Introduction to Section 85 and Late Filed Election
A transfer of property is a taxable disposition
and generally triggers a deeming rule that the transferee has
received the property at its fair market value under subsection
69(1) of the Income Tax Act. Section 85 of the Income
Tax Act, commonly referred to as a rollover provision,
outlines the conditions required for a tax-deferred transfer of
eligible property by a taxpayer (“transferor”) to a
taxable Canadian corporation (“transferee”). For more
information, please refer to our experienced Canadian Tax
Lawyer’s article on section 85 rollover.
A section 85 rollover election is required to be
filed on a timely basis, which is on or before the earlier of the
tax return filing deadlines for the transferor or the transferee
(“the original deadline”). A Late Filed Election,
pursuant to subsection 85(7), is permitted on or before the day
that is 3 years after the original filing deadline and estimated
penalty must be paid at the time of filing the election. The
monthly penalty is the lesser amount of an additional $100 or 0.25%
of the differences between the Fair Market Value and the actual
price of the transferred property. The total penalty is
capped at $8,000. Otherwise, it is equal to the sum of appropriate
monthly penalty multiplied by number of months between the original
deadline and the day when the election is filed or amended.
However, subsection 85(7.1) of the Income Tax Act
permits exceptions to be granted for special cases if in the
opinion of the Canadian Revenue Agency (“CRA”), it is
“just and equitable” to permit a section 85 Late Filed
Election or an amendment of the filed election 3 years after the original
Filing A Late or Amended Election
A late or amended election should be filed at the
transferor’s tax services office with a written request to
the CRA to accept the election and payment of an estimate of the
applicable penalty. The request should include the reasons why it
is “just and equitable” for the CRA to accept the
election. Although there is no specific requirement dictating what
information should be included or excluded, explanations provided
in the request should not be “so devoid of particulars that it
did not amount to an explanation at all (Glenogle Energy INC. v
AGC, 2022 FC 198).” Currently, there remains no absolute
limitation period for filing an election under subsection 85(1) of the Income Tax
What Is “Just and Equitable”?
The CRA does not set any criteria for its determination on what
circumstances should be considered “just and equitable”.
Similarly, the Income Tax Act provides no legislative
definition. Instead, the CRA tax auditors will have to review the
circumstances based on factors outlined in two CRA Information Circulars – IC 76-19R3 and IC
07-01. The tax courts have also provided some guidance on what
“just and equitable” means and when Canadian tax
litigation lawyers should apply to the tax courts for intervention
with the CRA’s determination on what is “just and
The CRA publishes information circulars to provide information
on administrative and procedural matters. Even though the CRA
itself is not bound by its own publications, they nearly always
follow the information circulars and the courts have specifically
recognized that both IC 76-19R3 and IC 07-01 are applicable in
assessing a section 85 Late Filed Election request.
Section 85 Late Filed Election Assessment Criteria
IC 76-19 R3 and IC 07-01 provide some guidance on whether
requests for Late Filed Elections may or may not be accepted.
Generally accepted purposes of a request include revising an agreed
amount of the transaction, without which there would be unintended
tax consequence for the taxpayers involved; and correcting an
error, omission, or oversight made at the time of the original
election. Retroactive tax planning, taking advantages of amendments
in tax law enacted after the original election, tax avoidance, tax
evasion or changing the agreed amount in a statute-barred year are
not accepted as legitimate purposes for making a section 85 Late
Filed Election. In addition, if there are no adequate records or if
the taxpayer had to make the request for his or her negligence and
carelessness in complying with the law, the request is unlikely to
The tax courts have attempted to clarify what is
considered to be “just and equitable”. Relevant factors
were discussed in Patterson Dental Inc. v The Queen, 2014
- The applicant should be at all times completely transparent
with the CRA during the tax audit process.
- The taxpayer should demonstrate a history of willingness to
voluntarily comply with his or her tax obligations.
- The CRA will not suffer prejudice as a result of the
- The request, if permitted, will permit a complete, open, frank
and fully informed debate on the validity of the assessment.
- The taxpayer should demonstrate an arguable position to defend
in the interest of justice.
- A full debate on the meris can potentially clarify the state of
- A significant amount is involved in the assessment.
The Federal Court, in recent years, has continued to clarify
what is required of the CRA tax auditors in assessing a request for
Late Filed Election. Refusal to allow late elections, for example,
can be based on the lack of evidence establishing the
taxpayers’ intention at the time of the transfer but an auditor
should nevertheless consider all relevant factors. The CRA is also
required to provide an explanation on why the requested amendment
or late election is not “just and equitable”.
Appealing A Denial of Section 85 Late Filed Election
The CRA decision to accept the request for Late Filed Election
is discretionary. A taxpayer who wishes to challenge the CRA denial
of his or her Late Filed Election requests should seek judicial
review in the Federal Court of Canada of the CRA decision.
Specifically, subsection 85(7.1) states that whether a circumstance
is “just and equitable” is “in the opinion of the
Minister”. Hence in Brent Carlson Family Trust, 2021
FC 506, the tax court has stated that the CRA is required to
demonstrate its expertise in applying the provisions of the
Income Tax Act to the facts of each case.
Pro Tax Tips – Prepare for A Late Filed S.85 Election
Although there is no absolute statutory limitation period for
filing a section 85 election, the Income Tax Act does
impose a general limitation of 3 years from the original filing
deadline, which is on or before the earlier of the tax return
filing deadlines for the transferor or the transferee. With no
definitive criteria for the CRA to accept or to deny a section 85
Late Filed Election that is filed 3 years after the original filing
deadline, it is best to include strong explanation and relevant
evidence in the request. You would also need to pay an estimate of
the applicable penalties at the time of the request.
For more advice on section 85 rollovers in general or with
respect to a Late Filed Election, contact our expert Canadian tax lawyers in Toronto.
Is there a statutory limitation period for filing
section 85 election?
There is no absolute statutory limitation period for filing a
section 85 election. However, if the election is filed 3 years
after the original filing deadline, then the CRA has the
discretionary power to accept or to deny your request.
Do I have to pay the penalty with the late filed
Yes, you would need to pay for an estimate of the applicable
Will my circumstances permit me to make a late filed
election 3 years after the original filing deadline?
The CRA is required to make its decision based on specific facts
of each case. We would need to conduct a comprehensive assessment
of your case prior to providing any legal advice. For an in-depth
evaluation of your circumstances, please contact our experienced
Canadian tax lawyers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.