27 August 1998 External T.I. 9821465 - PRE-1986 NON-CAPITAL 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:

Whether the example in para. 21 of IT-232R2, Losses – Their Deductibility in the Loss Year or in Other Years, is incorrect. This example illustrates the effect of subsection 111(1.1) of the Act.

Position: Following the step-by-step mechanics of subsection 111(1.1), the example in the bulletin is shown to be correct.

Reasons: The references in subsection 111(1.1) to the amounts claimed under paragraph 111(1)(b) mean the total amount of net capital losses that are available for deduction thereunder.

XXXXXXXXXX 982146
R. A. Primeau
August 27, 1998

Dear XXXXXXXXXX:

Re: IT-232R3, Losses – Their Deductibility in the Loss Year or in Other Years

This is in reply to your letter of August 10, 1998. You have expressed the concern that the example in paragraph 21 of IT-232R2 is in error.

In that example (which continues on from the examples in paragraph 20 of IT-232R2), the taxpayer, "Sarah", has a 1984 net capital loss of $6,000. Instead of applying any of that net capital loss against her $2,000 taxable capital gain for 1986, she claimed a $2,000 section 110.6 capital gains deduction in 1986. Consequently, as of the end of 1996, her "pre-1986 capital loss balance" (as defined in subsection 111(8)) is equal to the $6,000 net capital loss for 1984 minus the $2,000 capital gains deduction claimed in 1986 = $4,000. For 1996, she has a taxable capital gain of $10,000, an allowable capital loss of $5,500, and business income of $40,000. She wishes to claim as much of the 1984 net capital loss as possible in calculating taxable income for 1996.

Our Comments

In calculating the taxable income for a particular taxation year, subsection 111(1) (in conjunction with the rules in subsection 111(3)) provides for the deduction of certain unapplied losses, or such portion of those losses as the taxpayer may claim. The paragraphs under subsection 111(1) refer to the different types of losses (as defined in subsection 111(8)) for certain other years that are available for deduction, paragraph 111(1)(b) doing so with respect to other years' net capital losses (the "NCLs").

However, subsection 111(1.1) sets a limit on the amount of the NCLs that may be deducted under paragraph 111(1)(b) in computing taxable income for the year. Paragraph 111(1.1)(a) deals with the extent to which the NCLs may be deducted against the taxable portion of capital gains for the year, and paragraph 111(1.1)(b) deals with the extent to which the NCLs may be deducted against other income for the year. We interpret the references in subsection 111(1.1) to the amounts claimed for the year under paragraph 111(1)(b) in respect of NCLs as meaning the total amount of NCLs that are available for deduction under paragraph 111(1)(b) in calculating taxable income for the year.

Applying the step-by-step mechanics of subsection 111(1.1) to the facts given in the example for "Sarah", our calculations are as follows:

111(1.1)

(a) the lesser of

(i) the amount determined under paragraph 3(b) for the year = $10,000 – $5,500 = $4,500; and

(ii) A x B = $6,000 x 3/4 = $9,000.
C 1/2
The lesser of (i) and (ii) is $4,500.

(b) the least of

(i) $2,000;

(ii) the pre-1986 capital loss balance = $4,000; and

(iii) $3,000, which is the amount by which

(A) $6,000

exceeds

(B) $3,000, which is the amount that would be required to be used for A in the formula in subparagraph 111(1.1)(a)(ii) in order to produce the above result of $4,500 in paragraph 111(1.1)(a).

The least of (i), (ii) and (iii) is $2,000.

Therefore, as indicated in the example in paragraph 21 of IT-232R2, Sarah ends up using $5,000 of her $6,000 1984 NCL in 1996 as follows:

Amount Amount
Used Deducted

Against her 1996 net taxable portion of
capital gains (result under paragraph 111(1.1)(a)) $3,000 $4,500
Against her 1996 business income (result under
paragraph 111(1.1)(b) 2,000 2,000
Total reduction to 1996 taxable income $6,500
Total used in 1996 5,000
Available to be used in other years 1,000
$6,000

We trust our comments will be of assistance to you. Please note, however, that these comments represent our opinion of the law as it applies generally and accordingly, are not binding on the Department.

Yours truly,

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