16 November 1994 Internal T.I. 9419477 - NON-CAPITAL LOSSES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a taxpayer who receives non-taxable income and pays alimony and maintenance is entitled to claim a non-capital loss under subsection 111(8), where, if the income were taxable, no such loss could be claimed.

Position TAKEN:

Taxpayer can claim a non-capital loss.

Reasons FOR POSITION TAKEN:

Provided that taxpayers receiving non-taxable income (such as social assistance, OAS supplements, workers' compensation) can and do deduct such income under paragraph 110(1)(f) of the Act, they may increase the amount of their non-capital losses under subsection 111(8) by such amounts, notwithstanding that their total income from all sources exceeds their subdivision e of the Act deductions. The taxpayers' non-capital losses would be understated if these amounts were not added to the calculation of the loss.

		November 15, 1994

	Ottawa District Taxation Office	Head Office
	Client Assistance	Rulings Directorate
C. Chouinard
	Attention: G. Obert	957-8953
		7-941947

Non-Capital Losses - Subsection 111(8) of the Income Tax Act

This is in response to your memorandum of July 28, 1994, wherein you requested our opinion on the application of the above-mentioned provision in a situation where a taxpayer receives non-taxable income and pays alimony and maintenance. More specifically, you ask whether such a taxpayer is entitled to claim a non-capital loss under subsection 111(8) of the Income Tax Act (the "Act"), where, if the income received by the taxpayer were taxable, no such loss could be claimed.

In the first situation you describe, a taxpayer ("TP1") earns $1,000 employment income and receives non-taxable income in the amount of $30,000, for a total income for the year of $31,000. The taxpayer also pays $4,000 in alimony and maintenance in the year. In the second situation, the taxpayer ("TP2") earns only $1,000 of employment income in the year and pays $4,000 in alimony and maintenance. According to your calculations, TP1 would be entitled to claim a non-capital loss of $3,000, whereas TP2, who has an actual economic loss of $3,000, cannot recognize this loss as a non-capital loss for purposes of the Act.

Our Comments

We have reviewed the definition of "non-capital loss" in subsection 111(8) of the Act and your two scenarios and have determined that your calculations are technically correct.

Although social assistance payments, OAS payments and compensation received by workers under workers' compensation legislation are non-taxable income under the Act, for purposes of paragraph 3(a) of the Act, they constitute income from a source. They must therefore be considered in determining the amount under paragraph 3(c) of the Act in respect of the taxpayer. However, the "A" part of the formula to calculate a non-capital loss in subsection 111(8) of the Act causes a non-capital loss for the year to be increased by amounts deducted under paragraph 110(1)(f) of the Act, that is, social assistance payments, OAS payments, compensation received under workers' compensation legislation and other payments. Hence, provided that a taxpayer receiving such non-taxable amounts can, and does, deduct the amounts under paragraph 110(1)(f) of the Act, the taxpayer may claim a non-capital loss, notwithstanding that his or her total income from all sources (paragraph 3(a) of the Act) exceeds his or her subdivision e of the Act deductions. This explains why, in the first situation you describe, the taxpayer can claim a non-capital loss of $3,000.

Although it would appear that there is an anomaly in allowing a taxpayer whose income exceeds his or her subdivision e deductions to claim a non-capital loss, while denying such a loss to a taxpayer whose subdivision e deductions exceed his or her income, this result is not as anomalous as would appear at first glance. On the one hand, since the government has decided that social assistance payment, OAS supplements and workers' compensation should be non-taxable, it stands to reason that in considering whether a taxpayer has a non-capital loss, these amounts must be added to the calculation of the loss in order that the taxpayer's loss not be understated. This explains why a taxpayer's non-capital loss must be increased by amounts which constitute social assistance payments, OAS supplements and workers' compensation, all of which are non-taxable. On the other hand, we postulate that not that many taxpayers find themselves in a situation where their subdivision e deductions exceed their income from all sources.

Accordingly, in our opinion, form T1A has been properly designed and accurately reflects the intent of subsection 111(8) of the Act.

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch