2022-0924801C6 STEP 2022 – Q3 - Electing Contributor and Electing Trust

Principal Issues: a) Can the election described in the definition of electing contributor in subsection 94(1) be late-filed? b) Can the election described in the definition of electing trust in subsection 94(1) be late-filed?

Position: a) No. b) No.

Reasons: See below.

Author: Robinson, Katie
Section: 94, 150(1), 220(3.2), 248(1)

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 3. Electing Contributor and Electing Trust

a) Electing Contributor

The definition of “electing contributor” in subsection 94(1) of the Income Tax Act (the “Act”) (footnote 1) is relevant in applying the rules in subsections 94(16) and 94(17). Subsection 94(16) provides rules for attributing the income of a trust that is deemed to be resident in Canada under subsection 94(3) to its electing contributors. The provision applies on an electing contributor-by-electing contributor basis. Subsection 94(17) provides rules regarding certain liabilities in respect of joint contributions where there is an electing contributor who is a joint contributor in respect of a contribution to the trust.

Can the election described in the definition of electing contributor in subsection 94(1) be late-filed?

b) Electing Trust

The definition of “electing trust” in subsection 94(1) is relevant in determining whether property held in the “non-resident portion”, as defined in subsection 94(1), of a deemed resident trust is considered to be held in a separate trust.

Paragraph 94(3)(f) provides rules that generally have the effect, on an elective basis, of excluding from the taxable base of a deemed resident trust for Canadian tax purposes any income relating to property that has been contributed to the trust otherwise than by a “resident contributor” to the trust or, if there is a current “resident beneficiary” under the trust, a “connected contributor” to the trust (i.e., property that is part of the non-resident portion of the trust). Resident contributor, resident beneficiary, and connected contributor are all defined in subsection 94(1). In effect, this is accomplished by deeming there to be a second trust in addition to the electing trust. The additional trust is deemed to hold the property that forms the trust’s non-resident portion. This has the effect of removing from the taxable base of the trust any income derived from that property.

Can the election described in the definition of electing trust in subsection 94(1) be late-filed?

CRA Response

a) Electing Contributor

The term electing contributor is defined in subsection 94(1) and is applicable for section 94. An electing contributor at any time in respect of a trust means a resident contributor to the trust, who has elected to have subsection 94(16) apply in respect of the “contributor”, as defined in subsection 94(1), and the trust for a taxation year of the contributor that includes that time or that ends before that time and for all subsequent taxation years, if

* the election was filed in writing, on or before the contributor’s filing-due date for the first taxation year of the contributor for which the election was to take effect (referred to as the “initial year”); and

* the election included both the trust’s account number and evidence that the contributor notified, no later than 30 days after the end of the trust’s taxation year that ends in the initial year, the trust that the election would be made.

Based on this definition, it is clear that the election must be filed on or before the contributor’s filing-due date for the initial year. The filing-due date for a taxation year of a taxpayer is defined in subsection 248(1) as the day on or before which the taxpayer’s return of income under Part I for the year is required to be filed or would be required to be filed if tax under that Part were payable by the taxpayer for the year.

For example, consider a situation involving a contributor that is an individual with a filing-due date for a taxation year (a calendar year) which is April 30th of the following year. If the individual contributor to the trust would like to be an electing contributor in respect of the trust for their 2022 and subsequent taxation years, the election would need to be filed on or before May 1, 2023 (since April 30, 2023 is a Sunday). Even if the contributor files their tax return after May 1, 2023, the election must be filed on or before May 1, 2023.

Subsection 220(3.2) provides the Minister the discretion to allow a taxpayer to late-file, amend, or revoke an election that was otherwise required to be made under a provision that is prescribed by section 600 of the Income Tax Regulations (“Regulations”). The definition of electing contributor in subsection 94(1) is not a prescribed provision listed in section 600 of the Regulations.

Accordingly, there is no provision which would permit a contributor to be an electing contributor for an initial year, and all subsequent years, if the election is filed after the contributor’s filing-due date for that chosen initial year. However, this does not preclude a contributor from filing this election for a subsequent taxation year, assuming all conditions are met.

b) Electing Trust

The term electing trust is defined in subsection 94(1) and is applicable for section 94. In order for a trust to be an electing trust, it must meet the conditions outlined in the definition. In general, the conditions described in the definition include that the trust files the election described therein in writing with the Minister with the trust’s return of income for its first taxation year throughout which it is deemed by subsection 94(3) to be resident in Canada and in which it holds property that is at a time in the year part of its non-resident portion.

The courts have established that the meaning of the words “in the taxpayer’s return of income” are clear and unambiguous and therefore require that the election must be made in the original return of income. For instance, in Rezek et al v The Queen et al, 2005 FCA 227, the Federal Court of Appeal opined (in paragraphs 113 - 115) that where an election is required to be filed in the taxpayer’s return of income for the year, such an election would not be considered late-filed if the election was filed with a return of income for that year that was late-filed. As well, the courts have held that where an election that is required to be filed with the return of income for the year is not filed with the return of income, the election would be late.

Therefore, it is our view that where the Act specifies that an election is required to be filed with the taxpayer’s return of income for the year, no other filing requirement or specified deadline should be read into the Act that does not appear.

As such, the election must be filed with the trust’s return of income for its first taxation year throughout which the trust is deemed by subsection 94(3) to be resident in Canada for the purpose of computing its income and in which it holds property that is at a time in the year part of its non-resident portion. Where the particular return of income is late-filed, as long as the election is filed with the return of income, the election would not be considered late. Where the election is not included with the return of income filed, the election would be considered late.

Subsection 220(3.2) provides the Minister the discretion to allow a taxpayer to late-file, amend, or revoke an election that was otherwise required to be made under a provision that is prescribed by section 600 of the Regulations. The definition of electing trust in subsection 94(1) is not a prescribed provision listed in section 600 of the Regulations.

Accordingly, unless an electing trust election is filed with the trust’s return of income for its first taxation year throughout which the trust is deemed by subsection 94(3) to be resident in Canada for the purpose of computing its income and in which it holds property that is at a time in the year part of its non-resident portion, there is no provision which would permit the election to be made.

Katie Robinson
2022-092480

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2022

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2022