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 may recognize a non-capital loss that was not previously reported by a taxpayer in a taxation year that is statute-barred, and therefore, increase the non-capital loss carry forward available to be applied to a future taxation year that is not statute-barred.
Position: Yes, provided a loss determination under 152(1.1) has not been issued for the taxation year the non-capital loss was incurred.
Reasons: A non-capital loss exists whether or not the loss has been reported in the tax return for the taxation year when it was incurred, despite the fact that such taxation year cannot be reassessed.
January 14, 2014
Winnipeg Tax Centre HEADQUARTERS
Individual and Benefit Services Division Income Tax Rulings
Attention: Corinne Knapp Jennifer Ouimet
Application of 111(1)(a) and 152(4.2)
We are writing in reply to your email of November 26, 2013, requesting clarification of the interaction between paragraph 111(1)(a) and subsection 152(4.2) of the Income Tax Act (the "Act").
Specifically, you have asked us whether subsection 152(4.2) may permit the Minister to recognize a non-capital loss that was not previously reported by an individual taxpayer in a taxation year that is statute-barred and, therefore, increase the non-capital loss carry forward available under paragraph 111(1)(a) to be applied to a future taxation year that is not statute-barred.
In general, where an individual is a member of a partnership that has elected to retain an off-calendar fiscal period pursuant to subsection 249.1(4) of the Act, the individual is required to include an amount of additional business income under subsection 34.1(1) of the Act in computing income for the year. This amount is deducted under subsection 34.1(3) of the Act in the following year.
In your enquiry, you indicated that the taxpayer's XXXXXXXXXX return included additional business income of $XXXXXXXXXX, as required, under subsection 34.1(1). The taxpayer's XXXXXXXXXX return showed net income of $XXXXXXXXXX, but did not include the deduction of $XXXXXXXXXX required by subsection 34.1(3). Consequently, the taxpayer's XXXXXXXXXX business income was overstated by $XXXXXXXXXX. Had this amount been deducted, the taxpayer would have reported a non-capital loss of $XXXXXXXXXX.
A request under the taxpayer relief provisions was received in XXXXXXXXXX requesting a non-capital loss carry forward from XXXXXXXXXX to the individual's XXXXXXXXXX tax return. This request was initially denied because the loss was incurred in XXXXXXXXXX and, therefore, the request was made beyond the 10-year limitation period in subsection 152(4.2) of the Act.
The taxpayer requested a second review of the request. The request asked the CRA to recognize that the XXXXXXXXXX non-capital loss existed and to adjust the XXXXXXXXXX return to claim a deduction of the non-capital loss carry forward amount. As noted in the enquiry, the taxpayer's representative refers to the court case Leola Purdy, Sons Ltd. v. The Queen, 2009 TCC 21 ("Leola Purdy"), in support of the request. In addition, you indicate that the position taken in CRA Document 2013-0479161E5, wherein we concluded, "A net capital loss exists independently of whether or not it is reported in the tax return for the taxation year when it is incurred" may apply to the situation currently under review.
You have reviewed copies of both the XXXXXXXXXX and XXXXXXXXXX business information provided by the representative and have confirmed that the additional income was included in XXXXXXXXXX, but was not deducted in XXXXXXXXXX. You stated that had the loss been reported correctly on the XXXXXXXXXX return when it was filed, a carry forward to the XXXXXXXXXX return would have been allowed.
You have asked for our views on whether a non-capital loss exists independently from the amounts reported by a taxpayer in the taxation year the loss arises, and whether subsection 152(4.2) may permit the Minister to recognize a non-capital loss of a statute-barred year, therefore, increasing the non-capital loss carry forward available.
In general, subsection 152(4) of the Act provides that for a particular taxation year, the Minister may, at any time, issue an assessment, reassessment or additional assessment of tax or notify a taxpayer that no tax is payable. However, the Minister may not issue an assessment, reassessment, or additional assessment of tax, interest, or penalties for a taxation year beyond the "normal reassessment period" unless one of the exceptions in subsection 152(4) is applicable. The normal reassessment period for an individual, as defined in subsection 152(3.1) of the Act, is three years from the date of the initial assessment or notice that no tax is payable. Furthermore, subsection 152(4.2) allows the Minister to reassess tax, interest or penalties for a taxation year at any time after an individual's normal reassessment period provided that the individual makes the request within 10 calendar years from the end of that taxation year. In the situation described in your email, the XXXXXXXXXX tax return is statute-barred and the taxpayer is no longer within the time limit of subsection 152(4.2) to request an adjustment to that return.
Subsection 111(8) of the Act, defines a non-capital loss for a taxation year, in general, as the excess of the taxpayer's losses for the year from employment, business and property, an allowable business investment loss, and certain other amounts deductible in computing taxable income for the year over the taxpayer's income and taxable capital gains for the year. A non-capital loss exists whether or not it is reported in the tax return for the taxation year when it was incurred. There is no requirement in the Act that a non-capital loss must be reported to be eligible for carry forward. A taxpayer, including an individual, may apply, carry back, or carry forward a non-capital loss as permitted by paragraph 111(1)(a) of the Act.
Accordingly, we agree that the Minister may recognize the non-capital loss for a taxation year after the normal reassessment period, but cannot adjust the tax payable for that year except as described above. In other words, the Minister may recognize the non-capital loss (available for carry forward), but the amount of additional business income previously not deducted cannot be applied against the income reported for the statute-barred year or to recover any overpayment of taxes. In the situation described, the taxpayer's request to deduct the XXXXXXXXXX non-capital loss in the XXXXXXXXXX taxation year was received in XXXXXXXXXX, within the 10-year period provided in subsection 152(4.2). As such, the Minister may allow the deduction. The non-capital loss available is equal to the non-capital loss that would have been available for carry forward had the deduction under subsection 34.1(3) originally been reported correctly, that is, $XXXXXXXXXX as confirmed in your review.
We note that if the situation where such that the taxpayer had originally reported a non-capital loss, our comments would only apply if a notice of loss determination pursuant to subsection 152(1.1) had not been issued. If a loss determination had been issued, the normal reassessment period rules applicable to loss determinations would apply.
We trust our comments will be of assistance.
Terry Young, CPA, CA
Manager, Administrative Law Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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