14 April 2009 Internal T.I. 2009-0313781I7 - Arrears Interest on Requested Adjustments

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 s. 161(7)(b)(ii) or s. 161(7)(b)(iv) applies when an adjustment to taxable income arises.

Position: It depends on the circumstances that give rise to the adjustment.

Reasons: The intent of s. 161(7) is to cover situations where a taxpayer ignores payment of taxes, with the expectation of incurring losses to be carried back to erase the tax liability. Where there is no such intent, subparagraph 161(7)(b)(ii) would be applicable instead of subparagraph 161(7)(b)(iv).

									April 14, 2009

	Audit Professional Services Directorate		HEADQUARTERS
									Lindsay Frank
	Technical Applications and Valuations Division	613-948-2227
	Attention: Brett Evers
									2009-031378

Arrears Interest on Audit or Taxpayer Requested Adjustments

This is in reply to your request for comments on your proposed reply to the Ottawa Tax Services Office.

The issue concerns the application of paragraph 161(7)(b) of the Income Tax Act, when a taxpayer requests adjustments to taxable income following the application of losses carried back. Your initial view has been that subparagraph 161(7)(b)(iv) applies, whereas, the taxpayer contends that subparagraph 161)(7)(b)(ii) is the applicable provision.

Paragraph 161(7)(b) deals with the computing of interest when a taxpayer carries back losses. In Connaught Laboratories Ltd. v. Canada, [1995] 1 C.T.C. 216 (F.C.T.D.), the Court held that carryback deductions, used to reduce income tax of a preceding taxation year, would not affect the calculation of interest until 30 days after the latest of four possible dates. For the purposes of this discussion, only the dates in subparagraph (ii) and (iv) need to be considered, as follows

(ii) the date that the taxpayer's or the taxpayer's legal representative tax return for the subsequent tax return was filed; and
(iv) where the Minister has reassessed as a consequence of the taxpayer's request in writing that the earlier year be reassessed taking into account the exclusion or deduction from a subsequent year, the date of such request.

The intent of subsection 161(7), according to the Senate Debates, as referenced with approval in Connaught Laboratories, is to cover situations where a taxpayer ignores payment of taxes, anticipating the application of subsequent losses to wipe out the liability. In the instant case, there does not appear to be any indication that the taxpayer deliberately refused to pay income taxes, in anticipation of incurring subsequent losses which could be carried back to erase the liability. In our opinion, when a taxpayer filing the return of Year 2 carries back to Year 1 enough losses to entirely offset the income of Year 1, the CRA should accept that this meets the requirements of subparagraph 161(7)(b)(ii) for that carryback, even if it is later increased because the taxpayer learns that the income of Year 1 was higher than originally thought.

Should you have need any clarification on the foregoing, please do not hesitate to contact Lindsay Frank at 948-2227.

B.J. Skulski
Manager
Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate

c.c. Richard Montroy
Director General
Business Returns and Payments Processing Directorate
Assessment and Benefit Services Branch