2014-0533871E5 Corporation Loss Continuity and Application

Principal Issues: Where a non-capital loss is in dispute, whether non-capital losses incurred by a taxpayer are included in the taxpayer’s non-capital loss balance for the years when the losses were incurred or the year when the amount of the losses are accepted by the Minister or determined by the courts?

Position: A taxpayer’s non-capital loss is included in the taxpayer’s non-capital loss balance for the years when the losses were incurred.

Reasons: There is no provision in the Act that permits the Minister to move a loss incurred in one taxation year to the taxation year the loss is accepted by the Minister or determined by the courts.

Author: Ouimet, Jennifer
Section: 111(1)(a), 111(8)

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                                                                                                                                     2014-053387

Attention:  XXXXXXXXXX

October 29, 2014

Dear XXXXXXXXXX:

Subject: Non-capital losses

We are writing in response to your letters dated May, 26, June 8 and August 14, 2014, requesting a ruling that the Canada Revenue Agency (the “CRA”) would accept XXXXXXXXXX’s request to move losses incurred in its XXXXXXXXXX to XXXXXXXXXX taxation years to its XXXXXXXXXX taxation year, which was the year that the losses were determined by the Tax Court of Canada (the “Court”) and reflected in notices issued to the corporation by the CRA.

You have advised us that the corporation filed corporate income tax returns for the XXXXXXXXXX to XXXXXXXXXX taxation years indicating that the corporation had taxable income and tax payable. The CRA assessed these tax returns as filed. The corporation filed notices of objection disputing the assessments on the basis that the returns were incorrect, that the person who filed the returns on behalf of the corporation was not authorized to do so, and that the corporation actually incurred non-capital losses in the XXXXXXXXXX taxation years. On XXXXXXXXXX, the Court decided in favour of the corporation. As a result of the Court’s decision, on XXXXXXXXXX, the CRA issued reassessments for the XXXXXXXXXX taxation years showing non-capital losses totalling approximately $XXXXXXXXXX.

It is our understanding that in XXXXXXXXXX the corporation filed an amended XXXXXXXXXX corporate income tax return requesting that the non-capital losses incurred in the XXXXXXXXXX to XXXXXXXXXX taxation years be moved to the XXXXXXXXXX taxation year. On XXXXXXXXXX, the CRA denied the request and explained that “(a)lthough the returns were reassessed on XXXXXXXXXX, the source years of the losses remain the XXXXXXXXXX to XXXXXXXXXX tax years respectively.” You state that the years the losses were incurred are not in dispute. However, in your view the corporation could not realize a benefit from any of the losses until the losses were “ascertained and acknowledged” by the CRA. Accordingly, in your view the total of the losses should be a XXXXXXXXXX loss, resulting in a XXXXXXXXXX‑year loss carry forward period available under paragraph 111(1)(a) of the Income Tax Act (the “Act”) as it existed in XXXXXXXXXX.

Our Comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70‑6R6, Advance Income Tax Rulings. However, we can provide the following comments.

Subsection 111(8) of the Act defines a non-capital loss for a taxation year, in general, as the excess of the taxpayer’s losses for the year from employment, business and property, allowable business investment loss, and certain other amounts deductible in computing taxable income for the year over the taxpayer’s income and taxable capital gains for the year. A non-capital loss exists whether or not it is reported in the tax return for the taxation year when it was incurred. A taxpayer, including an individual, may apply, carry back or carry forward a non-capital loss as permitted by paragraph 111(1)(a) of the Act. For more detailed information on the non-capital loss carry over, please refer to Interpretation Bulletin IT-232R3, Losses - Their Deductibility in the Loss Year or in Other Year, dated July 4, 1997.

The CRA is required to assess in accordance with the law. There is no provision in the Act that permits the Minister to move a loss incurred in one taxation year to the taxation year the loss is accepted by the Minister or determined by the courts. Therefore, the notice of assessment of a particular taxation year will include the taxpayer’s non-capital losses in the years the losses were incurred rather than in the year the losses were accepted by the Minister or determined by the courts. In your situation, since the losses were incurred in the XXXXXXXXXX to XXXXXXXXXX taxation years, as confirmed by the Court, the non-capital losses belong to those particular taxation years and the CRA cannot move the losses to the XXXXXXXXXX taxation year. As a result, the losses were only available throughout the XXXXXXXXXX-year carry forward period permitted at that time by paragraph 111(1)(a).

We recognize that the XXXXXXXXXX to XXXXXXXXXX taxation years were not settled until after at least some of the losses had expired. However, a loss does not have to be accepted by the CRA in order for the taxpayer to claim it against income in other years. Where losses are in dispute, the taxpayer may deduct the losses against income in other taxation years as permitted by paragraph 111(1)(a). When the deduction of the losses is denied the taxpayer may file a notice of objection for the year the deduction was claimed. This will protect the taxpayer’s ability to carry forward (or back) losses that are in dispute. Once the loss year has been settled, the objection relating to the deduction of the losses may be settled as well. However, we recognize that in your situation the corporation did not have taxable income in any of the years when the XXXXXXXXXX to XXXXXXXXXX losses could have been used. As a result, the losses expired.

The Court decision, Burleigh et al. v. The Queen, 2004 TCC 197 (“Burleigh”), supports the view that losses do not have to be processed or accepted by the CRA in order to be claimed by a taxpayer. In Burleigh, the Crown argued that a taxpayer could not deduct losses from a prior year because the taxpayer had not reported the losses on its original tax return and the losses had not been accepted by the CRA. In its decision against the Minister, the Court stated at paragraphs 12 and 13:

“Finally, the idea that the return of income must have been processed by the CCRA has no basis on the statute or in common sense.

Losses that are available for carryforward — and I am talking about any kind of loss to which subsection 111(1) applies — like income, have an existence that is independent of their being reported in a return of income. They are susceptible of objective determination. The taxpayer’s right to utilize such losses is not subject to the restrictions which the Crown would impose on them. I am not prepared to read into the Income Tax Act words that are not there.” [Emphasis added]

It is our understanding that your request to amend the XXXXXXXXXX corporate income tax return was denied. It is our view that the CRA was correct to deny the amended XXXXXXXXXX return in the situation described since the losses were not incurred in XXXXXXXXXX.

In addition, pursuant to subsection 152(1.1) of the Act, a notice of loss determination may be issued where the Minister ascertains the amount of a taxpayer’s non-capital loss for a taxation year in an amount that differs from the one reported in the taxpayer’s income tax return. It is our understanding that the Minister agreed with the non-capital loss reported in the original XXXXXXXXXX tax return filed. Therefore, the CRA could not grant a request for a loss determination for that taxation year.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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