7 December 2010 Internal T.I. 2010-0385131I7 - Offsetting a Loss Carry 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 a request by a bankrupt corporation to carry back a loss to generate a refund should be denied where the refund would approximate a current-period liability to the fisc.

Position: No.

Reasons: Notwithstanding the non-payment, the Act recognises accrual accounting and allows the expense under paragraph 18(1)(a). In addition, paragraph 128(1)(g) of the Act permits a bankrupt corporation to deduct section 111 losses. Moreover, the refund generated as a result of the loss carry back could be offset under subsection 164(2).

                                                      December 7, 2010

      Toronto North Tax Services Office               HEADQUARTERS
      Audit Division                                  Income Tax Rulings
                                                            Directorate
      Attention:  Rosemin Hussein, Team Leader        Lindsay Frank
                                                      (613) 948-2227

                                                      2010-038513

Offsetting a Loss Carry Back

This is in reply to an email from Anson Tong, who has requested a technical interpretation on a taxpayer requested adjustment.

A corporation was reassessed in the amount of $XXXXXXXXXX for customs duty. Without paying that amount, it assigned itself into bankruptcy. The trustee has requested that a loss of $XXXXXXXXXX be carried back to prior taxation years. The loss carry back would generate a refund which apparently is sufficient to equal the customs debt. However, in light of the outstanding debt, there is reluctance to accede to the request. Mr. Tong would like to know whether the Income Tax Act (the "Act") provides an authority to deny the request since the customs debt would likely not be paid.

Unless stated otherwise, the Act recognises the accrual method of accounting. Accordingly, an expense that relates to a current period must be recognised in that period, even though the expense is yet to be paid. In the instant case, the liability for customs duty is a liability incurred as a cost of doing business and is deductible under paragraph 18(1)(a) in the current period. Furthermore, paragraph 128(1)(g) enables a bankrupt corporation to deduct in the usual way section 111 losses incurred in any taxation year preceding an order of discharge. As a result, there is no alternative, but to assent to the trustee's request.

This does not mean, however, that the estate would receive the refund. Pursuant to subsection 164(2), instead of making the refund, the Minister could apply the refund to an amount for which the recipient of the refund is liable. To that end, you may wish to contact the local Revenue Collections Division to put steps in place to apply the refund to the customs debt.

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

B.J. Skulski
Manager
Insolvency and Administrative Law Section
International & Trusts Division
Income Tax Rulings Directorate

c.c. Anson Tong
Audit Division
Toronto North Tax Services Office