14 November 1995 Internal T.I. 9524846 - consequential assessment

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:

Whether a second reassessment which corrects an error made to a previous reassessment that was authorized under subsection 152(4.3) as a consequential assessment be itself considered authorized under that provision.

Position TAKEN:

Yes.

Reasons FOR POSITION TAKEN:

The wording of the provision authorizes a reassessment as long it is (1) a consequence of a decision on appeal in respect of a particular previous year, (2) completed within the time frame set out in the provision and (3) there is a reasonable connection to the change in the particular year. In the case at hand, it is the Department's view that all three criteria are met.

		November 14, 1995

	Appeals & Referrals Division	HEADQUARTERS
L. C. Tremblay	J.A. Szeszycki
	Director			(613) 957-8953

		952484

XXXXXXXXXX
Consequential Assessment

This Directorate has recently been in receipt of an enquiry, dated September 18, 1995 and authored by A. Luke of the Appeals Division of the Vancouver Tax Services office in which it was requested that we review the series of assessments and reassessments involving the 1985 through 1987 taxation years of the above noted corporation. It is our understanding that such enquiries should be routed to your Division for consideration and action. As a result, we have directed our response to you for disposition. Since the issue raised was a technical interpretive one we have taken the liberty of providing our analysis and conclusions with respect to the matter. We have also enclosed a copy of the original enquiry as received by facsimile.

The matter at issue is whether the most recent of reassessments made to the 1987 taxation year, which return under normal circumstances would be considered statute barred, is valid by reason of subsection 152(4.3) of the Income Tax Act (the "Act"). The events leading to the reassessment in question can be summarized as follows:

1.The company was the subject of an audit and included in the resulting reassessment in respect of the 1985 taxation year was the disallowance of commodity losses in the amount of $XXXXXXXXXX The underlying issue was the timing of the actual realization of the loss; i.e., whether the loss was realized in taxation year 1985 or a subsequent year. Consequently, a Notice of Reassessment was issued on March 15, 1990.

2.As a consequence of that 1985 reassessment, where the losses were determined to have been realized later than initially reported, reassessments were made of the returns for the 1986 and 1987 taxation years in order to reflect the losses being shifted from the 1985 year.

3.At the same time, the identical issue was raised regarding commodity transactions in 1987 and a reported loss in that year in the amount of $XXXXXXXXXX The result of the two adjustments was to decrease the 1987 income by the net amount of $XXXXXXXXXX A Notice of Reassessment dated January 21, 1991 reflected these adjustments.

4.In the meantime, the taxpayer had appealed the 1985 reassessment to the tax court.

5.The taxpayer had provided a signed waiver in respect of the 1987 taxation year so that those reassessments, decreasing the 1987 income, could be made. On April 11, 1991, after the 1987 reassessment was completed the taxpayer revoked the waiver. Under the provisions of subsection 152(4.1) of the Act, when a waiver has been revoked the Minister has six months from the date of revocation to make any additional reassessments to that return.

6.On August 2, 1991, within the six-month window, a further reassessment was issued in respect of the 1987 taxation year deleting the commodity loss of $XXXXXXXXXX previously allowed, and described in item 3 above. The reassessment was promptly followed by a Notice of Objection.

7.In November 1993, the Supreme Court heard a case (the Queen v. Albert D. Friedberg 93 DTC 5507) involving the identical issue of the treatment of losses from commodity straddles and, in an adverse decision, the Court held that the losses could be deducted in the year the contract was purchased. This means, in the case under consideration here, that the losses were correctly reported in 1985.

8.On May 15, 1994 the Department, intending to reassess the 1987 return, as a consequence of the Friedberg decision, in order to reinstate the 1987 reported loss of $XXXXXXXXXX inadvertently adjusted for the wrong amount ($XXXXXXXXXX) thereby overstating the loss by $XXXXXXXXXX.

9.On January 12, 1995 the Department reassessed the 1985 return, as a consequence of the Friedberg decision, to reinstate the commodity loss as originally reported. At the same time, it issued a reassessment in respect of the 1987 year to delete the loss previously allowed on May 15th and to reinstate the actual 1987 loss of $XXXXXXXXXX.

10.On April 11, 1995 the taxpayer filed a Notice of Objection with respect to the latest of the 1987 taxation year reassessments on the grounds that the 1987 year was statute-barred at the time of the reassessment and that no authority, including subsection 152(4.3) of the Act, exists to permit the Minister to, in their view, correct a previous mistake.

