Principal Issues: [TaxInterpretations translation] Can the Minister reassess by virtue of subsection 152(4) in a particular situation?
Position: No
Reasons: Legislative analysis
January 7, 2011
Montreal TSO, Headquarters Technical Tax Interpretation Services Income Tax Rulings Directorate Isabelle Landry, M. Fisc. 450-623-0193 Attention: Mr. Michel A. Robert 2010-038701
Capital cost allowance in a prescribed year
This memorandum is in response to your e-mail of November 15, 2010, in which you asked for our opinion regarding the potential for reassessing under subsection 152(4) in a particular situation described below (the “Particular Situation”).
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have presented it to us is as follows:
1. Opco, a Canadian-controlled private corporation, has made a misrepresentation through negligence, carelessness or wilful default in its income tax return filed for a particular taxation year ("Year 1").
2. The misrepresentation in question had the effect of increasing the investment tax credit deducted by Opco under subsection 127(5) in computing its Part I tax for Year 1 and thereby reducing its Part I tax for that taxation year to nil.
3. Opco did not claim in computing its income from a business for Year 1 the maximum amount of capital cost allowance for all classes.
4. Following an audit, the Canada Revenue Agency ("CRA") issued a Notice of Reassessment to Opco after the expiry of the normal reassessment period applicable to Year 1 pursuant to subparagraph 152(4)(a)(i). This reassessment reduced the investment tax credit deductible in computing tax for Year 1 to nil and, as a result, determined the Part I tax for Year 1 to be $XXXXXXXXXX.
5. Opco served the CRA with a Notice of Objection to the Notice of Reassessment for Year 1 on the ground inter alia that subparagraph 152(4)(a)(i) was not applicable.
6. Opco has also applied to the CRA to request an adjustment in computing its business income for Year 1 so as to claim the maximum amount of capital cost allowance for all classes. The adjustment, if accepted by the CRA, would have the effect of reducing Opco's income, taxable income and Part I tax for Year 1 to nil.
7. In its income return filed in respect of the third taxation year ending after Year 1 ("Year 4"), Opco did not claim, in computing its income from a business, the maximum amount of capital cost allowance for all classes and determined such income and its taxable income to be nil. CRA has sent Opco a notice that no tax was payable in respect of Year 4 and Opco's normal reassessment period for Year 4 has not yet expired.
Your Questions:
You asked us the following three questions respecting the Particular Situation:
1. Can the CRA revise Opco's capital cost allowance claim for Year 1 and issue a Notice of Reassessment pursuant to subsection 152(4)?
2. If Opco had submitted its request for an adjustment to the CRA to claim the maximum amount of capital cost allowance in computing its business income for Year 1 before the Notice of Reassessment was issued, could the CRA accept the request and take it into account when issuing the Notice of Reassessment pursuant to subsection 152(4)?
3. Could the CRA accept a request by Opco for an adjustment in respect of Year 4 to allow it to claim the maximum amount of capital cost allowance in computing its income from a business if the effect of the request would be to increase Opco's non-capital loss for Year 4? If so, would the CRA be able to issue a Notice of Reassessment for Year 1 if Opco applied to amend its income tax return to deduct under paragraph 111(1)(a) in computing its taxable income the loss incurred in Year 4 (a loss carryback)?
Our Comments:
Subsection 152(4) provides that the Minister may make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, or notify in writing that no tax is payable, provided that such an assessment is made before the expiration of the "normal reassessment period" defined in subsection 152(3.1). The Minister may also make an assessment, reassessment or additional assessment after the normal reassessment period but only in the special circumstances described in paragraphs 152(4)(a) and (b). Subparagraph (a) includes situations where a taxpayer has made a misrepresentation through negligence, carelessness or wilful default in the taxpayer's income return filed for a particular taxation year.
Subparagraph 152(4.01)(a)(i) provides, among other things, that an assessment, reassessment or additional assessment to which paragraph 152(4)(a) applies in respect of a taxpayer for a taxation year may be made after the taxpayer’s normal reassessment period in respect of the year only to the extent that it can reasonably be regarded as relating to any misrepresentation made by the taxpayer that is attributable to neglect, carelessness or wilful default. It follows from these provisions that when the CRA issues a Notice of Reassessment for a taxation year after the normal reassessment period has expired by relying on subparagraph 152(4)(a)(i), only adjustments attributable to neglect, carelessness, wilful default or fraud may be made by the CRA.
In the Particular Situation, it is our view that the CRA would have the authority to revise the amount of capital cost allowance claimed by Opco for Year 1 and issue a Notice of Reassessment accordingly only if it was shown that it is reasonable to consider that this adjustment relates to neglect, carelessness, wilful default or fraudulent misrepresentation made by Opco in Year 1. In the absence of such a demonstration, it is our view that the CRA would not have the authority under the Act to issue a Notice of Reassessment for Year 1. Although we do not have all the facts surrounding the Particular Situation, we find it difficult in this case to conclude that it would be reasonable to consider that the revision to the amount of capital cost allowance claimed by Opco for Year 1 relates to the misrepresentation made by Opco in connection with the calculation of its investment tax credit deducted pursuant to subsection 127(5) in computing its Part I tax for Year 1.
Our position would be the same if the adjustment request had been made before the Notice of Reassessment was issued. This position is consistent with the conclusion of the courts in Canadian Marconi v. The Queen, 91 DTC 5626 and Jack A. Miller v. Her Majesty the Queen, 93 DTC 5035, that the Minister does not have the authority to make adjustments to a taxpayer's tax returns for a taxation year outside the normal assessment period, even if those adjustments were requested by the taxpayer.
Furthermore, paragraph 5 of Information Circular 84-1, Revision of Capital Cost Allowance Claims and Other Permissive Deductions, outlines the CRA's general position whereby the Minister authorizes the revision of the amount of capital cost allowance in respect of a particular year when a higher tax reassessment is made for the year and a taxpayer has not claimed maximum capital cost allowances in all classes in that year. In situations where such a request for review occurs after the normal reassessment period has expired, the Minister must consider subsections 152(4) and 152(4.01) before allowing such a review.
Finally, paragraph 10 of IC 84-1 indicates that where a taxpayer requests a revision of capital cost allowance claimed in a taxation year for which a notification that no tax is payable had been issued, such request will be allowed provided there is no change in the tax payable for the year or any other year filed, including one that is statute barred, for which the time has expired for filing a notice of objection. Consistently with this position, the CRA should not accept the adjustment request outlined in your third question as it would result in changes to the tax assessment for Year 1, which is a statute-barred year.
We hope that our comments are of assistance.
Best regards,
Guy Goulet CA M. Fisc.
Interim Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.