Income Tax Audit Manual (ITAM)
Compliance Programs Branch (CPB)
22.1.0 Overview
This chapter is aimed to auditors responsible for reviewing taxpayer elections. It will help them to audit elections and relief requests.
Elections are options available to taxpayers, which allow them to adapt the administrative requirements of the legislation to their own business activity. Taxpayers voluntarily file elections to qualify for special provisions under the Income Tax Act (ITA). The provisions are often used to eliminate or defer certain tax consequences that result from a specific type of transaction.
Designations are similar to elections in practice: the only difference is that for an election, a tax consequence may be avoided or shifted; whereas for a designation, the tax consequence will still occur, but the effect may differ.
Discretion refers to any instance where the minister has the choice to exercise authority under certain parts of the legislation. Generally, any instance where the legislation contains the phrase “the Minister may” is discretionary legislation.
The application of the minister’s discretion cannot be arbitrary and should be exercised based on a sound rationale. Some discretionary legislation, and the development of the rationale for each instance, is delegated to certain authorized persons. For example, the discretion of whether to require information under subsection 231.2(1) and when to use that authority is delegated to the manager, Audit. Other discretionary legislation may have an administrative policy developed, outlining the appropriate rationale used to decide whether or not to exercise the authority.
If the taxpayer believes that the minister’s discretion has not been properly exercised, the CRA generally advises the taxpayer to request a second administrative review. This may be done by either filling out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties and Interest, or they may send a letter to the CRA. Either option should include a detailed explanation on why the taxpayer disagrees with the original decision and provide any new, relevant information not considered.
First and second reviews are discretionary reviews. As a result, there is no formal right of appeal. However, taxpayers may apply for a judicial review to the Federal Court, pursuant to 18.1 of the Federal Courts Act, if they believe that discretion was not properly exercised during a first or second review or if they are not satisfied with a CRA decision. The scope of the Federal Court review is restricted to the exercise of discretion based on the reasonableness standard of review. This means that the Federal Court will not overturn a CRA decision but, if approved, will send the matter back to the CRA for reconsideration.
22.2.0 Legislation – Taxpayer relief and elections
Although several parts of the ITA allow relief for taxpayers, subsections 220(2.1) to (3.5) deal with issues that may specifically relate to elections.
Subsection 220(2.1) allows the minister to waive the requirement to file a prescribed form or provide prescribed information on the condition that it be provided at the minister’s request.
Subsection 220(2.2) excludes subsection 37(11) and paragraph (m) of the definition of investment tax credit in subsection 127(9) [scientific research and development] from inclusion in the requirements of subsection 220(2.1).
Subsection 220(3) allows the minister to extend the time for making a return (of income, or of information) under the ITA.
Subsection 220(3.1) allows the minister to waive or cancel all or any portion of any penalty or interest, under the ITA, for any taxpayer or partnership. The minister may do this within ten calendar years after the end of a taxation year (or fiscal period), or the application from the taxpayer or partnership must be received within that time.
Subsection 220(3.2) allows the minister to extend the time for making an election or grant permission to amend or revoke an election. The election must be required under a prescribed provision (Income Tax Regulation 600) and the taxpayer or partnership must make an application for this subsection to apply within ten calendar years after the end of the taxation year (or fiscal period) to when the election was required.
Subsection 220(3.201) allows the minister to extend the time for making an election or grant permission to amend or revoke an election under section 60.03 (pension income split) if certain conditions apply.
Subsection 220(3.21) includes a number of elections and designations in the “prescribed provisions” for subsection 220(3.2).
Subsection 220(3.3) clarifies the timing of elections allowed under subsection 220(3.2). If it is a late election, it is deemed to have been made on time. If it is an amended election, it is deemed to have been made on time and the original election never existed. If it is a revoked election, it is deemed that the original was never made.
Subsection 220(3.4) allows the minister to waive statute-barred periods in order to give effect to any necessary adjustments caused by late, amended, or revoked elections. This includes all returns from the time just before application under subsection 220(3.2) to the taxation year (or fiscal period) in which the election relates.
Subsection 220(3.5) defines the penalty amount that must be paid when the minister exercises the authority under 220(3.2) (including subsection 220(3.21), but excluding subsection 220(3.201)).
22.2.1 Discretion and taxpayer fairness
The lowest level of delegation, in the Compliance Programs Branch field personnel, for the legislation listed in 22.2.0 is team leader, Audit. However, the application of any of those subsections should follow the procedures outlined in 3.2.3, Audit guidelines – Waiver of penalties and/or interest. More specifically,
The team leader must approve all recommendations for waiver of penalty and/or interest. The recommendation to waive penalty and/or interest will be sent to the local independent taxpayer relief committee or to the section responsible for handling taxpayer relief for the Audit Division according to established tax services office (TSO) procedures. The approval of taxpayer relief must be made by persons independent of those responsible for making the related audit determination; that is, the supervisor authorizing relief must be a supervisor other than the team leader responsible for the audit.
The ultimate responsibility for the application of the taxpayer relief provisions lies with the Relief, Redress, and Branch Services Directorate of the Appeals Branch. They have created the Taxpayer Relief Procedures Manual that details the process and provides guidelines for decision making rationale.
The rationale for accepting late, amended, or revoked elections under subsection 220(3.2) is:
- There have been tax consequences not intended by the taxpayer, and there is audit evidence that the taxpayer took reasonable steps to comply with the law. This could include, for example, a situation where the taxpayer obtained a bona fide valuation for a property, but after the CRA’s review, the valuation was found to be incorrect.
- The request arises from circumstances that were beyond the taxpayer's control. Such extraordinary circumstances could include natural or man-made disasters, such as flood or fire; civil disturbances or disruptions in services, such as a postal strike; a serious illness or accident; or serious emotional or mental distress, such as death in the immediate family.
- The taxpayer acted on incorrect information given by the CRA. This could include incorrect written replies to queries and errors in CRA publications.
- The request results from what is clearly a mechanical error. This could include using the net book value amount (when obviously the taxpayer intended to use the undepreciated capital cost) or using an incorrect cost.
- The subsequent accounting of the transactions by all parties is as if the election had been made, or had been made in a certain way.
- The taxpayer can demonstrate that they were not aware of the election provision, even though the taxpayer took a reasonable amount of care to comply with the law, and undertook remedial action as quickly as possible.
The rationale for not accepting late, amended, or revoked elections is:
- It is reasonable to conclude that the taxpayer made the request for retroactive tax planning purposes. This could include taking advantage of changes to the law enacted after the due date of the election.
- Adequate records do not exist to verify whether or not the request can be accepted.
- It is reasonable to conclude that the taxpayer had to make the request because they were negligent or careless in complying with the law. In this instance, negligent or careless should be interpreted similar to the terms “neglect, carelessness or willful default” used in subsection 152(4).
The notion of retroactive tax planning is described in 12.1.4, Issues to consider when processing taxpayer requests, and “is the result of an event that occurs after initial planning was completed based on the facts available at that time.” Compare this to the last bullet of the rationale for accepting a late, amended, or revoked election where it indicates that if “the taxpayer can demonstrate that they were not aware of the election provision.” This is to emphasize that although the taxpayer is requesting to change a previous tax position, it is not necessarily retroactive tax planning. The facts have not changed, nor are new facts available; the taxpayer was just not aware of them.
When applying taxpayer relief, it is important to note that one set of circumstances may provide the rationale for applying multiple subsections. For example, during an overseas vacation in January 2014, an individual was in an accident that cost the lives of their spouse and child. The individual was hospitalized overseas for six months before being transported back to Canada and further hospitalized for another six months before beginning physical rehabilitation and beginning ongoing psychological therapy for the trauma. During the hospital stay, there was no one to manage financial affairs and the taxpayer was evicted from their residential rental property and their belongings put into storage. In 2021, the taxpayer is attempting to put their affairs in order.
Sufficient records exist to allow the taxpayer to complete a T1 return of income for 2013, and the current accountant believes that the taxpayer would have made an election under subsection 13(4), which must be made in the taxpayer’s return of income for that year; the following subsections may apply:
- 220(3) – the minister may extend the period in which the 2013 T1 is required to be made. If the T1 is considered filed on time, no late penalties can be applied, nor does an application for a late election need to be made.
- 220(3.1) – if subsection 220(3) is not applied, the circumstances may warrant waiving any interest or penalties that apply to the 2013 taxation year.
- 220(3.2) – the minister may, without waiting for an application, allow the late election to be accepted.
- 220(3.5) – again, the circumstances may warrant the minister exercising discretion under subsection 220(3.1) to waive the penalties levied under subsection 220(3.5).
22.2.2 Ten calendar years
The phrase “ten calendar years after the end of the taxation year or the fiscal period” or similar phrasing is used in subsections 152(4.2), 164(1.5), 220(3.1), and 220(3.2), all of which are considered fairness provisions and all are discretionary legislation.
A calendar year is a 12 month period that begins on January 1 and ends on December 31.
For example, if a corporate taxpayer with a taxation year ending on June 30 loses a building in a fire on April 15, 2010, receives an insurance settlement at some time, and buys a “replacement property” prior to June 30, 2012, subsection 13(4) allows an election to reduce the effect of the insurance settlement as proceeds of disposition.
As subsection 13(4) is a prescribed provision listed in Regulation 600, if the corporate taxpayer did not properly elect in their 2012 return of income, they may apply to the minister on or before December 31, 2022, for fairness to late file the election.
A request is not considered to have been made in satisfactory form until the CRA has been provided with complete and accurate information for the election under review.
22.2.3 Payment
It is CRA policy not to accept late, amended, or revoked elections, or to process the necessary adjustments to give an election effect, unless the amount of the penalty described in subsection 220(3.5) is paid. Taxpayers should send a payment for the penalty amount with their request. The CRA will determine and assess any unpaid balance of the penalty, which the taxpayer must pay immediately. Interest will be charged on the unpaid balance of the penalty from the date of the notice of assessment to the date of payment.
Go to 11.2.6, Accepting payment, for a description of payment methods and processing instructions.
22.2.4 Resources
- Income Tax Information Circular IC07-1R1, Taxpayer Relief Provisions, Part III, Guidelines for accepting late, amended, or revoked elections
Requests to accept late-filed elections should be in writing.
- Taxpayer Relief Procedures Manual
- Responsibility for incoming correspondence (Appendix 5A)
- Taxpayer Relief Policy and Program Division
22.3.0 Prescribed elections
This section contains a list of sections, subsections, paragraphs, and Regulations that include elections subject to subsection 220(3.2). Designations and allocations that are deemed by subsection 220(3.21) to be elections for the purposes of subsection 220(3.2) are noted.
Many of the elections and designations below are handled by the Assessment, Benefit, and Service Branch (ABSB), unless they require examination of the books, records, corporate financial details or other complex situations that would normally fall under Audit's responsibility. An ABSB program under their T2 Processing Section, Corporation and Specialty Returns Division, is known as Special Elections and Returns (SERS). This program is responsible for certain elections and forms. Where SERS is responsible, it has been noted below in the Audit issue line.
22.3.1 Elections and designations for subsection 220(3.2)
Subsection 7(8) Deferral in respect of non-CCPC employee options [repealed by 2010, c.25, s.3(8)], lets an employee defer the tax on an employment benefit realized from a qualifying acquisition of a particular security under an agreement with the employer (or a person not dealing at arm's length with the employer) until the year in which the employee disposes of the security, becomes a non-resident of Canada, or dies, whichever occurs first. This is the case if the employee elects, in accordance with subsection 7(10), to have subsection 7(8) apply. These subsections were repealed effective for rights exercised after 4:00 pm, Eastern time, March 4, 2010. The means that the latest possible date to apply for subsection 220(3.2) would be December 31, 2021.
File: Form T1212, Statement of Deferred Security Options Benefits
Audit issue: Was there an agreement, was it a qualifying acquisition?
Paragraph 12(2.2)(b) Deemed outlay or expense, lets a taxpayer elect to reduce the amount of an outlay or expense (other than an outlay or expense which relates to the cost of a property) incurred in the year, the next year, or any previous year, by all or part of any related government assistance received in the year, which would otherwise be included in income by virtue of paragraph 12(1)(x).
File: Signed letter
Audit issues: Time deadline for the election is the filing due date for the year when the outlay or expense is made or incurred. No time limit for making this assessment.
Subsection 13(4) Exchange of property, subsections 44(1) and 44(6) let a taxpayer elect to defer an income inclusion or the recognition of a capital gain when a replacement property is acquired for a property that was stolen, expropriated, or destroyed, or for a former business property that was sold.
File: Signed letter
Audit issue: Election to be made in the taxpayer’s return of income in the year the replacement property was acquired. Replacement property must be acquired within 12 months after the tax year of disposition (if voluntary), and within 24 months if not voluntary.
Subsections 13(7.4) and 53(2.1) of the Act let a taxpayer elect to reduce the capital cost of depreciable property and the adjusted cost base of non-depreciable capital property, respectively, by the amount of any related inducement, refund, reimbursement, contribution, allowance, or other assistance that would otherwise be included in income under paragraph 12(1)(x).
File: Signed letter
Audit issue: Election must be made by the filing date of the taxation year, or following year, if that is when the property is acquired. Verify that the amount is an amount to be included into income under paragraph 12(1)(x) and not a different section.
Subsection 13(29) Available-for-use rules on long-term projects, lets a taxpayer elect to include an amount, within limits, as undepreciated capital cost for long-term project, depreciable property under the available-for-use provisions of subsections 13(26) to 13(28), before the completion of the project.
Audit issues: Cannot be used for a building that is used (or to be used) principally for the purposes of generating rent. Rolling calculation is complex. Subsection 13(29) calculations are affected by subsection 13(27) [not a building] and subsection 13(28) [building] amounts.
Subsection 14(6) Exchange of property [repealed by 2016, c.12, s.4(1), effective January 1, 2017], lets a taxpayer elect to defer an income inclusion or the recognition of a capital gain when a replacement property is acquired for a property that was disposed.
File: Signed letter
Audit issue: Election filed with return of income in year the replacement property is acquired. Replacement property must be acquired within 12 months after the end of the year of disposition.
Subsection 20(24) Amounts paid for undertaking future obligations, lets a taxpayer deduct from income certain payments made to get another person's agreement to take on certain future obligations for which an amount was included in the taxpayer's income under paragraph 12(1)(a). The taxpayer and the recipient have to jointly elect under subsection 20(25).
File: Jointly signed letter
Audit issues: SERS responsibility. Both taxpayers have treated the transaction according to the election; one is allowed an expense and the other an increase in revenue.
Subsection 21(1) Cost of borrowed money, lets a taxpayer elect to capitalize, instead of deducting as a current expense, the cost of borrowed money used to acquire depreciable property (subsections 21(1) and 21(3)) or used for exploring, developing, or acquiring a resource property (subsections 21(2) and 21(4)).
File: Signed letter
Audit issues: Double counting as both an expense and addition to capital.
Subsection 21(2) Borrowed money used for exploration, lets a taxpayer elect to capitalize, instead of deducting as a current expense, the cost of borrowed money used for exploring, developing, or acquiring a resource property.
File: Signed letter
Audit issues: Double counting as both an expense and addition to capital.
Subsection 21(3) Borrowing for depreciable property, lets a taxpayer, if they have previously elected under subsection 21(1), to continue to capitalize the cost of borrowed money, provided they continue to elect each subsequent year using subsection 21(3).
File: Signed letter
Audit issues: Double counting as both an expense and addition to capital.
Subsection 21(4) Borrowing for exploration, lets a taxpayer, if they have previously elected under subsection 21(2), continue to capitalize the cost of borrowed money used for exploration, developing, or acquiring a resource property, provided they continue to elect each subsequent year using subsection 21(4).
File: Signed letter
Audit issues: Double counting as both an expense and addition to capital.