The Issue

The January 12, 1995 reassessment of a return that is clearly beyond the "normal reassessment period", as that term is defined in subsection 152(3.1) of the Act, was issued on the presumption that such a reassessment was permitted under the consequential assessment provisions of subsection 152(4.3) of the Act. The taxpayer argues that the only reassessment that can be made under the latter provision is one that has as its purpose to adjust the "balance" of a subsequent year due to the reassessment resulting from an appeal decision on a prior year, that it cannot be made where its purpose is to correct a previous (consequential) reassessment.

The Law

Subsection 152(4.3) of the Act was added in 1994 applicable to reassessments made after June 10, 1993 relating to changes in balances resulting from decisions on appeals rendered after December 20, 1991. The subsection states:

"Notwithstanding subsections (4), (4.1) and (5), where the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or where the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable, or redetermine an amount deemed to have been paid or to have been an overpayment, under this Part by the taxpayer in respect of the subsequent taxation year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year." (Emphasis added)

The term "balance" is further defined in subsection 152(4.4) of the Act for the purposes of subsection 152(4.3) as

"...the income, taxable income, taxable income earned in Canada or any loss of the taxpayer for the year, or the tax or other amount payable by, any amount refundable to, or any amount deemed to have been paid or to have been an overpayment by, the taxpayer for the year."

Our Comments

For the purposes of our analysis we accept that at the time in question, January 12, 1995, a reassessment of the 1987 return of the taxpayer could only be considered in the context of subsection 152(4.3) of the Act; that is, no other provision of the Act has application, under the circumstances of this case, to permit a further reassessment.

In analysing the words and phrases used in the construction of subsection 152(4.3) of the Act, as reproduced above, it is clear that the provision requires a reassessment to satisfy three essential elements:

a)the reassessment must be prompted by an assessment or decision on appeal in respect of the particular year,

b)the reassessment must be completed within a certain time frame, and

c)the reassessment can reasonably be considered to relate to the change in the balance in the particular year

With respect to the first element, in this case, there does not appear to be any dispute on the part of the taxpayer that the general circumstances of the case are described in the opening words of the provision; that is, as a result of a decision on an appeal (prompted by the Friedberg decision) the balance of a taxpayer in a particular year (1985) is changed (by deciding to allow the commodity loss in that year).

In setting out a time frame within which a consequential reassessment can be made it does not provide a specific starting point such as the reassessment date of the particular year but rather that it must be completed by a certain point in the future, that being one year from the day that appeal rights expire with respect to the reassessment of the particular year. As a result, in this case, the May 15, 1994 reassessment of a subsequent year (1987), made prior to completing the reassessment of the particular year, is not prohibited under this provision. Also not prohibited by the wording of the provision is the issuance of more than one reassessment with respect to the subsequent year.

With respect to the third essential element, the term used in the provision, "can reasonably be considered to relate", is not specifically defined in the Act so its interpretation relies on its "ordinary" meaning. We note, first of all, that the term is not one that suggests mathematical precision. Both the words "reasonably" and "relate" provide a broad scope for interpretation. The Oxford Dictionary includes the following relevant definitions:

"reasonable" - in accordance with reason, not absurd; within the limits of reason, not greatly less or more than might be expected; tolerable, fair.

"related" - have reference to; stand in some relation to

"relation" - what one person or thing has to do with another; kind of connection between persons or things.

Traditionally, the use of the word "reasonable" in the context of the administration of the Act allows for some considerable latitude. It is our view that as long as the connection between two things or actions is easily discernible then the two things or actions could reasonably be considered to be related.

It is our view that the May 15, 1994 and the January 12, 1995 reassessments of the 1987 taxation year each can be considered to be reasonably related to the change in the particular balance of the taxpayer for the 1985 taxation year. As noted earlier, the wording of the provision does not preclude a second or third reassessment in consequence of the change to the balance for the particular year. If the first consequential reassessment to the subsequent year is found to contain an error, in either the taxpayer's or the Department's favour, a correction should be permitted since the underlying reason for making the correction is to accurately reflect the consequences of the change in the balance for the particular year.

We hope that our comments will assist you in responding to your Vancouver office.

Roy C. Shultis
Acting Director General
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch