30 May 2001 Internal T.I. 2001-0072127 - STATUTE BARRED ADJUSTMENT REQUEST

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: 1) Whether changes to computation of net income (additional deductions) of a statute barred taxation year can be made concurrently with revised loss carry back request (reduced by same amount) such that the net result is proposed to be no changes in tax liability but an increased balance of loss carried forward. 2) Whether a loss carry back is "null and void" to the extent it exceeds taxable income otherwise available.

Position: 1) No. 2) No.

Reasons: 1) Paragraph 152(4)(b) of the Act provides that a reassessment may be made within 3 years after the normal reassessment period for a taxpayer in respect of a year where inter alia it is required pursuant to subsection 152(6) of the Act (loss carry back request). Notwithstanding these provisions, subsection 152(4.01) of the Act provides that such reassessment may only be made to the extent that it can reasonably be regarded as relating to the loss carry back request. This is consistent with the overall provisions of the Act and case law. 2) Taxable income is determined pursuant to subsection 2(2) of the Act as the taxpayer's income plus the additions and minus the deductions under Division C of the Act. Subsection 111(3) of the Act denies a deduction in respect of non-capital losses for the amount "deducted" in previous years. The deduction is not limited to the amount required to bring taxable income to nil.

						May 30, 2001

Mr. John Cunningham		HEADQUARTERS
	North York TSO			Patrick Massicotte
	Audit Division			(613) 957-9232

						2001-007212

Re: XXXXXXXXXX

This is in reply to your memorandum of August 29, 2000 requesting our views in respect of amendments to a statute barred taxation year that were requested by the above-mentioned corporate taxpayer.

Facts

The corporate taxpayer (a Canadian-controlled private corporation) reported taxable income of $XXXXXXXXXX for its XXXXXXXXXX taxation year and a non-capital loss of $XXXXXXXXXX for its XXXXXXXXXX taxation year. A loss carry back was requested (T2A) inter alia to reduce the XXXXXXXXXX taxation year's taxable income to nil. The XXXXXXXXXX taxation year was initially assessed on XXXXXXXXXX and it was reassessed pursuant to subsection 152(6) of the Income Tax Act (the "Act") on XXXXXXXXXX to allow for a deduction under subsection 111(1) of the Act in respect of the XXXXXXXXXX taxation year's non-capital loss carried back.

After the normal reassessment period of the XXXXXXXXXX taxation year had expired, the taxpayer determined that deductions amounting to $XXXXXXXXXX had been omitted from the computation of its net income for the XXXXXXXXXX taxation year. On XXXXXXXXXX, the taxpayer submitted a request whereby the XXXXXXXXXX loss carry back to XXXXXXXXXX would be reduced by $XXXXXXXXXX and deductions in the computation of the XXXXXXXXXX net income would be concurrently increased by the same amount of $XXXXXXXXXX.

The changes to the computation of the net income of the XXXXXXXXXX taxation year were denied by the Audit Division of the XXXXXXXXXX Tax Services Office of the Canada Customs and Revenue Agency (the "CCRA") since the normal reassessment period had expired for the taxation year in issue.

We wrote to you on June 26, 2000 (our file #2000-001074) confirming the above and agreeing with you that the XXXXXXXXXX tax return may not be reassessed for such changes, although a revised loss carry back could be allowed. The taxpayer's representatives requested our position be revisited in light of additional representations submitted to support the proposed amendments. In this regard, we acknowledge receipt of the representative's letters dated:

November 20, 2000; August 28, 2000; August 24, 2000; March 20, 2000; March 4, 2000; January 7, 2000; April 1, 1999 and September 22, 1998.

Our Comments

In the present situation, the amendments requested to the XXXXXXXXXX tax return actually involve two distinct but concurrent amendments: (1) an amended loss carry back from the XXXXXXXXXX tax year to XXXXXXXXXX, to reduce the amount of loss carried back (increasing the taxable income of XXXXXXXXXX), and (2) an amendment to the computation of the XXXXXXXXXX net income, to reduce it by previously unclaimed expenses and/or losses in the same amount (reducing the taxable income by the same amount). The taxpayer's representatives argue this results in no additional tax liability and that a reassessment is therefore not required, with the result that the limitations of subsection 152(4) of the Act do not apply.

Division I of Part 1 of the Act deals with Returns, Assessments, Payment and Appeals procedures. Subsection 152(4) of the Act provides inter alia that the Minister may reassess after the normal reassessment period, as defined in subsection 152(3.1) of the Act, only in specific circumstances. Generally, this involves that a taxpayer who wishes to make an amendment to a prior year's tax return (to allow additional deductions for example) in circumstances other than those provided in the Act (such as subsection 152(6) of the Act) has generally no right to do so other than by filing a notice of objection to an assessment for the prior year and the Minister is not authorized to accede to such a request, unless it is filed within the 90-day period for filing a notice of objection. Moreover, if the Minister wants to reassess, he must find his authority under the Act (subsection 152(4), (4.2), etc.).

Subsection 152(6) of the Act, which inter alia allows a taxpayer to request a loss carry back to a previous year's return of income, provides that the Minister shall reassess the taxpayer in order to take into account a deduction claimed under section 111 of the Act. Under subparagraph 152(4)(b)(i) of the Act, such a reassessment is allowed if made before the day that is 3 years after the normal reassessment period, as defined in subsection 152(3.1) of the Act. Generally, an amended loss carry back request will also be accepted by the CCRA where the years may still be reassessed under the same authority. In the present situation, as the request was made before that time, a reassessment of the XXXXXXXXXX taxation year could be made to allow for the amended loss carry back.

However, subsection 152(4.01) of the Act states that where a reassessment of a taxation year is allowed pursuant to subparagraph 152(4)(b)(i) of the Act in respect of a loss carry back, and is made after the normal reassessment period applicable to the taxation year (as in this case), the reassessment can only by made to the extent that it relates to the loss carry back request. It follows that no further adjustment can be made to the computation of the income, loss or any other item of addition or deduction in such situation, even if requested by the taxpayer to do so. The Minister, after the normal reassessment period, generally has no authority to make concurrent changes to income, expenses, inclusions or deductions when reassessing as a result of a loss carry back request under the authority of subsection 152(6) of the Act. Consistent with these provisions, subsection 165(1.1) of the Act limits an objection to an assessment made under subparagraph 152(4)(b)(i) of the Act (loss carry back) to the matter that gave rise to that assessment.

The taxpayer's request in this case falls squarely within those provisions. Although a reassessment to give effect to an amended request for a loss carry back may be made, a concurrent request to allow additional deductions in the computation of the net income for the same taxation year is specifically disallowed under subparagraph 152(4.01)(b)(i) of the Act.

Subsection 152(5) of the Act also provides for similar restrictions in general. It states:

"There shall not be included in computing the income of a taxpayer for a taxation year, for the purpose of an assessment, reassessment or additional assessment made under this Part after the taxpayer's normal reassessment period in respect of the year, any amount that was not included in computing the taxpayer's income for the purpose of an assessment, reassessment or additional assessment made under this Part before the end of the period."

Paragraph 4 of Interpretation Bulletin IT-241, Reassessments Made After the Four-Year Limit, states that the words "any amount" in subsection 152(5) of the Act are considered to refer to items of both revenue and expense. The intent of this provision is clear that no adjustments can be made to the computation of a taxpayer's net income after the normal reassessment period has expired, unless specifically authorized by the Act. A request for additional deductions or losses, such as in the present case, is an adjustment to the computation of the income of a taxpayer for the purpose of an assessment or reassessment made under the Act. Therefore, such amendments cannot be made after the normal reassessment period.

Moreover, in the case of Canadian Marconi, 91 DTC 5626, the Federal Court of Appeal concluded that the Minister had no power to make changes to a taxpayer's income tax returns for a taxation year outside the normal reassessment period, even if requested by the taxpayer. In addition, the fairness provisions of subsection 152(4.2) of the Act regarding a reassessment of tax after the normal reassessment period with the taxpayer's consent specifically do not apply to corporations. Similarly, in the case of Jack Miller, 93 DTC 5035 (FCA), the court found that the Minister had no power to amend a taxpayer's return or any components thereof, such as a forward averaging election, beyond the normal reassessment period. Mahoney, J.A. states:

"I am of the opinion that the Minister had no power to amend a forward averaging election for much the same reason that this Court held that absent fraud, misrepresentation or a timely waiver, the Minister is powerless to reassess after expiration of the limitation period provided by subsection 152(4) of the Act even if the taxpayer wanted the reassessment. A finding that the Minister had that power would not be limited to the particular taxpayer and could oblige other taxpayers to object to amendment of their elections and perhaps to litigate."

As the deduction of additional expenses or losses is not the result of a permissive deduction, it is therefore not eligible for the administrative policy described in Information Circular IC 84-1.

The taxpayer's representatives also refer to technical interpretations we have issued in the past (specifically documents #9412337 and #9518017), where we discussed the authority to make adjustments to a statute barred taxation year. Generally, it was said that adjustments could be made in the computation of a loss for a taxation year, even though the year may be outside the normal reassessment period. These comments have been taken by the taxpayer to mean that all components of any tax return are open for review, even if tax was originally assessed for a year that has become statute barred, provided the requested review does not result in additional taxes payable. However, it must be mentioned that the comments made specifically in those two letters concern revisions brought to the amount of a loss incurred by a taxpayer in a taxation year that was subsequently carried forward (back) to following (previous) taxation years.

In the year where a deduction is claimed under section 111 of the Act in respect of a loss incurred in another taxation year, the amount available for a deduction must be determined according to the provisions of the Act, whatever amount was computed by the taxpayer. This is consistent with the principle under which the Minister must assess in accordance with the law each individual taxation year. In the case of New St.James Ltd v. MNR, 66 DTC 5241 (Ex.Ct.), it was held that the Minister was not bound by the determination of the amount of a loss made for a statute barred year when assessing for a loss carry forward deduction, as a component of taxable income of a subsequent year. The Court made the following comments:

"Hence the question on appeal is whether or not in assessing for 1956 to 1959 inclusive, the Minister was precluded by Section 46(4) of the Income Tax Act from inquiring into the actual loss in respect of which the allowance should be made and in finding that not a rental expense but a capital expenditure.

(1/4(

For these subsequent years section 46(4), having no application, does not preclude an assessment being made in accordance with the provisions of this Statute, including sections 139(1)(x) and 32(5). That requires the loss for the years 1956 to 1959 inclusive being taken as provided by the Statute, not as implied in the assessment for the year 1955."

Hence, the Minister may properly recalculate a non-capital loss reported by a taxpayer in a taxation year, even though he may be barred by statute from reassessing that year, in order to properly determine a tax liability in relation to a subsequent taxation year which is not statute barred. Adjustments to a loss carried over are not adjustments to the statute barred taxation year. In Immobiliare Canada Ltd. v. M.N.R., 81 DTC 58 (TRB), these principles were confirmed and the following was added:

"It cannot be said that the Minister did indirectly what he could not do directly. The Minister did directly what he could do, namely recalculate the losses with the direct result of increasing the taxable income in 1970. This was done in conformity with the principle enunciated in the New St. James Limited decision..."

A similar discussion was also made in the case of Radio Engineering Products Limited v. MNR, 73 DTC 5071 (FCTD), where the Minister made adjustments to the amount of a 1961 loss, carried over against the 1962 taxable income, by reducing the amount of the deduction claimed in that year under section 111 of the Act. In that respect, the court made the following comments:

"The T7W-C, Exhibit A-4, indicates a revised loss for the year 1961, disallowing from the 1961 loss previously allowed the sum of $450,000 to give a revised loss of $78,831.92. I think that the Minister had authority to make that revision in computing the appellant's taxable income for 1962, by virtue of section 27(1)(e) of the Act, which reads as follows:

27. (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from the income for the year such of the following amounts as are applicable:

. . .

(e) business losses sustained in the 5 taxation years immediately preceding and the taxation year immediately following the taxation year. . . .

This is so notwithstanding the 4 years limitation in section 46(4), as the revision was made, insofar as the taxation year 1962 is concerned, within that 4 years."

The comments made in the letters referred to by the taxpayer's representatives are therefore not applicable to the situation in this case as it does not concern the determination of the amount of the loss actually incurred by the taxpayer in a taxation year. These letters were not intended to open up years that are statute barred. Also, we note that the comments made in letter #9506016 provide a more in depth analysis and supports our position here. In that situation, we confirmed based on applicable jurisprudence that a revision of deductions claimed in statute barred years is not possible.

The taxpayer's representatives argue that no reassessment is required in the situation submitted. Although an assessment is concerned with the ascertainment and determination of tax payable, it is the result of a process requiring the computation of the amount of income and allowable deductions before the total amount of tax liability can be ascertained and fixed (Pure Spring Co. Ltd v. MNR, 2 DTC 844 (Ex.Ct.)). They refer to the decision in The Queen v. The Consumers' Gas Company Ltd, 87 DTC 5008 (FCA) where it was observed that the word "assessment" can bear two constructions as being either the process by which tax is assessed, or the product of that assessment. Without any further analysis into the issue, the court made the comment that based particularly on subsection 165(1) of the Act, it seemed the word was there employed in the second sense only. While these comments are only obiter, they do no more than confirm the well established principle that a taxpayer can neither object to nor appeal from a nil assessment (Okalta Oils Limited, 55 DTC 1176 (SCC); The Queen v. Gary Bowl Ltd, 74 DTC 6401 (FCA); The Queen v. Bowater Mersey Paper Company Ltd., 87 DTC 5382 (FCA)). Therefore, we cannot agree that all components of income of a taxation year are open for review since a change in any such component would necessarily involve a new ascertainment of tax liability; i.e., a reassessment.

Alternatively, the representatives submit, based on the definition of "taxable income" in subsection 248(1) of the Act, that the amount claimed as a deduction under paragraph 111(1)(a) of the Act in respect of non-capital losses is "null and void" to the extent that it exceeds the amount required to reduce a taxpayer's taxable income to nil. Accordingly, the argument is that any excess deduction is "automatically available" for carryover to future years, being a portion not deducted in computing the taxable income of a previous taxation year for the purposes of subsection 111(3) of the Act and that a reassessment of the taxpayer's XXXXXXXXXX taxation year is not required to adjust the balance of non-capital losses carried forward.

The definition of "taxable income" in subsection 248(1) of the Act refers to subsection 2(2) of the Act. It adds however that in no case may a taxpayer's taxable income be less than nil. Subsection 2(2) of the Act provides that the taxable income of a taxpayer is the taxpayer's income (as defined in section 3 of the Act) plus the additions and minus the deductions permitted in Division C of the Act, i.e. those permitted in sections 110 to 114.2 of the Act. Although the definition in subsection 248(1) of the Act refers to taxable income as being an amount that is not less than nil, this does not imply that the deductions claimed under Division C of the Act are limited in any way to an amount required to bring taxable income to nil nor that any deduction is "null and void" to the extent it exceeds such amount (see letter #9629217).

The definition of "non-capital loss" in subsection 111(8) of the Act specifically provides that an amount deducted under provisions of Division C of the Act is valid even though it may be in excess of the amount required to bring the taxpayer's taxable income to nil, thereby allowing to increase the taxpayer's non-capital loss for the year in prescribed situations (such as an amount deducted under section 110.6 of the Act, etc.).

Since an amount claimed (as shown on the prescribed form requesting a loss carry back) as a deduction under paragraph 111(1)(a) of the Act may be in excess of the amount required to reduce taxable income to nil, no portion can therefore be considered "null and void". Indeed, the deduction is not limited to a lesser amount required to bring taxable income to nil, if any.

We would also note that, in our view, in the above situation the deduction claimed under paragraph 111(1)(a) of the Act for XXXXXXXXXX does not exceed the amount required to reduce the XXXXXXXXXX taxable income to nil, since the XXXXXXXXXX "taxable income", as defined in subsection 2(2) of the Act, is dependent on the amount of the XXXXXXXXXX income which, as explained above, can no longer be adjusted.

As to paragraph 111(3)(a) of the Act, it clearly provides that a deduction in a year in respect of non-capital losses can be claimed only to the extent the amount of such loss exceeds, inter alia, the total of the amounts deducted (i.e., claimed by the taxpayer, as discussed above) under section 111 of the Act, in respect of the loss, in computing taxable income for preceding taxation years. The paragraph does not provide that the amount available for a deduction in a subsequent taxation year is determined by reference only to the portion of the amount that could have been claimed as a deduction to bring taxable income of previous years to nil. There is therefore no provision in the Act allowing the for the "automatic" adjustment of the balance of a non-capital loss carried forward, contrary to what is suggested by the taxpayer.

Considering the above, we agree that the taxpayer's request for additional deductions in the computation of its income for the XXXXXXXXXX taxation year cannot be allowed.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898.

We trust that these comments will be of assistance to you.

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch