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.
