29 November 1988 Income Tax Severed Letter 7-3216 - [Minimum Tax and the 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.

DATE NOV 29 1988

TO Saskatoon District Office Reg Johnson Chief of Audit Review

FROM Head Office Small Business and General Division A. Humenuk 957-2135

SUBJECT: Minimum Tax and the Capital Gains Deduction

We are responding to your memorandum dated August 25, 1988, wherein you requested our views as to whether the amount of adjusted taxable income for minimum tax purposes can be reduced by the portion of the capital gains deduction not otherwise required to reduce taxable income to nil. You are of the view that for the purposes of Division E of the Income Tax Act (the "Act"), a full capital gains deduction can be claimed even if taxable income is otherwise nil and that the otherwise unusable portion of this deduction can reduce the adjusted taxable income for purposes of the minimum tax payable under Division E.1 of the Act.

Your comments on the Minister of Finance's intentions have been noted. However, we do not agree that our position in any way represents a tax on the taxable portion of the capital gain in that the minimum tax arises by virtue of the non-taxable portion of the capital gain rather than by virtue of the taxable portion as you have suggested.

You have put forth the argument that a capital gains deduction can be claimed in excess of that which is required to reduce taxable income to nil despite the definition of taxable income in subsection 248(1) of the Act and that no other exemption is so restricted. We disagree with both of these points in that the ordering provision of section 111.1 of the Act provides specific instructions of how to apply the relevant deductions to reduce taxable income to nil. The 1987 amendment to the definition of taxable income did not represent a change in the Department's position and was enacted for greater certainty. Prior to the amendment, the question arose as to whether taxable income could be negative based on the mathematical meaning of "minus" in subsection 2(2) of the Act or whether the words were used in the grammatical sense, thus precluding a negative amount. In two leading cases dealing with the meanings of these words and the possibility of a negative result (Canterra Energy Ltd. v. The Queen 87(1) CTC 89 where a negative was allowed and F. Capling Estate v. MNR 87(2) CTC 2003 where it wasn't) the court analysis indicates that the grammatical sense of the word in dispute did not allow a negative implication whereas the mathematical sense did (prior to the amendment to taxable income).

The word "deduct" in its grammatical sense of "take away" precludes a negative meaning. In its mathematical sense of "subtract" a negative meaning would have been possible if "taxable income" had not been defined as not less than nil. If taxable income is not less than zero, the mathematical equation for income (income additions minus deductions equals taxable income) prevents total deductions from exceeding total income additions. Therefore, the ordering provisions will limit the various division C deductions to the amount of income available immediately prior to the particular deduction in question.

You have referred to paragraph 127.52(1)(h) of the Act as a further authority that the full capital gains deduction computed solely with reference to section 110.6 of the Act, can reduce the adjusted taxable income and the minimum tax payable thereon. Unlike paragraph 111(8)(b) of the Act which, prior to 1988, referred to the capital gains deduction deductible and paragraph 119(1)(a) which refers to deductions permitted by Division C, paragraph 127.52(1)(h) limits the capital gains deduction to the amount deducted under Section E of the Act. The reference to "computed without reference to this section" in paragraph 127.52(1)(h) ensures that a capital gains deduction or any other deduction or exemption referred to in that paragraph, which could not be deducted for the purposes of Division E of the Act, would not be deductible for the purposes of Division E.1 of the Act.

It is, therefore, our opinion that the portion of the capital gains deduction which is not required to reduce taxable income to nil, cannot be "deducted" for the purposes of Division E of the Act and that the computation of the adjusted taxable income under subsection 127.52(1)(h) for the purposes of calculating minimum tax payable does not allow the deduction of an amount which is in excess of the amount deducted. It would appear that the tax assessed in the present situation has been correctly computed. You may wish to remind the taxpayer that section 120.2 of the Act allows the taxpayer to apply the minimum tax assessed under Division E.1 to the tax payable under Division E for the seven year period following the assessment under Division E.1 of the Act.

Finally, you have suggested that line 32 of form T691(E) "Calculation of Minimum Tax " is misleading. We do not agree as a negative amount on line 32 could suggest to some taxpayers that the minimum tax calculation could be used to reduce tax otherwise payable which is not the case.

We trust our comments will be of assistance to you.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. B. Bryson Current Amendments and Regulations Division