22 May 1997 External T.I. 9700195 - SUBSECTION 111(8) AND PARAGRAPH 3(F) OF THE ACT

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 a corporation deduct a net capital loss carryforward to offset a taxable capital gain in calculating taxable income when there is no taxable income.

Position:

Corporation can claim a net capital loss carryforward

Reasons:

Wording of provision of 111(8) in particular the formula E - F

XXXXXXXXXX 970019

Attention: XXXXXXXXXX

May 22, 1997

Dear Sirs:

Re: Subsection 111(8) and paragraph 3(f) of the Income Tax Act

This is in reply to your letter of December 20, 1996 in which you request a technical interpretation with respect to subsection 111(8) of the Income Tax Act (the "Act") and in particular the definition of "non-capital loss".

Your enquiry concerns the definition of non-capital loss contained in subsection 111(8) of the Act and in particular the formula contained in the definition.

Since the definition of taxable income in subsection 248(1) of the Act states that taxable income cannot be less than nil, and the deductions available under Division C are deducted from net income, the issue arises as to whether it is possible to deduct an amount as a net capital loss carried over from previous taxation years pursuant to paragraph 1(b), when the taxpayer is in a non-capital loss position and thus has a net income of less than the total relevant Division C deduction otherwise available.

Pursuant to the formula contained in the calculation of the non-capital loss for a particular year, certain deducted or deductible amounts are included in variable E of "E - F". Also included in variable E of that formula is the amount of any net capital loss that is carried over from another year and deducted in the year. If a taxpayer was required to use a loss from an office, employment, business or property or an ABIL in the loss year to offset a taxable capital gain for the year, variable E in the formula allows the taxpayer to reinstate that loss as a non-capital loss for the year to the extent that a net capital loss of another year is used in the year.

In our opinion, a taxpayer may claim a net capital loss carried over from a previous year, subject to the limitations contained in subsection 111(1.1) of the Act, pursuant to variable E in the formula, notwithstanding the fact that there is insufficient income to absorb the deduction. While this will not reduce the taxpayer's income below nil, the amount can be considered "deducted" so that it can be used to reinstate the amount of a loss from an office, employment, business, property or an ABIL as a non-capital loss which would otherwise be reduced by the taxable capital gain included in income for the year. The taxpayer will have to file the appropriate forms claiming the net capital loss carried over, thereby reducing the taxpayer's net capital loss balance.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch