7 July 2010 Internal T.I. 2010-0352901I7 - Re-characterising Expenses of Statute-Barred Years

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a re-characterisation of expenses requires an assessment.

Position: It depends on the facts.

							July 7, 2010

	Calgary Tax Services Office		HEADQUARTERS
	Audit Division				Income Tax Rulings
							  Directorate
	Attention: Wayne Funk			Lindsay Frank
	Manager, Large Files			(613) 948-2227

							2010-035290

Re-characterising Expenses of Statute-Barred Years

This is in reply to an email from Bruce Tysdal. At issue is whether a request by XXXXXXXXXX to re-characterise expenses for statute-barred years (in this case XXXXXXXXXX to XXXXXXXXXX ) would run afoul of subsection 152(4) of the Income Tax Act (the "Act"). A summary of the years in question follows:

Year
Taxable Income
Loss
Revised Taxable Income
Explanation
XXXXX
XXXXX
XXXXX
XXXXX
Loss carried back from XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
Loss carried back from XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

XXXXX
XXXXX
XXXXX
XXXXX

XXXXXXXXXX has requested the following adjustments:

1. For the XXXXXXXXXX taxation year, replace the capital cost allowance ("CCA") claim with the Saskatchewan resource surcharge ("resource surcharge"), and restore the CCA amount to the XXXXXXXXXX taxation year.

2. For the XXXXXXXXXX taxation year, replace the non-capital loss carried back from XXXXXXXXXX with the resource surcharge, and restore the non-capital loss to XXXXXXXXXX .

3. For the XXXXXXXXXX taxation year, replace the claims for various expenses such as CCA, Canadian exploration expense, Canadian development expense, eligible capital expense, and charitable donation expense with the resource surcharge.

To facilitate the request, XXXXXXXXXX has filed the appropriate waivers, and in support of its request relies on Clibetre Exploration Ltd. v. The Queen, [1999] 2 C.T.C. 2869 (T.C.C.), rev'd in [2003] 1 C.T.C. 106 (F.C.A.). Your office does not feel that the request can be acceded to, and relies on technical interpretation document E2001-0072127. The resource surcharge is not a permissive deduction, and the request arises from the decision in Cogema Resources Inc. v. The Queen, [2005] 5 C.T.C. 76 (F.C.A.), aff'g [2005] 1 C.T.C. 2452 (T.C.C.), which stands for the proposition that the amounts paid in respect of the surcharge were taxes in relation to the sales of minerals, and not to the production of minerals.

Generally, under subsection 152(1), the Minister shall assess tax, interest and penalties arising from a return of income, and may reassess those numbers later, subject to the timing and subject-matter restrictions described in subsections 152(4) to (6.2). Because the changes requested by the taxpayer do not involve changes to the tax, interest or penalties of any of the years in question, it could be argued that a reassessment is not required to any of those years; so the time limits do not apply. The alternative argument is that a reassessment is not merely the calculation of a tax amount, but the thought process involved in arriving at that amount. On the latter argument, even arriving at the same amount, but on a different basis, is a reassessment.

Furthermore, there are other provisions of the Act that restrict the ability to make offsetting adjustments to prior years through such things as loss carryovers and CCA. Subsection 111(3) allows a loss to be applied to a year only to the extent that it was not deducted in previous years. The definition of un-depreciated capital cost in subsection 13(21) reduces the balance at any time by depreciation allowed before that time. The effect of these limitations is that offsetting changes in a year that involve a reduced CCA or loss claim do not have the effect of increasing the balance available for carryover of future years.

Several publications set out the considerations that apply in acceding to a taxpayer's request for an adjustment in prior years. Paragraph 9 of Information Circular IC 84-1 indicates that a requested adjustment of this type would not be acceded to unless the taxpayer's time limit for filing a notice of objection has not expired. Paragraph 4 of Information Circular 75-7R3 indicates that a reassessment based solely on another taxpayer's successful appeal will not be made.

The reason for these policies, as for the existence of legislated limitation periods for assessment, is to provide certainty, and allow the CRA to put a line under prior years. The question is not solely whether or not the claimed deduction is correct, but whether the deduction is timely. If the CRA were to take the position of acceding to this type of request, any amount could be claimed as a deduction in any prior year of any taxpayer, as long as the taxpayer had previously claimed enough permissive deductions in that year to absorb the deduction. This would render the limitation periods ineffective.

In our opinion, the request should be denied, and the carry forward balances of the taxpayer's permissible deductions should not be changed.

Should you need clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

Phil Jolie
Director
International and Trusts Division
Income Tax Rulings Directorate

c.c. Bruce Tysdal
Large File Auditor
Calgary Tax Services Office

c.c. Bruce Hartt
Technical Publications and Valuations Division
Audit Professional Services Division
Compliance Programs Branch