Principal Issues: Whether, in a hypothetical scenario, a reassessment of tax resulting from the modification of an ending inventory balance of the taxpayer for taxation year 1 would result in a change to the taxpayer's "balance" for that year such that a consequential assessment can be made, pursuant to subsection 152(4.3), to adjust the tax resulting from the modification of the opening inventory balance for the subsequent taxation year.
Position: Yes
Reasons: The reassessment of tax resulting from the modification of the ending inventory results in a change to the taxpayer's income, taxable income and tax payable, all of which meet the definition of "balance" in subsection 152(4.4).
XXXXXXXXXX 2014-053711 Sophie Larochelle May 29, 2017
Dear Mr. XXXXXXXXXX,
Consequential assessment after the expiry of the normal reassessment period
This is further to your e-mail dated June 19, 2014, in which you provided a hypothetical situation for which you requested our views, specifically as to the applicability of the consequential assessment provisions in subsections 152(4.3) and (4.4) of the Income Tax Act (the "Act").
We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references in this letter are to the provisions of the Act.
Facts
Our understanding of the hypothetical facts you submitted is as follows:
- A notice of assessment for a particular taxation year ("Year 1") was under objection regarding the method of inventory valuation.
- The position of the taxpayer was not accepted by the appeals officer and thus the inventory balance at the year end was adjusted in Year 1 so that, in the subsequent taxation year ("Year 2"), the corporation would ordinarily be entitled to an additional deduction in respect of the cost of goods sold if Year 2 were not otherwise statute-barred.
- The corporation wishes to have the option of requesting the Canada Revenue Agency (the "CRA") to issue a consequential Notice of Assessment for Year 2 to allow for an additional deduction in respect of the cost of goods sold in Year 2.
- The Year 2 adjustment request would be solely for the purpose of reflecting the Year 1 adjustment and would be directly related to the Year 1 inventory adjustment.
- The one-year deadline following the extinguishment or determination of all objection or appeal rights with respect to Year 1 is still running.
Your interpretation
Your reading of subsections 152(4.3) and (4.4) is to the effect that all the requirements are satisfied with respect to the hypothetical situation submitted. Accordingly, in your view, the corporation could request the CRA to issue a consequential assessment for Year 2 to reflect the tax resulting from the change in the opening inventory balance arising from the closing balance change for Year 1.
Our Comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations, issued on April 22, 2016.
Subsection 10(2) of the Act requires a taxpayer to have its inventory at the commencement of the year valued at the same amount as the amount at which it was valued at the end of the preceding taxation year for the purpose of computing income for that preceding year.
Under subsection 152(4.3), if the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may reassess the tax, interest or penalties payable by the taxpayer, redetermine an amount deemed to have been paid or to have been an overpayment by the taxpayer or modify the amount of a refund or other amount payable to the taxpayer (a "consequential assessment"). However, the Minister can only make such a consequential assessment to the extent that it can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
The "balance" for the purposes of subsection 152(4.3) is defined in subsection 152(4.4) as the income, taxable income, taxable income earned in Canada or any loss of the taxpayer for the year, or the tax or other amount payable by, any amount refundable to, or any amount deemed to have been paid or to have been an overpayment by, the taxpayer for the year.
In the Tax Court of Canada decision Hevey v. The Queen, 2005 TCC 76, Bowie J stated that for the purpose of determining whether subsection 152(4.3) applies, the following issues must be considered:
i) has there been an assessment or a decision on an appeal?
ii) if so, did it result in a change to a particular balance within the meaning of that word as it is defined in subsection 152(4.4)?
iii) if so, can the reassessment reasonably be considered to relate to that change in the particular balance for the earlier year?
In the hypothetical situation submitted, we are of the view that these conditions are met since a reassessment modifying the tax payable following a change in the closing balance of the inventory in Year 1 results in a change in the "balance" of the taxpayer for Year 1 and that the request to adjust the tax payable for Year 2 by changing the opening inventory balance can reasonably be considered to relate to the change in the "balance" of the taxpayer in Year 1.
In the situation described above, a consequential assessment could therefore be issued under subsection 152(4.3) to reflect the tax payable as a result of an adjustment to the opening inventory balance for Year 2, so that it is consistent with the Year 1 year end inventory balance, as determined by the reassessment.
We hope that our comments are of assistance.
Best regards,
Yves A. Grondin
Specialist, Industry Sector
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch