14 June 2013 Internal T.I. 2013-0486251I7 - Consequential Assessment - 152(4.3)

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 beyond the normal reassessment period can be issued under the provisions of either subsection 152(4.3) or subparagraph 152(4)(a)(ii) to include the taxpayer's request for additional deductions under either paragraph 20(1)(m) or section 111.

Position: No.

Reasons: Subsection 152(4.3) allows the Minister to reassess beyond the normal reassessment period for a taxation year where the balance is changed from an earlier year. However the reassessment can only be made to the extent that the reassessment can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year. It is our view that neither the deduction under 20(1)(m) nor the deduction under section 111 reasonably relate to the change in the balance in these circumstances. Furthermore, where there is a waiver provided for under subparagraph 152(4)(a)(ii), subsection 152(4.01) limits the circumstances in which the Minister can reassess beyond the normal reassessment period. In that regard, where there is a waiver the Minister may reassess beyond the normal reassessment period only to the extent that it can reasonably be regarded as relating to the issues identified in the waiver. In these circumstances the deductions requested by the taxpayer were not identified in the waiver, therefore the Minister is not permitted to include these deductions in the reassessment.

June 14, 2013

Toronto Tax Service Office HEADQUARTERS
Large Audit Division Income Tax Rulings
Directorate
Attention: Murray Davie Gillian Godson

2013-048625

Application of Subsection 152(4.3)

We are writing in reply to your email of April 22, 2013, requesting our views on whether a reassessment beyond the normal reassessment period could be issued pursuant to subparagraph 152(4)(a)(ii) or subsection 152(4.3) of the Income Tax Act (the "Act") to allow for certain taxpayer requested adjustments. Our reply confirms our discussions with you up to and including May 13.

In your inquiry, you indicated that there is a proposed reassessment to the taxpayer's XXXXXXXXXX, 2005, taxation year (the "First 2005 Year"), which is being made beyond the normal reassessment period. The proposed reassessment will include the following:

• The CRA reassessed the taxpayer's XXXXXXXXXX, 2004, taxation year (the "Prior Year") to allow a deduction of approximately $XXXXXXXXXX pursuant to paragraph 20(1)(m) of the Act. The proposed reassessment will include this amount in income for the First 2005 Year pursuant to paragraph 12(1)(e) of the Act. This portion of the assessment will be made using subsection 152(4.3) as a consequential reassessment which was confirmed to you in our technical interpretation letter 2012-0463681I7.
• The CRA identified a number of audit adjustments totalling approximately $XXXXXXXXXX. These adjustments were the subject of a specific waiver issued pursuant to subparagraph 152(4)(a)(ii). This waiver was revoked by the taxpayer, but, at the time of our discussions and for the purpose of this letter, had not yet expired.

On XXXXXXXXXX, 2013, the taxpayer requested a number of additional deductions to the First 2005 Year to offset the income inclusions referred to above. The requested adjustments included a $XXXXXXXXXX deduction pursuant to paragraph 20(1)(m) and the deduction of losses from other taxation years that had already been deducted by the taxpayer in computing its taxable income for its 2006 taxation year. The taxpayer also requested $XXXXXXXXXX deductions under paragraph 20(1)(m) in the taxpayer's XXXXXXXXXX 2005 and XXXXXXXXXX 2005 taxation years (the "Second 2005 Year" and "Third 2005 Year", respectively).

You have asked us for our views on whether the Act would permit the CRA to issue a reassessment beyond the normal reassessment period to allow the deductions requested by the taxpayer.

The taxpayer's representative submitted a letter dated XXXXXXXXXX in support of its request. However, as the arguments contained in the submission are based on the CRA's administrative policies, we will not be commenting on the submission. As we agreed, we are restricting our comments to what is permitted under the Act, except as noted at the end of this memo.

Our comments

In general, subsection 152(4.3) permits the Minister to reassess a taxpayer beyond the normal reassessment period where the reassessment arises as a consequence of an assessment or a decision on an appeal either of which changed a taxpayer's balance in a particular year. The reassessment is allowed only to the extent that it can reasonably relate to the change in the balance in that year, and may be made only where the Act requires the inclusion, or allows the deduction, in computing a taxpayer's balance for the year of an amount relating to the deduction or inclusion that was adjusted for the other year.

As stated above, the taxpayer's balance in the return for the Prior Year was changed due to a reassessment to adjust the amount deducted with respect to a reserve under paragraph 20(1)(m). The reassessment of the Prior Year to allow for this reserve resulted in a required income inclusion under paragraph 12(1)(e) in the First 2005 Year, which in our view reasonably relates to the change in the balance of the Prior Year. In that regard, we concluded in a previous correspondence to you that a reassessment may be made beyond the normal reassessment period as provided by subsection 152(4.3).

At issue in this inquiry is whether subsection 152(4.3) or subparagraph 152(4)(a)(ii) of the Act would also allow the Minister to reassess the First 2005 Year to include a deduction under paragraph 20(1)(m) or section 111 of the Act. Subsection 152(4.3) requires that the reassessment must reasonably be related to the change in the balance of the particular year. Although the reassessment of the Prior Year did result in a required income inclusion in the taxpayer's First 2005 Year with respect to subsection 12(1)(e), in these circumstances it is our view that the reassessment of the Prior Year does not result in any required change to the amount provided under 20(1)(m) in the First 2005 Year. In particular, the deduction of a reserve under paragraph 20(1)(m) in the Prior Year would not have any impact on the amount of a deduction available under 20(1)(m) in the First 2005 Year. Therefore, it would be difficult to conclude in these circumstances that the deduction provided by 20(1)(m) requested by the taxpayer to the First 2005 Year would reasonably be related to the change in the taxpayer's balance in the Prior Year.

Similarly, with regard to the requested deduction of the non-capital losses pursuant to section 111, we are of the view that there is no causal connection between non-capital loss adjustment and the change in the balance of the reserve in the Prior Year. As a result we do not believe that this adjustment reasonably relates to the change in the balance with respect to the reserve in the Prior Year.

Based on the foregoing, it is our view that a consequential assessment under 152(4.3) could not be made to allow deductions under paragraph 20(1)(m) or section 111.

Furthermore, with respect to the issue of whether the requested deductions would be permitted under the waiver provided under subparagraph 152(4)(a)(ii), we have the following comments. Although, in general, a waiver allows the Minister to reassess beyond the normal reassessment period, subsection 152(4.01) of the Act limits what can be included in the reassessment. In that regard, in circumstances where the taxpayer has filed a waiver for a particular taxation year, the Minister may reassess the taxation year "to the extent that, but only to the extent that, it can reasonably be regarded as relating to" the waiver. In the circumstances of this inquiry, neither a reserve under paragraph 20(1)(m) nor a deduction under section 111 is provided for in the waiver. Accordingly, subsection 152(4.01) restricts the Minister from issuing a reassessment which includes these adjustments.

In conclusion, we are of the view that neither subsection 152(4.3) nor subparagraph 152(4)(a)(ii) of the Act would permit the Minister to issue a reassessment beyond the normal reassessment period in respect of the additional deductions requested by the taxpayer in these circumstances. As mentioned above, we have restricted our comments to what is permitted under the Act and have not commented on the applicability of any CRA administrative policies except for the comment below.

We note that the requested deduction of the reserves under paragraph 20(1)(m) would result in no change to the tax payable in the Second 2005 Year and Third 2005 Year and an increase in taxable income of $XXXXXXXXXX in the 2006 Year, which is otherwise statute-barred. Because the net effect on the Third 2005 Year would be nil, there would not be a reassessment of that year. Consequently, we share your concern that, if the request were allowed, there would not be "an assessment or a decision on an appeal" that would allow the CRA to include the corresponding $XXXXXXXXXX income inclusion under paragraph 12(1)(e) in the 2006 Year.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CA, CPA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch