12 December 1996 Internal T.I. 9629217 - NON-CAPITAL LOSS & DIVISION C DEDUCTIONS

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:

meaning of "deducted" in relation to Division C deductions used in the calculation of a non-capital loss

Position:

the taxpayer may "deduct" a Division C deduction, even though net income is nil so that the amount may form part of the non-capital loss

Reasons:

object and spirt suggests that this is a reasonable interpretation

								December 12, 1996

	Saint John Tax Services Office	HEADQUARTERS
	Client Services				A. Humenuk
								957-8953
	Attention: Louise Bolduc
								962921

Non-Capital Loss Calculation

We are replying to your memorandum of August 30, 1996 concerning the interpretation of "deducted" as used in the definition of non-capital loss in subsection 111(8) of the Act.

Since the definition of taxable income in subsection 248(1) of the Act states that taxable income cannot be less than nil, and the deductions available under Division C, including the capital gains deduction, are deducted from net income in computing taxable income, the issue arises as to whether it is possible to deduct an amount as a capital gains deduction when the individual is in a non-capital loss position and thus has a net income of less than the total of the relevant Division C deduction otherwise available. If it is determined that no amount is deductible under section 110.6, then in the following example, Part E of the formula for non-capital loss would be $10,000 and the non-capital loss would be $1,000. However, the example illustrates how the law works to fully preserve the loss as a non-capital loss.

Calculation of Taxable Income

Business Loss						$(10,000)
Taxable Capital Gain				   9,000
Net Income deemed to be nil under paragraph 3(f)       0
Capital Gains Deduction				  (9,000)
Taxable Income 						0

Non-Capital Loss Calculation as defined in subsection 111(8)

Amounts B, C, D, D.1, D.2					0
Thus, Non-capital loss = A
E is calculated as Business Loss + Amount
deducted under 110.6 or    10,000 + 9,000 =	  $19,000
Less: F		 						   (9,000)
Non-Capital Loss						  $10,000

It is clear from the technical notes to the 1985 amendments to subsection 111(8) of the Act that the intent of the amendments is to permit an individual to "preserve" a non-capital loss when the taxpayer has any of the deductions set out in part "E" of the formula for a non-capital loss which would reduce taxable income if the taxpayer had sufficient income.

XXXXXXXXXX

we have concluded that an individual may claim a capital gains deduction under section 110.6 in computing taxable income, notwithstanding the fact that there is insufficient net income to absorb the deduction. As a result, the amount can be considered "deducted" so that it can, in turn, be used to preserve the amount of the non-capital loss which would otherwise be reduced by the taxable capital gain included in income. The taxpayer would, of course, have to file the appropriate form claiming the capital gains deduction, thereby reducing the individual's "cumulative gains limit" as defined in subsection 110.6(1) of the Act.

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch