31 October 1994 Internal T.I. 9412337 - REASSESSMENT OF STATUTE BARRED RETURN

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.

Principal Issues:

1. From a policy standpoint, does a taxpayer requested 	adjustment automatically carry with it an "implied" 	waiver?
2.  Can the reported but unassessed capital gain be changed to an income gain?
3.  As an alternative, can subsection 152(6) be used to reduce the loss?
4.  If the capital gain in the statute barred year is not recognized as such does the reserve claimed and included in the following year need to be changed as well?

Position TAKEN:

1. No.

2. The loss can be reduced to the extent that it does not create tax payable. The reduction can result from included previously unreported income and any other appropriate application of tax law.

3. No.

4. If we are characterizing the 1989 transaction as an income transaction and reducing the claimed loss on that basis we should follow through and change the reserve inclusion to an income reserve on the subsequent year's returns.

Reasons FOR POSITION TAKEN:

1. The law requires the waiver to be filed in prescribed form (T2029). Taxpayer requested adjustments are normally to the taxpayers benefit and therefore there is a general acceptance of an implied waiver accompanying the request so that procedural delays will not prevent an adjustment being made when the normal reassessment period runs out. Where the adjustment is to the disadvantage of the taxpayer we cannot imply a waiver, we must get the real thing.

2. A "nil" assessment is an assessment for purposes of establishing the normal reassessment period but it does not constitute an assessment that is subject to appeal. Consequently, we can amend a previous "nil" assessment.

3. 152(6) governs the application losses of other years, which is not what is involved in this case.

4. As explained above.

		October 31, 1994

	Mississauga District Office	J.A. Szeszycki
	Business Audit	(613) 957-8953
R. Kaknevicius, Auditor

		941233

Reassessment of Statute Barred Returns

This is in reply to your memorandum of May 10, 1994 in which you requested our views as to the legislative authority to reassess a corporate taxpayer's return outside of the normal reassessment period in the circumstances described below. We also refer to our recent telephone conversation (Szeszycki/Kaknevicius).

The underlying circumstances in this case, as we understand them, can be summarized as follows:

1.The taxpayer is a corporate member of a joint venture involved in property "flip" transactions.

2.An audit of the joint venture concludes that property transactions in the 1989 to 1992 period resulted in income gains as opposed to capital gains. The other members of the joint venture have been reassessed for those years.

3.A follow-up audit of the corporate member in question involved a reassessment of the 1990 and 1991 returns. The 1989 return had become statute barred as of March of 1993.

4.When the 1989 return was located, it was found that an amended return had been received in June of 1991 requesting an adjustment to the original filing to include a previously unreported $XXXXXXXXXX gain on the disposition of a property, a disposition that had been reported by each of the other members of the joint venture.

5.The original 1989 return reported a $XXXXXXXXXX loss and a request to carry that loss back. That request was not acted upon because the previous returns were already in a loss position. The original 1989 assessment, therefore, was a "nil assessment".

6.The amended 1989 return also set out an $XXXXXXXXXX reserve against the gain reported in that return, deferring it to the 1990 taxation year.

You have asked a series of questions related to the situation described above. We will respond to your questions in the order presented:

a)Does subsection 152(4) apply as a taxpayer requested adjustment "implied waiver" even though the taxpayer submitted the request two years before the statute barred date?

We have consulted with Assessment of Returns Directorate concerning the Department's administrative policy with respect to "implied waivers". The policy, set out in TOM 4161.6(1)(E), advises that where the requested adjustment leads to an increase in tax or a decrease in a loss, the assessor (auditor) should try to obtain a completed form T2029 for the particular year. Generally speaking, where the requested adjustment cannot be said to be beneficial to the taxpayer, a waiver cannot be implied and an actual one must be sought in order to keep the return open. Once the return becomes statute barred, any adjustment that is to the disadvantage of the taxpayer can be resisted on the grounds that a waiver was not filed in prescribed form in respect of that year.

b)If we can reassess the 1989 return can we alter the reported capital gain so that it becomes an income gain?

It is our view that if the 1989 return is now outside the normal reassessment period, and a waiver in prescribed form has not been received, then a reassessment of that return cannot take place. However, where the original notice of "nil" assessment is statute barred, the Department is still entitled to revise the loss as long as it does not create taxes payable so that a notice of reassessment is required. The revision of the loss in this manner can be due to a reduction in overstated expenses, inclusion of previously unreported income and, in our view, may include an amendment to the nature of the income itself.

c)As an alternative, can we use subsection 152(6) to reduce the original losses to nil since there were unreported gains?

The application of subsection 152(6) of the Act, among other things, relies on there being a claim made under section 111 subsequent to the particular year. In our view, the filing of an amended return disclosing previously unreported income in the particular year would not constitute a claim being made under section 111 of the Act. Section 111 deals with claims by the taxpayer in respect of certain losses incurred in other years.

d)The amended 1989 return had an $XXXXXXXXXX reserve to defer income to 1990. This (the reserve inclusion on the 1990 return) was already assessed and is now being changed on account of income. Since the original gain was not assessed does the taxpayer now have to include the reserve into income (in 1990)?

As explained in our comments under (b), although we are precluded from revising the 1989 return to the extent of creating a tax payable and issuing a notice of reassessment, the fact that the original assessment of that return was a "nil" assessment allows us to use any information at our disposal to reduce the loss. If, in so doing, we use previously unreported (unassessed) income information to reduce the loss and we characterize that income as business income, then that characterization should be maintained in the assessment of other years still open to reassessment. In short, if the 1989 transaction is considered an income transaction then the reserve should be considered a reserve taken under paragraph 20(1)(n) of the Act and the inclusion in 1990 should be assessed on the same basis, under paragraph 12(1)(e) of the Act.

We hope our comments will be of some assistance to you.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Policy and Legislation Branch