25 June 1993 External T.I. 9311235 F - Net Capital 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.

Client Assistance Directorate Business and General DivisionT1 Supplementary Guides Division Pierre Boucher  A/Chief

Net Capital Losses (NCLs) Subsection 111(1.1) of the Act

This is in reply to your memorandum dated April 20, 1993 in which you requested clarification of the interpretation of subsection 111(1.1) in cases where pre-1986 NCLs are being applied in a subsequent year.

The example provided in your memorandum involves a situation where a current year taxable capital gain is sufficiently large to absorb the remainder of a pre-1986 NCL balance as well a portion of a 1990 NCL carried forward. As we understand the enquiry, there is a difference of opinion as to whether, in the application of the prior year NCLs against the current year taxable capital gain, subsection 111(3) would require that the pre-1986 loss be absorbed in full against the taxable capital gain prior to the use of any amount of the more recent year's loss. You are in receipt of an enquiry in which it is suggested that in such a situation a sufficient amount (up to $2,000) of pre-1986 loss can be used to apply against other income in the current year rather than being applied in full against the taxable capital gain. The effect of such an interpretation would be to allow an additional (up to) $2,000 to be claimed under paragraph 111(1)(b) of the Act.

You have asked us to determine whether the client's argument is valid and, if so, using the illustration in your memorandum, just what the resultant pre-1986 and subsequent net capital loss balances are that can be carried forward to a subsequent year. The facts set out in your memorandum are:

Pre-1986 net capital loss $ 4,000 1990 net capital loss $100,000 1992 taxable capital gain $ 30,000

Our Comments

We have reviewed the provisions of paragraph 111(1)(b), subsections 111(1.1) and 111(3) including their histories and have drawn the following conclusions:

Subsection 111(1) provides for the deduction of unapplied losses of other years, or such portion as the taxpayer may claim. The paragraphs under subsection 111(1) describe the different types of losses available which are further defined under subsection 111(8). References in subsection 111(1.1) to amounts claimed under paragraph 111(1)(b) are therefore references to the total NCLs available for application. Notwithstanding the total NCL available subsection 111(1.1) computes the maximum that may be claimed in the current year. Paragraph (a) of that computation deals with the extent to which the NCL may be deducted from taxable capital gains while paragraph (b) deals with the extent, if any, the NCLs may be claimed against other income.

For illustration purposes, we will apply the set of facts described above to the provisions of subsection 111(1.1). The amount that may be deducted by reason of paragraph 111(1)(b) is the total of:

(a)     the lesser of (i) taxable capital gain for 1992 $ 30,000

(ii)     All NCL amounts as adjusted by formula A X B/C Pre-1986 NCL:  A = $4,000 B/C = adjustment factor... 3/2 = $ 6,000 1990 NCL: (no adjustment) $100,000 Total $106,000

Lesser amount........$ 30,000

AND

(b)     the least of

(i)     $2,000

(ii)     $4,000 (Pre-1986 NCL being brought forward)

(iii)     the excess of A = $104,000 (NCL available under 111(1)(b) to a maximum of $106,000)

over

B = $28,000 (the portion under A used to offset the amount determined under (a) above) 76,000

"least of" amount = $2,000

As a result, the maximum amount of NCLs that may be claimed under subsection 111(1) is $32,000.

Subsection 111(3) of the Act provides that, for the purposes of subsection (1), no amount in respect of NCLs will be deductible under that subsection until the deductible NCLs for preceding taxation years have been deducted. Since this subsection makes no direct reference to paragraphs 111(1.1)(a) or (b) it can be reasonably argued that the restrictions imposed in this subsection can be satisfied as long as it can be shown that if a more recent NCL is being claimed under paragraph 111(1)(b) there is no longer any outstanding NCL balance from an earlier year being carried forward.

The balance of Pre-1986 NCL to be carried forward (as required by subsection 111(3)) is nil due to application of a portion of the 1990 NCL. The balance of the 1990 NCL available for carry forward is determined to be the beginning balance of $100,000 less the portion of that balance that was required to top up to the $30,000 of NCLs applied against taxable capital gains (i.e., $30,000 less $3,000 (the adjusted Pre-1986 NCL applied against taxable capital gains)). The 1990 NCL balance, therefore, is $73,000 (i.e. $100,000 - $27,000).

We hope that our comments and illustration will assist you in your review of the Capital Gains Guide for 1993.

B.W. Dath DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch