3 July 1997 External T.I. 9639225 - SECTION 114

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:

Can losses incurred in the one period of the partial year of a part-year resident be able to apply against income or gains realized in another period of the partial year?

Position: No

Reasons:

Section 114 specifies that in computing income or taxable income earned in Canada, each partial period would be treated as though it was a whole taxation year. However, for purposes of section 111, the losses and income would be combined pursuant to subsection 111(8) to determine loss carryover.

963922
XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

July 3, 1997

Dear Sirs:

Re: Section 114 of the Income Tax Act (the "Act")

We are writing in response to your letter of November 14, 1996 in which you requested our interpretation of section 114 of the Act with respect to the utilization of losses incurred in the year in which a taxpayer becomes or ceases to be a resident of Canada and the application of prior year losses of such a person to that year.

You indicated in your letter that, with respect to a non-resident of Canada, you are aware of the restriction on the ability to create loss carryovers under subsection 111(9) of the Act and the restriction on the ability to apply loss carryovers under paragraph 115(1)(e) of the Act. Where current year losses are concerned, you are probably aware of the restriction to claim such losses under paragraph 115(1)(c) of the Act. You asked us to assume that the losses that are dealt with in your letter as well as in our comments meet all the requirements of the above-noted provisions of the Act and can, therefore, be utilized for tax purposes by a part-year resident or a non-resident of Canada.

You are probably aware that an Interpretation Bulletin IT-262R2, dated November 28, 1996, has been issued by the Department regarding losses of non-residents and part-year residents and you may have already found in that bulletin (in particular, in paragraphs 23 and 24 thereof) some, if not all, of the answers to the questions you raised in your letter. We enclose herewith a copy of that bulletin for your reference. However, we can provide you with brief comments on your specific questions in the same order as you listed them in your letter.

In this letter, as in yours, we will refer to the period or periods of the year during which an individual is resident in Canada as the "resident partial year" and the period or periods of the year during which the individual is not resident in Canada as the "non-resident partial year".

.Yes, loss carryovers from a taxation year during which an individual is a resident of Canada for the full year can be applied to compute taxable income earned in Canada in a non-resident partial year.

.No, net losses arising in a resident partial year cannot be applied to compute taxable income earned in Canada in a non-resident partial year of the same taxation year.

.See specific comments below.

.Yes, loss carryovers from a taxation year during which an individual is a non-resident of Canada for the full year can be applied to compute taxable income earned in Canada in a non-resident partial year.

.No, net losses arising in a non-resident partial year cannot be applied as a deduction for the purpose of computing taxable income in a resident partial year of the same taxation year.

.See specific comments below.

In respect of 3 and 6 above, it should be noted that it is a misnomer to say "loss carryovers from a resident partial year" or "loss carryovers from a non-resident partial year" as a section 111 loss carryover can not be created in either the resident partial year or the non-resident partial year. This is because in determining the amount of a section 111 loss, the definitions of the various types of losses in subsection 111(8) of the Act refer to losses of a particular taxation year but the losses in a partial year (whether resident or non-resident) are not losses of a taxation year. To determine the section 111 losses for a taxation year, the losses incurred in one partial year (net of income of that partial year) have to be added to the losses or netted against the income of the other partial year of the same taxation year. For example, if there is income in the resident partial year but losses in the non-resident partial year of the same taxation year, the losses of the non-resident partial year will be reduced or eliminated by the income of the resident partial year to determine the net loss for the purpose of section 111 for that taxation year. As a result, there may not be any loss carryover to be applied to other years. This is so notwithstanding that the losses in the non-resident partial year are not able to be applied against income in the resident partial year as stated in 5 above. We are aware that there appears to be an anomaly of the law in this regard.

In summary, it is our view that losses incurred in one partial year cannot be used to net against income of another partial year as would normally occur under section 3 of the Act because income or taxable income earned in Canada is required to be computed under section 114 of the Act as though each partial year were a whole year. In addition, for the purpose of section 111 of the Act, loss carryovers cannot be created in a partial year because the partial year is not a taxation year. All income and losses of the resident partial year and such income or losses of the non-resident partial year as described in subsection 111(9) of the Act need to be taken into account to determine the amount of the loss carryover for the purposes of section 111 of the Act.

We trust you will find the above to be of assistance.

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