30 March 1995 CTF Roundtable Q. 88, 9506016 - REVISED RESOURCE ALLOWANCE CLAIMS IN CLOSED YEARS

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.

							March 30, 1995

	Audit Technical Support Division	Resource Industries
	Industry Specialist Services		Section
B. Neville					B. Rankin
	Acting Chief				(613) 957-8974

	Attention:  R. Cloutier
							7-950601

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Revised Resource Allowance in nil years

We are writing in response to your March 2, 1995 request for our opinion on whether producers in the Oil & Gas and Mining Industries may increase resource allowance claims in taxation years with nil taxable income. As a result of adjusting the earlier years resource allowance deductions, the undeducted balances for cumulative Canadian exploration expense ("CCEE"), cumulative Canadian development expense ("CCDE"), cumulative Canadian oil and gas property expense ("CCGPE"), foreign exploration and development expense ("FEDE"), earned depletion base ("EDB") and undepreciated capital cost of a CCA class ("UCC") would be increased. This memorandum confirms our comments provided to you on March 22, 1995 (Cloutier/Rankin).

We understand that at least one corporation is expected to take the position that a nil year is open for adjustment and thus, resource pool and UCC balances that are carried forward from the nil year or years may be increased to reflect the larger resource allowance deductions under the terms of the Memorandum of Understanding for the Calculation of Resource Profits-Regulation 1204 Pre-July 23, 1992 Amendments ("MOU"). We also understand that some corporations have expressed the view that such adjustments can be made because "nil notifications" can be sent by the Minister at any time without restriction.

According to subsection 152(4) of the Income Tax Act (the "Act"), the Minister is permitted to assess tax for a taxation year or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable providing one of the conditions described in paragraph (a), (b) or (c) is met. We note that subsection 152(4) as it applies to 1976 and subsequent taxation years, establishes very specific circumstances under which the Minister is permitted to assess tax or notify that no tax is payable. The Federal Court of Appeal confirmed this view in Her Majesty the Queen v. Canadian Marconi Company, 91 DTC 5626. In view of the above, we do not agree with the statement that the Minister can issue nil notifications at any time without restriction.

In Kenneth H. Drake v. The Minister of National Revenue, 76 DTC 6468 the Federal Court-Trial Division concluded that the Minister could not open a return after the limitation period to make a taxpayer requested adjustment. On page 6476, Sweet, D.J. said:

"There was no evidence of any extension of time for filing being granted by the Minister pursuant to section 116(3) of the Act, nor for that matter, was there any evidence of any application by the plaintiff for any such extension of time. The result of this, in my opinion, was that the plaintiff was not at the time of the trial, nor previously, entitled to require the defendant to re-assess the plaintiff's tax for the 1964 taxation year in order to take into account and make deductions from the plaintiff's 1964 income of any amounts arising out of any loss by the plaintiff from his 1965 stock transactions."

In Montreal Trust Company (Lodestar Drilling Co. Ltd.) v. Minister of National Revenue, 62 DTC 1242 the Supreme Court of Canada concluded that the Minister was under no compulsion to reassess in accordance with an amended return made out of time for the purpose of carrying losses back to the affected taxation year.

In Jack A. Miller v. Her Majesty the Queen, 93 DTC 5035 the Federal Court of Appeal found that the Minister had no power to amend a forward averaging election after the expiration of the limitation period even if the taxpayer wanted the reassessment.

Drake, Montreal Trust Company (Lodestar Drilling Co. Ltd.) and Miller support the view that a taxpayer requested adjustment can not be made to a year that is not open for assessment. The point that the Minister is not compelled to make a taxpayer requested adjustment affecting a closed year is emphasized in the 1988 Canadian Tax Foundation Corporate Management Conference paper, Reassessments, Waivers, Amended Returns and Refunds, where on page 8:34 David W. Smith said:

"If the 90 day period for filing a notice of objection has expired, the taxpayer must ask Revenue Canada to make the adjustment to the prior year, but Revenue Canada is not bound to accede to his request. Any reassessment of a prior year following such a request can be made only within the three year time limit for reassessing unless the taxpayer files an appropriate waiver within the period. Accordingly, if a request is made for an adjustment for a prior year and there is any danger the matter can be dealt with by Revenue Canada, a waiver specifying the particular matter for which an adjustment is requested should be filed with the Minister at the time the request for the adjustment is made."

The above is relevant to the suggestion that balances of unclaimed CCEE, CCDE, CCOGPE, FEDE, EDB and UCC may be revised to reflect adjustments to resource allowance claimed in years where there was no Part I tax payable. For example the unclaimed CCDE balance would be revised by changing the amount that was claimed in the previous tax year or years. According to the description for CCDE in subsection 66.2(5) of the Act, "E" provides that the total of all amounts deducted in computing the income for a taxation year ending before that time in respect of the cumulative Canadian development expense is subtracted from the total of all Canadian development expenses and other additions to CCDE. Thus, where the amount of CCDE deducted in the year can not be changed, there can not be an adjustment of the unclaimed CCDE balance. For the same reasons, adjustments to unclaimed CCEE, COGPE, FEDE, EDB and UCC are not permitted. In Trico Industries Limited v. Minister of National Revenue, 94 DTC 1740 (T.C.C.) on page 1747, commenting on the calculation of safe income and by analogy retroactive tax planning, Teskey, T.C.J. said:

The making of the designation is "optional", but once a corporate taxpayer decides to do so, it must be done in accordance with paragraph 55(5)(f), i.e., in its return of income for the taxation year during which the dividend was received subject to the principle in Lee. I am unable to avoid the conclusion that the plain meaning of this paragraph is that the advantage available to a corporate taxpayer provided in paragraph 55(5)(f) cannot be claimed unless done so pursuant to the provisions therein.

Chief Justice Dickson, as he then was, of the Supreme Court of Canada said in The Queen v. Bronfman, 87 DTC 5059 at 5067 and 5068:

"...The courts must deal with what the taxpayer actually did and not what he might have done:..."

This principle, I believe, can also apply to what a taxpayer did not do and not what he might have done.

The notion of reflecting amended resource allowance deductions for previous years in unclaimed resource pool and/or UCC balances and non-capital loss carried forward is premised on there being a change to the resource allowance claimed. As discussed above, we do not agree that a deduction claimed in an earlier year can be amended when the statute barred period for the (taxable or nil) year of the deduction is passed and there is no notice of objection, waiver, or loss determination outstanding.

Information Circular IC-84-1 paragraph 10 states that a taxpayer request to adjust the amount of CCA claimed in a statute barred year and thereby increase the non-capital loss for that year will be permitted providing that the Minister has not issued a notice of determination pursuant to subsection 152(1.1) of the Act. Where a notice of determination has been issued, no adjustment will be made after the 90 days from the day of mailing the notice. Discretion may also be exercised in favour of a taxpayer as described in the response to question 88 of the 1984 Canadian Tax Foundation Conference Round Table. Here the Department states that the deduction of additional CCA would be allowed to increase the non-capital loss of a statute barred year as long as there is no change to the tax payable for any year for which time has expired for filing a notice of objection. IC-84-1 paragraph 12 states that the above position is under review and may be changed.

In Les Entreprises Ludco Ltée et al v. Her Majesty the Queen, 94 DTC 6221 (F.C.-T.D.) Dubé, J. said at page 6227:

...as noted earlier, the case law has clearly established that the Minister is not bound by his earlier assessments, or by his earlier policies, or by his representations or the representations of his agents, or by the treatment he gives or has given to other taxpayers. The Minister's duty is to apply the Act as it stands. The Act authorizes the Minister to amend his assessments and requires that he make assessments in accordance with the provisions of the Act.

Thus, the Department should not be bound to the 1984 position which is specific to changes affecting CCA deductions claimed in loss years. In our view the decisions in Canadian Marconi, Drake, Montreal Trust (Lodestar Drilling Co. Ltd.) and Miller do not support the 1984 position. Accordingly, the Minister is not required to permit taxpayer requested adjustments affecting deductions that were claimed in a statute barred year (taxable or non-taxable), a year for which time for filing a notice of objection has expired or a year for which time for filing a notice of objection to a loss determination has expired. New St. James Limited v. Minister of National Revenue, 66 DTC 5241 (E.C.C.) supports the view that the Minister is not required to make a taxpayer requested adjustment affecting a non-capital loss, where at page 5243 with respect to correcting the amount of the loss that is available for application in an open tax year Sheppard, D.J. said:

"For these subsequent years section 46(4), having no application, does not preclude an assessment being made in accordance with the provisions of this Statute, including sections 139(1)(x) and 32(5). That requires the loss for the years 1956 to 1959 inclusive being taken as provided by the Statute, not as implied in the assessment for the year 1955."

In respect of requested increases affecting undeducted resource pools, UCC balances and non-capital loss carried forward, New St. James allowed the Minister to correct the amount carried forward in compliance with the Act. With regard to adjustments to the above-noted amounts, the requested increases would not be corrections in compliance with the Act. In fact, the requested adjustments would alter the amounts that were claimed by the taxpayers and reinstate deductions claimed in the corresponding years. The Minister is not compelled to make requested adjustments affecting discretionary deductions. Rather, Drake, Montreal Trust (Lodestar Drilling Co. Ltd.) and Miller suggest that the Minister is not permitted to make such adjustments unless subsection 152(4) of the Act applies. However, we recognize that when the adjustments are refused, taxpayers may be in a position to file notices of objection to assessments for the years affected by disallowed claims or to request a loss determination that may become the subject of a notice of objection.

If you require any further assistance, please contact the writer.

Acting Chief
Resource Industries Section
Manufacturing Industries,
Partnerships and Trust Division
Income Tax Rulings and
Interpretations Directorate