Backdoor Amendment of the Elected Amount in Rollovers

In R & S Industries Inc. v. Canada (National Revenue) (2017 TCC 75; see also R & S Industries Inc. v. The Queen, 2016 FC 275), the taxpayer was seeking to amend information that it had entered on CRA form T2059 ("Election on Disposition of Property by a Taxpayer to a Canadian Partnership"); the CRA had refused to allow that amendment. Instead of merely following the normal route for challenging administrative decisions—applying at the FC for judicial review of the CRA's use of its discretion (which failed)—the taxpayer concurrently asked the TCC to disregard part of the form. The minister moved that the appeal be quashed on the grounds that the TCC lacked jurisdiction, but the motions judge disagreed. Thus, a new route may now be available for altering various rollover election forms, including those under section 85.

The facts of the case are fairly typical: Opco transferred its business assets to a new limited partnership pursuant to subsection 97(2) and filed form T2059 with its 2006 tax return. However, the original form contained errors; the non-share consideration allocated to transferred assets (except goodwill) exceeded the agreed amounts. The CRA reassessed in January 2010, the taxes payable were increased, and the taxpayer submitted an amended form T2059 in early 2013. In January 2014, the CRA denied the submission of the amended T2059. The taxpayer filed a notice of appeal with the TCC on November 6, 2014 in respect of the January 2010 reassessment and filed an application for judicial review with the FC on May 19, 2015.

The motions judge's analysis separated form T2059 into three "components":
  1. factual information about the parties, the transaction, and the transferred property;

  2. the agreed amount; and

  3. "key facts" consisting of the FMV of the transferred property, the type and value of partnership interest and non-partnership interest consideration, and the allocation of consideration between partnership and non-partnership interests.

The first component was not in dispute, and the motions judge stated that the TCC did not have jurisdiction to amend the second component. However, the motions judge found that the third component was entirely within the TCC's jurisdiction to review; the minister is not bound by these "key facts" and therefore neither should the taxpayer be. Both parties were said to be free to adduce evidence to support their respective positions on determinations of FMV or the allocation of consideration among transferred properties (although this was said to be an "uphill battle" for the taxpayer).

Is this decision consistent with the minister's exclusive right to permit (or not to permit) amendments to such forms pursuant to subsection 96(5.1) (and, by extension, subsection 85(7.1))? Paragraphs 9 and 10 of the TCC judgment are not completely clear, but one reading is that the Act refers only to the agreed amount, and therefore the minister's right extends only to that amount; all other information on the form is there only because the CRA has chosen to request it on the form for its information purposes (or, as the taxpayer seemed to argue in the reply to the minister's motion, to showcase the economic realities of the transaction). Further, the taxpayer was not seeking to amend the additional information on the form; rather, it was seeking to have the assessment declared incorrect because the CRA used the erroneous additional ­information on the form. Specifically, the taxpayer disputed the facts as they pertained to non-share consideration, the consequence of which would be a deemed change by paragraph 85(1)(b) (and not by the taxpayer) to the elected amount. ­According to this view, this decision can be distinguished from Govender (2010 TCC 486) because the taxpayer in that case sought to directly change the elected amount.

The decision may square with the CRA's own policies concerning price adjustment clauses (Folio S4-F3-C1, "Price Adjustment Clauses," and IC 76-19R3, "Transfer of Property to a Corporation Under Section 85"), which explicitly support adjustments to those "key facts" noted above, provided that a valid price adjustment clause exists. Notably, there was a price adjustment clause present in R & S Industries' case; it stated that the agreed amount for all assets would be the minimum amount permitted under the Act (except for goodwill, which was fixed at a particular amount unless otherwise agreed). This clause formed the basis of the taxpayer's request that the original form T2059 be disregarded in favour of an allocation determined by reference to (1) the economic and legal realities flowing from the clause; (2) the taxpayer's intention, evidenced in the transfer agreement, that the transfer should occur on a fully tax-deferred basis; and (3) the "common practice" for tax-deferred transfers of assets.

Taken together, the applicable policies and the case law now appear to yield the following conclusions, at least for this particular rollover:
  • agreed amounts on the rollover election form are only capable of direct amendment by way of ministerial discretion under the Act (and potential subsequent judicial review by the FC); and

  • "key facts" on the rollover election form—such as the FMV of transferred property, equity consideration, and non-equity consideration, as well as the allocation of consideration among such types of consideration—are all subject to being amended or being disregarded, either pursuant to the same methods as the agreed amount or by a decision of the TCC.

Joseph A. Gill
McKercher LLP, Saskatoon

Canadian Tax Focus
Volume 7, Number 3, August 2017
©2017, Canadian Tax Foundation