8 December 1993 Income Tax Severed Letter 9330216 - AMT & Application 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.

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.

                                        December 8, 1993

  Assessment of Returns Directorate     Personal and General
  J.M. Legault, Director                Section
  T1 Programs Division                  A. Humenuk
                                        (613) 957-2134

Attention: Nancy Kelly

                                        933021

Application of Non-Capital Losses for Minimum Tax Purposes

We are replying to your memorandum of October 19, 1993, concerning the method of determining the amount of non- capital losses deductible under clause 127.52(1)(i)(i)(B) of the Act for a particular taxation year.

The amount of non-capital loss deductible in a taxation year for minimum tax purposes is the lesser of the actual amount deducted for regular tax purposes and the amount which would be deductible if the non-capital losses for any taxation year after 1985 had been determined without reference to any CCA claimed in respect of MURBs, films or to any deduction made in respect of oil and gas exploration and development (i.e. on the basis that paragraphs 127.52(1)(b),(c) and (e) of the Act were applicable in computing the amount of non- capital loss available). In determining the amount of adjusted non-capital losses available for a particular taxation year for minimum tax purposes, you state that the system computes the aggregate of adjusted non-capital losses incurred since 1985 and subtracts the aggregate of non- capital losses applied from those taxation years. In your view, this method may overstate the adjustment required in computing the non-capital losses to be applied for minimum tax purposes.

To illustrate, you provided the following example in which the taxpayer has a non-capital loss available to be applied in 1992 for regular purposes of $160,483 and applies $144,586 of that loss to the 1992 taxation year.

                                   adjustment 
                                   required to
                                   non-capital      adjusted non- 
       non-capital  non-capital    loss for         capital loss
       loss for     loss applied    minimum tax       as determined 
       regular      for regular    purposes (eg.      under clause
Year  tax purposes  tax purposes   CCA on film)    127.52(1)(i)(i)(B)
---------------------------------------------------------------------
85                    $74,556
86                     81,074
87                     76,778
88      $169,748                     $87,500            $82,248
89        80,166                         0               80,166
90       142,977                         0              142,977
---------------------------------------------------------------------
Total   $392,891     $232,408        $87,500           $305,391

Based on the ordering provision of subsection 111(3) of the Act, it is clear that the non-capital loss to be applied to the 1992 taxation year does not include the 1988 non-capital loss which must be adjusted for minimum tax purposes. However, the system calculation restricts the non-capital loss for minimum tax purposes to $72,983, being the difference between the total adjusted non-capital losses incurred during the period 1986 to 1991 and the amount of those non-capital losses which were applied to a taxation year. You point out that if the calculation of adjusted non-capital loss carryforward for minimum tax purposes is recomputed on a year-to-year basis, the carryforward to 1992 would be $160,483 and thus the taxpayer's 1992 non-capital loss applied would not need to be adjusted for minimum tax purposes. You ask for our views on the correct manner of calculating the adjusted non-capital losses carryforward for minimum tax purposes.

Any effect that the adjustments to the 1988 non-capital loss for minimum tax purposes might make on a taxation year will apply the year or years in which that particular non-capital loss was applied and not to all future taxation years. Accordingly, it is our view that the second method you describe in which the adjusted non-capital loss carryforward for minimum tax purposes is recomputed on a year-to-year basis is the correct method to be used.

Because of the unique circumstances of your example, it appears as if the non-capital loss adjustment required for minimum tax purposes is never applied to any taxation year since the 1986 and 1987 adjustments for minimum tax purposes are reversed when the taxpayer incurs the 1989 non-capital loss. However, in a different fact situation the results could be significantly different. If, for example, the 1989 loss had not been available to be applied to 1986 and 1987 for minimum tax purposes, then the application of the 1988 non-capital loss to those years for regular purposes would have given rise to a minimum tax adjustment for those years (while the $81,074 adjustment required in 1986 would likely result in minimum tax payable, the $14,118 adjustment in 1987 would only create a minimum tax liability if other adjustments were required).

In summary, we agree that any minimum tax adjustments made in respect of non-capital losses must take into account the taxation year or years in which the loss was applied.

B.W. Dath Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch