30 August 1995 Internal T.I. 9518227 - CONSEQUENTIAL REASSESSMENT

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:

Does subsection 152(4.3) of the Act apply to a subsequent (statute barred) year reassessment where the reassessment involves a shareholders loan and an interest benefit under subsection 80.4(2) of the Act

Position TAKEN:

Yes, it does.

Reasons FOR POSITION TAKEN:

A reassessment in the particular year which recharacterizes a loan as being one to which 15(2) does not apply (and as previously assessed) consequentially raises the issue of an interest benefit previously precluded from consideration by virtue of subsection 80.4(3) of the Act.

			August 30, 1995

	Vancouver Tax Services 	HEADQUARTERS
	Appeals Division	J.A. Szeszycki
	Attention:  Thea Kreuger		(613) 957-8953

		951822

Consequential Reassessments

This is in reply to your memorandum of July 11, 1995 in which you requested our views as to whether a consequential reassessment to a subsequent taxation year can be made under the provisions of subsection 152(4.3) of the Income Tax Act (the Act) in circumstances described below.

The circumstances, as we understand them, can be summarized as follows:

1.An audit reassessment was made in respect of the taxpayer's 1990 taxation year to include a shareholder's loan in income under subsection 15(2) of the Act and to recognize a partial repayment in 1991 as a deduction in that year under paragraph 20(1)(j) of the Act. Other adjustments were being made to the 1991 return that are unrelated to the treatment of the shareholder's loan.

2.The taxpayer filed a Notice of Objection for both the 1990 and 1991 taxation years. The 1991 objection relates only to the "other" adjustments.

3.Appeals Division now proposes to vary the audit reassessment by reducing the assessment under subsection 15(2) of the Act and the related paragraph 20(1)(j) deductions. As well, it proposes to assess a section 80.4 benefit with respect to the shareholder's loan.

4.The 1990 and 1991 returns are now beyond the "normal reassessment period" described in subsection 152(3.1) of the Act; i.e., they are statute barred for purposes other than the resolution of specific items under appeal.

It is the taxpayer's view that the assessment of a subsection 80.4(2) interest benefit, on what is being accepted as a bona fide shareholder's loan, is prohibited due to the 1991 return being beyond the normal three-year reassessment period. It is the taxpayer's further view that the exception to that three-year rule, described in subsection 152(4.3), which sets out a specific circumstance under which a reassessment of a statute barred return can be made, does not have application in this instance.

Our Comments

Subsection 152(4.3) of the Act permits a reassessment to a return that is statute barred in circumstances where, as a result of an assessment or decision on appeal with respect to a previous year, that return is consequentially affected. The legislation provides that the reassessment can be made

"...but only to the extent that the reassessment...can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year".

We note that the Explanatory Notes prepared by the Department of Finance to explain the provision includes the following statement:

"Such a reassessment may be made only where the Act requires the inclusion, or allows the deduction, in computing a taxpayer's balance for the subsequent taxation year of an amount relating to the deduction or inclusion that was adjusted for the particular year." (emphasis added)

The example cited in the Notes involves a situation where the amount of a reserve taken in the particular year is changed. In such a situation, the change in the particular year causes there to be a misstatement in the corresponding reserve inclusion in the subsequent year's return. It can be clearly seen, therefore, that a reassessment to the subsequent year was made necessary only because of the change made in the particular year.

While the wording of the explanation and the particular example used might suggest that the provision only applies to situations described in the example, we believe that the wording used in the legislation itself, as cited earlier, suggests a much wider scope for effecting a consequential reassessment.

Where the reassessment to the particular year alters the characteristics of a transaction, provisions of the Act previously not applicable to the transaction consequently become applicable. When an interest-free loan to a shareholder is determined to be one to which subsection 15(2) of the Act applies and is therefore included in the income of the shareholder, the Minister is precluded from assessing the interest benefit under subsection 80.4(2) by virtue of subsection 80.4(3) of the Act. If the change to the particular year excludes the loan from income, that change re-establishes the application of subsection 80.4(2) of the Act for any year in which the interest is less than the prescribed rate. In our view, the provisions of 80.4 of the Act relate to shareholder or employee loans and that a reassessment to include the interest benefit can reasonably be considered to relate to the re-characterization of the loan to the shareholder as one that is not required to be included in income by reason of subsection 15(2) of the Act.

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