Paragraph 40(2)(b) of the Act determines the amount of the capital gain or loss from a principal residence – see section 54 principal residence designation.
Subsection 45(2) lets a taxpayer elect to designate a property as their principal residence, even though there has been a change in use to an income-producing property.
File: Signed letter
Audit issue: Election in the return of income for the year of change. Prior to March 19, 2019, a portion of a residence was not considered eligible for a subsection 45(2) election. After March 18, 2019, the election can be made on a portion or a change to the portion of the residence. The election cannot be in effect for more than four years, per the section 54 definition of “principal residence” paragraph (d).
Subsection 45(3) of the Act lets a taxpayer elect to defer a capital gain on the change of use of a property from an income-producing property to a principal residence.
File: Signed letter
Audit issue: Election to be filed by the filing due date for the taxation year in which the property is disposed. Prior to March 19, 2019, a portion of a residence was not considered for the election; after March 18, 2019, the election can cover a portion or change in portion.
Subsection 50(1) of the Act applies to debts established to be bad debts in a tax year and to certain shares. This subsection lets a taxpayer elect to have a deemed disposition at the end of the year and a reacquisition right after at nil cost.
File: Signed letter
Audit issue: If a debt, were the criteria for establishing the amount as a bad debt acceptable? If the subsection is in reference to a share, primarily, do the criteria in subparagraph 50(1)(b)(iii) exist?
Section 54, Principal residence designation
File: Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust), or Form T1079, Designation of a Property as a Principal Residence by a Personal Trust, or Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual.
Audit issue : Whether the sale was on account of capital, whether elections under section 45 void the eligibility, whether a person specified in section 54 “ordinarily inhabited” the property.
Paragraph 56.4(3)(b) of the Act lets a taxpayer, who is dealing at arm's length with a purchaser, elect (or jointly elect with the purchaser, if the purchaser does business in Canada to which a covenant relates), according to subsection 56.4(13), to not have the covenant income inclusion rules under subsection 56.4(2) apply. Subsection 56.4(2) does not apply to the extent that an amount would otherwise be included in calculating the proceeds of disposition of a property included in class 14.1.
File: Jointly signed letter, since the prescribed form is not available
Audit issue: Calculation.
Paragraph 56.4(3)(c) of the Act lets a taxpayer and the purchaser (with whom the taxpayer is dealing at arm's length) jointly elect, according to subsection 56.4(13), to not have the covenant income inclusion rules under subsection 56.4(2) apply, to the extent that an amount is additional proceeds of disposition from the disposition of an eligible interest.
File: Jointly signed letter, since the prescribed form is not available
Audit issue: Whether the amount is for the undertaking, whether the taxpayer continues to provide property or services.
Subsection 56.4(7) of the Act lets a taxpayer (or the taxpayer's eligible corporation) and the purchaser (or the purchaser's eligible corporation) that deal at arm's length, jointly elect, according to subsection 56.4(13), to have subsection 56.4(5) apply, thus avoiding the allocation rules in section 68. These rules would otherwise apply to an amount received or receivable under a restrictive covenant on the realization of a goodwill amount or the disposition of property.
File: Jointly signed letter, since the prescribed form is not available
Audit issue: Inclusion of goodwill amount.
Paragraphs 66.7(7)(c), 66.7(7)(d), and 66.7(7)(e), and 66.7(8)(c), 66.7(8)(d), and 66.7(8)(e) of the Act let a predecessor corporation and a successor corporation elect to transfer the unused pools of resource expenses from the predecessor to the successor corporation. The elections stated in paragraphs 66.7(7)(d) and 66.7(8)(d) that were filed under the old first and second successor rules were repealed with the introduction of the new successor rules effective for tax years that ended before February 18, 1987.
Audit issue: SERS responsibility. Accurate flow of amounts. Determination of amounts.
Subsection 70(6.2) of the Act lets a taxpayer's legal representative elect to have the rollover rules under subsections 70(5.1), 70(6), and 70(6.1) not apply. This would result in the deemed disposition of assets at fair market value under subsection 70(5) and the deemed payment of amounts in NISA Fund No. 2 (an AgriInvest program account) under subsection 70(5.4).
File: Signed letter
Audit issue: Accurate flow of amounts. Determination of amounts.
Subsection 70(9.01) of the Act lets a taxpayer's legal representative elect an amount, within limits, as proceeds of disposition for farm and fishing property that is transferred to a child on the taxpayer's death.
File: Signed letter
Audit issue: Accurate flow of amounts. Determine amounts within limits.
Subsection 70(9.11) of the Act lets a spousal or common-law partner trust elect an amount, within limits, as proceeds of disposition for farm and fishing property that is transferred from the trust to a child on the spouse or common-law partner's death.
File: Signed letter
Audit issue: Accurate flow of amounts. Determine amounts within limits.
Subsection 70(9.21) of the Act lets a taxpayer's legal representative elect an amount, within limits, as proceeds of disposition for a share in a family farm or fishing corporation, or an interest in a family farm or fishing partnership, that is transferred to a child on the taxpayer's death.
File: Signed letter
Audit issue: Accurate flow of amounts. Determine amounts within limits.
Subsection 70(9.31) of the Act lets a spousal or common-law partner trust elect an amount, within limits, as proceeds of disposition for a share in a family farm or fishing corporation, or an interest in a family farm or fishing partnership, that is transferred from the trust to a child on the spouse or common-law partner's death.
File: Signed letter
Audit issue: Accurate flow of amounts. Determine amounts within limits.
Subsection 72(2) of the Act lets a legal representative of a deceased taxpayer and a transferee jointly elect to claim a deduction for certain reserves, as long as the amount deducted is included in the income of the taxpayer's spouse or common-law partner or spousal or common-law partner trust.
File: Form T2069, Election in Respect of Amounts Not Deductible as Reserves for the Year of Death
Audit issue: Income inclusion for other party.
Subsection 73(1) of the Act lets a taxpayer elect to have the rollover provisions for an inter vivos transfer of assets to a spouse or common-law partner or certain trusts not apply. This results in the assets to be considered transferred at fair market value for tax purposes.
File: Signed letter
Audit issue: Determination of fair market value, correct treatment of disposition.
Paragraph 80.01(4)(c) of the Act lets a parent corporation elect to reduce the amount to which subsection 80(1) (debt forgiveness rules) might otherwise apply. This is for cases where a debt owed between a parent corporation and its subsidiary is settled on the winding-up of the subsidiary for less than the principal amount and the cost amount of the debt.
Audit issue: SERS responsibility. Proper recording of amount in both parent and subsidiary.
Paragraph 80(2)(i) (deemed by subsection 220(3.21)) for the purposes of determining debt forgiveness, the taxpayer (debtor) may designate an order for the settlement of multiple commercial obligations that were settled at the same time.
Audit issue: Designated order is clear.
Subsection 80(5) to 80(11) (deemed by subsection 220(3.21)) allows a taxpayer (debtor) to designate the application of the forgiven amount to (5) depreciable property, (8) resource expenditures, (9) adjusted cost base of capital properties, (10) adjusted cost base of certain shares and debts, and (11) adjusted cost base of certain shares, debts and partnership interests.
File: Form T2154, Designation of Forgiven Amount by the Debtor – Subsections 80(5) to 80(11)
Audit issue: Allocation of forgiven amount follows the order set out in paragraph 80(2)(c) and to the maximum allowed for each subsection. Determination of forgiven amount and correct allocation.
Subsection 80.03(7) (deemed by subsection 220(3.21)) allows a taxpayer to designate that the debt forgiveness rules apply on the disposition that is not necessarily a commercial debt obligation.
File: Form T2155, Alternative Treatment of Capital Gains Arising Under Section 80.03 on Settlement of Debt
Audit issue: Correct application of section 80.
Subsection 80.1(1) of the Act applies to a Canadian resident taxpayer who has acquired expropriation assets issued or guaranteed by a foreign government as compensation for the expropriated or forced sale of shares of a foreign affiliate or foreign property used for business in a foreign country. The election establishes the deemed cost of the expropriation assets and the deemed proceeds of disposition of the property that was expropriated or sold.
Audit issue: SERS responsibility. Limits set in paragraphs (e), (f), and postamble.
Subsection 82(3) of the Act lets a taxpayer elect to have a taxable dividend from a taxable Canadian corporation received by the taxpayer's spouse or common-law partner included in the taxpayer's income, where such an inclusion increases the taxpayer's spouse or common law partner credit under paragraph 118(1)(a).
File: Signed letter
Audit issue: Calculation.
Subsection 83(2) of the Act lets a private corporation elect to have the full amount of a dividend that is payable by it to be treated as a capital dividend, which effectively allows those dividends to be paid tax-free to shareholders resident in Canada.
File: Form T2054, Election for a Capital Dividend Under Subsection 83(2)
Audit issue: SERS responsibility. Timing of election and resolution of appropriate person(s), amount available in capital dividend account.
Paragraph 86.1(2)(f) of the Act lets a taxpayer elect to defer the tax on eligible distributions of foreign spin-off shares.
File: Signed letter
Audit issue: Determine that the spin-off shares are not taxable in country of origin, correct calculation of cost of spin-off.
Subsection 104(14) of the Act lets a trust and its preferred beneficiaries elect to have the income of the trust included in the income of the preferred beneficiaries, instead of being taxed in the trust.
File: Written statement, as stated in section 2800 of the Regulations
Audit issue: Definition of preferred beneficiary subsection 108(1).
Subsection 107(2.001) of the Act lets a personal trust or prescribed trust resident in Canada at the time of a distribution elect to not have the rollover in subsection 107(2) applied to the distribution of certain property to a beneficiary to satisfy the beneficiary's capital interest in the trust.
File: Signed letter
Audit issue: Correct reporting by beneficiary of proceeds.
Paragraph 128.1(4)(d) of the Act lets an individual (other than a trust) elect to treat certain properties that would otherwise be exempt from the deemed disposition that occurs when the individual stops being resident in Canada as having been disposed of.
Audit issue: Determination of fair market value.
Paragraphs 128.1(6)(a) and 128.1(6)(c) of the Act apply to an individual (other than a trust) who stops being resident in Canada after October 1, 1996, and later returns to reside in Canada. The effect of the election is to unwind the deemed disposition under subsection 128.1(4) for certain properties still held when the individual returns to Canada.
File: Signed letter
Audit issue: Cost and fair market value determination.
Paragraphs 128.1(7)(d) and 128.1(7)(g) of the Act apply to an individual trust beneficiary (other than a trust) who stops being resident in Canada after October 1, 1996, receives a distribution of property from the trust while a non-resident, and later returns to reside in Canada, while still owning the property. These rules let the beneficiary and the trust jointly elect, on the beneficiary's return to Canada, to unwind the deemed disposition under subsection 107(2.1), which was triggered when the trust distributed the property to the non-resident beneficiary.
File: Jointly signed letter
Audit issue: Cost and fair market value determination.
Paragraph 128.1(8)(c) of the Act applies to an individual (other than a trust) who disposes of taxable Canadian property, after no longer being resident in Canada after October 1, 1996, for proceeds that are less than the deemed proceeds that arose on the deemed disposition on emigration under paragraph 128.1(4)(b). The individual can elect to reduce the deemed proceeds of disposition that arose when the individual emigrated.
File: Signed letter
Audit issue: Limits set out in paragraphs (d) to (f).
Subsection 132.11(6) (deemed by subsection 220(3.21)) allows a mutual fund trust to designate an amount to be included as additional income in a particular year in order to flow the amount through to unitholders.
File: Signed letter
Audit issue: Designated amount is included as income, no designations made under subsections 104(13.1) or 104(13.2) for that particular year.
Subsection 143(2) of the Act lets a communal organization elect to have its taxable income, earned by the deemed trust under subsection 143(1), allocated to members of the organization.
File: Signed letter
Audit issue: Matching. Have all members reported the income?
