Tax Refunds: Corporate Tax Credits from Closed Tax Years – Re-Appropriation of Amounts – A Canadian Tax Lawyer Analysis

Tax Refunds: Corporate Tax Credits from Closed Tax Years – Re-Appropriation of Amounts – A Canadian Tax Lawyer Analysis

When a taxpayer files a tax return within 3 years of the end of the taxation year, the Canada Revenue Agency (“CRA”) is obligated to refund to the taxpayer any overpayments of tax. Outside of that 3 year period, the CRA is no longer required to issue a tax refund, but may still issue tax refunds to individual taxpayers at the CRA’s discretion. The CRA has no discretion to issue refunds to corporations after the 3 year period; however, a corporation can apply under s.221.2 of the Income Tax Act to re-allocate tax credits that it has stemming from those statute barred years to offset current or expected taxes owing.

Refunds of Tax Overpayments

Under s.164 of the Income Tax Act, once a taxpayer files a tax return for a taxation year, the CRA generally must issue a refund to the taxpayer for the amount of tax that the taxpayer overpaid for that particular year. However, this obligation to issue a refund only extends to 3 years after the end of a taxation year. For example, if a taxpayer filed a tax return for the 2014 taxation year in 2017, then that would be within 3 years of the end of 2014, and the CRA would be obligated to issue a refund for any overpayments. However if a taxpayer filed the tax return for the 2013 taxation year in 2017, then that would be outside of the 3 year period and the CRA would not longer have an obligation to issue a refund. If the taxpayer is an individual, he or she may still be able to obtain refunds from the CRA pertaining to taxation years outside the 3 year period at the CRA’s discretion. For more information about late refunds, call one of our experienced Toronto tax lawyers.

Re-Allocation of Amounts for Corporate Tax Credits

If the taxpayer is a corporation, then the CRA not only has no obligation to issue a late refund, but the CRA is actually barred from issuing that refund. Unlike the situation with individuals, the CRA has no discretion as to whether or not it issues late refunds to a corporation – it is unable to do so. However, s.221.2 is a remediative provision which allows a corporate taxpayer to apply to the CRA to have a credit for an overpayment from a taxation year more than 3 years prior to be re-appropriated or in other words applied, to a later tax debt. Simply said, the corporate taxpayer is unable to obtain a refund for an overpayment in a statute barred year, but can use the tax credit that resulted from an overpayment to offset taxes from a different taxation year.

Submit form RC431. This application requires that the corporate taxpayer explain why it was unable to file the return within the normal 3 year period. In addition, the CRA’s administrative policy is now to refuse s.221.2 applications except where there were extraordinary circumstances which prevented the timely filing of the corporate tax returns. Acceptable factors or circumstances for a s.221.2 application might be that the delay is due to CRA fault, a civil disturbance, a natural or man-made disaster, death or serious illness, or any other sufficiently extraordinary circumstance. Contact our top Canadian tax firm and learn how we can help your corporation or business with its tax issues or with tax planning.

Tax Tips for Taxpayers

The main tax tip is that if you have a corporation and expect that you may have overpaid your taxes for a taxation year, it is especially important to make sure that your corporation’s tax return is filed as soon as possible to avoid having tax credits trapped in a statute barred year. However, if you do find that your corporation has tax credits in a statute barred year, speak to one of our Canadian tax lawyers and it may be possible to utilize those tax credits to offset your current or expected tax liabilities through the application of s.221.2.