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: Where in year 3 by virtue of ss.152(6), the taxpayer requests a reduction of tax for year 1 by means of a loss carryback from year 3 to year 1, but then subsequently in year 5, revises the request in order to increase the loss carryback from year 3 to year 1, would the interest charged pursuant to subsections 161(1) and (7) be charged on the combined reduction up to the date of the later request, or would interest be charged on each reduction separately up to the date of each respective request?
Position: Interest would be calculated on the original reduction from the balance due date up to the date of the 1st request and interest would be calculated on the subsequent reduction, up to the date of the later request.
Reasons: The general charging provision for interest under subsection 161(1) provides that where the total taxes payable exceeds the total of all amounts paid at or before the balance due day for a taxation year, the taxpayer shall pay interest on the excess, computed for the period during which that excess is outstanding. However, it should be noted that the CRA's policy is to disallow a request for reassessment to reduce taxes payable where the request is based solely on an increased claim of a particular (as opposed to substituting one for another) permissive deduction when the taxpayer had originally claimed less than the maximum allowable (see paragraph 4 of IC75-7R3).
XXXXXXXXXX 2006-018949
Tim Fitzgerald, CGA
December 19, 2006
Dear XXXXXXXXXX:
This is in reply to your correspondence of March 23, 2005 wherein you requested our comments regarding interest computations under subsections 161(1), (2) and (7) of the Income Tax Act ("the Act") and also asked us for our views regarding a nil assessment. We apologize for the delay in responding to you.
Interest Computations
We understand the hypothetical fact situations presented in your letter with respect to interest computations to be as follows:
Scenario A
1. In year 1 the taxpayer files an income tax return and is assessed for $1,000 of taxable income and $400 tax, which remains unpaid.
2. In year 3, the taxpayer incurs a non-capital loss of $1,000, and requests under subsection 152(6) of the Act, that $500 of that loss be carried back to year 1 by virtue of section 111, to reduce taxes payable by $200.
3. The taxpayer pays interest on the $200 tax eliminated for year 1 for the period from the balance-due day of year 1 to the date that is 30 days after the day in which the taxpayer filed the amended return for year 1, in accordance with subparagraph 161(7)(b)(iii) of the Act.
4. In year 5, the taxpayer amends the original carry back request from year 3 to increase the amount of non-capital loss carried back from $500 to $1,000, thereby reducing taxable income for year 1 to Nil.
Scenario B
The facts for Scenario B are identical to Scenario A with the exception of items 2 and 4, which are replaced as follows:
2. In year 3, the taxpayer incurs a non-capital loss of $500 and requests, in accordance with the provisions of subsection 152(6) of the Act, that $500 of that loss be carried back to year 1.
4. In year 5 the income tax return for year 3 is reassessed by the Canada Revenue Agency (CRA) to increase the non-capital loss to $1,000. The taxpayer amends its original carry back request to increase the amount carried back to year 1 to $1,000, thereby reducing its taxable income in year 1 to Nil.
In respect of Scenario A, you seem to be concerned that the subsequent request for loss carryback made in year 5 may reset the interest calculation date under paragraph 161(7)(b) for the total tax reduction resulting from all amounts carried back (i.e., $500 + $500) from year 3 to year 1 so that interest is payable on the entire $400 of reduction of tax payable for the period from the balance-due day of year 1 to the day that is 30 days after the day in which the latest carry back request was made in year 5, pursuant to subparagraph 161(7)(b)(iv). Accordingly, you would like confirmation that the later loss carry-back request made in year 5 will be treated separately such that interest is charged on the first $200 reduction of tax payable for the period from the balance-due day of year 1 to the day that is 30 days after the day in which the original request was made (subparagraph 161(7)(b)(iii)) and interest is charged on the remaining $200 reduction in tax payable for the period from balance-due day of year 1 to the day that is 30 days after the day in which the later loss carry-back request was made in year 5 (subparagraph 161(7)(b)(iv)).
In respect of Scenario B, you ask whether the interest payable is computed in the same manner as in Scenario A, notwithstanding that the second request made in year 5 for loss carry-back is as a consequence of a CRA recalculation of the non-capital loss for year 3.
Nil Assessment
We understand the facts to be as follows:
A corporate taxpayer carries on business in the province that is party to a collection agreement with the Federal Government (i.e. an agreeing province). The taxpayer receives a notice of assessment for the taxation year indicating nil federal income tax but $100 of provincial tax owing.
Your question concerns the proper procedure for filing a notice of objection to the provincial tax assessment.
As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we offer the following general comments, which may be of assistance.
Interest Computations
Scenario A
Generally, subsection 152(6) provides that where a taxpayer filed for a particular taxation year, an income tax return and an amount is subsequently claimed by the taxpayer for the year as a deduction under, among other tax provisions, section 111 of the Act in respect of a loss for a subsequent taxation year, the Minister shall reassess the taxpayer's tax in order to take into account the deduction claimed. Subsection 161(1) of the Act generally provides that where at any time after a taxpayer's balance-due day (as defined in subsection 248(1)) for a taxation year, the total of the taxpayer's taxes payable under Parts I, I.3, VI and VI.1 for the year exceeds the total of all amounts paid at or before that time for the year, the taxpayer shall pay interest on the excess, computed for the period during which that excess is outstanding. Generally, subsection 161(7) of the Act provides that, where the amount of the tax payable for a taxation year is reduced because of certain deductions or exclusions arising from the carryback of losses or tax credits or from events in subsequent years, interest on any unpaid tax for the taxation year is calculated without regard to the reduction until 30 days after the latest of several dates.
In the case of scenario A, for the purposes of subsection 161(1), the "excess" (i.e. the net outstanding taxes payable since the time of the balance-due day) for year 1 is $400 until it is reduced by $200 by virtue of the first request for a $500 loss carryback from year 3 to year 1(subparagraph 161(7)(b)(iii)). The remaining amount of the excess is $200 and this amount is outstanding until it is further reduced to nil as a result of the subsequent request for loss carry-back made in year 5 to apply an additional loss of $500 from year 3 to year 1 (subparagraph 161(7)(b)(iv)). Therefore, the answer to your first question is that interest would be charged on the first $200 reduction (in taxes payable) for the period from the balance-due day of year 1 to the day that is 30 days after the date of the first loss carry-back request and interest would be charged on the second $200 reduction in taxes payable for the period from the balance-due day of year 1 to the day that is 30 days after the day in which the second loss carry-back request was made in year 5.
We would draw your attention to the CRA's administrative practice in dealing with taxpayer requested adjustments for claim of permissive deductions. Generally, such requests will not be granted if the requested decrease in taxable income assessed is based solely on an increased claim of a permissive deduction such as a loss carryback where the taxpayer originally claimed less than the maximum allowable. We refer you to paragraph 4 of Information Circular IC75-7R3 Reassessment of a Return of Income.
Scenario B
In our view, the interest charges in scenario B would be computed in a similar manner as indicated for scenario A.
Nil Assessment
In respect to your question regarding the procedure for filing a notice of objection to the assessment of provincial tax in situations where there is no federal income tax liability, the notice of objection can be filed with the Chief of Appeals at the local tax services office (TSO). This particular type of notice of objection may be, and usually is, then forwarded by the TSO to Head Office - Appeals Branch for action and resolution. Any other procedure in this regard, which would be affected by the terms of the tax collection agreement entered between the applicable province and the Federal Government, would be best discussed with Appeals.
We trust our comments are of assistance.
Yours truly,
Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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