12 December 2000 Internal T.I. 2000-0036467 - AMT AND NET CAPITAL LOSSES

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:

Taxpayer incurred a net capital loss in 1998 and wishes to carry back a portion to 1995. Can the taxpayer carry back a different portion of the loss for alternative minimum tax purposes than for regular Part I tax purposes?

Position TAKEN:

Yes, subject to the restriction in clause 127.52(1)((i)(ii)(A) of the Act.

Reasons FOR POSITION TAKEN:

Clause 127.52(1)((i)(ii)(A) allows a taxpayer to deduct for AMT purposes the total of all amounts each of which is an amount that can reasonably be considered to be the amount that the individual would have deducted under paragraph 111(1)(b) had the capital gains inclusion rate been 100%.

		December 12, 2000

		HEADQUARTERS
	Toronto Centre Tax Services Office	T. Young
	Large Business Audit	952-1506

	Attention: Paul Loo
		2000-003646

Alternative Minimum Tax and Subsequent Year's Net Capital Losses

This is in reply to the letter dated January 6, 2000, from the firm of XXXXXXXXXX on behalf of XXXXXXXXXX that you forwarded to us on July 7, 2000.

It is our understanding that the taxpayer had taxable capital gains in 1995 of $XXXXXXXXXX. The taxpayer had a net capital loss in 1998 of $XXXXXXXXXX. Among other adjustments, the taxpayer wishes to carry back, for Division E purposes, $XXXXXXXXXX of the 1998 net capital loss to 1995 pursuant to paragraph 111(1)(b) of the Income Tax Act (the "Act"). However, for alternative minimum tax ("AMT") purposes (Division E.1), the taxpayer wishes to carry back $XXXXXXXXXX of the 1998 net capital loss to 1995 pursuant to subparagraph 127.52(1)(i)(ii) of the Act.

Our Comments

Subparagraph 127.52(1)(i)(ii) of Act sets the amount of net capital losses that can be deducted for AMT purposes. The amount is the lesser of the amounts calculated in clauses 127.52(1)(i)(ii)(A) and (B).

The amount in clause 127.52(1)(i)(ii)(B) is the amount of net capital losses available from other years had the capital gains and losses inclusion rates been 100% instead of 75% in those years. Accordingly, under clause 127.52(1)(i)(ii)(B), the 1998 net capital loss would be computed to be $XXXXXXXXXX for purposes of a paragraph 111(1)(b) deduction for AMT purposes.

Clause 127.52(1)(i)(ii)(A) states:

"the total of all amounts each of which is an amount that can reasonably be considered to be the amount that the individual would have deducted under paragraph 111(1)(b) had paragraph (d) of this subsection been applicable in computing the amount deductible under paragraph 111(1)(b)". (underlined for emphasis)

In other words, clause 127.52(1)(i)(ii)(A) restricts the amount of net capital losses the taxpayer can deduct to the amount that the taxpayer would reasonably have deducted for purposes of Division E under paragraph 111(1)(b) had the capital gains and losses inclusion rate been 100% instead of 75%. This subparagraph involves making reasonable assumptions as to the actions of a taxpayer in a hypothetical situation. It should be kept in mind that while a reasonable assumption is a rebuttable assumption, it is generally accepted that a taxpayer will ordinarily wish to minimize the amount of tax payable. Therefore, where a taxpayer used sufficient net capital losses to reduce Part I tax calculated pursuant to Division E of the Act to nil, it is reasonable to assume that the taxpayer would have minimized the AMT tax liability by using sufficient net capital losses as determined by clause 127.52(1)(i)(ii)(B) of the Act. However, in our opinion, the effect of clause 127.52(1)(i)(ii)(A), generally, is to limit the amount of additional net capital losses the taxpayer can deduct for AMT purposes to the increase in taxable income in the year (in our case, for example, 1995) for AMT purposes resulting from the use of a capital gains and losses inclusion rate of 100% instead of 75%.

In the case in question, the taxpayer carried back sufficient net capital losses from 1998 to 1995 to reduce his federal tax under Division E of the Act to nil. Therefore it would also appear reasonable that the taxpayer would wish to reduce his AMT pursuant to Division E.1 of the Act to nil as well. To reduce his Division E tax to nil, the taxpayer deducted $XXXXXXXXXX of the 1998 net capital loss in 1995 pursuant to paragraph 111(1)(b) of the Act. To reduce his AMT to nil, the taxpayer deducted $XXXXXXXXXX of the 1998 net capital loss (as grossed up to 100% pursuant to clause 127.52(1)(i)(ii)(B)) pursuant to subparagraph 127.52(1)((i)(ii) of the Act. The difference of $XXXXXXXXXX between the amount deducted for Division E purposes and the amount deducted for Division E.1 purposes is less than the additional $XXXXXXXXXX in capital gains that are taxable in 1995 pursuant to paragraph 127.52(1)(d) of the Act. Therefore, it appears that the amount the taxpayer wishes to deduct pursuant to subparagraph 127.52(1)(i)(ii) satisfies the restriction in clause 127.52(1)(i)(ii)(A) and is deductible in computing AMT.

We trust that these comments will be of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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