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Judicial Review of the Minister’s Decision to Deny an Amended Rollover Election
The Income Tax Act (the “Act”) contains a number of provisions which allow taxpayers to amend documents previously filed when those documents contain errors. Obvious examples which come to mind involve rollover elections under S.85 of the Act which are either late filed or which require amendment. Another example is one addressed by the Federal Court in the recent case of R&S Industries Inc. where the taxpayer sought to amend a T2059 Election Form filed in connection with the rollover of a property to a partnership.
The actual transaction involved a transfer of an operating business to a partnership. The Rollover Agreement contained a provision regarding the transfer of goodwill and provided that the elected amount would be equal to $2,502,600, unless otherwise agreed.
Ultimately, the parties determined that the goodwill had been inaccurately valued. As it turns out, it appears that the “goodwill amount” may well have been a balancing figure to be determined after the precise extent and value of the assets and debts being transferred and assumed, respectively, were determined.
CRA assessed the taxpayer on the basis that the non-share consideration allocated to the assets being transferred (other than goodwill) was in excess of the agreed amounts (i.e. the minimum amount permitted under the Act for each asset).
The taxpayer appealed the reassessment and the appeals officer indicated that they would consider changing the assessment but only if a proper amended T2059 Election Form was filed.
The Act allows for amendment of such forms where “in the opinion of the Minister, the circumstances of a case are such that it would be just and equitable.” Clearly, the amendment will not be allowed in circumstances where there is obvious retroactive tax planning. However, simple errors can clearly be amended through the filing of an amended election form.
In this case, the taxpayer attempted to file an amended election form and the Minister rejected the application. The taxpayer then sought to challenge that rejection by application to the Federal Court.
The Court found, in accordance with the applicable legislation, that any appeal of the Minister’s decision denying an amendment to the election form should have been made within 30 days of the decision. Ultimately, an application to obtain the amendment was not brought for 15 months following the communication of the decision.
The Court found that CRA communicated its views regarding the need for the taxpayer to file an Application for Judicial Review on more than one occasion. The taxpayer simply declined to bring the application because it felt it would get the relief it sought through its appeal in the Tax Court of Canada.
Furthermore, the Court found that there was simply no reasonable explanation for the delay, bearing in mind that the taxpayer was represented by tax and accounting professionals.
Ultimately, the Court rejected the Application for Judicial Review since it was not made in a timely fashion.
There is a deeper and more profound lesson from this case. Rollover transactions are frequently entered into. The values for the various assets are not always clear at the time that the rollover is intended to be effective. Rollover Agreements must be clear in allowing parties to adjust amounts and any adjustments must be fully and completely documented in order to be effective.
If you have any questions regarding this decisions, please contact Keith Trussler, Linda Smits or Ainsley Furlonger.