12. Retroactive Provisions and Post Wind-Up Obligations
TI2011-0401821C6 - 2011/06/03
In this TI, CRA is asked to provide comments on the obligations of a legal representative of a corporation or a trust where the corporation or the trust is wound up subsequent to legislation being tabled but prior to the enactment of the legislation. In the fact scenario proposed by the taxpayer, the legislation has retroactive provisions, and the corporation or trust had filed their income tax returns based on the then existing legislation rather than the proposed legislation.
As we are aware, although there is no legal requirement to do so, CRA adopts the practice of asking taxpayers to file on the basis of proposed legislation. Filing in such a manner is intended to ease the compliance burden on the taxpayer and the administrative burden on CRA. Should a taxpayer file on the basis of existing legislation, the taxpayer would have to amend the tax returns when the legislation is enacted and incur interest on any additional tax.
In the fact scenario, although the legislation is tabled, the corporation or trust files based on the existing legislation rather than the proposed legislation. The corporation or trust subsequently winds-up, with the assets of the corporation or trust distributed to the shareholders or beneficiaries. Subsequent to the winding-up of the corporation or trust, the proposed legislation is proclaimed, and because of its retroactive provisions, creates a tax liability for the now wound-up corporation or trust. As the funds and assets of the corporation or trust were distributed in the course of the wind-up, there are no funds to pay for the tax liability. Hence, the question arises: will the legal representative be held liable for the tax liability?
CRA references s.159(3), which holds the legal representative personally liable for amounts the corporation or trust is liable to pay under the Tax Act, to the extent of the value of the assets distributed (and under the possession and control of the legal representative) from the corporation or the trust. An exception to this liability is to obtain, prior to the distribution, a clearance certificate under s.159(2).
CRA provides comments on the validity of retroactive legislation, when the tax liability results, and the issuing of a notice of reassessment subsequent to the wind-up of a corporation or a trust.
In answering what is the post wind-up obligation, CRA states:
In summary, where notice is given of proposed legislation having a retroactive effect date, and a legal representative:
(a) does not file in accordance with the proposed legislation;
(b) does not obtain a clearance certificate; and
(c) distributes the property of the taxpayer in the possession or control of the legal representative,
the provisions of subsection 159(3) apply.
CRA concludes that the legal representative would be personally liable for the additional tax liability of the corporation or the trust that arose from the enactment of the proposed legislation if all three of the above listed conditions are satisfied.
As we have said many times before, make sure you get that clearance certificate if you are incontrol of assets that are to be distriubed to shareholders or beneficiaries. It should also be obvios from the views of CRA that you should not make final distributions while there is pending legislation that could affect the entity wishing to make such a distribution.