19 November 1993 Income Tax Severed Letter 9312806 - Minimum Tax and Loss Carryback

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                      November 19,1993

  Appeals Branch                      Business and General
  Appeals and Referrals Division         Division
                                      J.A. Szeszycki
                                      (613) 957-2135
  Attention: Fali J Dubash
                                      931280
  XXXXXXXXXX
  Minimum Tax
  1987 & 1988 Objections

This is in reply to your memorandum of April 30, 1993 in which you requested our views on the technical accuracy of reassessments made of the 1987 and 1988 returns of the above noted taxpayer. Enclosed with your enquiry was correspondence received from the Sudbury Taxation Centre in which several questions were raised to which you requested that we provide a response. The delay encountered in providing you with our comments was due to the need to address complex interpretive issues raised by this and other enquiries on the same subject.

Facts

The facts of the case can be briefly summarized as follows:

     a) In 1987 the taxpayer became subject to the minimum
        tax (MT) calculation due to the receipt of capital
        gains in the year.

     b) In the following year, 1988, the taxpayer claimed
        the MT carryover receiving a credit for the MT paid
        in 1987.

c) In 1989, the taxpayer suffers a capital loss.

     d) In 1991, the taxpayer elects to carryback the 1989
        loss to the 1987 taxation year. 

     e) With the carryback of the 1989 loss the MT was
        recalculated using the subsequent year capital
        losses available, resulting in the reversal of
        the MT assessment.

     f) With the reversal of the MT assessment in 1987
        the taxpayer's entitlement to an MT carryover in
        1988 is eliminated leading to a reassessment of the
        1988 return which resulted in a debit of tax and
        interest (from May/89).

     g) The taxpayer has objected to the adverse tax 
        consequences resulting from the application of
        the 1989 net capital losses.

Issues

In their correspondence dated September 9, 1992 and February 5, 1993 the Sudbury T.C. Appeals Division raised several questions concerning the application of losses in the calculation or recalculation of minimum tax. Similar issues were subsequently raised by Assessment of Returns Directorate on a more general basis.

The basic question being asked by Sudbury T.C. is whether the Department is correct in using all subsequent year capital losses to reduce a minimum tax calculation if the return is being reassessed for any reason.

Subparagraph 127.52(1)(i)(ii) of the Act sets out the calculation of net capital losses for minimum tax purposes. The subparagraph can be paraphrased as providing that the amount deductible is the lesser of:

     a) the total of all amounts each of which is an
        amount that can reasonably be considered to
        be the amount that he would have deducted
        under paragraph 111(1)(b) if paragraph 127.52(1)(d)
        were applicable (a grossed up capital gain or loss)
        in calculating that amount, and

     b) the total of all amounts that would be deductible
        if paragraph 127.52(1)(d) were applicable for
        taxation years commencing after 1985 in calculating
        the net capital losses.

The underlined phrase has now been examined by this Directorate and our conclusions are reflected in the response dated October 27, 1993 given to the Assessment of Returns Directorate enquiry. Rather than reiterate the detailed reasoning in this memorandum we have attached a copy of that response for your information. In brief, however, it concludes that a reasonable assumption in calculating minimum tax payable is that a taxpayer would try to minimize the tax liability to the maximum extent possible but that the assumption is also rebuttable.

With respect to the assessment of interest charges resulting from the reassessment of the 1987 and 1988 taxation years, we have consulted with T1 Programs Division as to current assessing policy. Upon the application of losses to prior years a tax refund is generated. Subsection 164(5) of the Act sets out the rules used to determine the date from which credit interest will accrue. Unlike other types of prior year reassessment, the earliest date from which the interest can accrue is generally the date that the loss application is received by the Department rather than the date that the prior year return was required to be filed. Prior year reassessments in which the tax payable is increased normally results in interest being charged from the date that the return was required to be filed to the date of payment of the tax liability. Subsection 161(7) of the Act, however, effectively deems the tax payable in the affected years to be the same, for interest calculation purposes, as if the loss carryback had not been applied.

                    XXXXXXXXXX

We would recommend a review of the reassessments made on XXXXXXXXXX 1987 and 1988 returns in light of the information contained in the attached documents.

C.B. Darling Acting Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch