2 December 2003 External T.I. 2003-0048545 - Refund of Non-Deductible Outlay

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.

Principal Issues: Whether 12(1)(x)(iv) applies to a refund of a non-deductible outlay or expense?

Position: Yes

Reasons: The legislation does not differentiate between refunds in respect of amounts that were deductible and those that were not deductible. As well, the position is consistent with previous interpretations.

Tax Executives Institute
December 2, 2003 CCRA Liaison Meeting

Question 7 - Reimbursement of Arrears Interest

A recent CCRA release (No. 2002-0164407, January 16, 2003) discusses the refund of previously paid non-deductible interest on Crown charges and states that subparagraph 12(1)(x)(iv) does not distinguish between a deductible and non-deductible expense. The view expressed is that a refund of previously paid non-deductible interest would be included in income absent an election under subsection 12(2.2).

TEI believes the interpretation of subparagraph 12(1)(x)(iv) enunciated in the release would impose a significant punitive financial burden on taxpayers where a refund of non-deductible interest is made. CCRA's previous administrative position of not taxing refunds of previously paid, non-deducted amounts provided an equitable application of the Act. The interpretation in the release would result in the government collecting a windfall even where all the issues reassessed are reversed on appeal. We invite CCRA to enumerate all the items that are potentially caught by this recent interpretation.

CCRA Response

In 1998, applicable to amounts received after January, 1990, a "refund" was added to the types of payments that are required to be included in a taxpayer's income pursuant to subparagraph 12(1)(x)(iv). Subparagraph 12(1)(x)(iv), both before and since the amendment, has not differentiated between a payment that is in respect of a deductible outlay or expense and a payment that is in respect of a non-deductible outlay or expense. However, the election available under subsection 12(2.2) ITA provides an appropriate solution to avoid the financial burden to which you refer, particularly in cases where it concerns a payment in respect of a non-deductible outlay or expense (to similar effect, see the Department of Finance "Explanatory Notes Relating to Income Tax - Natural Resources", June, 2003, in respect of proposed paragraph 12(1)(x.2)). Accordingly, if the election is made in respect of issues reassessed that are reversed on appeal, no windfall should be realized by the government.

From a general tax policy perspective, you believe that previous non-deductible amounts should be excluded from being included in income under subparagraph 12(1)(x)(iv). Consequently, this policy issue should be raised with the Department of Finance.

We are unable to enumerate for you all items that would represent non-deductible outlays or expenses that would, if refunded, be included in income pursuant to subparagraph 12(1)(x)(iv).

File 2003-004854
Marc Edelson