21 March 2014 Internal T.I. 2013-0504491I7 - Change to loss application in a nil assessed year

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 changes may be made to a loss application after the end of the normal reassessment period where a nil assessment was issued.

Position: Taxpayers may request changes. Although the Minister is not obligated to accede to the request, the Minister may do so where it is appropriate in the circumstances.

Reasons: Where a nil assessment has been issued, changes that do not result in tax payable do not require the Minister to issue an assessment, reassessment or additional assessment. Therefore, the restrictions in subsection 152(4) of the Act do not apply. However, where it would be inappropriate to accept the request, the Minister can deny it.

March 21, 2014

Legislative Application Section HEADQUARTERS
Large Business Audit Division Income Tax Rulings
Directorate
Attention: Leslie Bafia Gillian Godson

2013-050449

Changes to a loss application in a year where no tax was payable

We are writing in reply to your letter of September 11, 2013, requesting our views on whether the Minister should accept a taxpayer's request to make offsetting adjustments to a taxation year for which the Minister issued a notification that no tax was payable (often referred to as a "nil assessment"), notwithstanding that the request was made after the end of the normal reassessment period. We also acknowledge several discussions concerning the file (Godson, Young / Bafia, Holly Carswell).

In the particular circumstances of the inquiry, the taxpayer reported income in its Part I return and deducted non-capital losses from a previous taxation year to reduce the taxable income to nil. The taxpayer later became aware of an error made in the original return that resulted in an overstatement of income. The taxpayer has requested to amend the original return to decrease the income reported for the year and to decrease the amount of non-capital losses deducted by the same amount. The result would be that taxable income and tax payable would remain nil and there would be an increase in the non-capital loss balance available for carry forward to future tax years. The request to amend the return was received after the end of the normal reassessment period for the taxation year in question.

We have reviewed your draft memorandum, and although it is our view that adjustments may be made to a nil assessment after the end of the normal reassessment period where the adjustments do not result in a change to tax payable, the particular facts of each case should be closely reviewed to ensure that it would be appropriate for the Minister to accept the request.

Our comments

In general terms, the provisions of subsection 152(4) of the Income Tax Act (the "Act") provide that the Minister may not reassess tax payable for a taxpayer after the normal reassessment period unless certain conditions described in subsection 152(4) are met. Nonetheless, where a notification that no tax was payable has been issued, there is no need to issue a notice of assessment, reassessment or additional assessment of taxes, interest, or penalties where the requested changes will not result in tax payable. Only if the correction of the errors would make the year taxable, so that an assessment is required, must the statute bar be considered.

In Clibetre Exploration Ltd v The Queen, the Federal Court of Appeal stated that there is no need to reassess a taxation year to recharacterize expenses where taxable income and thus tax payable are nil and would remain unchanged if the requested amendments were accepted. (footnote 1) In the situation at hand, the taxpayer's request to amend the return to adjust both the amount of income and the amount of the non-capital losses applied to the taxable income would not require the Minister to issue a notice of assessment. Therefore, the issue with respect to your enquiry is not whether the Minister can reassess, but whether it is appropriate for the Minister to accept the request to amend the return.

The Minister is not obligated to accede to a taxpayer's request to amend a return where it would be inappropriate to do so. A number of factors may be relevant when determining whether it is appropriate to accept a request. For example, in our view, it would be inappropriate to accede to a request where the request is inconsistent with specific provisions of the Act or with the scheme of the Act as a whole. This view is supported by the Federal Court decision, Clover International Properties (L) Ltd. v AGC, where the Court stated that Parliament did not intend to confer on the Minister the authority to indirectly accomplish what could not be accomplished directly. (footnote 2) As well, it would be inappropriate to accede to a request where the facts indicate that the taxpayer is engaged in retroactive tax planning by changing amounts that were validly included in or deducted from income, but resulted in a less favourable outcome than might otherwise have been achieved. One example of retroactive tax planning would be a request to decrease a capital cost allowance claim in a prior taxation year in order to reinstate a non-capital loss that has expired or is about to expire.

As noted in your memorandum, the Act provides limitation periods with respect to the application of losses, and the adjustment of loss applications, such as those in section 111 and subsections 152(4) and (6). The restrictions in subsection 152(4) limiting the Minister's ability to assess beyond the normal reassessment period except in certain circumstances provide a level of assurance that a taxation year will not be subject to changes. We also acknowledge your concern that to allow such requests may result in taxation years effectively remaining open indefinitely.

In your enquiry you also requested clarification of our comments made in our documents 2011-040124 and 2001-007212. In document 2011-040124, we stated that taxpayer-requested adjustments may be made to taxation years for which the taxpayer received a notification that no tax was payable, as long as the adjustments do not result in an assessment of taxes. Our views in that document have not changed; however we note that our comments only addressed whether the requested adjustments could be accepted. We note that it was not necessary to address the appropriateness of the request as the taxpayer's requested adjustments would not have achieved the taxpayer's desired outcome.

With respect to document 2001-007212, we stated that offsetting adjustments could not be made beyond the normal reassessment period where a notification that no tax was payable was issued. Our views in that document were premised on the understanding that the requested adjustments would require a reassessment. However, for the reasons discussed above, our views in that document are no longer applicable.

In conclusion, it is our view that adjustments may be made to a taxation year with a nil assessment to correct an error where the adjustments do not result in tax payable. Nevertheless, where the request is inconsistent with specific provisions of the Act or with the scheme of the Act as a whole, the Minister is not obligated to accept the request. Whether it is appropriate for the Minister to accept the request depends on the facts in the particular situation. For greater certainty, we have confirmed this position with Department of Finance officials.

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

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 2003 FCA 16 at paragraph 6.
2 2013 FC 676 at paragraph 59.