Questions? Call 416-367-4222
Man behind a large stack of tax files with a clock on top checking the time

Published: June 27, 2022

Last Updated: October 28, 2022

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 deadline.

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 Act.

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 equitable”.

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 be accepted.

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 TCC 62:

  • 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 request.
  • 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 the law.
  • 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 election?

Yes, you would need to pay for an estimate of the applicable penalty.

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.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

Get your CRA tax issue solved

Address: Rotfleisch & Samulovitch P.C.
2822 Danforth Avenue Toronto, Ontario M4C 1M1