2021-0895261E5 Application of subsection 162(7) to a T3 return

Principal Issues: Whether a penalty for the failure to file an information return as and when required under subsection 162(7) can be applied when a trust, that has taxes payable for the taxation year but no unpaid balance owing on its due date because of instalments paid throughout the year, has filed its T3 Income Tax and Information Return (T3 return) late.

Position: Yes.

Reasons: The T3 return is both a return of income and an information return. The failure to file a return of income is subject to a penalty under subsection 162(1) or (2). The failure to file an information return is generally subject to a penalty under section 162(7) unless another provision sets out a penalty for the failure. Therefore, if a penalty amount is calculated and assessed under subsection 162(1) or (2) for a failure to file a T3 return, no penalty in subsection 162(7) can apply for that same failure. If the penalties in subsections 162(1) and (2) do not apply (because there is no unpaid tax when the T3 return was required to be filed), the penalty in subsection 162(7) can apply.

Author: Clarkson, Julia
Section: 162(1), (2) and (7); 150(1)(c); 204(1) of the Regulations

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                                                                                           Julia Clarkson

March 13, 2023

Dear XXXXXXXXXX:

Re: Application of subsection 162(7) to a late-filed T3 return

This is in reply to your emails of May 2021 requesting our views on the application of a penalty under subsection 162(7) of the Income Tax Act for a late-filed information return in the following hypothetical situation:

A taxpayer (Trust) was required to file a T3 return for its taxation year but it was filed past the due date. Due to instalments it made throughout the year, Trust had no amount owing on the due date of the return.

All statutory references in this document are to the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the Act), unless stated otherwise.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

Our comments

Generally, to report the activities of a trust for a taxation year, Form T3, Trust Income Tax and Information Return (“T3 return”) must be completed. It is both a return of income for the trust, calculating its tax liability, and an information return, reporting amounts allocated and designated to beneficiaries

Filing a T3 return is required by paragraph 150(1)(c) of the Act and subsection 204(1) of the Income Tax Regulations (Regulations). Both provisions require the relevant return(s) to be filed within 90 days from the end of the taxation year.

The failure to file a return of income required by subsection 150(1) is subject to a penalty under subsection 162(1) or (2). Subsection 162(1) states:

“Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of

(a) an amount equal to 5% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed, and

(b) the product obtained when 1% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, from the date on which the return was required to be filed to the date on which the return was filed.”

Subsection 162(2) is similar to subsection 162(1); it may be applicable in certain instances where a taxpayer that has failed to file a return of income on more than one occasion.

The failure to file an information return is generally subject to a penalty under section 162(7) unless another provision sets out a penalty for the failure. Subsection 162(7) states:

“Every person (other than a registered charity) or partnership who fails

(a) to file an information return as and when required by this Act or the regulations, or

(b) to comply with a duty or obligation imposed by this Act or the regulations

is liable in respect of each such failure, except where another provision of this Act (other than subsection (10) or (10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty equal to the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.”

In our view, the failure of a trust to meet its paragraph 150(1)(c) requirement to file a return of income (T3 return) is the same failure as the failure to meet the subsection 204(1) of the Regulations requirement to file an information return (T3 return). Given the constraints of subsection 162(7), it is our view that if a penalty amount is calculated and assessed under subsection 162(1) or (2) for a failure to file a T3 return by its due date, no penalty in subsection 162(7) can apply for that same failure.

If a return of income is not filed by its due date, subsection 162(1) (or (2)) would cause a taxpayer to be liable to a penalty only if a portion of Part I tax payable was unpaid when the return was required to be filed. If no tax was unpaid on the due date of the return, then no subsection 162(1) (or (2)) penalty could be calculated; the taxpayer would be liable for a penalty of nil.

Consistent with the reasoning in paragraph 37 of the decision for Exida.com Limited Liability Company v The Queen (2010 FCA 159), it is our view that “a "penalty of a nil amount" is not a penalty.” Therefore, where no amount of penalty can be calculated under subsection 162(1) or (2) because the taxpayer had no amount of tax owing on the filing deadline for its T3 return due the to payment of tax instalments throughout the year, subsection 162(1) or (2) would not “set out” a penalty for the failure to file the T3 return. In that regard, it is our view that where no penalty amount is calculated under subsection 162(1) or (2) for the failure to file a T3 return by its due date, a penalty for that failure may be applied under subsection 162(7).

Information with respect to the penalties that may be applicable to a trust can be found in the T4013 T3 Trust Guide – 2022 available on the Canada.ca website.

We hope our comments are of assistance.

Yours truly,

Gillian Godson
A/Section Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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