29 September 2011 Internal T.I. 2011-0420701I7 - Interest on a Taxpayer Requested Adjustment

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: What is the date to be used when calculating interest where Years 1 to 7 were reassessed, resulting in losses being converted to income, and the taxpayer states during the audit that it would be applying losses for the current year to reduce taxable income in one of those reassessed years?

Position: Subparagraph 161(7)(b)(ii) applies: interest is calculated until 30 days after the date on which the return is filed for the current year.

Reasons: Subparagraph 161(7)(b)(ii) applies when a taxpayer files a return for a subsequent year and requests sufficient losses be carried back to a preceding year to offset that year's income. This would be the case even if the income is later increased, when, as a result of an audit, the preceding year's income is higher than originally reported.

		September 29, 2011

	Toronto East Tax Services Office			HEADQUARTERS
									Income Tax Rulings
	Attention: Ms Cynthia Cox				  Directorate

      Assistant Director, Audit Division			Lindsay Frank
	                 						(613) 957-2097

									2011-042070

Arrears Interest on a Taxpayer Requested Adjustment

This is in reply to a request from Iftekhar Shariff for a technical interpretation on the appropriate effective interest date on a loss carry-back.

Reassessments in respect of Years 1 to 7 resulted in the disallowance of non-capital losses thereby giving rise to taxable income. The taxpayer reacted to the reassessments by informing the Agency that on filing the return for Year 8, it would be applying that year's losses to reduce taxable income in Year 6. At issue is the appropriate date to be used when calculating interest.

Subsection 161(7) of the Income Tax Act deals with the effect of loss carry-backs. Where the amount of tax payable for a taxation year is reduced because of the carry-back of losses, subsection 161(7) provides that 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. The intent of this provision, according to the Senate Debates, as referenced in Connaught Laboratories v. Canada, [1995] 1 C.T.C. 216 (F.C.T.D.), is to cover situations where a taxpayer ignores payment of taxes, in anticipation of incurring subsequent losses, which could be carried back to erase the liability.

For the purposes of this technical interpretation, subparagraphs 161(7)(b)(ii) and (iv) are the relevant provisions for determining the charging of interest, namely,

(ii) the date on which the taxpayer filed its return for that subsequent taxation year; and
(iv) the day on which the request was made.

Reference was made to technical interpretation 2008-0275501I7. The position taken therein was that both of the foregoing provisions applied. Subparagraph 161(7)(b)(ii) was triggered, as the loss reported in a subsequent year was carried back on filing; subparagraph 161(7)(b)(iv) was effected when the taxpayer requested that additional losses be carried back when an audit was completed. Since then, two additional interpretations, 2009-0313781I7 and 2009-0337341I7, have been issued.

Technical interpretation 2009-0313781I7 recognises the intent of the legislation, and can be distinguished from 2008-0275501I7 on its unique set of facts. Subparagraph 161(7)(b)(ii) applied, given that the taxpayer, on filing the return, requested that the current-year losses be carried back to a preceding taxation year. The provision also applied when an audit of the preceding year resulted in an increase of taxable income, and the taxpayer decided to reduce the increase by the application of additional losses from the subsequent year. In short, subparagraph 161(7)(b)(ii) would apply when a taxpayer files a return of a subsequent year, and carries back sufficient losses to offset the income of a preceding year. This would be the case even if the income were to be increased later, as a result of an audit, and the taxpayer learned that the income for the preceding year was higher than originally reported.

In technical interpretation 2009-0337341I7, subparagraph 161(7)(b)(iv) applied, when, as a result of an audit, the taxpayer's income for Year 1 was increased and the losses for Year 2 were reduced. There were no additional losses available from Year 2 to carry back to Year 1, as was the case in 2009-0313781I7. As a result, when the audit was completed, the taxpayer requested losses from Year 4 be carried back to offset the additional increase in income in Year 1.

In the instant case, subparagraph 161(7)(b)(ii) would apply, as the taxpayer filed a subsequent-year return and requested sufficient losses be carried back to offset the income of a preceding year. This provision would apply even if the income were to be increased at a later date as a result of an audit, and the taxpayer learnt that the income for the preceding year was higher than originally reported.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset of this memorandum.

Phil Jolie
Director
International and Trusts Division
Income Tax Rulings Directorate

c.c. Ms Anita Lee
A/Team Leader
Audit Division

Iftekhar Shariff
Aggressive Tax Planning Section
Audit Division