CRA indicates that not permitting taxable income to be negative in the ATI formula is producing anomalous results

Is the computation of “adjusted taxable income” (ATI), defined in s. 18.2(1), iterative if a taxpayer wishes to claim sufficient non-capital losses under s. 111(1)(a) such that taxable income is nil after accounting for the deduction limitation under s. 18.2(2)? The core of this question is whether taxable income used in computing para. (b) of variable D in computing variable A of the definition of ATI can be negative or can it only be nil or positive having regard to the definition of “taxable income” in s. 248(1)? If it can be negative for the purposes of computing ATI, then this can lead to an iterative computation of the deduction claimed under s. 111(1)(a) and the limitation of interest and financing expenses (IFE) under s. 18.2(2).

CRA noted that ATI is determined by the formula

A + B – C,

and A is determined by the formula

D – E.

with variable D in general terms referring to the taxpayer’s taxable income for the year determined without regard to s. 18.2(2). As per s. 248(1), the taxpayer’s “taxable income” cannot be less than nil. This means that the taxable income of a taxpayer for purposes of computing (D - E) (e.g., taxable income minus non-capital losses used) can only be nil or positive, and ATI does not capture the non-capital losses that have been used to offset IFE.

CRA indicated that this result may not be consistent with policy in all circumstances, and it has been brought to the attention of the Department of Finance.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.5 under s. 18.2(1) – ATI – A – D(b).