Issuance of Notice of Determination under subsection 152(1.1)

CRA document 2014-0550351C6 provides a response to Question E1 posed at the 2014 Tax Executive Institute (TEI) liaison meeting. In 2013, the TEI had recommended that the Department of Finance (Finance) consider an amendment to the Act that would require the CRA to make an initial determination of loss for a taxation year at the same time and in the same manner as the initial determination of income for that year. Finance had indicated that they would support an interpretation of subsection 152(1.1) that allowed a taxpayer to request that the amount of a loss be determined when the taxpayer files its return.

Income Tax Rulings stated that if “a taxpayer files its return of income and the Minister accepts the return as filed, the amount of the taxpayer’s loss has not been “ascertained” by the Minister in an amount that differs from the one reported in the return.” This lack of difference results in the second requirement of subsection 152(1.1) listed above not being met. In such a situation, the Minister could not issue a loss determination upon request of the taxpayer at the time of filing its return of income unless the existing legislation is amended.

The CRA document also noted that “this interpretation has been confirmed by the courts.”

We continue to hold the view, as stated in 2014-0550351C6, that the Act would need to be amended in order to allow the Minister to issue a Notice of Determination where a taxpayer has requested one confirming the amount of a loss reported on the initial income tax return in situations where the CRA agrees with the reported loss amount.

If an audit by the CRA results in a taxpayer having a loss that was not previously reported by the taxpayer for that taxation year, then a Notice of Determination could be provided upon a request for one by the taxpayer. In such a case, the CRA has ascertained a loss (the first requirement) that differs from what was reported on the taxpayer’s tax return as filed (the second requirement), and a Notice of Determination has been requested by the taxpayer (the third requirement). This conclusion is supported by the legislation, numerous cases, as well as interpretation bulletin IT-512 (Cancelled) and other CRA documents. ^{(footnote 2)}

Request for a Notice of Determination when taxpayer requests amendments to a tax return

Of the three previously stated criteria required to be met in order to issue a Notice of Determination, the first two raise more questions than the third. While not necessarily always as straightforward as one might think, for simplification purposes, our comments assume that the final criterion has been met. Therefore, our comments only consider the concepts of when the Minister has “ascertained” a loss and when a taxpayer has reported an amount in a return.

Ascertain a loss

The word “ascertain” is not defined in the Act. As stated in the Federal Court Trial Division decision for Burnet ^{(footnote 3)} , “[a]ccording to the Shorter Oxford English Dictionary (1973) “ascertain” means “to determine” or “to fix”. An amount may be “ascertained” or “fixed” even if a precise amount is not given; it is sufficient if the amount can be made certain through the use of a formula.” ^{(footnote 4)} While this case was later overturned by the Federal Court of Appeal, this definition of ascertain was not disputed by the Federal Court of Appeal.

The wording of subsection 152(1.1) provides no indication under what circumstances the Minister may, or must, ascertain a loss amount. The details of exactly when the Minister is considered to have “ascertained” a loss has not been discussed in many documents. The response to Question 27 of the Revenue Canada Round Table at the 1986 CTF Conference states that the CRA “will provide a loss determination only when the loss as filed by the taxpayer is changed as a result of an audit or otherwise by [the CRA].” In addition, paragraph 4 of IT-512, Determination and Redetermination of Losses ^{(footnote 5)} states “Where at the initial assessing stage or as a consequence of a reassessment arising from an audit or other investigative action by the Department the Minister ascertains a loss…” Therefore, it appears that in the past the CRA considered the Minister to have ascertained a loss amount after that amount was subject to an audit, assessment or similar procedure undertaken by the CRA.

While these documents are not recent and IT-512 has been cancelled, we have not found a case or other CRA document that provides comments to contradict this interpretation. In fact, the Federal Court of Appeal decision for Burnet ^{(footnote 6)} supports the view that an ascertainment is a “definite undertaking” by the Minister to take the loss in question “into consideration” for the taxation year and “issue a Notice of Determination accordingly.”

The provisions in Divisions I and J of the Act that apply to assessments generally also refer to determinations “with any modifications that the circumstances require.” ^{(footnote 7)} The legislation supports the view that the Minister examines a taxpayer’s return to assess a tax liability, ^{(footnote 8)} but ascertains a loss to determine its amount. ^{(footnote 9)}

By modifying comments that have been made regarding an assessment of tax, ^{(footnote 10)} it seems logical to conclude that the determination of a loss would be the ascertainment by the Minister of the type and amount of that loss after all the necessary information has been taken into account. The level of effort needed to make this ascertainment would be at the discretion of the Minister. ^{(footnote 11)} It would not be the same in every situation. So, while one ascertainment could involve the review of a requested amendment submitted by the taxpayer, another could involve a full- scale audit of the taxation year.

Certain CRA documents have been interpreted to state that no ascertainment occurs where the difference in the amount of a loss reflects an amendment requested by the taxpayer. Rather than concluding that no ascertainment has occurred, paragraph 4 of IT-512 states that the Minister “will not be considered to have ascertained that the amount of a loss differs from an amount reported by the taxpayer where the difference fully reflects a change requested by the taxpayer as a result of amended or new information.^”

It is our view that documents that state that an ascertainment has not occurred if the difference in the amount of the loss is the result of a taxpayer request (such as XXXXXXXXXX, E 2011- 0401241I7) should not be relied upon. In our view, the interpretation that no ascertainment occurs when the change is requested by the taxpayer is not supportable. To clarify, in the context of a final loss amount being different than the loss amount in a return as filed by a taxpayer, the application of subsection 152(1.1) should be the same whether the final loss amount arises from a request for amendment by the taxpayer or from an audit or investigation by the CRA. In either case, the CRA would have performed a sufficient analysis of the components of the loss to decide whether the loss should be the taxpayer’s original or amended loss amounts (or types), or something else entirely. ^{(footnote 12)} That decision is the ascertainment. What prompted the decision to be made is not important, or a requirement of the legislation.

In our view, the more appropriate interpretation of paragraph 4 of IT-512 is that where a taxpayer’s requested amendment is fully reflected (or accepted by the Minister), the Minister will not be considered to have ascertained a different loss amount from the taxpayer.

Amount reported by the taxpayer

In the context of a taxpayer requesting amendments to a return, the wording of subsection 152(1.1) does not specify that the loss reported on the return of income is to be the taxpayer’s return as filed or an amended return. If the CRA does not accept the requested amendment, is the reported amount contemplated in subsection 152(1.1) referring to the amount reported in the return as filed or the requested amendment amount?

The courts have noted that the filing of an amended income tax return is a request by the taxpayer for a reassessment. ^{(footnote 13)} The CRA is not required to accept the requested amendment. ^{(footnote 14)} It seems inappropriate to treat a fully rejected amendment request as a return. If a nil assessment is not considered an assessment, ^{(footnote 15)} and a penalty of nil is not considered a penalty, ^{(footnote 16)} in our view, a fully rejected amendment request should not be considered a return.

By comparison, it seems appropriate to consider a fully accepted request for an amendment to be an amount reported in a taxpayer’s return. Under this interpretation, if the CRA fully agrees with a taxpayer’s request to amend a loss for a taxation year, then it is reasonable to consider the amended balance to be the amount reported in a return by the taxpayer. As there is no disagreement about the loss in this situation, there would be no ability to provide a Notice of Determination as the second requirement is not met. Although the interpretation bulletin was cancelled in 2012, it is worth noting that this conclusion is supported in paragraph 4 of IT-512. In our view, the wording of IT-512 supports the interpretation that amended amounts requested by the taxpayer become the amount reported in a return by the taxpayer for the taxation year when they are fully accepted by the CRA. As such requested amendments were fully accepted by the CRA, no difference exists to support the issuance of a Notice of Determination.

If the CRA were to only partially agree with a taxpayer’s request to amend a return, then the CRA would be in disagreement with both the amount reported on the return as filed and the requested amended amount. In this case, the CRA’s ascertained amount would not agree with the amount reported in a return by the taxpayer (the second requirement). It seems reasonable to conclude that the taxpayer’s reported amount in this situation would be the amount reported in the return as filed. This applies the same logic as that used above when concluding that a fully rejected amendment request does not constitute an amount reported by the taxpayer in a return. In other words, unless an amendment request is fully accepted, in our view, the requested amount would not be an amount reported by the taxpayer in a return.

In summary, it is our view that if a taxpayer requests an amendment that will result in a loss that is not reported on its return for the year as filed, and the CRA fully rejects that request, no Notice of Determination can be issued as the amount ascertained by the Minister does not differ from the amount reported by the taxpayer in their return (the original return). Similarly, if such a request is fully agreed to by the CRA, no Notice of Determination can be issued as the amount ascertained by the Minister agrees with the amount reported by the taxpayer in their return (the amended return). However, if such a request is partially agreed to by the CRA, then a Notice of Determination can be issued if the taxpayer requests one as the amount ascertained by the Minister differs from the amount reported by the taxpayer in the filed return.

A simple table reflects this position for a taxpayer that initially reported a non-capital loss of $100 for the tax year that the taxpayer now believes is a non-capital loss of $200.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

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

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 This is supported by subsection 152(1.1), the CRA’s document 2014-0550351C6, and Inco Limited v. HMQ, [2004] 4 C.T.C. 2114 2004 D.T.C. 2847.
2 For example, see Inco Limited v. HMQ, [2004] 4 C.T.C. 2114 2004 D.T.C. 2847, Hoffman v The Queen (2010 TCC 267), E 2006-0179961I7 (not publicly available), E 2011-0401241I7.
3 Burnet v MNR (97 DTC 5346, [1997] 3 CTC 192) (FCTD).
4 The Burnet FCTD decision also refers to the following cases as support for these comments: [Hill v. Straight [1913] 5 W.W.R. 225, at 230 (Man.K.B.)), British Pacific Properties Ltd. v. Minister of Highways and Public Works ((1980) 2 SCR 283, 112 D.L.R. (3d) 1 at 6 (S.C.C.)) and Rizzi v. Grazcos Co-operative Ltd. ((1981), 153 C.L.R. 669, at 675 (High Court of Australia)).
5 IT-512, Determination and Redetermination of Losses was issued on July 15, 1988, and cancelled on September 30, 2012 as it was considered obsolete.
6 See paragraph 17 of Burnet v MNR (98 DTC 6205, [1999] 3 CTC 60).
7 Subsection 152(1.2) of the Act.
8 Subsection 152(1) of the Act.
9 Subsection 152(1.1) of the Act.
10 See CRA internal interpretation XXXXXXXXXX (not publicly available), and the decisions for Provincial Paper Limited v MNR (Ex. Ct.) [1954] CTC 367, as well as Pure Spring Co. Ltd. v MNR ([1946] 2 DTC 844 at 857 [Ex. C.].) and The King v. Deputy Federal Commissioner of Taxation (S.A.); ex parte Hooper ((1926) 37 C.L.R. 368 at 373), one or both of which are cited in Leola Purdy, Sons Ltd. v The Queen (2009 TCC 21), Anchor Pointe Energy Ltd. v The Queen (2006 TCC 424), Roland Parent v. H.M.Q. (2003 TCC 509), and The Queen v Riendeau ([1990] 1 CTC 141, FCTD, affirmed by the FCA in [1991] 2 CTC 64).
11 Provincial Paper Limited v MNR (Ex. Ct.) [1954] CTC 367.
12 See paragraphs 37 and 38 of Petratos et al v The Queen (2013 TCC 240).
13 See paragraphs 8 and 17 of Armstrong v. The Queen (2006 FCA 119).
14 See paragraph 8 of Armstrong v The Queen (2006 FCA 119), paragraph 25 of Petratos et al v The Queen (2013 TCC 240) and paragraph 38 of Imperial Oil Ltd. R (2003 TC 46), as cited in paragraph 32 of AFD Petroleum Ltd. v AGC (2016 FC 547).
15 See paragraph 16 of Nagel v The Queen (2018 TCC 32), paragraph 50 of Bérubé v The Queen (2014 TCC 304) and paragraph 30 of The Queen v Interior Savings Credit Union (2007 FCA 151).
16 See paragraph 37 of Exida.com Limited Liability Company v The Queen (2010 FCA 159).
17 See 2014-0530751M6.