26 May 1998 Internal T.I. 9733167 - INTEREST CHARGES ON AMENDED RETURNS / LOSSES

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 interest on taxes payable where changes are made to a return to carry back losses, ITCs, FTCs, etc.

Position:

No interest applies if there is no change to the tax originally payable.

Reasons:

The tax payable must be determined without taking into account subsequent events listed in 161(7)(a) of the Act and "specified future tax consequences" defined in s. 248 (1)- which refers to 161(7)(a) of the Act. Therefore, if changes are made to a return to substitute losses, or substitute losses for deductions already claimed, or to claim tax credits available and usable once the income has been increased, no interest should apply since there was no tax payable originally. There would be no increase in the tax if it were not for the deduction, exclusion, tax credit or loss subsequently applied. This applies to interest on tax payable as well as interest on instalments.

This must be distinguished from situations where the taxpayer carries back a loss or tax credit to remove a balance of tax payable originally because he or she did not claim all the permissive deductions he or she was entitled to. See Connaught Laboratories Limited, 94 DTC 6697.

		May 26, 1998

	Business Returns Processing	HEADQUARTERS
	   Directorate	Nicole Mondou, M. Fisc.
	Processing Division	(613) 957-8961

	Attention:  R. G. Quiney
		973316

Interest (Section 161) and Loss/Credit Replacements
Your file: HDV 89700-5-1

This is in response to your memorandum dated December 10, 1997, in which you requested our opinion with respect to the requirements to charge interest under subsections 161(1) and 161(2) of the Income Tax Act (the "Act") in a situation which is the same as in our technical interpretation dated June 10, 1991 (E910949A), except that other types of losses or credits are involved, and the revised return does not change the Part I tax payable showing on the original return. We apologize for the delay in replying.

The particular situations which you wish us to address are as follows:

1. The corporation files its return reporting net income for tax purposes of $1,000 with a loss of $1,000 from a prior year applied against this income. Thus taxable income and tax payable are both NIL. An amended return for the same taxation year is later filed in which the corporation elects not to claim the loss carried forward against net income. Taxable income then becomes $1,000. However, against tax otherwise payable of $300, the corporation wishes to claim a carryback of investment tax credits (ITC) from the subsequent taxation year in the amount of $300. Thus the tax payable remains NIL.

2. The scenario is the same as in paragraph 1 above but the prior year loss applied on the original return was $500, leaving a taxable income of $500 and tax payable of $150. When the amended return is filed, the loss carried forward is not claimed and the resulting tax otherwise payable of $300 is reduced by an ITC carryback of $150 thus leaving tax payable unchanged at $150.

3. The corporation, when filing its original return, utilizes an ITC carryforward to reduce tax otherwise payable to NIL. The corporation subsequently submits an amended return to withdraw the ITC application and replace it with a carryback of an unused foreign tax credit (FTC) for the same amount thus maintaining NIL tax payable.

The scenario is the same as in paragraph 3 above but after the application of the ITC carryforward, there is an amount of tax payable on the original return. When the ITCcarryforward is replaced by a carryback of an identical amount of unused FTC on the amended return, the tax payable remains the same.

Our comments

Subsection 161(1) of the Act provides that:

"Where at any time after a taxpayer’s balance-due day for a taxation year

(a) the total of the taxpayer’s taxes payable under this Part and Parts I.3, VI and VI.1 for the year

exceeds

(b) the total of all amounts each of which is an amount paid at or before that time on account of the taxpayer’s tax payable and applied as at that time by the Minister against the taxpayer’s liability for an amount payable under this Part or Part I.3, VI or VI.1 for the year,

the taxpayer shall pay to the Receiver General interest at the prescribed rate on the excess, computed for the period during which that excess is outstanding."(Emphasis added)

On the other hand, subsection 161(2) of the Act provides that:

"In addition to the interest payable under subsection (1), where a taxpayer who is required by this Part to pay a part or instalment of tax has failed to pay all or any part thereof on or before the day on or before which the tax or instalment, as the case may be, was required to be paid, the taxpayer shall pay to the Receiver General interest at the prescribed rate on the amount that the taxpayer failed to pay computed from the day on or before which the amount was required to be paid to the day of payment, or to the beginning of the period in respect of which the taxpayer is required to pay interest thereon under subsection (1), whichever is earlier."(Emphasis added)

These subsections apply with respect to the net tax payable and for the purposes of these two provisions, subsection 161(7) of the Act specifies that the tax payable by the taxpayer is deemed to be the amount of tax payable without taking into account certain listed exclusions and deductions.

With respect to subsection 161(2), which concerns the interest to be charged on deficient instalments, section 5300 and subsection 5301(10) of the Income Tax Regulations provide that in determining the “instalment base” (as defined in subsection 161(9) of the Act) on which the instalments required to be paid are calculated ( by virtue of subsection 161(4), (4.01) or (4.1) of the Act), the tax payable by a taxpayer is the tax determined before taking into consideration the "specified future tax consequences" (defined in subsection 248(1) of the Act) for the year. These amended provisions of the Regulations are effective after 1996 for corporations, and after 1997 for individuals. "Specified future tax consequences" essentially means the exclusions and deductions referred to in subsection 161(7) of the Act.

Therefore, the items to be excluded in determining the "tax payable" are essentially the same, whether we apply subsection 161(1) or 161(2) of the Act.

In the decision of Connaught Laboratories Limited v. The Queen, 94 DTC 6697, Reed J. stated that:

"I interpret the term "tax payable", upon which interest is to be paid, pursuant to that subsection, as referring to the tax payable on the basis of the particular way the taxpayer chooses to compute its taxable income, when there is an option available, in this regard. I do not interpret that subsection as referring to tax which might have been payable had another option been chosen. Had the taxpayer chosen to use the undetected scientific research expenditures or its investment tax credits then the tax payable in 1981 would have been zero. (Emphasis added)

Interest is to be calculated on the basis of the balance of tax payable, as determined by the taxpayer in the original return. If this balance is subsequently reduced, then subsection 161(7) states that the reduction is not to be taken into account if it is attributable to the specified exclusions and deductions arising after the year in question. In other words, subsequent events cannot be used to reduce the tax liability determined originally.

In the technical interpretation dated June 10, 1991, we stated that the practice of the Department is not to charge interest under 161(1) of the Act where there is a substitution of losses. This was confirmed in technical interpretations dated March 5, 1996 and October 15, 1997. The June 10, 1991 technical interpretation was submitted by the taxpayer in the Connaught Laboratories Limited case. Justice Reed distinguished the case at bar from the factual situation set out in the technical interpretation:

"That fact situation is different from the present one. In year 1, on the facts described by the letter, the capital gain was declared and no tax was payable because of non-capital losses incurred by the taxpayer. Thus when the amended return was filed it was merely a matter of substituting one type of loss for another — the taxable income remained nil. In the present case there were taxes payable at the end of year 1, as a result of the undeclared taxable capital gain of that year." (Emphasis added)

The Connaught Laboratories Limited case does not contradict the policy of the Department.

Consequently, it is our opinion that the policy of the Department would apply mutatis mutandis to the substitution of other losses, and if the Part I tax payable showing on the original return remains unchanged by the amended return, no interest would apply once the balance outstanding has been paid. This policy would extend to interest under subsection 161(2) of the Act.

With respect to your particular situations:

1. As stated in a technical interpretation dated October 15, 1997 (E9721216), since there would be no increase in the taxable income of the taxpayer were it not for the ITC carryback claimed, no interest should be charged.

2. In the same way, since there would be no increase in the taxable income of the taxpayer were it not for the ITC carryback claimed, no interest would apply once the original balance of $150 has been paid.

3. This situation is essentially the same as your scenario 1. Therefore, no interest would apply.

4. This situation is essentially the same as your scenario 2. Therefore, no interest would apply once the balance of tax, which remains the same as the balance originally calculated by the taxpayer, has been paid.

We trust that these comments are of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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