11 December 2012 Internal T.I. 2012-0459341I7 - Adjustments Beyond Normal Reassessment Period

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 business expenses could be substituted for non-capital losses in a statute-barred year.

Position: Yes.

Reasons: As long as taxable income and thus tax payable does not change, there is no need to reassess; hence, neither subsection 152(3.1) or (4) would apply.

December 11, 2012

Toronto West Tax Services Office HEADQUARTERS
Income Tax Rulings
Directorate
Attention: Tara Le Lindsay Frank
Audit Division (613) 957-2097

2012-045934

Adjustments Beyond the Normal Reassessment Period

We are replying to your request for a technical interpretation concerning a request by a taxpayer to claim business expenses that were not previously deducted in the 2003 to 2008 taxation years. The taxpayer had deducted non-capital losses from prior years to bring taxable income to nil. The adjustments will neither change taxable income nor tax payable, but will increase the non-capital losses available to reduce taxable income in the current taxation year (2011). You have asked us whether the Minister is precluded from processing the request given that the taxation years are statute-barred.

Ordinarily, the Minister is precluded from reassessing a taxpayer after the end of the normal reassessment period except where one of the conditions in subsection 152(4) of the Income Tax Act (the "Act") applies. In the instant case, as explained below, the request does not require a reassessment, and it follows that it is open to the Minster to process the request, on the assumption that a notice of loss determination, pursuant to subsection 152(1.1) of the Act, has not been issued.

The facts are somewhat analogous to those in Clibetre Exploration Limited v. The Queen, [1999] 2 C.T.C. 106 (T.C.C.); rev'd in [2003] 1 C.T.C.106, 2003 D.T.C. 5073 (F.C.A.). In that case, the Minister did not accede to the taxpayer's request to substitute as Canadian exploration expenses the expenses that gave rise to non-capital losses for the 1980 – 1995 taxation years, and the Tax Court concurred. Had the Minister accepted the request, the taxpayer would have realised a cumulative exploration expense balance at 1995, enabling it to reduce its taxable income to nil in 1996, and allowing it to maintain indefinitely an un-deducted pool of such expenses, for use as required to offset its income in accordance with the provisions in the Income Tax Act relating to Canadian exploratory expenses.

The Federal Court of Appeal held that nothing in the Act precluded the Minister from undertaking the requested recharacterisation. The Court added that if, in fact, the taxpayer had reported non-capital losses for every year from 1980 to 1995, there was no need for the Minister to reassess the taxpayer for those years to characterise, as Canadian exploration expenses, the amounts that gave rise to the non-capital losses, which were initially claimed for those years.

Whether the expenses for the year are claimed as deductions in computing a non-capital loss, or treated as Canadian exploration expenses, the Court reasoned, the taxable income, and thus the tax payable for each of those years, would be nil. In the instant case, a similar result would be effected. Consequently, it is open for the Minister to process the request to substitute business expenses for non-capital losses because no reassessment is required.

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.

Yours truly,

Terry Young CA
Manager
Administrative Law Section
International Division
Income Tax Rulings Directorate