16 August 2010 Internal T.I. 2010-0354811I7 - Adjustment Based on Success of Unrelated Appeal

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 taxpayer requested adjustment will be made based on a successful, but unrelated appeal.

Position: It depends on the facts. Where retroactive tax planning is involved, the adjustment will not be made.

Reasons: IC75-7R3, paragraph 4(e).

August 16, 2010

	          2010-035481

Request for Adjustment Based on Success of Unrelated Appeal

This is in reply to a memorandum from Pat Bird, requesting comments on the position that Technical Applications is taking on a taxpayer requested adjustment.

The facts are as follows. In XXXXXXXXXX 2003, the taxpayer sought adjustments to exclude deferred capital funding (government funding to purchase depreciable assets) from the calculation of taxable capital for the 1998 taxation year. A similar request was made in XXXXXXXXXX 2004 for the 1999 to 2001 taxation years. Appropriate waivers were filed in respect of the requests. The returns were filed between XXXXXXXXXX 1999 and XXXXXXXXXX 2002.

In calculating taxable capital, a corporation is required to include its reserves, defined in subsection 181(1) as the year-end amount of all of its reserves, provisions, and allowances including any provision for deferred taxes. It was the CRA's policy that deferred capital funding was part of a corporation's reserves. However, in Oerlikon Aérospatiale v. The Queen, [1999] 4 C.T.C. 358 (F.C.A.), aff'g [1998] 4 C.T.C. 2821 (T.C.C.), and Manufacturer's Life Insurance Co. v. The Queen, [2003] 2 C.T.C. 171 (F.C.A.), aff'g [2000] 1 C.T.C. 2481 (T.C.C.), it was held that the definitions in Part I.3 are generally to be interpreted according to accounting rather than legal terminology. On July 2, 2002, the CRA revised its policy in light of Manulife.

The taxpayer claims to understand the CRA's position stated in Information Circular IC75-7R3 of not reassessing a taxpayer's particular taxation year to generate a refund based on a successful but unrelated appeal, to which the taxpayer was not a party. The taxpayer denies engaging in retroactive tax planning and asserts that the request for adjustment is based on the decision in Oerlikon. However, Oerlikon was decided in 1999, at which time the CRA had yet to revise its policy concerning the components of the balance sheet to be included in calculating taxable capital. The Manulife case was decided in 2001; whereas the taxpayer only made the adjustment request in 2003.

Mr. Bird correctly takes the view that the requests to adjust the 1998 and 1999 taxation years should be disregarded, as they were assessed before the Manulife case was decided and before the policy change took effect. Moreover, the taxpayer never disputed the assessments. On the other hand, the requests for the adjustment of the 2000 and 2001 taxation years should be accepted and processed. Those years were initially assessed subsequent to the Manulife decision, and the requested adjustment seeks to correct returns that were erroneously assessed.

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
Ontario Corporate Tax Division
Income Tax Rulings Directorate

c.c. Pat Bird
Senior Technical Application Officer
Calgary Tax Services Office