Principal Issues: Paragraph 104(13.4)(a) applies to alter ego, joint spousal and certain other trusts. Where the provision applies, the trust will have two taxation years in the same calendar year. Consider a situation where the trust realizes a capital gain in the first taxation year and realizes a capital loss in the second taxation year. 1. What is the proper method for ensuring the capital loss is applied in the first taxation year? 2. Where the net capital loss carried back (LCB) is at least equal to the taxable capital gain in the first taxation year, will arrears interest be charged in respect of tax payable in the first taxation year?
Position: 1. The capital loss realized in the second taxation year must be reported in the T3 return for that year and the LCB request must be made by filing a T3A form. The T3A form should be filed on or before the balance-due day for the first taxation year. 2. The LCB request will be processed after the notice of assessment for the first taxation year is issued. Where the tax payable reported on the return for the first taxation year is not paid on the balance-due day, the notice of assessment will reflect arrears interest. However, where the LCB request is filed on or before the "balance-due day" of the first taxation year and the net capital loss is at least equal to the taxable capital gain in the first taxation year, arrears interest reported on the notice of reassessment should be reversed.
Reasons: 1. The date on which the T3 return is due, and the “balance-due day” for the first taxation year is extended by paragraph 104(13.4)(c) to be 90 days within the end of the calendar year in which the taxation year ends. 2. The application of the LCB as described will result in no tax payable at the balance-due day for the first taxation year. Accordingly, arrears interest should not apply.
