The CRA’s Information Circular IC 76-19R3 sets out its position on the procedures for correcting T2057s (the form used for elections under section 85 of the Income Tax Act (Canada)). In effect, the Circular identifies two types of mistakes.
The first is a clerical error as per ¶19 of CRA Information Circular IC 76-19R3, which reads as follows:
19. The Department will correct clerical errors without requiring an amended election. We will consider transposition or typographical errors as clerical errors only if they are obvious upon our initial review of the election form. We will not consider as a clerical error a situation where the agreed amount equals the fair market value of the property at the time of transfer.
An election filed to replace a previously-filed election to correct a clerical error on the latter election is an amended election that is not an amended election as far as the CRA is concerned. Got it? The significance of this is that the amended election will not be late-filed, on which see below.
In addition, you need not file an amended election where you have picked an agreed amount that is automatically adjusted by the various rules in subsection 85(1) and the adjustment does not give rise to adverse tax consequences.
The second type of amended election corrects a mistake on a T2057 that does not fall into the descriptions above. For this type of error, it will be necessary to file what is in effect a new election to replace the old one. The election of the parties will now be considered to have been filed on the date of the new election. If the election is late, the transferor must pay a penalty equal to $100 per month (in most cases). If the election is really late—if it is being filed more than three years after its original due date—it can be filed only with the consent of the CRA. The Circular says the following about that process:
15. […] The Minister delegates the authority to accept these late and amended elections to the directors of tax services offices. You or your representative should file a late or amended election, provided under subsection 85(7.1), at the transferor’s tax services office, together with a written request to the Minister to accept the election. The request should provide the reasons why you consider that it is just and equitable to accept the election. If you do not include these reasons, the Department will not process the election. You also have to pay an estimate of the applicable penalty when making the election (refer to paragraph 21).
16. We will generally accept an amended election under subsection 85(7.1) if its purpose is to revise an agreed amount, and without this revision, there would be unintended tax consequences for the taxpayers involved. We will permit revisions to correct an error, omission, or oversight made at the time of the original election. However, we will not permit revisions when, in the Department’s view, the main purpose of the amended election is:
(a) retroactive tax planning, such as taking advantage of losses or tax credits not considered when the election was originally filed. In situations where the changes are partly retroactive tax planning and partly to correct errors, we will advise you that we will only accept an amended election for the latter;
(b) to take advantage of amendments in the law enacted after the original election was filed, e.g., an increase in the agreed amount of an election made in April 1985 to create a capital gain that may be offset by a capital gains deduction under section 110.6;
(c) to improperly avoid or evade tax; or
(d) to change the agreed amount in a statute-barred year.
The CRA will accept an “amended” election only if a valid T2057 was previously filed. The CRA has stated that it will generally accept an amended election if
(a) it corrects an inaccurate property valuation that gave rise to unintended tax consequences;
(b) it reduces the agreed amount of transferred shares to the correct cost amount when a transfer at cost was the intention, e.g., subsection 83(1) dividends were omitted when calculating their adjusted cost base;
(c) it corrects situations where it is clear that an amount was inserted in error, such as the transfer of depreciable property at its net book value instead of its undepreciated capital cost; and
(d) it corrects other situations which resulted in unintended tax consequences, e.g., the application of section 84.1, subsections 15(1), 84(1), and 85(2.1), or paragraph 85(1)(e.2), when it is clear the parties wanted the rollover without any immediate tax consequences.
