22 June 1993 Income Tax Severed Letter 9316076 - Cumulative Gains Limit and Subsequent Net Capital Loss Applied

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.

                                         June 22, 1993

  R.M. Beith                       Personal and General
  Assistant Deputy Minister          Section
  Appeals Branch                   A. Humenuk
                                   (613) 957-2134
  Attention: Peter Bush
                                   931607

XXXXXXXXXX 1988 Notice of Objection Capital Gains Deduction—Cumulative Gains Limit

We are replying to your memorandum of May 28, 1993 concerning the calculation of the maximum capital gains deduction available where the taxpayer has carried back a subsequent year's net capital loss.

Although the amendments made to section 110.6 by virtue of Bill C-92 which received Royal Assent on June 10, 1993 are effective for 1988 and subsequent taxation years, the changes to the definitions of "annual gains limit" and "cumulative gains limit" will not affect the calculation of XXXXXXXXXX annual or cumulative gains limit for 1988 since the 1991 net capital loss in question does not involve "non-qualifying real property" as that term is now defined in the Income Tax Act.

                          XXXXXXXXXX

You have asked whether it is appropriate to reduce the cumulative gains limit for a particular year by the subsequent year net capital loss since it is your view that the published material available suggests that the cumulative gains limit is only reduced by net capital losses incurred prior to the year of application. In particular, the 1991 Capital Gains Tax Guide states that the application of a 1990 net capital loss to the 1988 taxation year will reduce the cumulative gains limit for 1991. While this statement is not wrong in that the 1991 cumulative gains limit is affected by the application of a 1990 net capital loss to the 1988 taxation year, the statement is misleading in that the application of the net capital loss to the 1988 taxation year will also affect the cumulative gains limit as of the end of the taxation years 1988 to 1990 for the reasons explained below.

The wording of the Act clearly supports the view that a subsequent year net capital loss will reduce the "annual gains limit" and "cumulative gains limit" for the year in which the net capital loss is applied. The definition of "cumulative gains limit" and the relevant portion of the "annual gains limit" read as follows:

""cumulative gains limit" of an individual at the end of a taxation year means the amount, if any, by which

(a) the total of all amounts each of which is

        (i)  the amount determined in respect of the
        individual for the year or a preceding taxation year
        ending after 1987 for A in the definition "annual
        gains limit", or

        (ii)  the amount determined in respect of the
        individual for a preceding taxation year ending after
        1984 and before 1988 under paragraph (a) of the
        definition "annual gains limit" as it read in its
        application to those years

exceeds the total of

(b) all amounts each of which is

        (i)  the amount determined in respect of the
        individual for the year or a preceding taxation year
        ending after 1987 under paragraph (a) or (b) of the
        description of B in the definition "annual gains
        limit",

        (ii)  the amount determined in respect of the
        individual for a preceding taxation year ending after
        1984 and before 1988 under paragraph (b) or (c) of
        the definition "annual gains limit" as it read in its
        application to those years, or

        (iii)  an amount deducted under paragraph 3(e) by the
        individual for the individual's 1985 taxation year,

(c) all amounts deducted under this section in computing the individual's taxable income for a preceding taxation year, and

(d) the individual's cumulative net investment loss at the end of the year;"

The description of "B" in the formula A - B found in the definition of "annual gains limit" reads in part, as follows:

"B is the total of

(a) the amount, if any, by which

        (i)  the individual's net capital losses for other
        taxation years deducted under paragraph 111(1)(b)
        in computing the individual's taxable income for
        the year

        exceeds

        (ii)  the amount, if any, by which the amount
        determined in respect of the individual for the year
        under paragraph 3(b) in respect of capital gains and
        capital losses exceeds the amount determined for A in
        respect of the individual for the year, and

b) all of the individual's allowable business investment losses for the year; " (emphasis added is ours)

Note that the definitions of "annual gains limit" and "cumulative gains limit" as they read prior to the 1993 amendments would yield the same result provided that none of the gains or losses in question relate to non-qualifying real property.

Consequently where a subsequent year net capital loss has been applied to a prior year's return,

- the net capital losses deducted in that previous year increase,

- the annual gains limit for that year is reduced and

- the calculation of the cumulative gains limit for that year which is based in part on subparagraph (a)(i) of the description of B in the definition of "annual gains limit" is also reduced.

This result is justified in policy terms as well. In the case before you, XXXXXXXXXX cannot fully utilize his capital gains deduction and net capital losses to offset his entire taxable capital gain because he has a cumulative net investment loss (CNIL) of $XXXXXXXXXX. Without a CNIL, his cumulative gains limit after the application of the 1991 net capital loss would have been $XXXXXXXXXX and his capital gains deduction would have remained unchanged at $XXXXXXXXXX

As indicated in the Supplementary Information Relating to Tax Reform Measures dated December 16, 1987, the CNIL was introduced to prevent tax avoidance and to ensure that gains in respect of property against which other deductions have been claimed will be taxed. The CNIL calculation attempts to determine the amount by which other deductions against capital property (as specified in the definition of CNIL) exceed income from capital property (also as specified in the definition of CNIL). Where a taxpayer has a CNIL of a significant amount in a particular year, it would be inappropriate for the taxpayer to be able to fully offset the net taxable capital gains included in income after 1984 and up to that particular year by the otherwise available capital gains deduction since a CNIL represents a "net deduction" which has been claimed in respect of capital property.

Note as well that the published material which you submitted does not state that the calculation of the capital gains exemption claimed in a prior year is unaffected by the application of subsequent year losses; instead, the examples given in the material do not reflect a situation where the loss application would in fact change the prior year capital gains deduction. For example, in the CCH example given on page 149 of the excerpt from "Preparing Your Income Tax Return", the taxpayer applies a 1987 net capital loss to the 1986 return fully offsetting the taxable capital gain which was subject to tax after the application of the capital gains deduction as follows:

1986 Taxable Capital Gain                        $27,500
Less:  Capital Gains Deduction                   (25,000)
   1987 Net Capital Loss                          (2,500)
Net Taxable Capital Gain Subject to tax               $0

This example does not show the calculation of various limits used in the calculation of the capital gain deduction after the application of the net capital loss and thus it may be presumed that the taxpayer did not have a CNIL in the situation contemplated by the example.

With respect to the Capital Gains Tax Guide and form T657 and T657A, it appears that the Guide and forms were designed to reflect the tax situation available at the time of filing the tax return for the particular year for which it was written. The lack of reference to potential future net capital losses is a reflection of that perspective rather than a comment on whether or not such losses will affect a prior year's capital gains deduction. We have advised Technical Publications Division and the T1 Returns and Guides Division of Client Assistance Directorate of the potential for misunderstanding arising from such a perspective by way of a copy of this memorandum.

R.J.L. Read Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c.    Technical Publications Division
c.c.    T1 Returns and Guides Division
  Client Assistance Directorate
c.c.    Assessment of Returns Directorate
                                                       Appendix A

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