9 December 2010 Internal T.I. 2010-0379801I7 - Additions to taxable income to utilize FTCs

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 a reassessment to allow an addition to taxable income under s.110.5 to permit the company to deduct unutilized foreign tax credits is statute barred

Position: The s.110.5 adjustment needs to be made in the year the return is filed. The CRA is not required to make the adjustment.

Reasons: The wording of subsections 152(4) and 152(6).

		December 9, 2010

	Calgary Tax Services Office				Headquarters
									Income Tax Rulings 											Directorate

Attention: Scott Shelton, Assistant Director
Audit Division

2010-037980
Richard Aronoff
613-941-7239

Reassessment to Permit a s.110.5 Addition to Income

This is in response to Lorraine Chow's memorandum of September 7, 2010 concerning revisions that a company is requesting be made to its 2005 return. The facts that you provided are as follows:

The company, a Canadian Controlled Private Corporation, reported taxable income of $XXXXXXXXXX for its 2005 taxation year. A 2008 capital loss was carried back to reduce the 2005 taxation year's income to XXXXXXXXXX . The 2005 taxation year was initially assessed on XXXXXXXXXX , 2006 and was subsequently reassessed on XXXXXXXXXX , 2009 to allow the 2008 loss carryback.

After the normal reassessment period for the 2005 taxation year had expired, the company determined that it had unutilized foreign tax credits (FTCs). On XXXXXXXXXX , 2009, the company submitted a request for an addition to its 2005 taxable income pursuant to section 110.5, in the amount of $XXXXXXXXXX , which would enable it to utilize the available FTCs. The proposed revision to the company's 2005 taxable income would result in no additional tax liability once the FTCs were utilized. Under the definition of "non-capital loss" in subsection 111(8), the $XXXXXXXXXX amount, proposed to be added to the company's 2005 taxable income pursuant to section 110.5, would be a non-capital loss, which the company requests be carried forward to its 2006 return.

You have asked us to provide our views on the following questions:

1. Can the section 110.5 addition to the company's 2005 taxable income be made given that the 2009 request was received after the normal reassessment period?

The addition to income that is requested pursuant to section 110.5 needs to be made in the year the return is filed. In the present situation, the return has already been filed and the company is requesting a change. The Canada Revenue Agency is not required to make the adjustment once the return has already been filed.

2. Does subparagraph 152(4)(b)(iv) extend the normal reassessment period to six years on a section 110.5 addition to taxable income or does the subparagraph apply only to transactions relating to additional payments or reimbursements of income tax of another country? The question is premised on the understanding that the application of section 110.5 results in an addition of arbitrary income, not foreign income, and the foreign tax credit is not an additional payment (the amount was available on the initial assessment of the 2005 return).

Subsection 152(4) provides that the Minister may make an assessment, reassessment, or additional assessment of tax for a taxation year, including interest and penalties, provided it is made within the taxpayer's normal reassessment period as defined in subsection 152(3.1), unless this period is extended pursuant to paragraphs 152(4)(a) or (b). Paragraph 152(4)(b) and subsection 152(6) provide criteria whereby the normal reassessment period in subsection 152(3.1) can be extended by an additional three years. These criteria are enumerated within these provisions.

A revision to a return to utilize available subsection 126(1) or (2) FTCs that is initiated by a request for a section 110.5 addition to taxable income is not specifically provided for in either paragraph 152(4)(b) or subsection 152(6). In particular, subparagraph 152(4)(b)(iv) does not apply to extend the normal reassessment period on a section 110.5 addition to taxable income. A section 110.5 addition of income does not result in a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country.

3. Does the request for a section 110.5 addition for foreign tax deductions fall under the same category as permissive deductions? The question is premised on the understanding that the administrative policy on revisions to permissive deductions reflected in IC-84-1 Revision of CCA Claims & Other Permissive Deductions, permits requested adjustments in non-taxable years to be processed, even if the return is statute barred, provided there are no changes to the tax payable for the year.

This question is premised on the application of the administrative policy pertaining to the revision of permissive deductions. A permissive amount, as contemplated by Information Circular 84-1, is one for which a taxpayer can claim any amount in a range, such as capital cost allowance or loss carryovers. An addition to income under section 110.5 is not permissive in that sense, because the taxpayer can choose only to use that section or not to use it, but cannot vary the amount of inclusion, which amount is that which absorbs the FTCs, no more or less. Furthermore, this circular deals with deductions in computing income, while section 110.5 involves an income increase with an offsetting change to a federal tax credit, so it is not neutral from the standpoint of provincial tax.

4. Provided that the 2005 amendments are allowable, if no additional tax is assessed to the 2005 return, would a reassessment still be required for the section 110.5 addition to income or would it be acceptable to issue a revised Schedule of non-capital losses without raising a reassessment?

Where a taxpayer requests a change in a permissible deduction, which results in no changes to the tax payable for the year, the change could be accomplished through the exchange of correspondence with the taxpayer. This could, for example, arise where a change in the amount
of a permissible deduction is offset by an equal and opposite change in the amount of another permissible deduction.

Hopefully, these comments will provide you with the clarification that you were seeking. Should you have any questions or require additional information, please do not hesitate to telephone Richard Aronoff at the number provided at the outset.

Yours truly,

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate

c.c. Lorraine Chow
Tax Auditor
Calgary TSO