CRA indicates that it could, but is not required, to amend a statute-barred year return to replace an inventory with a capital gain so as to eliminate a loss carryback and interest

The initial assessment of a particular year of the taxpayer resulted in an amount of tax payable, which remained unpaid, so that interest accrued thereon. A non-capital loss was then carried back from a subsequent taxation year, resulting in CRA issuing a notification that no tax was payable for the particular year.

The taxpayer then requested an amendment to its return for the particular year (which now was statute-barred) so as to recharacterize as a capital gain an amount previously reported as business income, thereby eliminating the loss carryback.

CRA indicated that such a request could be granted since it would have no impact on the tax payable for the particular year, but “emphasize[d] … that there is nothing in the Act that compels the Minister to automatically accept such requests.” However, it noted that if the amendment request was accepted, the accrued interest would be eliminated, stating:

[H]ad the taxpayer filed its initial tax return on that [capital gains] basis, the tax payable would be nil and a notification of no tax payable would be issued. In such a case, there would be no excess of tax payable over the tax paid on account of tax payable by the taxpayer and thus, no interest can accrue pursuant to subsection 161(1).

Neal Armstrong. Summaries of 25 January 2024 Internal T.I. 2023-0973901I7 under s. 152(4) and s. 161(1).