2017-0736291E5 Interest calculation - loss substitutions

Principal Issues: Whether subsections 161(1) and (7) of the Act apply, such that interest is applicable where there is a substitution of losses for a particular taxation year that does not result in a change in tax payable.

Position: Yes. It is the longstanding administrative position of the CRA to not assess interest when there is a substitution of losses for a particular taxation year that does not result in a change in tax payable.

Reasons: Generally, subsections 161(1) and (7) apply such that where a loss carry forward has been applied to a taxation year to reduce tax payable to nil, and is later substituted with a loss carry back, the calculation of interest would result in an assessment of interest from the balance due date of the taxation year to which the loss is applied, until 30 days after the date the subsequent taxation year’s return (the year of the loss) was filed. Nevertheless, the CRA has historically taken the administrative position to not assess interest in these particular loss substitution situations.

Author: Godson, Gillian
Section: 161

XXXXXXXXXX                                                                              2017-073629
                                                                                                      G. Godson
March 21, 2018

Dear XXXXXXXXXX:

Re: Interest calculation – loss substitutions

We are writing in response to your email dated XXXXXXXXXX, in which you requested clarification of the application of subsections 161(1) and (7) of the Income Tax Act (the “Act”), such that interest is applicable where there is a substitution of losses for a particular taxation year that does not result in a change in tax payable. We also acknowledge our various telephone conversations (Godson/XXXXXXXXXX).

XXXXXXXXXX. You indicated that the situation that is at issue is similar to the facts outlined in our document 9504905. The facts are as follows:

-     Aco incurred non-capital losses of $1,000 in its 1990 taxation year.

-     Aco realized a taxable capital gain of $1,000 in its 1991 taxation year and applied its 1990 non-capital losses against it, resulting in no taxable income or tax payable.

-     Aco incurred an allowable capital loss of $1,000 in its 1992 taxation year.

-     Aco files an amended return for 1991 and claims a deduction under paragraph 111(1)(b) for the $1,000 net capital loss, eliminating the 1991 taxable capital gain resulting in the non-capital losses from 1990 being available for use in a future taxation year.

Specifically, you have asked whether it remains our current administrative policy not to assess interest where there is a substitution of losses and the facts are similar to those outlined above.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist taxpayers 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In general, paragraph 161(7)(b) of the Act provides the effective date for the purposes of computing interest under subsections 161(1) or (2) of the Act for a particular taxation year where the amount of tax payable for a taxation year is reduced because of certain deductions or exclusions arising from the carry back of losses or tax credits or from events in subsequent taxation years. Where this is the case, interest on any unpaid tax for the taxation year is calculated without regard to the reduction until the day that is 30 days after the latest of:

(i)   the first day immediately following that subsequent taxation year,

(ii)  the day on which the taxpayer's return of income for that subsequent taxation year was filed,

(iii) where an amended return of the taxpayer's income for the particular year or a prescribed form amending the taxpayer's return of income for that year was filed, the day on which the amended return or prescribed form was filed, and

(iv)  where, as a consequence of a request in writing, the Minister reassessed the taxpayer's tax for the particular taxation year to take into account the loss carry back, the day on which the request was made.

Accordingly, where a loss carry forward has been applied to a taxation year to reduce tax payable to nil, and is later substituted with a loss carry back, the calculation of interest under paragraph 161(7)(b) would result in a calculation of interest from the balance due date of the taxation year to which the loss is applied until 30 days after the latest of the dates noted above.

Nevertheless, it remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore, for a situation like the one outlined in the example above, the CRA would not assess interest.

We trust these 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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