15 October 1997 Internal T.I. 9721216 - APPLICATION OF 161(7) WHERE 110.5 ADDBACK

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 161(7) where there is an addback to taxable income pursuant to section 110.5.

Position:

No interest payable in this scenario under subsections 161(1) and(2).

Reasons:

Tax payable calculated under 161(7) before the deduction for foreign tax credits is nil, because if the FTCs are not deducted there is no section 110.5 addback.

								October 15, 1997

R. Quiney						International Section
	Director General					J. Stalker
	Business Returns & Payments			957-2118
	 Processing Directorate
								972121

Sections 110.5 and 161(7) of the Income Tax Act (Canada) (the "Act")

We are writing in reply to your memorandum dated August 5, 1997 in respect of the application of section 161 of the Act where an amount is added back to taxable income pursuant to section 110.5 to utilize foreign tax credits carried back from a subsequent year.

You have presented a scenario where a corporate taxpayer has filed its T2 return for a taxation year and a notice that no tax was payable has been issued. The taxable income was nil. Upon the filing of the T2 return for the subsequent taxation year, the taxpayer requests that the unused foreign tax credit as defined in subsection 126(7) of the Act for that subsequent year be carried back to the year in question in accordance with subsection 126(2). Concurrent with this request, the taxpayer requests the application to the year in question of the provisions of section 110.5 in order to utilize the foreign tax credits carried back. The reassessment of this prior year is nil taxable income. The section 110.5 amount which was added becomes a non-capital loss in accordance with the definition of that term in subsection 111(8) of the Act.

You have asked whether instalment and/or arrear interest pursuant to subsection 161(2) and 161(2) of the Act may be levied on the amount of the increase to taxable income which was added back to taxable income pursuant to section 110.5 in order to utilize the foreign tax credits.

It is our view that interest under subsection 161(1) and (2) of the Act is not exigible in the above scenario. Subsection 161(7) requires a determination of what the tax payable would have been if there were no deduction for the carryback of the foreign tax credits. Since there would be no addback to taxable income pursuant to section 110.5 if there were no deduction taken under subsection 126(2), tax payable as calculated without the carryback of foreign tax credits pursuant to subsection 161(7) would be nil.

We understand that the Assessing instructions for T2s and T1s state that arrears interest is not charged where it is a case of substitution of losses or tax credits when these amounts are added back. We suggest this is a similar situation because there is no change in tax payable for the year in question.

Please call the writer if you have further questions.

for Director General
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch