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: 1. How subparagraph 111(1.1)(a)(ii) functions when the allowable capital losses are applied to taxable capital gains under paragraph 100(1)(b)? 2. Whether the claiming of a loss carryover is discretionary by a taxpayer?
Position: 1. The application of the formula in subparagraph 111(1.1)(a)(ii) is not dependent on the 100% inclusion rate under paragraph 100(1)(b) but rather on the applicable inclusion rates in section 38 for a particular year and a loss year. 2. See reasons.
Reasons: 1. Section 100 only deals with the computation of the amount of the taxable capital gain that is included in computing the taxpayer’s income under paragraph 3(b) from a disposition of a partnership interest in a taxation year in the circumstances described in paragraphs 100(1.1)(a) to (d). The provision does not deal with, and the computation is not effected by, the carry-over of net capital losses under paragraph 111(1)(b). Paragraph 111(1)(b) provides for the deduction, whether by way of carry-back or carry-forward, of a taxpayer’s net capital losses. Subsection 111(1.1) adjusts the amount of a taxpayer’s net capital loss where there has been a change in the inclusion rate at which capital losses can be deducted from the date such losses were realized and the date of deduction. This adjustment is based on the fraction under section 38 at the relevant times referred to in subparagraph 111(1.1)(a)(ii). While paragraph 100(1)(b) deems a higher amount of a taxable capital gain from the disposition of a partnership interest to be included in income, it does so by ignoring and not adjusting the fraction under section 38 for purposes of determining the allowable capital loss (or taxable capital gains). The amount of the allowable capital loss (including for a taxation year where there has been an inclusion of a taxable capital gain under paragraph 100(1)(b)) is then still determined under the ordinary rules in section 38. 2. The claiming of a loss carryover and the amount that may be deducted are discretionary in the hands of a taxpayer, subject to certain limitations. Since the net capital losses will be applied to reduce the taxable capital gains based on the applicable inclusion rate in section 38 and subparagraph 111(1.1)(a)(ii), independent of whether the taxable capital gains are subject to a 100% inclusion rate under paragraph 100(1)(b) or a 50% inclusion rate under paragraph 100(1)(a) or the general rules for computing taxable capital gains under another provision of the Act, there is no ordering issue.
Brent Renaud
T2 Legislation Team
Corporation and Specialty Returns Division 2021-090786
Assessment, Benefit and Service Branch
Canada Revenue Agency Yaroslavna Serdyukova
September 21, 2021
Dear Mr. Renaud:
Re: Application of subparagraph 111(1.1)(a)(ii) and paragraph 100(1)(b)
This is in reply to your email of June 17, 2021, concerning how subparagraph 111(1.1)(a)(ii) functions when the allowable capital losses are applied to the taxable capital gains subject to paragraph 100(1)(b), and whether claiming the allowable capital loss is discretionary by the taxpayer.
You provided us with two loss carryover examples where the taxable capital gains to which the allowable capital losses are to be applied were subject to paragraph 100(1)(b). In your calculations, it does not appear that capital losses were adjusted under section 38 pursuant to subparagraph 111(1.1)(a)(ii). Instead, your view seems to be that allowable capital losses may reduce such taxable capital gains at a rate that is the same as the 100% inclusion rate set out in paragraph 100(1)(b) to the extent of taxable capital gains covered under that paragraph. Based on this view, you asked whether a taxpayer may apply the allowable capital losses against the taxable capital gains under paragraph 100(1)(b) first, before applying the remainder of the allowable capital losses against the taxable capital gains subject to a 50% inclusion rate under paragraph 100(1)(a) or the general rules for computing taxable capital gains.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.
The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
On the review of the relevant provisions, it is our view that, while subparagraph 111(1.1)(a)(ii) is intended to deal with differences in the inclusion and allowance rates for capital gains and capital losses in the year realized and incurred, the application of the formula in subparagraph 111(1.1)(a)(ii) is dependent on the applicable allowance rate for capital losses in section 38 used for the year that the loss is being deducted (for part “B” of the formula) and the year the loss arose (for part “C” of the formula). The fact that the loss is applied against the amount of a taxable capital gain that was computed using the 100% inclusion rate under paragraph 100(1)(b) is irrelevant. Thus, to the extent that your examples assumed a calculation of the net capital loss at a 100% rate where the loss offsets a taxable capital gain computed under paragraph 100(1)(b), it is our view that the result is incorrect since it ignored the 50% rate for allowable capital losses required under section 38 and subparagraph 111(1.1)(a)(ii).
Since the net capital losses will be applied to reduce the taxable capital gains based on the applicable inclusion rate in section 38 and subparagraph 111(1.1)(a)(ii), independent of whether the taxable capital gains are subject to a 100% inclusion rate under paragraph 100(1)(b) or a 50% inclusion rate under paragraph 100(1)(a) or the general rules for computing taxable capital gains, there is no ordering issue.
We trust these comments will be of assistance.
Yours truly,
H. Chong
Manager
Partnerships and Corporate Financing Section
Reorganization Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
UNCLASSIFIED
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2021
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2021
Email this Content