Principal Issues: Whether arrears interest should be calculated before or after the effect of a loss carryback.
Position: Arrears interest must be calculated before the effects of a loss carryback.
Reasons: S. 161(7)(a)(iv).
March 3, 2010
Kitchener/Waterloo Tax Services Office HEADQUARTERS Appeals Division Income Tax Rulings Directorate Lindsay Frank Attention: Sylvia Dienst, Team Leader (613) 948-2227
2009-033150
Loss Carryback and Arrears Interest
This is in reply to an email from Gerardo Elises. At issue, is the calculation of interest following a reassessment on account of a loss carryback.
A taxpayer requested a loss be carried back from 2007 to 2004. As a result, a refund was issued, but instalment interest and arrears interest were assessed. However, the arrears interest was calculated after taking into consideration the effect of the loss carryback. Mr. Elises is of the view that, pursuant to subparagraph 161(7)(a)(iv) of the Income Tax Act, arrears interest should have been calculated on the tax payable before the loss carryback took effect. We share his view, see Slau Ltd. v. Canada, [2009] 1 C.T.C. 277 (F.C.) at paragraph 35, where the effect of the operation of the loss carryback has been explained as follows:
"Because s. 161(7) specifically provides dates for the computing of interest on taxes reduced by loss carryback, it indicates that according to the ITA, loss carryback does not operate to negate the original existence of taxes owed and any related interest and penalties. Loss carryback does not create a legal fiction that taxes from prior years were never owed. Rather, it simply allows a taxpayer to offset the taxes they owe with non-capital losses reported previously or subsequently. Thus the argument that taxes were never owed is incorrect. The taxes were owed until the applicant requested that they be offset by losses ..."
While Slau was reversed in [2010] 1 C.T.C. 15 (F.C.A.), it should be noted that the reversal was on other grounds, and as such does not disturb the finding at first instance as it pertains to the exigibility of interest.
Should you need clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law
Ontario Tax Division
Income Tax Rulings Directorate
c.c. Gerardo Elises
Appeals Division
Kitchener/Waterloo Tax Services Office