29 January 1996 External T.I. 9510375 - APPLICATION OF LOSSES BY A NON-RESIDENT

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:

Application of losses by a non-resident - subsection 111(9) and paragraph 115(1)(e) of the Act

Position:

While we generally agree with the interpretation used by the writer, we feel that it is too restrictive in one respect. It is our view, that the intention of paragraph 115(1)(e) of the Act is to allow the utilization of losses incurred by a resident of Canada from an office or employment performed in Canada or from a business carried on in Canada to offset income earned by such person from an office or employment performed in Canada or from a business carried on in Canada after that person becomes a non-resident of Canada. Furthermore, a net capital loss, which results from the disposition of taxable Canadian property of a taxpayer when he was a resident of Canada, can be carried forward to offset taxable capital gains on the disposition of taxable Canadian property realized by the taxpayer when he is a non-resident of Canada.

Reasons:

Position was adopted after previously examining this issue

		951037
XXXXXXXXXX	David R. Senécal

January 29, 1996

Dear Sirs:

Re: Application of losses by a non-resident

This is in reply to your letter of February 27, 1995, wherein you request our views regarding the application of subsection 111(9) and paragraph 115(1)(e) of the Income Tax Act (the "Act"). We apologize for the delay in responding. The other issues referred to in your letter have been addressed in other correspondence.

In our view, pursuant to subsection 111(9) of the Act, a non-resident's "non-capital loss" for a particular loss year (and which would be available for carryover) would be restricted to any unused losses of any of the three types of income mentioned in paragraph 115(1)(c) of the Act, namely:

• any losses from performing in Canada duties of an office or employment;
• any losses from carrying on business in Canada; and
• any allowable business investment losses (ABIL) in respect of property if any gain from the disposition of that property would be included in the non-resident's section 115 income earned in Canada (i.e. taxable Canadian property).

Subsection 111(9) of the Act would also apply to restrict a non-resident's "net capital loss" for a particular loss year (and which would be available for carryover) to any unused allowable capital losses from the disposition of taxable capital property.

It should be noted that while a non-resident's non-capital loss includes any unused ABIL as described above, the non-resident's net capital loss for a particular year may be increased by any of that unused ABIL that was incurred for the taxpayer's seventh preceding taxation year. This is in order to ensure that any unused ABIL may be carried forward indefinitely as a net capital loss.

In our opinion, subsection 111(9) of the Act will apply if the taxpayer is a non-resident in the loss year, irrespective of the fact that the loss may be carried over to a year when the taxpayer was or will be a resident of Canada.

Paragraph 115(1)(e) of the Act contains a restriction that any section 111 carried-over loss must be reasonably considered to be applicable to:

• the duties of an office or employment performed by the non-resident in Canada,
• a business carried on by the non-resident in Canada, or
• a disposition of property, any profit or gain on which would have been required by subsection 115(1) of the Act to be included in the non-resident's taxable income earned in Canada.

In this regard, it is our view, that the intention of paragraph 115(1)(e) of the Act is to allow the utilization of losses incurred by a resident of Canada from an office or employment performed in Canada or from a business carried on in Canada to offset income earned by such person from an office or employment performed in Canada or from a business carried on in Canada after that person becomes a non-resident of Canada. Furthermore, a net capital loss, which results from the disposition of taxable Canadian property of a taxpayer when he was a resident of Canada, can be carried forward to offset taxable capital gains on the disposition of taxable Canadian property realized by the taxpayer when he is a non-resident of Canada.

In our opinion, the use of a carried-over loss to reduce a non-resident's income earned in Canada for a year of loss application is subject to the restriction in paragraph 115(1)(e) of the Act regardless of the fact that the taxpayer may have been a resident of Canada in the loss year. As well, any net capital losses incurred from the disposition of property, other than taxable Canadian property, while the taxpayer was a resident of Canada may not be carried over to years when the taxpayer is a non-resident because of the restriction in that paragraph.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch