17 November 1987 Income Tax Severed Letter

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.

NOV 17 1987

WESTERN REGIONAL OFFICE A. Toews Executive Officer

HEAD OFFICE Audit Programs Directorate Audit Applications Division

Revised Reassessment Policy Investment Tax Credit Overallowance Cases

This Directorate previously advised you that any reduction in ITC claimed by a taxpayer i n a trade-in overal l owance case was to be fully offset against the taxpayer's ITC pool, if possible. No reassessment would arise from these offsets. Offsetting could also be done, at the taxpayer's request, where excessive refundable ITC had been claimed under subsection 127.1(1).

This practice is not entirely in accordance with the provisions of the Income Tax Act and prevents the taxpayer from filing a Notice of Objection in respect of the reduction in ITC claims since no reassessment or redetermination of refundable credits' is issued. The taxpayer can only appeal when the questioned amount of ITC is later claimed and disallowed. We propose that effective immediately, reassessments be issued, as required, in accordance with the policy set out below.

Where a reduction of ITC earned in a taxation year is required, the first step is to reduce the taxpayer's "investment tax credit", as defined in subsection 127(9), at the end of that taxation year (the taxpayer's ITC "pool"). That pool includes the credits earned in the current year plus prior year's credits carried over- (and subsequent years' credits carried back), less any amounts deducted in computing tax payable in a prior taxation year. Whether or not a reassessment is to be issued will depend on what action the taxpayer took in respect of the balance in that pool. The following reassessment policy is to be followed.

1. If the taxpayer has claimed a refundable ITC for the year under subsection 127.1(1), a reassessment must be issued to recover the excess refund given to the taxpayer.

2. If the entire pool balance was applied against taxes payable in the year and/or a prior taxation year, a reassessment(s) will be issued to recover any excess ITC applied in the year(s). The prior year(s) will be reassessed first, and the particular year in which the ITC was earned is reassessed only if any excess continues to exist after reassessing the prior year(s).

3. If all or some portion of the excess ITC is carried forward to a subsequent year, a reassessment will not be required of that year if there is a balance in the taxpayer's ITC pool at the end of that subsequent year sufficient to cover the excess credit. The taxpayer will simply be advised that the balance in the ITC pool at the end of that year has been reduced by the amount of any excess, and that the 20 taxpayer may appeal the reduction in the year that is is claimed. If 20 there is not sufficient balance in the ITC pool at the end of the subsequent year to cover the excess carried forward, it will be necessary to reassess that subsequent year to recover any excess claimed in that year.

As all taxpayers will presumably have claimed any available refundable ITC and/or applied all available ITC against taxes payable in the year or in a prior year, a reassessment will be. required in virtually all cases. Auditors, after determining the revised credit earned in the year, may find it beneficial to make the revised calculations as required on form T2038 in order to determine which taxation years require reassessment.

Notwithstanding the above policy, there may be situations where a taxpayer has already-been offered an offset against the ITC poor instead of a reassessment. It is appropriate that these offers be proceeded with even in cases where they are technically not correct, provided the taxpayer is in' agreement with the proposed adjustment and understands that by using this method there is no right of appeal in, respect of that year.

K.R. Warren Director Audit Applications Division

This will follow up our memorandum of November 18, 1987 concerning the above taxpayer.

It would appear that the wording of the penultimate paragraph of the above letter is misleading and should be revised as follows.

Paragraph 4 of Article XXXXIV of the Convention does not preclude Canada from applying subsection 20(11) of the Income Tax Act and therefore the non-business income tax, as defined in paragraph 126(7)(c), is automatically reduced by the amount deducted under subsection 20(11) of the Act. Under subsection 20(11) of the Act the taxpayer is permitted a deduction from income in respect to the portion of profits or income tax paid by him to the foreign government on income from property, other than real property, equal to the amount by which the income or profits tax paid to that foreign government exceed 15% of the amount included in ink his income for the year from that property. Accordingly, XXXX should be permitted a foreign tax credit under subsection 126(1) of the Act in respect to the amount determined under paragraph 126(7)(c) of the Act after making the appropriate deduction under subsection 20(11) of the Act.

Since this is in accordance with the provisions of Article XVIII and XXIV of the Convention, the U.S. will treat a portion of the pension income as arising in Canada in order to avoid double taxation as provided for in paragraph 6 of the latter Article.

We trust this change in our letter will clarify the matter for you.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch