4 March 2011 External T.I. 2009-0348481E5 - Exigibility of Interest When Losses Carried Back

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.

Principal Issues: Whether interest is exigible when losses are carried back.

Position: Yes.

Reasons: S. 161(7)(b) provides that interest continues to accrue until 30 days after the request to carry back losses is made.

XXXXXXXXXX 					2009-034848
						Lindsay Frank
						(613) 948-2227

Attention: XXXXXXXXXX

March 4, 2011

Dear XXXXXXXXXX :

Re: Exigibility of Interest When Losses Carried Back

This is in reply to your request for a technical interpretation regarding the charging of interest under section 161 of the Income Tax Act (the "Act") on adjustments to be requested by a corporation. The adjustments pertain to the 1992 and 1996 taxation years, and involve the application of non-capital loss carryovers under paragraph 111(1)(a) of the Act.

The corporation reported non-capital losses of $3 million and $30 million for the 1993 and 1994 taxation years respectively, and these returns were accepted as filed. Losses totalling $17 million, made up of the $3 million loss reported for 1993 and $14 million of the $30 million loss reported for 1994, were carried back and applied against the corporation's taxable income for 1992 thereby reducing it to nil. The remaining $16 million of the loss reported for 1994 was carried forward to reduce the corporation's taxable income for 1996.

The corporation's returns for the 1993 and 1994 taxation years were subsequently reassessed and the losses originally reported for those years were disallowed. The corporation's objection to the reassessments was resolved to the extent that losses of $17 million were allowed in respect of the 1994 taxation year. The corporation requests that the entire amount of that loss be carried back to the 1992 taxation year.

The depletion of the loss for 1994 leaves nothing available to carry forward to the 1996 taxation year. Accordingly, the corporation requests that a $16 million non-capital loss reported for the 1997 taxation year be carried back to the 1996 taxation year and reduce the taxable income for that year to nil. At issue is the question of what would be the arrears interest implications of these transactions, if any.

You take the position that arrears interest should not be charged with respect to the requested transactions. The technical interpretation documents, which you cite, state that interest would not be charged if there is no change to the tax originally payable. However, the situation addressed in those interpretations is not consistent with the circumstances in the instant case. Tax is payable in respect of the 1992 and 1996 taxation years at the time of the making of the request to carry back losses, and the effect of the loss carry back is to eliminate tax payable.

Paragraph 161(7)(b) provides that a loss carry-back takes effect on the day that is 30 days after the latest of four possible events. In this regard, subparagraph 161(7)(b)(iv) applies. In Connaught Laboratories Ltd. v. Canada, [1995] 1 C.T.C. 216, 94 D.T.C. 6697 (F.C.T.D.), it was held that where losses are carried back and result in no tax payable, interest under subparagraph 161(7)(b)(iv) is payable on the tax that would have been payable, but for the loss carry-back. Although reversed on other grounds, the decision in Yang v. The Queen, [2004] 3 C.T.C. 2408, 2004 D.T.C. 2579 (T.C.C.), is helpful insofar as it was held therein that a carry-back of losses does not affect any liability for interest.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset of this letter.

Yours truly,

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate

c.c. XXXXXXXXXX