30 April 1993 External T.I. 9312125 F - Ordering of Non-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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Ordering of Non-Capital Losses

We are writing in reply to your verbal request of April 26, 1993 (XXXXXXXXXX/Albert) and further to our previous correspondence dated April 16, 1993, reference 930719.

We understand that you are concerned with Revenue Canada's policy with respect to the ordering of claiming non-capital losses derived from different sources, for example from two different businesses or from a business and from property. This ordering would be of particular importance in situations where the control of a corporation is to be acquired by an unrelated person who will carry on only one of the businesses or the business, respectively. In such a case, in the post- acquisition period, the corporation would only be entitled to deduct non-capital losses incurred in the pre-acquisition period which relate to the business which the corporation will continue to carry on. In your view, the corporation should be able to claim non-capital losses in the pre-acquisition period in the order which would be most beneficial to the corporation, ie., in the order that would leave the largest amount of non-capital losses available for carryover which relate to the business which will be carried on after the acquisition. In the examples referred to above, in the pre-acquisition period, the corporation would first claim its non-capital losses from the business not to be carried on in the post-acquisition period or the non-capital losses from property.

In support of your views that the corporation should be able to claim the non-capital losses in the order most beneficial to them, you cited Question 73 of the 1986 Revenue Canada Round Table wherein it is stated: "Where no ordering of tax credits is established in the Act, it is departmental practice to apply tax credits in the manner most beneficial to the taxpayer".

Our Comments:

Paragraph 4 of Interpretation Bulletin IT-431R2, entitled `Order of provisions applicable in computing taxable income of an individual' with respect to losses, states:

4.     Under section 111 a taxpayer may carry over losses of a taxation year to be deducted in computing taxable income of other taxation years (see IT-232R). For the 1983 and subsequent taxation years, a taxpayer may choose the order in which non-capital losses, net capital losses, restricted farm losses, farm losses and effective after February 25, 1986, limited partnership losses are to be deducted. Subsection 111(3) requires, however, that losses of any one particular type that have arisen in more than one taxation year are to be deducted in the chronological order in which they were incurred. Thus, taxpayers no longer need consider whether or not their right to a loss carry over will be forfeited solely by reason of their choice for ordering. Factors such as the proximity of the date on which a particular unapplied loss lapses and prospects for future income of the type necessary to absorb the loss should now govern a taxpayer's decision."

Although the bulletin relates to the ordering of categories of losses for individuals, in our view, this position applies equally to corporations. In addition, without specific ordering provisions in the Act, the general view expressed that losses may be ordered in the manner most beneficial to the taxpayer should also apply within each category of loss to the extent possible. The provisions of subsection 111(3) require that the non-capital losses of earlier taxation years be utilized before those of later taxation years. However, it is our view that, for purposes of analyzing the composition of a non-capital loss for a particular taxation year, a corporation would be entitled to deduct non-capital losses from different sources within that year in the order which will be most beneficial to the corporation taking into consideration all factors.

The foregoing represents our understanding of the law as it applies generally. In accordance with paragraph 21 of Information Circular 70-6R2, it is not binding on the Department.

We trust that these comments will be of assistance.

Yours truly,

E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch