Words and Phrases - "consequential adjustment"

The taxpayer was allocated losses for the initial years of his membership of three film-distribution limited partnerships and income-account gains for a subsequent year (1998). CRA initially reassessed to deny both the taxpayer’s allocated losses and to reverse the subsequent year’s gains allocation on the basis that the LPs did not exist (i.e., on the basis that the partners were not carrying on business in common with a view to profit), and also denied claimed carrying costs. For the taxpayer’s 1998 taxation year (for which the claimed carrying costs of $176,981 exceeded the allocated gains of $135,747), the effect of such reassessment was to reverse his previously claimed net loss of $41,234. A subsequent settlement agreement provided for the reinstatement of much of the losses but was silent on the treatment of the gains (although it did reference an ability of CRA to reassess to make “consequential adjustments”).

In agreeing to the settlement, the taxpayer provided a waiver of any right of appeal of an implementing assessment. The implementing reassessment (made well after the normal reassessment period) restored the original net carrying charge deduction of $41,234 and, thus, effectively included the allocated gains of $135,747 in his income. The taxpayer argued that such effective inclusion was not contemplated by the settlement agreement.

In rejecting the taxpayer’s argument that “in the settlement agreement, the reference to ‘consequential adjustments’ should be interpreted as only those adjustments that could be made under subsection 152(4.3) …, which would not include the restoration of income for his 1998 taxation year, as was done by the Minister” (para. 26), and that the Tax Court had not made reviewable error in finding that the settlement agreement allowed the Minister to make the implementing reassessment, Webb JA stated (at paras 25, 27):

When the settlement was reached and the losses were recognized (subject to certain adjustments) and the carrying charges were allowed, this was, in effect, a recognition that the partnerships were valid partnerships. A further consequence of recognizing the partnerships as valid partnerships is that the amount of income that had been removed should be restored. …

[T]he expression "consequential adjustment" does not appear anywhere in the text of subsection 152(4.3) of the Act, nor for that matter anywhere in the Act. The title of this subsection is "consequential assessment", not "consequential adjustment", which is a different expression. Therefore, the reference to this subsection does not assist Mr. Savics.