14 June 1989 Income Tax Severed Letter RRRR151 - Cumulative net investment loss

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.

CGA ASSOCIATION ROUND TABLE
QUESTION 15

If a taxpayer finds a balance in his/her Cumulative Net Investment Loss (CNIL) and the next year has sufficient excess investment earnings/income to more than compensate for the balance previously accumulated, what happens?

DEPARTMENTS POSITION

To illustrate the income tax implications of the "cumulative net investment loss" ("CNIL") calculation on the capital gains exemption, we will make the following assumptions for the 1988 and 1989 taxation years of a hypothetical taxpayer. The taxpayer has not claimed a capital gains exemption prior to 1988.

1988          1989
Capital gains deduction available  $66,667       $57,667
Capital gain                        15,000        18,000
Taxable capital gain (2/3)          10,000        12,000
Investment expense                   1,000         1,000
Investment income                      NIL         3,000
CNIL                                 1,000           NIL

In 1988, the taxpayer would have included in income a taxable capital gain of $10,000. The capital gains exemption allowable is determined under subsection 110.6(3) and is the least of

• (a) the portion of the taxpayer's lifetime exemption which has not been used = $66,667;
• (b) the cumulative gains limit, which in this case is $10,000 less the CNIL balance of $1,000 $9,000; and
• (c) the annual gains limit, which in this case is $10,000.

The $1,000 balance in CNIL has reduced the capital gains exemption otherwise available by $1,000. The taxpayer's allowable capital gains exemption for 1988 is $9,000. If the maximum allowable exemption was claimed, the taxpayer's 1988 taxable income would include a taxable capital gain of $1,000.

In 1989, the taxpayer's CNIL would be made up of two amounts, investment expense of $2,000 ($1,000 from 1988 and $1,000 deducted in 1989) and investment income of $3,000. Since, by definition, investment income can only reduce the investment expense to a NIL amount, the taxpayers CNIL for 1989 would be NIL. The least of the amounts determined under subsection 110.6(3) for 1989 would be the annual gains limit of $12,000. (The cumulative gains limit for 1989 would be $13,000: $10,000 from 1988 plus $12,000 in 1989 less the 1988 claim of $9,000. CNIL at the end of 1989 being NIL, there is no further reduction to the cumulative gains limit.) The taxpayer could claim a capital gains exemption of $12,000 to entirely offset the 1989 taxable capital gain.

There is no mechanism in the Act that would permit the recalculation of the taxpayer's 1988 capital gains deduction through the carry-back to 1988 of the excess of investment income over investment expense in 1989.