19 September 1991 External T.I. 9110795 F - Determination of Losses

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.

5-911079

Dear Sir

Re:  Subsection 152(1.1)/ Determination of Losses

We are writing ln reply to your letter of march 25, 1991 wherein you have asked us to consider the following hypothetical scenarios:

I

•     The corporation has incorrectly reported non-capital losses in 1987 by claiming certain expenditures (capital amounts which should be added to the cost of the inventory) to be deductible as expenses for the taxation year.

•     The corporation has received nil assessments for the 1987-1989 taxation years.

•     The corporation has not applied these 1987 non-capital losses against any other income in any taxation year since 1987.

•     The taxpayer wishes to correct this error in the 1990 taxation year by adjusting the carrying value of the inventory.

•     The taxpayer wishes to dispose of the inventory ln 1991.

II.

•     The corporation has incorrectly added 5300,000 of current  expenditures in 1987 to the carrying value of its ending inventory the ending inventory thus has a higher incorrect carrying value, resulting in an overstatement of income.

•     The corporation has received nil assessments for the 1987-1989 taxation years.

•     The corporation will readjust the error by writing off against income the expenditures in the 1990 taxation year and thereby reduce the carrying cost base of the inventory.

•     The taxpayer wishes to dispose of the inventory in 1991.

Based on the above-mentioned facts in both scenarios, it is your opinion that should Revenue Canada disallow the adjustments either in 1990 or at any time thereafter, the taxpayer will be able to ask the Minister to make a determination of losses pursuant to subsection 152(1.1) of the Income Tax Act (the "Act") The Minister, upon receipt of this request, will be bound to make this determination. Your opinion is predicated on the belief that the disallowance by the Minister of the adjustment in 1990 or in any other subsequent year will result in the Minister ascertaining that the the non-capital loss for 1987 is not as reported in the 1987 tax return.  As a result, the taxpayer will have a right to request that the Minister determine the amount of the loss for the taxation year The Minister upon receipt of this request must send a notice of determination of losses to the person who has filed the return for the year.  Furthermore, the taxpayer corporation will be eligible to make this request for the 1987 tax year because it has received a nil assessment for that year such that it would not be precluded from making any request to readjust its income for the year.

Opinion

We cannot agree that an adjustment to a taxpayer's reported income in a given year necessarily entails that the Minister will ascertain the non-capital loss of a previous year to be different from what was reported by the taxpayer.  We note that according to subsection 10(3) of the Act, where the property described in the inventory of a business at the commencement of a taxation year has not been valued as required by subsection 10(1) of the Act, it shall, if the Minister so directs, be deemed to have been valued as required by that subsection.  This indicates that the Minister is not bound to accept an adjustment pertaining to inventory valuation.

A taxpayer can ask the Minister to make a determination of losses as long as the loss ascertained by the Minister to be the taxpayer s non-capital loss for a taxation year is not the amount that the taxpayer reported for that taxation year.  The question of whether the Minister would in fact ascertain that a taxpayer's non-capital loss for a taxation year is not as reported in this type of situation will depend upon all the facts of the particular situation and may involve the application of subsections 10(1), 10(2) or 10(3) of the Act concerning the valuation of inventory It is therefore not possible to provide an opinion on this question.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for DirectorBilingual Service and Resources industrial DivisionRulings DirectorateLegislative and Intergovernmental Affairs