28 May 1990 Ministerial Letter 59838 F - Cumulative Net Investment Loss and Capital Gains Deduction

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.

19(1)

May 28, 1990

Dear Sirs:

This is in reply to your letter of March 19, 1990.  We apologize for the delay in our response.

You have asked for our comments regarding the application of the cumulative net investment loss (CNIL) and capital gains deduction provisions in section 110.6 of the Income Tax Act in the following situation.  We understand that the situation is a hypothetical one.

Mr. A is transferred by his employer from Ottawa to Toronto for a term of two years.  Since the cost of housing in Toronto is considerably higher than in Ottawa, the employer agrees to reimburse Mr. A for the difference, resulting in a form of "housing subsidy".

The employer considers the "housing subsidy" to be a taxable benefit under paragraph 6(1)(a).  The employer therefore grosses up the net "housing subsidy" payment and includes the gross amount on Mr. A's T4 slip as income from employment.  Appropriate tax withholdings are remitted to Revenue Canada by the employer.

Mr. A continues to own his house in Ottawa and rents it to an arm's length party during the two-year transfer period.  As the rental income received (fair market value) is less than the carrying costs of the Ottawa property, a rental loss is incurred. However, there is no real economic loss to Mr. A because of the above-mentioned "housing subsidy".

On his T1 return, Mr. A reports the gross "housing subsidy" in his employment income and claims the rental 1050 for income tax purposes.

For purposes of calculating Mr. A's CNIL, it is your understanding that while the rental loss claimed is included in his "investment expense", there does not appear to be any offset allowed for the "housing subsidy" included in his employment income. Consequently, the rental loss claimed results in a CNIL balance to Mr. A which can reduce a subsequent claim by him for the capital gains deduction.

Our Comments

1.     A paragraph 6(1)(a) employment benefit occurs if, for example, the employer itself provides Mr. A with housing or if it pays a landlord all or a part of Mr. A's rent on his behalf.  In the situation you have outlined, however, since the "housing subsidy", net of tax withheld, is paid directly to Mr. A by the employer, the gross amount is more properly included in section 5 "salary, wages and other remuneration".

2.     A taxpayer is not entitled to claim a rental loss for income tax purposes unless the rental expenses included in the calculation of that loss are incurred for the purpose of earning income, i.e., unless there is a reasonable expectation that the rental operation is capable of showing a profit after expenses. Generally, a rental operation has a reasonable expectation of profit if the rent charged is sufficient to cover the rental expenses on an ongoing basis.  If a rental loss cannot be claimed for income tax purposes, then of course it will not be included in "investment expense" for purposes of determining CNIL.  In the situation which you have outlined, it could well be that Mr. A would not be entitled to claim the rental loss for tax purposes due to the fact that it is known that the Ottawa property is to be rented for a term of only two years and the carrying charges on the property exceed the rent charged.

3.     If Mr. A were entitled to claim a rental loss on the Ottawa property for tax purposes - say, for example, that he incurred a rental loss in the first year because of an unusually high expense, but earned a rental profit in the second year - then we agree that the rental loss claimed would be included in the calculation of Mr. A's CNIL and there would not be any offset in that calculation for the "housing subsidy" portion of his employment income.  We would point out, however, that the creation of a CNIL balance at the end of a particular taxation year does not permanently reduce or eliminate the amount of capital gains deduction available since it reduces only the taxpayer's cumulative gains limit at the end of that year and not the taxpayer's lifetime capital gains deduction that can ultimately be claimed.  In other words, net investment income earned in a subsequent year (e.g., the rental income earned by Mr. A in the second year in our modified example) can reduce or eliminate the CNIL balance, thus partly or fully restoring the availability of the capital gains deduction within the limits provided by section 110.6.

We trust that our comments will be helpful.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Ruling DirectorateLegislative and IntergovernmentalAffairs Branch