20 December 2012 Internal T.I. 2012-0463681I7 - Consequential Reassessment

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 the Minister could raise a consequential assessment to include in the immediately preceding year a reserve deducted in a reassessment of the previous year. A notice of objection was filed in respect of the reassessment, although the amount claimed as the reserve is not disputed.

Position: Yes.

Reasons: As the objection to the reassessment is yet to be decided, the time frame for issuing the reassessment has not expired.

December 20, 2012

Toronto Centre Tax Services Office HEADQUARTERS
Audit Division Income Tax Rulings
Directorate
Attention: Murray Davie Lindsay Frank
Large File Case Manager (613) 957-2097

2012-046368

Consequential Reassessments

We are replying to your inquiry concerning the application of the consequential reassessment provision in subsection 152(4.3) of the Income Tax Act (the "Act").

You have a file where a corporation, following the filing of a waiver pursuant to subparagraph 152(4)(a)(ii) of the Act, was reassessed for Year 1. The reassessment took into account a number of adjustments, including the claiming of a reserve under paragraph 20(1)(m). The taxpayer filed a notice of objection to the reassessment, but the amount in respect of the reserve is not part of the amount in dispute. The objection has yet to be finalised.

Where a taxpayer has deducted an amount in a taxation year pursuant to paragraph 20(1)(m), an equal amount must be included in income for the next taxation year pursuant to paragraph 12(1)(e). Therefore, the subsequent taxation year ("Year 2"), which we understand is otherwise statute barred, should have been reassessed pursuant to subsection 152(4.3) to include the paragraph 12(1)(e) amount in income. This reassessment has yet to be issued.

You have asked us whether the Minister could now reassess the corporation, pursuant to subsection 152(4.3), even though it is now more than two years since Year 1 was reassessed. As explained below, the Minister may do so.

Subsection 152(4.3) permits the Minister to reassess a subsequent year that is otherwise statute-barred, if the reassessment is consequential to a reassessment or a decision on appeal that changed a taxpayer's balance in a prior year. This reassessment has to be reasonably considered to relate to the change in the particular balance of the taxpayer for a particular year. Moreover, it must be raised no later than one year after the end of the day on which all rights of objection and appeals expire or are determined in respect of the prior year.

In your case, although the outstanding objection does not relate to the paragraph 20(1)(m) deduction, the time restriction in subsection 152(4.3) relates to the taxation year as a whole, and not to the specific item in respect of that year which necessitated the consequential reassessment, that is, the paragraph 20(1)(m) deduction. Since the objection to the Year 1 reassessment is still outstanding, the taxpayer's appeal rights in respect of that year have not yet expired, and thus the one-year period referred to in subsection 152(4.3) has not yet begun. Therefore, the Minister may still issue the consequential reassessment of Year 2.

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.

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