Vol. 145, No. 26 — December 21, 2011

Registration

SOR/2011-295 December 8, 2011

INCOME TAX ACT

Regulations Amending the Income Tax Regulations (Corporate Internet Filing)

P.C. 2011-1531 December 8, 2011

His Excellency the Governor General in Council, on the recommendation of the Minister of National Revenue, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Corporate Internet Filing).

REGULATIONS AMENDING THE INCOME TAX REGULATIONS
(CORPORATE INTERNET FILING)

AMENDMENT

1. Section 205.1 of the Income Tax Regulations (see footnote 1) is renumbered as subsection 205.1(1) and is amended by adding the following:

(2) For purposes of subsection 150.1(2.1) of the Act, a “prescribed corporation” is any corporation whose gross revenue exceeds $1 million except

  • (a) an insurance corporation as defined in subsection 248(1) of the Act;
  • (b) a non-resident corporation;
  • (c) a corporation reporting in functional currency as defined in subsection 261(1) of the Act; or
  • (d) a corporation that is exempt under section 149 of the Act from tax payable.

APPLICATION

2. Section 1 has effect for taxation years ending after 2009.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issue: Budget 2009 introduced subsection 150.1(2.1) to the Income Tax Act (the Act) to require a “prescribed corporation” to file its T2 income tax return each year by way of electronic filing. With the enactment of subsection 150.1(2.1) in 2009, the Income Tax Regulations (the Regulations) require amendment to define the types of corporations that are prescribed for purposes of the mandatory electronic filing requirements.

Description: Subsection 205.1(2) has been added to the Regulations to define a “prescribed corporation” as a corporation with gross revenue in excess of $1 million, with the exception of an insurance corporation, a non-resident corporation, a corporation reporting in functional currency, or a corporation exempt from tax under section 149 of the Act. Prescribed corporations are required to file their T2 returns through Corporate Internet Filing (CIF) in keeping with current Canada Revenue Agency (CRA) system capabilities.

Cost-benefit statement: Because no manual keying is required, the cost to process a return filed through the Internet is significantly less than the cost to process a paper return. With this regulatory amendment, it is expected that the increase in the number of Internet-filed T2 returns will result in net savings to the CRA of approximately $8.5 million (present value over 10 years of $5.7 million). In addition, because Internet-filed returns can be processed more quickly, the CRA will be able to deliver its services to corporations more efficiently.

With this regulatory amendment, approximately 254 000 corporations will be required to file their T2 electronically. Many of these corporations are already filing on the Internet but, based on 2010–2011 statistics, approximately 131 500 are not and will need to convert to filing electronically using Corporate Internet Filing (CIF). While a limited number of corporations will incur a minor incremental cost to convert to CIF (present value over 10 years of $6.4 million), by filing their T2 return electronically the overall administrative burden for prescribed corporations will be reduced.

Business and consumer impacts: Based on 2010–2011 statistics, approximately 7 450 corporations will incur a minor incremental cost (estimated at $110 annually) to convert to CIF. As this amount is negligible when compared to their gross revenue, it is unlikely that any costs will be passed on to Canadian consumers. Similarly, although only certain corporations will experience increased costs as a result of this regulatory proposal, the amount is so small that the proposal is expected to have no impact on competition between affected and unaffected firms.

Domestic and international coordination and cooperation: This regulatory initiative will have no impact on domestic or international trade.

Performance measurement and evaluation plan: A weekly report will be prepared to identify non-compliance figures by tax centre.

Issue

Under the Act, all corporations (except a corporation that was a registered charity throughout the year or a non-resident corporation that does not carry on business in Canada) are required to file a T2 corporate income tax return for each tax year, even if there is no tax payable. Corporations have had the option of filing their T2 return on paper or in electronic format. While growth in Internet filing has been steady, it has not yet reached levels that would enable the CRA to achieve desired savings and efficiencies in the delivery of its programs. In view of this, the CRA recommended mandatory electronic filing for certain types of corporations as a way to increase Internet filing and reduce CRA costs.

To implement this recommendation, Budget 2009 introduced subsection 150.1(2.1) to the Act to require mandatory electronic filing for a “prescribed corporation” as well as a new penalty under subsection 162(7.2) for the failure to comply. These provisions received Royal Assent on March 12, 2009. The Regulations require amendment to define the types of corporations that are prescribed for the purposes of the mandatory electronic filing requirements and the associated penalty.

Objectives

The objective of this amendment is to help the CRA achieve desired savings in the processing of T2 corporate income tax returns by increasing the number of returns that are filed electronically. This regulatory amendment gives effect to the 2009 mandatory filing legislation by defining a “prescribed corporation” for the purposes of subsection 150.1(2.1) of the Act. Prescribed corporations are required to file using Corporate Internet Filing (CIF) in keeping with current CRA system capabilities.

Description

Subsection 205.1(2) has been added to the Regulations to define a “prescribed corporation” for the purposes of subsection 150.1(2.1) of the Act as follows.

A corporation with gross revenue in excess of $1 million with the exception of

  • an insurance corporation as defined in subsection 248(1) of the Act;
  • a non-resident corporation;
  • a corporation reporting in functional currency as defined in subsection 261(1) of the Act; or
  • a corporation that is exempt from tax payable under section 149 of the Act.

The term “gross revenue” is defined in subsection 248(1) of the Act. For the purposes of calculating the $1 million gross revenue threshold, corporations would add lines 8299 (total revenue) and 9659 (total farm revenue) of Schedule 125 of the General Index of Financial Information (GIFI). The GIFI is an extensive list of financial statement items used by corporations to report financial statement information with their T2 Corporation Income Tax Return. For more information, refer to Guide RC4088 titled General Index of Financial Information (GIFI) for Corporations.

Those corporations that are exempt from the mandatory electronic filing requirements must still file their T2 Corporation Income Tax Return each year in accordance with subsection 150(1) of the Act. While these corporations do not have to file their T2 return electronically, certain eligible corporations continue to have the option of filing electronically where CRA system capabilities permit. For more information, refer to the T2 Corporation Income Tax Guide (T4012).

Regulatory and non-regulatory options considered

With the enactment of subsection 150.1(2.1) in 2009, a regulatory amendment is required to define those types of corporations that are prescribed for purposes of the mandatory electronic filing requirements. As such, only regulatory options were considered.

The threshold of $1 million in gross revenue was selected because the number of corporations that fall above this threshold is large enough to achieve desired savings and efficiencies without imposing undue hardship on small corporations.

The exceptions to the mandatory electronic filing requirements were selected based on the following:

  • (a) Insurance companies: When filing a T2 annual return, a corporation is required to include financial statement information. Most corporations use the GIFI for this purpose. The GIFI is an extensive list of financial statement items with each item having a unique code and is an important component of Internet filing. However, the GIFI does not currently meet the unique reporting needs of insurance corporations (such as life insurers, deposit insurers, or property and casualty insurers) as it does not include items specific to the industry. As such, insurance corporations must continue to submit a paper copy of their financial statements with the T2 returns and schedules.
  • (b) Non-resident corporations: Several types of non-resident corporations are unable to Internet file in Canada as their returns require manual verification and/or review by a CRA assessing or compliance officer. Due to the number of exceptions, all non-resident corporations are excluded from the mandatory Internet filing requirements to simplify both the administration and regulatory amendments required for this initiative.
  • (c) Corporations filing in functional currency: Where certain conditions are met, a corporation resident in Canada throughout the tax year can elect to report in functional currency. A functional currency is the currency of a country other than Canada and is the primary currency in which the corporation maintains its records for financial reporting. Presently, qualifying currencies are the U.S. dollar, the Australian dollar, the British pound, and the euro. Indications are that software developers would not incorporate the functionality for reporting in functional currency into their products for such a small number of corporations. As such, these types of corporations are excluded from the mandatory electronic filing requirements.
  • (d) Corporations excluded from tax under section 149: Corporations that are exempt from tax under section 149 of the Act include the following:
  • • municipal authorities exempt under paragraph 149(1)(c);
  • • Crown corporations exempt under paragraph 149(1)(d);
  • • agricultural organizations, boards of trade, and chambers of commerce exempt under paragraph 149(1)(e);
  • • registered charities exempt under paragraph 149(1)(f);
  • • low-cost housing corporations exempt under paragraph 149(1)(i);
  • • certain non-profit scientific research and experimental development corporations exempt under paragraph 149(1)(j), where certain conditions are met;
  • • non-profit clubs, societies, or associations (excluding charities) exempt under paragraph 149(1)(l);
  • • mutual insurance corporations exempt under paragraph 149(1)(m); and
  • • certain insurance corporations related to the insuring of farming and fishing property exempt under paragraph 149(1)(t).

Due to the tax-exempt status of these types of corporations, they are excluded from the mandatory electronic filing requirements.

No alternatives were considered other than the current regulatory proposal because Budget 2009 indicated that it was the Government’s intent to apply mandatory electronic filing to corporations above a threshold of $1 million in gross revenue with the exceptions listed above.

Benefits and costs

A cost-benefit analysis conducted by the CRA reveals that the proposed regulatory amendment will provide a net present benefit to Canadians of $506,753 over 10 years. The benefit-cost ratio is 1.06:1, with quantified benefits of $9,553,871 present value and quantified costs of $9,013,698 present value. The quantified benefits outweigh the costs; however, the overall benefits of the proposed Regulations are further increased by the qualitative benefits. For example, the benefits to corporations from faster processing times and improved accuracy were not quantified, but contribute to the overall benefits of the proposal.

With this regulatory amendment, CRA resources devoted to the manual processing of T2 corporate income tax returns will be greatly reduced. This will enable the CRA to achieve net savings of $8.5 million (present value over 10 years of $5.7 million).

With this regulatory amendment, approximately 254 000 corporations will be required to file electronically. Many of these corporations are already Internet-filing but, based on 2010–2011 statistics, approximately 131 500 are not and will need to convert to filing electronically using Corporate Internet Filing (CIF). While a limited number of corporations will incur a minor incremental cost to convert to CIF, overall the administrative burden for prescribed corporations will be reduced.

CRA benefits

By eliminating manual keying, the cost to the CRA to process an Internet-filed return is significantly less than the cost to process a paper return. By defining a “prescribed corporation” as a corporation with revenue in excess of $1 million, the increased number of Internet-filed T2 returns will result in net payroll savings to the CRA of $8.5 million (present value over 10 years of $5.7 million).

CRA costs

The CRA will incur additional payroll costs each year to ensure that resources are available to assist prescribed corporations in meeting the new electronic filing requirements, CRA systems and security applications are kept up to date, and corporations are kept apprised of their filing requirements and application of penalties. The additional payroll costs are estimated to be $3.9 million (present value over 10 years of $2.6 million). An additional $2,000 will be incurred annually to prepare a weekly “Mandatory Internet Filing Compliance Report” to reveal the number of non-compliant returns by tax centre (present value over 10 years of $13,420).

Industry benefits

With the conversion to CIF, corporations will derive several distinct benefits, including:

  • immediate confirmation that a T2 return has been received by the CRA;
  • improved processing times of T2 returns and refunds;
  • lower mailing, delivery and storage costs. The present value of postage savings over 10 years is estimated at over $500,000;
  • reduced printing costs. The present value of reduced paper, ink, etc. over 10 years is estimated at over $500,000; and
  • improved accuracy and data integrity.

Industry costs

The incremental cost to a particular corporation to convert to CIF will depend on its current filing method or whether it chooses to use the services of a professional tax preparer.

In 2010–2011, 50% of filers with gross revenue in excess of $1 million (131 922 corporations) used CIF to file their T2 returns. Since these corporations already meet the mandatory electronic filing requirements, they will not be impacted by this regulatory amendment.

In 2010–2011, 47% of corporations with gross revenue in excess of $1 million (124 023 corporations) used commercial tax preparation software to prepare their returns, then printed a paper copy to submit to the CRA. Since these corporations are already purchasing tax preparation software, they will not incur additional costs as a result of the requirement to file electronically.

In 2010–2011, 3% of corporations with gross revenue in excess of $1 million (7 442 corporations) used Agency pre-printed forms to paper-file their T2 returns. This regulatory proposal will cause these filers to annually purchase commercial tax preparation software with CIF capacity or secure the services of a professional tax preparer. Tax software with CIF capacity can be purchased for $110. The average annual incremental cost is estimated to be $969,427 (present value over 10 years of $6.4 million).

Note: For tax purposes, corporations can deduct the expense for tax preparation software or services in the calculation of their taxable income thereby mitigating the cost of any outlays.

Cost-Benefit Statement

2012

2021

Total (present value)

Annual Average

A. Quantified impacts (2011 dollars)

Benefits

CRA — Reduction in payroll

$1,245,761

$1,245,761

$8,359,161

$1,245,761

Benefits

Prescribed corporations — Postage

$77,140

$100,651

$582,419

$88,433

Benefits

Prescribed corporations — Paper

$78,448

$102,356

$592,291

$89,932

Total benefits

$1,401,349

$1,448,768

$9,533,871

$1,424,126

Cost

CRA — Payroll increases

$391,803

$391,803

$2,629,030

$391,803

Cost

CRA — Reports

$2,000

$2,000

$13,420

$2,000

Cost

Prescribed corporations — Software

$845,636

$1,103,364

$6,384,668

$969,427

Total costs

$1,239,439

$1,497,167

$9,013,698

$1,363,230

Net benefits

$161,910

($48,398)

$506,753

$60,895

B. Quantified impacts (in non-dollars) [e.g. results from risk assessments]

Positive impacts

By stakeholder

n/a

n/a

n/a

n/a

Negative impacts

By stakeholder

n/a

n/a

n/a

n/a

C. Qualitative impacts

Canada Revenue Agency benefits

  • Increased accuracy results from avoiding manual keying.
  • Reduced paper consumption contributes to sustainable development.

Prescribed corporations benefits

  • Corporate filers can file their return at a time and location convenient to them.
  • Real-time confirmation that the T2 return has been received by the CRA.
  • Improved processing times of T2 returns and refunds.
  • Lower storage costs.
  • Improved accuracy and data integrity.

Rationale

The CIF facility was built in 2002 to provide corporations with a convenient, easy-to-use, secure filing option. While growth in CIF has been steady, it has not reached levels that would enable the CRA to achieve desired savings and efficiencies in the delivery of its programs. A perception that there may be security risks and/or the need to file corporate income tax returns in paper format in certain provinces may have contributed to low take-up rates.

By defining a “prescribed corporation” as a corporation with gross revenue in excess of $1 million (with some exceptions), the expected increase in the number of Internet-filed T2 returns will generate net savings to the CRA of approximately $8.5 million over 10 years. The quantified net present benefit of the proposal to all stakeholders would be $506,753 over 10 years. In addition, prescribed corporations will benefit from increased convenience, faster processing times and refunds, improved accuracy and reduced costs. Based on the foregoing analysis, the benefits outweigh the costs.

An increasing number of countries recognize the benefits of and have implemented mandatory electronic filing requirements. Most countries target large businesses based on their level of sales or income (referred to as turnover) or their assets. For example, the United States requires mandatory electronic filing for corporations with assets greater than $50 million or exempt bodies with assets greater than $100 million. In February 2011, the Internal Revenue Service announced its intention to introduce new penalties for the failure to comply with these filing requirements. The move by the CRA to implement mandatory electronic filing for larger corporations is consistent with actions taken by revenue authorities in other jurisdictions.

Consultation

Mandatory electronic filing for corporations was first announced by way of the Finance Web site as part of Budget 2009. Specifically, Budget 2009 stated

Taxpayers are currently allowed to file their income tax information with the CRA in electronic format if they meet certain criteria acceptable to the CRA. The CRA will increase efficiencies in the implementation of its programs by requiring such electronic filing in certain circumstances. First, corporations that have annual gross revenues in excess of $1 million for a taxation year will generally be required to file their income tax returns for the year in electronic format. The CRA may provide exceptions for corporations of a type in respect of which the CRA would not generate efficiencies through electronic filing. These could include, for example, non-resident corporations, insurance corporations, and corporations filing in a functional currency. This measure will apply in respect of corporate income tax returns for taxation years that end after 2009.

With this announcement, subsections 150.1(2.1) and 162(7.2) were added to the Act as part of Bill C-10 which received Royal Assent on March 12, 2009. These changes alerted corporations of the intent to implement mandatory electronic filing. Moreover, the CRA has been notifying those corporations impacted along with their Notice of Assessment since 2010.

