Principal Issues: 1. Whether document E2009-031387 replaces E2008-027550.
2. What is the appropriate effective interest date for losses carried back to offset taxable income.
Position: 1. No.
2. It depends on the facts.
Reasons: 1. It could be subparagraph 161(7)(b)(i), (ii), (iii), or (iv), depending on the facts.
2. Should be subparagraph 161(7) (b)(iv)
January 29, 2010
Ottawa Tax Services Office HEADQUARTERS Audit Division Lindsay Frank Attention: Marc Charron (613) 948 - 2227 Manager, Large File Cases 2009-033734
Arrears Interest on Audit or Taxpayer Requested Adjustments
This is in reply to an email from Stephen Fox on the application of subsection 161(7) of the Income Tax Act (the "Act"), in particular paragraph 161(7)(b).
At issue are (1) whether the position stated in document E2009-031378 replaces the position stated in document E2008-027550; and (2) the appropriate effective interest date for losses carried back to offset increased taxable income in a preceding year.
The intent of subsection 161(7) of the Act is to cover situations where a taxpayer ignores payment of taxes, with the expectation that it would have subsequent losses to erase the liability. In essence, paragraph 161(7)(b) provides that the application of losses carried back to a particular year does not cancel interest. Connaught Laboratories Ltd. v. Canada [1995] 1 C.T.C. 216 (F.C.T.D.) stands for the proposition that such carry back would not affect the calculation of interest until 30 days after the latest of 4 possible dates listed in subparagraphs 161(7)(b)(i) to (iv).
The position taken in document E2009-031378 does not override the position taken in E2008-027550. The former recognises the intent of the legislation, and can be distinguished from the latter on a unique set of facts. In document E2008-027550, subparagraph (ii) and (iv) both applied. Subparagraph (ii) applied as the loss reported in a subsequent year was carried back at the taxpayer's request on filing. However, subparagraph (iv) applied when the taxpayer requested additional losses be carried back when an audit was completed.
In document E2009-031378, subparagraph (ii) applied because the taxpayer requested, when filing the return, the losses in the current year be carried back to a preceding taxation year to erase taxable income in its entirety. It applied as well when an audit of that preceding taxation year resulted in an increase of taxable income, and the taxpayer decided to offset totally that increase with additional losses from the subsequent year after the initial carry back.
In other words, subparagraph (ii) would apply when a taxpayer files a return of a subsequent year, and carries back to a preceding year sufficient losses to entirely offset the income of the preceding year. This would be the case even if the income is later increased when as a result of an audit the taxpayer is informed that that the income of the preceding year is higher than originally reported.
In the instant case, as a result of an audit, the taxpayer's income for the 2001 taxation year was increased and the losses for the 2002 taxation year were reduced. There were no additional losses available from the subsequent year to carry back to the preceding year as was the case in document E2009-031378. As a result, on completion of the audit, the taxpayer requested losses from the 2004 taxation year be carried back to offset the additional income increase in the 2001 taxation year. Under the circumstances, we share your view that subparagraph (iv) is the appropriate applicable provision.
Should you need clarification or additional information on the foregoing, please do not hesitate to contact Lindsay Frank at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
c.c. Stephen Fox
Large File Case Manager
Audit Division
Ottawa Tax Services Office