the corporate tax return had been assessed. 2. What constitutes “sound business reasons” to approve a retroactive change request to a corporate taxpayer’s fiscal year-end?

Position: 1. No. 2. General comments provided.

Reasons: 1. There is no provision in the Act that allows a taxation year that has been assessed to be reversed and a different fiscal period assessed. Where the taxpayer’s request to change its fiscal period has been prompted by the taxpayer’s desire to engage in retroactive tax planning in order to obtain a tax benefit, it is our view that the taxpayer’s request to change its fiscal period should be denied. 2. The fiscal period can only be changed when the request is prompted solely on sound business reasons other than to obtain a tax benefit. Retroactive changes in FYE, changes in FYE for the personal convenience of the taxpayer and changes to defer taxes are not permitted.

Author: Ouimet, Jennifer
Section: 249.1(7)

October 16, 2014

Request for retroactive change in fiscal period

We are writing in reply to an email received from the Small and Medium Enterprises Directorate; Medium Business Audit Section dated July 10, 2014, requesting our comments regarding a request to retroactively change the fiscal period of a corporation under subsection 249.1(7) of the Income Tax Act (the “Act”).

In the situation described, the CRA received a request from a corporation to retroactively change its fiscal year-end (“FYE”) after the corporate tax return had been assessed. The Tax Centre agent noted that a corporation’s FYE change request can be approved if it is requested for “sound business reasons” and not to minimize taxes. However, the agent referenced the Taxpayer Services and Debt Management Branch’s reference guide, which states that the Canada Revenue Agency (the “CRA”) will not normally approve a retroactive change in fiscal period.

We have been asked for our comments on whether the Minister should provide concurrence where a corporation makes a request to retroactively change its FYE in order to obtain a tax benefit after the corporate tax return has been assessed. In addition, we have been asked for our comments on what constitutes “sound business reasons” to approve a retroactive change request to a corporate taxpayer’s FYE.

Background

A taxpayer has made a request to retroactively change its FYE for the taxation years XXXXXXXXXX pursuant to subsection 249.1(7) of the Act in order to be eligible to claim XXXXXXXXXX tax credits in each of its provincial returns.

The following facts have been provided:

1. ACo claimed XXXXXXXXXX tax credits (“tax credits”) pursuant to section 125.4 of the Act, and the equivalent provincial tax credits in its provincial return with the Agence du revenu du Québec (the “ARQ”) in respect of its XXXXXXXXXX taxation years.
2. During the ARQ’s audit of ACo, it was determined that ACo did not have a permanent establishment in Quebec, thereby rendering ACo ineligible for the provincial tax credits.
3. ACo proceeded to enter into a legal agreement with the taxpayer, BCo, a corporation related to ACo with a permanent establishment in Quebec. The agreement provided that ACo would retroactively assign all of its contracts to BCo. The goal of the arrangement was to place BCo in a position to claim the tax credits in the provincial returns.
4. Prior to the arrangement outlined in #3 above, BCo was an inactive corporation.
5. BCo’s XXXXXXXXXX federal income tax returns were already assessed at the time the request to change the FYE was made.

The CRA had previously denied the request to retroactively change the FYE of the taxpayer for taxation years XXXXXXXXXX based on the view that the income tax returns in question had already been assessed, and the taxpayer’s request to change its FYE had been made to obtain a tax benefit rather than for sound business reasons.

The view of the taxpayer’s representative is that the taxpayer’s request to change its FYE is prompted by the taxpayer’s desire to claim the provincial tax credits (which have otherwise been denied to ACo).

Our Comments

Pursuant to subsection 249.1(7) of the Act, no change to a taxpayer’s fiscal period may be made without the concurrence of the Minister. It is the CRA’s view that a request to change the FYE should only be approved when the request is prompted solely on sound business reasons other than to obtain a tax benefit. Retroactive changes in FYE, changes in FYE for the personal convenience of the taxpayer and changes to defer taxes should not be permitted. In our view, this would include changes to obtain provincial tax credits or defer income for provincial tax purposes.

Notwithstanding the above, it is the CRA’s long-standing view that any request to change a corporation’s FYE will be reviewed on its own merit. On the basis of the facts described, it appears that BCo’s request to change its FYE is prompted by ACo’s desire to engage in retroactive tax planning to obtain a tax benefit by having BCo claim tax credits that had previously been disallowed by the ARQ to ACo.

Whether a request is made for sound business reasons, other than to obtain a tax benefit, is a question of fact. In our view, based on the facts provided, it would seem unlikely that the Minister could concur with BCo’s request to change its FYE on the basis that it is not for sound business reasons other than to obtain a tax benefit. Further, if a period of time has already been assessed as part of a taxation year, it is our view that the scheme of the assessing provisions in section 152 of the Act does not make it possible to assess the same period of time as part of the new taxation year. Therefore, in this situation, it is not possible for the Minister to treat the taxation years in question as not having been assessed in order to allow the change in the fiscal period.

Accordingly, in our view, the CRA cannot concur with the change in fiscal period requested by BCo. Further, even if the CRA could agree to the change, in our view, the request should be denied because the change is being requested to obtain a tax benefit.

You have also requested our comments with regard to what may constitute “sound business reasons” in respect of a taxpayer’s request to change its FYE. It continues to be this Directorate’s view that the following non-exhaustive list of reasons could constitute “sound business reasons”:

• a corporation changes its fiscal period to end on the same date as that of its parent or associated company;
• a business changes its fiscal period to end when its inventory is at a seasonally low level or within a seasonally slack period;
• a taxpayer has transferred property used in carrying on a business to a corporation under section 85 or to a partnership under section 97(2) and changes the fiscal period of the business to end on the day immediately before the day of transfer;
• a corporation changes its fiscal period to ease financial reporting.

Neither the personal convenience of the taxpayer, nor the saving or deferment of income taxes would be considered a “sound business reason”. As noted above, a retroactive change also should not be approved. If it would be helpful, we would be pleased to meet with you to further discuss circumstances that may constitute “sound business reasons”.

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, following a 90-day waiting period (unless advised otherwise to extend this waiting period), 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: LPRA-PLAR ITR-DDI Access Team-Équipe d'Accès. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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