20 January 1994 Internal T.I. 9400506 - CONSEQUENTIAL REASSESSMENTS

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

The D.O. disallowed capital losses claimed in a year on the basis that there was no disposition of the particular properties. Where the properties are actually disposed of (at a loss) in another year which is otherwise statute-barred, does 152(4.3) apply to permit re-opening of that other year to allow the capital losses (where the request is made on time)?

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

The situation meets the requirements of the Act.

			January 20, 1994

	Head Office	Head Office
	Audit Technical Support Division	Rulings Directorate	    Industry Specialist Services	957-8953

Att: B.A. Chisholm, Coordinator
     Financial Institutions
			940050
	XXXXXXXXXX      

Application of Subsection 152(4.3)

This is in reply to your memorandum dated January 7, 1994. All references to statute are to the Income Tax Act.

Based on the material provided with your memorandum, we understand the situation to be as follows.

FACTS

-A reassessment of XXXXXXXXXX 1986 taxation year by Scarborough District Office included the disallowance of certain capital losses claimed by XXXXXXXXXX with respect to shares which were subject to transactions which the D.O. considered to involve the circumvention of the superficial loss rules in paragraph 54(i).

The D.O. disallowed the losses on the basis that the shares had not been disposed of in that year.

- XXXXXXXXXX

- XXXXXXXXXX

-The "normal reassessment period", as defined in subsection 152(3.1), with respect to XXXXXXXXXX 1987 taxation year expired on October 13, 1992.

While the 1987 taxation year is thus otherwise statute-barred, XXXXXXXXXX is requesting the reassessment by virtue of subsection 152(4.3).

ISSUE

In the opinion of both S. Yee, Basic Files Group Head in the D.O., and Stan Trevor, Insurance Industry Specialist, Head Office, subsection 152(4.3) would apply to XXXXXXXXXX request. (Mr. Yee has set out in a memorandum dated December 20, 1993 a detailed analysis and his interpretation of subsection 152(4.3)). However, in view of the fact that subsection 152(4.3) is a relatively new provision, our opinion on the matter is being requested.

OPINION

Subject to the qualifications discussed below, we concur with Mr. Yee's analysis and interpretation (including that pertaining to the related coming-into-force provisions) and agree that subsection 152(4.3) would apply to permit the reopening of XXXXXXXXXX 1987 taxation year for the purpose of allowing the Losses.

1.XXXXXXXXXX request involves questions of fact upon which we are not in a position to comment. These include: whether the dispositions actually took place in 1987, the amount of the Losses, and whether the properties so disposed of were among those in respect of which allowable capital losses were denied pursuant to the 1986 Notice of Reassessment. These are matters on which the D.O. has presumably satisfied itself.

2.Mr. Yee's memorandum includes at the top of page 3 the following excerpt from subsection 152(4.3):

"but only for the purpose of ... allowing the deduction of, an amount in computing a balance of the taxpayer for the other year"

and the following interpretation related thereto:

" - "amount" in my opinion is the actual 1987 allowable capital loss

- "balance" is 1987 taxable income as defined in subsection 152(4.4)."

While we would not disagree with respect to "amount", we would think that "balance" in this particular context would more likely refer to income for 1987 or possibly a loss for 1987, rather than taxable income for that year.¹ In this regard, it is useful to consider the words which were omitted in the above excerpt, as underlined below:

"but only for the purpose of giving effect to any provision of this Act requiring the inclusion, or allowing the deduction of, an amount in computing a balance of the taxpayer for the other year".

There is no provision in the Act which allows a deduction in computing taxable income for allowable capital losses, taxable income being determined under Division C of Part I of the Act. It would seem to us that if there is a provision of the Act "allowing the deduction" of allowable capital losses in computing a "balance", it is section 3 (notably the calculation in paragraph (b) thereof), which determines income for the year. Similarly, if there is a provision "requiring the inclusion" of allowable capital losses in computing a "balance", it is paragraph 111(8)(a), notably the calculation in subparagraph (a)(i) thereof, which determines the net capital loss for the year.

With that in mind, the adjustment requested by XXXXXXXXXX is in actuality a request to increase, by the amount of the Losses, the amount determined under subparagraph 3(b)(ii) for 1987. Therefore, the 1987 "balance" will either refer to "income" for that year, to a "loss" (specifically a net capital loss) for that year, or possibly to both, depending on the relativity of the existing subparagraph 3(b)(i) amount and the adjusted subparagraph 3(b)(ii) amount, as follows:

"Balance" refers to "Income" for 1987

To the extent XXXXXXXXXX adjusted subparagraph 3(b)(ii) amount for 1987 would not exceed the existing subparagraph 3(b)(i) amount for that year, the adjustment would be a deduction in computing income under section 3 and the "balance" would thus refer to "income" for 1987.

"Balance" refers to a "Loss" for 1987

To the extent the Losses would cause the adjusted 3(b)(ii) amount to exceed the existing 3(b)(i) amount, that portion of the adjustment would be an inclusion in computing the net capital loss under subparagraph 111(8)(a)(i) and the "balance" would thus refer to a "loss" for 1987.

We hope this will be of assistance to you.

for Director
Financial Industries Division
Rulings Directorate

¹ However, we do not disagree that "balance" in the context of 1986 could be taxable income.

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