Principal Issues: 1. Whether the effective interest date is the same for the non-capital loss carryforward and the net capital carryforward.
2. Whether the late filing penalty would be reduced by the application of a future tax consequence such as a loss carryback.
Position: !. Not necessarily.
2. No.
Reasons: 1. S. 161(7) contains a number of events and each event has different start date for computing interest.
The late filing penalty is calculated on tax payable first, before a future tax consequence is considered.
January 28, 2009
Business Returns Directorate Headquarters
Business Registration & Corporation Income Tax Rulings
Programs Division Directorate
Attention: Jeneva Brown Lindsay Frank
613-948-2227
2008-029425Arrears Interest and Late-Filing Penalty
This is in reply to an email from Denis Chartrand, in which he is seeking guidance on a particular file that he has.
At issue are: (1) whether the effective interest date ("EID") for the non-capital loss carry-forward will be the same as the net capital loss carryback; and (2) whether the application of the net capital loss would have a bearing on the amount of the late-filing penalty charged in 1998. To resolve these issues, it is necessary to examine sections 150, 152, 161, and 162 of the Income Tax Act ("the Act").
The facts are as follows. In 1999, a corporate taxpayer incurred a net capital loss, which it requested be carried back and applied to 1997. The return for 1999 was filed late. The application of the loss carryback resulted in a non-capital loss of $5,000.00. The corporation has requested that this newly created non-capital loss be carried forward and applied to 1998. The corporation's year-end is January 31.
At the time of the request, its tax information was as follows:
Taxation Year-End 1997 1998 1999 Net income $5,000.00 $10,000.00 Nil Taxable income $5,000.00 $10,000.00 Nil Part I tax payable $1,500.00 $3,000.00 Nil Net capital loss Nil Nil <$10,000.00>
After making the adjustment, its tax information was as follows:
Taxation Year-End 1997 1998 1999 Net income $5,000.00 $10,000.00 Nil Amount carried back $10,000.00 Nil Nil Amount carried forward Nil $5,000.00 Nil Taxable income Nil $5,000.00 Nil Part I tax payable Nil $1,500.00 Nil Non-capital loss $5,000.00 Nil Nil
Pursuant to subsection 152(6) of the Act, the Minister is obliged to reassess a taxpayer's tax to consider a deduction claimed for a non-capital or a net capital loss. To effect this obligation, the taxpayer must have filed an income tax return for a particular year, i.e. 1998, and claimed a deduction for a loss incurred in a subsequent year, i.e.1999.
In accordance with subsection 161(1) of the Act, a taxpayer must pay interest on the amount of tax owing after a balance-due date. If, however, the amount of tax payable for a taxation year is reduced on account of certain deductions or exclusions arising from the carryback of losses incurred in subsequent years, pursuant to paragraph 161(7)(b), interest is calculated without regard to that reduction, until 30 days after the latest of several dates, namely:
(i) the first day immediately following the taxation year in which the loss arose;
(ii) the day on which the taxpayer's return of income for the taxation year in which the loss arose was filed;
(iii) where an amended return of the taxpayer's income for the year on a prescribed form amending the taxpayer's return of income was filed in accordance with subsection 49(4) or 152(6) or paragraph 164(6)(e), the day on which the amended return or prescribed form was filed; and
(iv) where, as a consequence of a request in writing, the Minister reassessed the taxpayer's tax for the year to take into account the loss carryback, the day on which the request was made.
Keeping the foregoing in mind, we share the view that subparagraph (iv) applies, that is, the EID for the net capital loss carried back to 1997, remains unchanged, since the corporation requested to carry back that portion of the loss, when it filed the return for 1999.
Subsection 150(1) of the Act requires a taxpayer to file a return, and when a person is late in filing such, subsection 162(1) levies a penalty. In levying the penalty, the Minister must take three steps. First, the Minister must determine the time when the taxpayer had to file the return. Second, the Minister must calculate the amount of the unpaid tax at the time. Third, the Minister must compute the amount of penalty: five per cent of the amount in the second step is added to the product obtained when one per cent of the tax , unpaid, when the return was required to be filed, is multiplied by the number of complete months, not exceeding 12, between the date on which the return was required to be filed and the date on which it was filed (see Leach Brothers Stores Ltd., v. M.N.R., [1985] 1 C.T.C. 2408 (T.C.C.)).
However, when future tax consequences, such as a loss carryback, are considered, the Minister has to determine the person's tax payable for the year before considering the effect of such tax consequences: subsection 162(11of the Act. In other words, notwithstanding the fact that such tax consequences could reduce tax payable the penalty is calculated first on the full amount before applying these tax consequences to reduce tax payable (see Yang v. R.,[2004] 3 C.T.C. 2408 (T.C.C.)).
Trusting you find this satisfactory
B.J.Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate
c.c. Denis Chartrand