Canada Revenue Agency officials have discussed the mandatory electronic filing requirements with various groups as follows:

  • In February 2008, teleconferences were held with two national accounting organizations and with the Canadian Federation of Independent Business.
  • In May 2009 and September 2010, CRA officials met with nine national accounting firms in Toronto to discuss mandatory Internet filing. The CRA also held a teleconference with these stakeholders in June 2010.
  • In September 2009, CRA officials addressed mandatory Internet filing at the EFILE Association Annual General Meeting.
  • In the fall of 2009, mandatory Internet filing was raised at the CRA’s “Represent a Client Consultation” during sessions held in Vancouver, Toronto, Montréal and St. John’s.

The proposed mandatory electronic filing requirements have also been announced on the CRA Web site and in various publications.

  • In February 2009, a fact sheet and “Questions and Answers” were posted on the CRA Web site that address which corporations would be affected by the new filing requirements, those that would be excluded, and expected implementation timelines.
  • The CRA included a paragraph on mandatory electronic filing in the 2009 and 2010 T2 Corporation Income Tax Guide (T4012) alerting corporations to the new filing requirements.
  • In October and November 2009, the CRA issued two “Tax Tips” to individuals and corporations that subscribe to CRA News.
  • In December 2010, the CRA provided an article for the Quebec publication Stratège.

No significant concerns have been raised with respect to mandatory Internet filing.

The proposed amendment was pre-published in the Canada Gazette, Part Ⅰ, on October 8, 2011. On October 11, 2011, the CRA posted a news release to its Web site and wrote to several national-level organizations within the tax and business communities. These communications advised taxpayers and their advisors of the pre-publication of the proposed Regulations and invited feedback. No comments were received.

Implementation, enforcement and service standards

Implementation

Date of effect: Mandatory electronic filing for corporations was first announced in Budget 2009. Since this regulatory initiative gives effect to a budgetary announcement, under the authority of paragraph 221(2)(d) of the Act, it is effective for taxation years that end after 2009 to coincide with the effective date of subsection 150.1(2.1). Notwithstanding a retroactive effective date, the CRA has stated that no penalties will be applied for tax years ending before 2012.

Data security: A key concern with electronic filing is the CRA’s ability to protect taxpayer information during transmission and once it is in the CRA’s possession. The CRA is committed to safeguarding taxpayer information and has measures in place to ensure data security and confidentiality. The CRA uses Secure Socket Layer (SSL) protocol which provides a safe passage for the transmission of data and authentication processes by encrypting the information. SSL ensures the privacy of information passing between the filer’s browser and CRA Web servers.

In addition, safeguards are in place to ensure that there is no unauthorized access to data once in the possession of the CRA. Part of the CRA security protocol is the use of Web access codes (WAC) — an 8-digit number assigned to each corporation. A corporation’s electronic signature is composed of its WAC, business number, and taxation year end and that signature is used for authentication purposes. Internet filing is not allowed unless the CRA has determined that the sender has been properly identified through the use of their individualized WAC.

Communication: The CRA will use existing communication strategies, including the CRA Web site, publications and messaging on Notices of Assessment, to inform affected corporations and the business community of the effective date of the Regulations and implementation of penalties.

Enforcement

Budget 2009 introduced subsection 162(7.2) to the Act which is a penalty for the failure to comply with the mandatory electronic filing requirements in subsection 150.1(2.1). The penalty for non-compliance is $1,000 effective for taxation years that end after 2010. However, the CRA has indicated its intention to apply the penalty on a gradual basis. No penalty will be applied for tax years ending before 2012. For tax years ending in 2012, the penalty for non-compliance with subsection 150.1(2.1) will be $500. For tax years after 2012, the penalty for non-compliance will be $1,000.

Service standards

With the new requirements, the CRA has put in place additional resources to provide affected corporations assistance with filing their returns through the Internet. In this regard, assistance with CIF is available Monday to Friday by calling the Corporation Internet Filing Helpdesk at 1-800-959-2803.

Performance measurement and evaluation

It is intended that a “Mandatory Internet Filing Compliance Report” be prepared weekly to reveal the total number of compliant and non-compliant returns by tax centre.

Contact

Mr. Mark Richer
Director
Business Registration and Corporation Programs Division
Business Returns Directorate
750 Heron Road
Ottawa, Ontario
K1A 0L5
Telephone: 613-952-9314
Email: Mark.Richer@cra-arc.gc.ca

Footnote a
S.C. 2007, c. 35, s. 62

Footnote b
R.S., c. 1 (5th Supp.)

Footnote 1
C.R.C., c. 945