30 July 2010 Internal T.I. 2010-0374531I7 - Taxpayer req. adj. to change a loss carryback

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 the CRA should agree to a taxpayer requested adjustment to reduce the amount of losses previously carried back to a prior tax year to create taxable income in that prior year.

Position: No.

Reasons: A taxpayer requested adjustment is not meant to be an alternative way of formally objecting to an assessment after the objection deadline under section 165 has expired.

July 30, 2010

Toronto North TSO						Headquarters
								Income Tax Rulings Directorate
Attention:	Manish Goel
		Assistant Director, Audit

								2010-037453
								Richard Aronoff
								(613) 941-7239

Taxpayer Requested Adjustment to Reassess a Loss Carryback

This is in response to Bernard Mailach's email of July 14, 2010 wherein he requested an interpretation of subsection 152(4) of the Income Tax Act as to whether a taxpayer can seek an adjustment for the purpose of providing an alternative means for objecting where the objection deadline has expired.

The facts are as follows. The taxpayer carried back losses from the 2008 taxation year to the 2005 taxation year to eliminate any taxable income in 2005 (i.e. this created a Nil reassessment for 2005). Following an audit, the 2005 taxation year was reassessed resulting in taxable income. The taxpayer sought to carry back additional losses from 2008 to again eliminate any taxable income in the 2005 taxation year and was reassessed accordingly.

The four year reassessment period in paragraph 152(3.1)(a) has expired with the result that the possibility of issuing additional reassessments for the 2005 taxation year is now statute barred. However, the seven year reassessment period for carrying a loss back from the 2008 taxation year to 2005 pursuant to subparagraph 152(4)(b)(i) and paragraph 152(6)(c) has not yet expired. The taxpayer has requested a reduction in the amount of the loss carryback from 2008 in order to create a small amount of taxable income in 2005. Were the CRA to agree to the additional reassessment of the 2005 taxation year, the taxpayer would object to the reassessment in order to assert that the 2005 taxable income, created by the reduced loss carry back, should be eliminated through previously unutilized expenses.

Subsection 152(4) provides, in part, that "the Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year...". While a reassessment can be issued more than once, the wording of subsection 154(2) provides the Minister with discretion to decide whether to reassess once the initial assessment has been raised under subsection 152(1). It has been held that the Minister is only bound to consider a request for loss carryback, and is not bound to grant the relief sought by the taxpayer, see The Queen v. Agazarian, [2004] 3 C.T.C. 101, 2004 DTC 6366 (F.C.A.).

Should the Minister refuse to make a reassessment following a taxpayer's request, it has been held that nothing stands in the way of the taxpayer making an application to the Federal Court for a judicial review of the decision. However, courts are reluctant to make a determination that the Minister has been unreasonable in the exercise of his discretion not to reassess; see Abakhan & Associates Inc. v. Canada, [2008] 2 C.T.C. 1, 2008 DTC 6028 (F.C.). In the present situation, the CRA has already agreed to two prior requests to reassess the 2005 taxation year.

A taxpayer requested adjustment is not meant to provide a taxpayer with an alternative way to formally object to an assessment after the objection deadline under section 165 of the Act has expired, and this is particularly so for "sophisticated" taxpayers such as large corporations.

Should you have any questions or require clarification, please do not hesitate to contact Richard Aronoff at the number provided above.

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

c.c. Bernard Mailach
Manager, Large File Cases
Toronto North TSO