2021-0918031I7 Ontario CMT - corrected adjusted net loss balance

Principal Issues: Can adjustments be made to a taxpayer’s reported Ontario CMT balances (adjusted net loss and eligible losses) when the taxation year that the balances relate to is statute barred?

Position: Yes, provided that the future taxation year's normal reassessment period has not ended, or is the subject of an appeal.

Reasons: Note that any CMT credit or CMT payable balance for the taxation year cannot be changed if the taxation year is statute barred. This would include any amount of eligible losses that were deducted from adjusted net income for the taxation year when calculating any CMT liability of the taxpayer. However, it is our view that any adjusted net loss balance for the taxation year could be corrected in a future taxation year if it was not correctly reported because an error has been made by the taxpayer.

Author: Clarkson, Julia
Section: 57(1) and (3), 58(1) and (2) of the Taxation Act, 2007

                                                                                                 May 10, 2023

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                                                                                                 Income Tax Rulings
                                                                                                 Directorate

                                                                                                 Julia Clarkson

Attention: Gabriel Crozzoli
                Tax Auditor                                                                2021-091803

Ontario Corporate Minimum Tax adjusted net loss balance correction

We are replying to your request for guidance on whether a taxpayer’s reported Ontario Corporate Minimum Tax (CMT) balances may be adjusted for a taxation year that is statute barred.

All statutory references in this document are to the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the Act), unless stated otherwise.

Your request is with respect to the return of income for the 2014 taxation year of a taxpayer for which the normal reassessment period has ended. The final assessment for Ontario income tax purposes for the 2014 taxation year included the following:

* an adjusted net income balance (as defined in subsection 57(1) of the Taxation Act, 2007 (TA)) for CMT purposes

* eligible losses deducted against the 2014 adjusted net income balance for CMT purposes (as calculated under subsections 58(1) and (2) of the TA)

* a CMT liability of nil.

The taxpayer has requested an adjustment to the 2014 tax return with respect to the amount reported as adjusted net income for Ontario CMT purposes. The requested adjustment is due to an error made by the taxpayer that, if corrected, would result in an adjusted net loss (as defined in subsections 57(3) of the TA) for CMT purposes for the 2014 taxation year. Based on our understanding of the facts, no CMT liability would be created if the proposed adjustments were accepted.

You request our views on whether the taxpayer can recognize a corrected adjusted net loss balance for its 2014 taxation year when calculating its CMT liability in future taxation years despite the 2014 taxation year’s normal reassessment period having ended.

Our comments

Please note that our comments are general in nature; they do not address whether the adjustment proposed by the taxpayer to correct an error in its 2014 taxation year with respect to the reported adjusted net loss amount for Ontario CMT purpose is required or allowed under the TA.

When calculating Ontario CMT, subsection 58(1) of the TA provides that eligible losses are determined at a point in time and calculated to reflect, among other things, the deeming provision in subsection 58(2) of the TA. For taxation years ending after March 22, 2007, subsection 58(1) of the TA generally calculates a corporation’s eligible losses for a particular taxation year to be the sum of the corporation’s adjusted net losses for the previous 20 taxation years (paragraph (b) of variable F), less any of those amounts that were deducted or deemed to have been deducted as an eligible loss for previous years (variable G). Subsection 58(2) of the TA deems eligible losses to be applied to the fullest extent possible to reduce the corporation’s adjusted net income in a taxation year to nil, regardless of whether or not the corporation was subject to the CMT.

It is our view that a corrected adjusted net loss balance for CMT purposes for a statute-barred taxation year could be considered when determining a future taxation year’s eligible loss balance if that adjusted net loss had not been correctly reported because an error was made by the taxpayer. However, such a correction could only be made if the future taxation year’s normal reassessment period had not expired, or if the future taxation year was the subject of an appeal. This is supported by the decision for Leola Purdy, Sons Ltd. v The Queen (2009 TCC 21):

“[16] That is not how Bowman J. (as he then was) saw New St. James Limited. In Coastal Construction, supra,5 he explained:

... The Minister is obliged to assess in accordance with the law. If he assesses a prior year incorrectly and that year becomes statute-barred this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute-barred, even though it involves adjusting carry-forward balances from previous years, whether they be loss carry-forwards or balances of investment tax credits. New St. James Limited v. M.N.R., 66 DTC 5241; Allcann Wood Suppliers Inc. v. The Queen, 94 DTC 1475. No question of estoppel arises: Goldstein v. The Queen, 74 DTC 1029.

[…]

[28] The respondent's concern is unnecessary. We are not dealing with an adjustment request. Nobody is saying that a statute-barred year can be reassessed. The tax the taxpayer has been assessed for the statute-barred year cannot be changed. The assessment of tax for the statute-barred year is "deemed valid and binding notwithstanding any error, defect or omission in the assessment..."15 But it is valid and binding only for the year assessed. If an error was made in the assessment of the statute-barred year which affects another year, the Minister, in assessing the other year, must follow the Act and if there was an error in law in a previous year, including a statute-barred year, that error ought to be corrected so that the assessment for the current year is correct: New St-James Limited, supra, Coastal Construction, supra, Aallcann, supra, Burleigh et al., supra, Cabano, supra, Clibetre Exploration Ltd., supra.”

Accordingly, where a particular taxation year is statute barred, any CMT credit or CMT payable balance assessed for the particular taxation year cannot be changed. However, as supported above, a corrected 2014 adjusted net loss balance may be applied in a taxation year that is subsequent to the 2014 taxation year (provided it is not statute barred) when determining the CMT eligible loss balance for that subsequent year.

For example, the eligible loss balance available to be deducted or deemed deducted (but not to exceed adjusted net income) for the subsequent year would generally be calculated as:

* the total adjusted net losses from the previous 20 taxation years (including any corrected 2014 adjusted net loss balance)

in excess of

* any amount of those losses that was deducted or deemed deducted in a previous taxation year (including the assessed amount of the adjusted net loss that was an eligible loss deducted for the 2014 taxation year).

In summary, similar to our conclusion in internal interpretation E 2015-0585371I7, where reported amounts for a taxation year that is statute barred contain an error, the corrected amount may generally be recognized in a future taxation year’s CMT calculation provided the future taxation year is not statute barred.

We trust that these comments will be of assistance.

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,

Gillian Godson
Section Manager
Specialty Tax Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

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