23 November 1989 Administrative Letter 58926 F - Calculation of Cumulative Net Investment Loss - Meaning of Investment Expense

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.

November 23, 1989

Dear Sirs:

Re:  Request for Technical Interpretation Paragraphs 110.6(1) "Investment Expense", 3(a) and 3(c) of the Income Tax Act (the "Act")

We are writing in reply to your letter dated October 16, 1989, wherein you requested a technical interpretation of the above paragraphs with regards to mining, oil and gas expenses described in sections 65 and 66 of the Act.

Subsection 110.6(1) "investment expense"

Your query, in calculating the cumulative net investment loss ("CNIL") of an individual not actively engaged in mining, oil and gas limited partnership (i.e. a specified member thereof) whether such individual must take into account all mining, oil and gas deductions (other than the earned depletion) or only reductions in respect of post-December 15, 1987 expenditures.

The calculation of an individual's CNIL as this term is defined in subsection 110.6(1) of the Act, for 1988 and subsequent taxation years requires a determination of investment expense. "Investment expense" is defined in subsection 110.6(1) of the Act and provides at paragraph (d) for the inclusion of 50% of amounts deducted by the individual under subsections 66(4), 66.1(3), 66.2(2) or 66.4(2) of the Act (collectively, the "resource deductions") in computing his income for the year, i.e. 1988 and subsequent taxation years, in respect of expenses... incurred by a partnership of which he was a specified member in the fiscal period of the partnership in which the expense was incurred.

Your clients' interpretation of the above is that since the definition of "specified member" was added to subsection 248(1) of the Act applicable after December 15, 1987 the expenditures added to the resource pools under section 66 of the Act prior to December 16, 1987 should not be included in the CNIL calculation regardless of the year in which the amount is actually deducted for tax purposes.

Your clients' interpretation of paragraph 110.6(1)(d) of the definition of investment expense would be accurate only if the fiscal period of the partnership in which the expenditures have been incurred also ended prior to December 16, 1987.

The definition of investment expense provides, inter alia, that 50% of all amounts which are deducted by an individual under subsections 66(4), 66.1(3), 66.2(2) or 66.4(2) of the Act will be added to that individual's investment expense, which amount forms part of the CNIL computation.

It is our view that resource deductions claimed by an individual would enter into the computation of his investment expense for CNIL purposes where he is a specified member of a partnership in the same fiscal period that the expense is incurred by the partnership. Since the definition of specified member in subsection 248(1) is applicable after December 15, 1987 it is only the partnership's fiscal periods ending after that date that are relevant.

For example, if an individual claimed resource deductions in computing his income under the existing provisions of the Act for the 1988 taxation year, the deductions are in respect of expenses allocated to him by a partnership on December 16, 1987, i.e. the end of the fiscal period, and he was a specified member of the partnership within the meaning of subsection 248(1) of the Act on December 16, 1987; it is our view that although the expenses within this particular fiscal period may have been incurred by the partnership prior to December 16, 1987,they would fall within the ambit of paragraph 110.6(1)(d) of the definition of investment expense. Hence, 50% of the deductions claimed in respect of these expenses would be added to the individual's investment expense for the 1988 taxation year, thereby entering into his calculation of CNIL for that year.

Paragraphs 3(a) and 3(c) of the Act

You described the situation in which an individual is actively engaged in a mining or oil and gas operation and ask whether in calculating his income under section 3 of the Act, the earned depletion and resource deductions available under sections 65 and 66 of the Act respectively would be claimed under paragraph 3(a) or 3(c).

In this situation, the individual would be required to compute his business income under paragraph 3(a). Pursuant to paragraph 4(1)(a) of the Act, if only source of business income is the mining or oil and gas operation, he would be required to deduct in computing the income therefrom (1) all of the deductions as may reasonably regarded as being wholly applicable thereto and (2) such part of any other deductions as may reasonably be regarded as being applicable thereto.

Whether or not a particular deduction that is allowed under sections 65 and 66 of the Act is wholly or partially applicable to a particular source of business income is a question of fact that can only be resolved by examination of all of the relevant facts of the particular situation. However, since the individual which you described is actively engaged solely in a mining or oil and gas business, it is our view that pursuant to paragraph 4(1)(a) he would be required to claim the deductions that are available to him by virtue of sections 65 and 66 at the stage of the computation of income contemplated by paragraph 3(a).

Pursuant to paragraph 3(c), a taxpayer may claim deductions permitted by subdivision e (sections 65 and 66 deductions for example) in computing his income for the year, except such or such part of those deductions, if any, as have been taken into account in determining income under paragraph 3(a).

You state that your client's interpretation of the exception contained in paragraph 3(c) is that the exception was never intended to be applied to deductions under sections 65 and 66. We have not found any evidence in law or anywhere else to support your clients' interpretation. It is our view that in the absence of any specific exclusion, the reference in paragraph 3(c) to deductions permitted by subdivision e is to all deductions contained therein which includes deductions under sections 65 and 66.

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

Section ChiefResource Industries SectionBilingual Services and ResourceIndustries DivisionRulings Directorate