10 May 2000 External T.I. 1999-0009665 - Refundable Portion of Part I Tax

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Impact of a carryback of non-capital losses on the calculation of the Refundable Portion of Part I Tax in the carryback year.

Position: In the circumstances described, a reduction in taxable income in a prior year caused by a carryback of non-capital losses will reduce the Refundable Portion of Part I Tax component of RDTOH to nil by virtue of subparagraph 129(3)(a)(ii).

Reasons: The carryback of non-capital losses reduces taxable income in the prior year. Net income in the prior year is not affected. Since active business income is calculated by subtracting certain amounts from net income, active business income is not reduced when non-capital losses are carried back to the prior year. Therefore, in the circumstances of this case, the reduction of taxable income in the prior year results in a tax refund for the 1995 taxation year, and also eliminates the Refundable Portion of Part I Tax component of the taxpayer's RDTOH for the 1995 taxation year by virtue of subparagraph 129(3)(a)(ii). Eliminating the Refundable Portion of Part I Tax in 1995 results in an amount payable for the 1997 taxation year.

1999-000966
XXXXXXXXXX T. Lanzer
(613) 957-2129
Attention: XXXXXXXXXX

May 10, 2000

Dear Sirs:

Re: Calculation of Refundable Portion of Part I tax in Carryback Year

We are writing in response to your letter of June 25, 1999 wherein you requested our comments on the impact of a non-capital loss carryback on the calculation of the refundable portion of Part I tax in the carryback year. We apologize for the lengthy delay in replying.

In your view, a carryback of non-capital losses should not reduce or eliminate the refundable portion of Part I tax in the carryback year. In support of this conclusion, you have presented the following fact situation.

1. A Canadian-controlled private corporation had taxable income in 1995 of $27,752. Of this amount, $2,850 was income from property. Active business income eligible for the small business deduction was $24,902. The $2,850 in property income generated $666 in refundable tax in the 1995 year (December 31st year end).

2. The company paid a dividend in 1997 sufficient to clear all of its refundable dividend tax on hand account at that time.

3. The company incurred a non-capital loss in 1998 of $3,784. The loss was carried back to 1995. The company received two subsequent reassessments as a result of the loss carryback. The first was for the 1995 year, applying the $3,784 loss to reduce taxable income. A refund resulted for the 1995 year. The second reassessment was for the 1997 year. The company's dividend refund was reduced by $666, being the RDTOH previously generated. An amount was therefore owed for the 1997 year.

4. The 1998 loss of $3,784 was applied to reduce taxable income to $23,968. There was no change to the amount of income from an active business carried on in Canada (i.e. $24,902). Therefore, since taxable income was less than active business income, no refundable Part I tax was generated.

You question whether this is in fact the correct result, and ask whether the loss carryback should not also reduce the active business income for the 1995 year. In your view, this would make sense because the 1998 loss resulted from carrying on an active business.

Our Comments

In your letter, you have outlined what appears to be an actual fact situation related to a particular taxpayer. The review of such situations falls within the responsibility of the Taxation Services Offices and it is the practice of the Canada Customs and Revenue Agency not to comment on such transactions when the identities of the taxpayers are not known. We can, however, provide you with the following general comments which we hope will be of assistance.

We believe that the Income Tax Act was correctly applied to the situation you describe. Paragraph 111(1)(a) permits non-capital losses in a year to be carried back three years to reduce taxable income in those prior years. In your example, non-capital losses were carried back to reduce taxable income in the 1995 taxation year, resulting in a tax refund for that year.

However, a carryback of non-capital losses that reduces taxable income in a prior year does not affect the calculation of net income in the prior year. The consequence is that active business income, which is calculated by subtracting certain amounts from net income, is not reduced when non-capital losses are carried back, even if those losses resulted from carrying on an active business.

In your example, therefore, the Refundable Portion of Part I Tax component of the taxpayer's RDTOH for the 1995 taxation year was reduced to nil by virtue of subparagraph 129(3)(a)(ii). Eliminating the Refundable Portion of Part I Tax in 1995 results in an amount payable for the 1997 taxation year.

In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are, therefore, not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch