If you plan to file your 2011 re-turn electronically this tax sea-son, a recent tax case decided last month could come in handy.
Samipal Dhaliwal advanced $156,000 to a small business corporation and was never repaid. In 2007, the year the debt became un-collectible due to the bankruptcy of one of the principals, Mr. Dhaliwal claimed an allowable business investment loss (ABIL) on his 2007 tax return. An ABIL can be deducted against all sources of income.
Under the Income Tax Act, to properly claim an ABIL on a bad debt, the taxpayer must file an election "in his or her return of income for that year." The issue in the case was whether Mr. Dhaliwal properly elected in his 2007 electronic tax re-turn to have the special ABIL rule apply. In other words, can you properly "elect" on an e-filed return?
There is no actual prescribed form under the tax act for making this election so there was nothing for Mr. Dhaliwal to fill out. In fact, the tax returns developed by the Canada Revenue Agency do not even have a space to expressly indicate such an election is being made. While you can certainly add pages to a paper tax return to indicate you are making such an election, electronic tax returns are fixed by the CRA and there is no way to add a new form, letter or document to them.
The judge summarized the issue as follows: "In an electronic filing age - if an election making a specific reference to the (tax act) is required, but no such choice is available in the CRA's electronic tax returns, (does) this - mean that (the election) is only available to paper filers?"
The CRA's T4037 Capital Gains guide explains: "To make this election, attach to your return a letter signed by you. State that you want subsection 50(1) of the Income Tax Act to apply."
Yet in its publication on electronic filing, it states, "There are no paper returns to file and, unless we ask for receipts, none are needed ... Neither you nor your EFILE service provider should send us a paper copy of your return or any documents, unless we ask you to do so."
The CRA insisted no election was made since it wasn't made with his return and that "the Act as written simply does not permit an e-filer to make (that) election."
The judge had harsh words for the CRA, stating, "I would be loath to make such a backwards step un-less the language of the Act compels me to. I am frankly surprised that the CRA would be asking for barriers to electronic filing."
As a result, the judge found that since the act doesn't describe a prescribed form for the election nor otherwise specify how the election is to be made, other than in the tax return, it was sufficient for Mr. Dhaliwal to communicate his intention by claiming the ABIL on the e-filed return and thus the ABIL was allowed.