Subsection 146.01(7) of the Act lets a deceased taxpayer's legal representative and the surviving spouse or common-law partner elect to continue the repayment obligations of the deceased taxpayer who participated in the Home Buyers' Plan, and not to have the full outstanding balance of the plan included on the taxpayer's final return. The effect of the election is to put the surviving spouse or common-law partner in the same position as the deceased taxpayer for the repayment of the balance.
File: Signed letter
Audit issue: Flow through of amounts.
Subsection 146.02(7) of the Act lets a deceased taxpayer's legal representative and the surviving spouse or common-law partner elect to continue the repayment obligations of the deceased taxpayer who participated in the Lifelong Learning Plan, and not to have the full outstanding balance of the plan included on the taxpayer's final return. The effect of the election is to put the surviving spouse or common-law partner in the same position as the deceased taxpayer for the repayment of the balance.
File: Signed letter
Audit issue: Flow through of amounts.
Subsection 164(6) of the Act lets a deceased taxpayer's legal representative elect to treat certain capital losses or terminal losses of the taxpayer's estate for its first tax year as capital losses or terminal losses of the taxpayer for the year of death.
File: Signed letter with documents, as stated in section 1000 of the Regulations
Audit issue: Determination of loss amounts.
Subsection 164(6.1) of the Act lets a deceased taxpayer's legal representative elect to treat the amount of the loss realized on the exercise, disposition, or expiration of rights to acquire certain securities within the first tax year of the taxpayer's estate as a loss of the taxpayer for the year of death.
File: Signed letter, as stated in section 1000.1 of the Regulations
Audit issue: Determination of loss amounts.
Subsection 184(3) of the Act lets a corporation elect to have the amount of the elected capital dividend (for a private corporation) or capital gains dividend (for a mortgage investment, mutual fund, or investment corporation) in excess of the balance in the corporation's capital dividend or capital gains dividend account treated as a separate, taxable dividend, thereby avoiding the tax otherwise payable under Part III.
File: Signed letter with documents, as stated in section 2106 of the Regulations
Audit issue: SERS responsibility. Timing of election, determination of amounts that are a capital dividend and a taxable dividend.
Subsection 251.2(6) of the Act lets a trust elect not to have a loss restriction event deemed to occur at the start of the day on which the event took place. If the trust makes an election, the time of day that the loss restriction event took place will be recognized.
File: Signed letter
Audit issue: Subsidiary issues – whether the events that would have been affected by the loss restriction event are properly calculated or transacted.
Subsection 256(9) of the Act lets a corporation elect not to have the acquisition of control deemed to occur at the start of the day on which the acquisition took place. If the corporation makes an election, the time of day that the acquisition of control took place will be recognized.
File: Signed letter
Audit issue: Subsidiary issues – whether the events that would have been affected by the timing of acquisition of control are properly calculated or transacted.
Subsection 1103(1) of the Regulations lets a taxpayer elect, for capital cost allowance purposes, to include in Class 1 all properties in any of classes 2 to 10, 11 and 12.
File: Signed letter
Audit issue: Verify classification of inclusion assets and amounts.
Subsection 1103(2) of the Regulations lets a taxpayer elect, for capital cost allowance purposes, to include in Class 2, 4, or 17, a property acquired before May 26, 1976, that would otherwise be included in another class when the chief depreciable properties of the taxpayer are included in Class 2, 4, or 17.
File: Signed letter
Audit issue: Assessment of “chief” depreciable properties, correct inclusion amount.
Subsection 1103(2d) of the Regulations lets a taxpayer elect to defer a capital cost allowance recapture by transferring the property disposed of to a new class of which the taxpayer has property. This can be done when the property disposed of would have been a property of the new class if it had been acquired when the property of the new class was acquired.
File: Signed letter
Audit issue: Determination of whether disposed asset would be part of present class.
Subsection 5907(2.1) of the Regulations lets a corporation, in calculating the active business earnings of a foreign affiliate, make an election for the cost of a foreign resource property or the cost of a capital property.
File: Signed letter
Audit issue: Joint election by all non-arm’s length corporations resident in Canada, determination of amounts.