8 March 2013 External T.I. 2012-0447651E5 - Deficiency Tax Account

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 a corporation has used Ontario corporation minimum tax credits to satisfy Ontario taxes owing in one year and subsequently requests that the Minister carry back a loss from a subsequent year to the prior year, will interest be charged on the balance of tax outstanding from the prior year?

Position: Yes

Reasons: The provisions of 79(7)(a) and (b) of the Corporations Tax Act (Ontario) clearly state that interest will be charged.

XXXXXXXXXX
2012-044765
Katharine Skulski

March 8, 2013

Dear XXXXXXXXXX:

Re: Arrears Interest Computation and Paragraph 79(7)(b) of the Corporations Tax Act (Ontario)

We are replying to your letter of May 8, 2012, inquiring about how to compute arrears interest under the Corporations Tax Act (Ontario) (the "OCTA"). We apologize for the delay in responding.

You have explained that a corporation resident in Ontario had taxable income for a taxation year (the "Prior Year") resulting in Ontario tax payable and that the corporation used Ontario corporation minimum tax ("CMT") credits in order to reduce Ontario tax payable to nil. In a subsequent year (the "Subsequent Year"), the corporation incurred a non-capital loss and requested that the loss be carried back to the Prior Year to reduce taxable income to nil. You note that as a result of the non-capital loss being carried back, the Corporation's CMT credits are restored at the date on which the taxes were due (the "Balance Due Date").

You submit that, as a result, no amount of Ontario tax was owing on any date from the Balance Due Date until the date the non-capital loss was carried back, which means that no arrears interest should accrue on the account.

It is your view that the wording of subsection 79(2) of the OCTA provides that a deficiency in a tax account is measured on a day-to-day basis and arrears interest will only be charged for each day that there is a deficiency in the tax account. Furthermore, you have suggested that on each day from the Balance Due Date until the date the non-capital loss is carried back, there is no deficiency in the tax account. On the day the corporation requests that the non-capital loss be carried back, there remains no balance of Ontario tax owing because the corporation has merely substituted a loss carry back for a CMT credit.

Regardless of whether arrears interest should accrue as a result of carrying back a loss in place of claiming a CMT credit, you refer to paragraph 16 of the Ontario Ministry of Finance Information Bulletin 4010R1, Interest on Overpayments, Underpayments and Instalments of Tax ("OMoF Bulletin"). It states that its policy was not to charge interest where losses are carried back in place of deductions previously claimed.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. As noted in paragraph 7 of IC 70-6R5, the Canada Revenue Agency ("CRA") will not provide an advance ruling on a completed transaction. Where a situation involves a specific taxpayer and a completed transaction, the request should be addressed to the relevant tax services office. Since the situation you describe appears to relate to a completed transaction involving a specific taxpayer, we are only able to provide general comments, which may or may not be applicable to your particular situation.

Paragraph 79(7)(a) of the OCTA provides that the amount of tax payable to be used for the purpose of calculating arrears interest payable is the amount determined before the application of any loss carry-back from a subsequent year. Paragraph 79(7)(b) provides that for the purpose of determining interest where a loss is carried back, the reduction to the tax payable is deemed to be an amount paid on account of the corporation's liability under the OCTA that occurs on the latest of three specific dates, namely:

(1) the first day of the taxation year after the loss year;

(2) the day on which the corporation's return for the loss year is delivered to the Minister; or

(3) the day on which the Minister receives a request in writing from the corporation to reassess the particular taxation year to take into account the deduction referred to in paragraph 79(7)(a).

Consequently, where a corporation replaces a CMT credit in a Prior Year with a loss carry back from a Subsequent Year, the result is that the taxpayer will have a deficiency in its tax account from its Balance Due Date until the date the loss from the Subsequent Year is applied as determined pursuant to paragraph 79(7)(b).

We are unaware of the origin of the Ontario Ministry of Finance's administrative positions that were in place when it administered the OCTA, and therefore, we are not in a position to provide comments in this regard.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch