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 interest and penalty are exigible on a request to revise the small business deduction allocation to zero, then carry back sufficient losses to reduce the resulting tax payable to zero.
Position: Interest, yes; penalty, no. But the associated companies could be eligible for a refund.
Reasons: Pursuant to subparagraph 161(7)(b)(iv), interest is payable for another 30 days on the tax that would have been payable, but for the loss carry-back. A penalty is not exigible as a return has not been filed late; rather, it is an adjustment requested of a return.
XXXXXXXXXX
2009-035172
Sam Kim
(905) 721-5199
March 29, 2011
Dear XXXXXXXXXX :
Re: Interest/Penalty on Taxpayer-Requested Adjustment
This is in reply to your correspondence regarding the exigibility of interest and penalty charges when a non-capital loss is carried back to a prior taxation year.
Your client is a member of an associated group of companies. The corporation reported taxable income for a taxation year. A portion of the group's small business deduction ("SBD") pool was allocated to the corporation. The corporation subsequently incurred a non-capital loss for a subsequent taxation year and is contemplating carrying back a sufficient portion of the loss to eliminate the entire taxable income reported for the earlier year. The group proposes to reallocate the SBD for that earlier year among the other companies in the group, thereby reducing their taxes. At issue is the question of interest and penalty charges that may arise as a result of the foregoing adjustments.
Paragraph 161(7)(b) of the Income Tax Act provides that a loss carry-back takes effect on the day that is 30 days after the latest of four possible events. Subparagraph 161(7)(b)(iv) is applicable in the instant case. In Connaught Laboratories Ltd. v. Canada, [1995] 1 C.T.C. 216, 94 D.T.C. 6697 (F.C.T.D.), it was held that where losses are carried back and result in no tax payable, interest under subparagraph 161(7)(b)(iv) is payable on the tax that would have been payable, but for the loss carry-back. Although reversed on other grounds, the decision in Yang v. The Queen, [2004] 3 C.T.C. 2408, 2004 D.T.C. 2579 (T.C.C.), is helpful insofar as it was held therein that a carry-back of losses does not affect any liability for interest.
The reallocation of the SBD would be effective as of the original date of allocation in the earlier year, both for the corporation whose tax payable would increase as a result, and for other companies in the group whose taxes would decrease. Consequently, interest would be charged to the corporation; whereas, interest would be paid to the other companies, for the period between that time and the effective date of the carry-back (for the corporation) and the date of payment of the refund (for the other corporations).
It should be noted that a revised allocation agreement would be accepted, provided that it did not change the amount allocated to any associated corporation for a taxation year for which a reassessment is statute-barred.
If the corporation's return for the earlier year was filed late, a penalty under subsection 162(1) would have been exigible, based on the amount owing as at the filing-due date. The penalty would be recalculated to account for the increased tax owing as a result of the reallocation of the SBD pool. Any late-filing penalties assessed against other group companies who received an increased SBD allocation would be reduced.
Should you have any questions or require additional information, please do not hesitate to contact Sam Kim at the number provided at the outset of this letter.
Yours truly,
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content