7 February 2006 External T.I. 2005-0122381E5 F - Consequential assessment
Principal Issues: In a situation where a taxpayer requests in writing the carry forward of a loss to a statute barred taxation year, whether the Minister must reassess the tax payable by the taxpayer for the statute barred taxation year pursuant to ss 152(4.3).
Position: Yes.
Reasons: The law.
XXXXXXXXXX
February 7, 2006
Dear Sir,
Subject: Subsections 152(4.3) and 165(1.11) of the Income Tax Act
This is in response to your letter of March 6, 2005, requesting our comments on the application of subsections 152(4.3) and 165(1.11) of the Income Tax Act in the situation described below. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
The Situation
- Corporation is a "taxable Canadian corporation", as defined in subsection 89(1), and a "large corporation", as defined in subsection 225.1(8), for the purposes of, inter alia, the application of subsection 165(1.11) relating to the contents of a Notice of Objection filed by such a corporation.
- Corporation filed its income tax return for taxation year 1 ("Year 1") in which Corporation reported a loss for Year 1 and the Canada Revenue Agency ("CRA") issued a notice to Corporation that no tax was payable by Corporation for Year 1.
- Thereafter, Corporation requested that the CRA make a determination in respect of the amount of its loss for Year 1, to which the CRA responded by sending Corporation a notice of determination pursuant to subsection 152(1.1) confirming the denial of Corporation's loss for Year 1 ("Determined Amount # 1 for Year 1")
- Corporation filed a Notice of Objection pursuant to subsections 152(1.2) and 165(1), in the manner provided for in subsection 165(2), in respect of Determined Amount #1 for Year 1 (or Corporation filed an appeal to the Tax Court of Canada pursuant to subsection 169(1) to set aside the determination confirmed by the Appeals Division of the CRA pursuant to subsection 165(3).)
- At a Particular Time in Year 1+X, the Notice of Objection filed by the Corporation in respect of Determined Amount #1 for Year 1 was allowed (or its appeal was allowed by the Tax Court of Canada) (the "Particular Time"). The Appeals Division of the CRA therefore made a redetermination in respect of the amount of the Corporation's loss for Year 1, pursuant to of subsection 165(3), which confirmed that the amount of the Corporation's loss for Year 1 was as reported by the Corporation ("Determined Amount # 2 for Year 1").
- Corporation has never used its Year 1 loss (a non-capital loss as defined in subsection 111(8)).
- The Determined Amount #2 for Year 1 cannot be carried forward to Year 1+X because the carryforward period in paragraph 111(1)(a) does not permit it (or because the Corporation has no taxable income for Year 1+X).
- In Year 1+2 (which is prior to Year 1+X), the Corporation had taxable income against which it could carry forward Determined Amount #2 for Year 1. At the Particular Time, the normal reassessment period applicable to the Corporation for Year 1+2 pursuant to subsection 152(3.1) had expired and the Corporation had not filed with the Minister a waiver in respect of that year pursuant to subparagraph 152(4)(a)(ii).
- In Year 1+5 (which is prior to Year l+X), the Corporation had taxable income against which it could carry forward the Determined Amount # 2 for Year 1. At the Particular Time, the normal reassessment period applicable to the Corporation for Year 1+5 pursuant to subsection 152(3.1) had not expired, but the Corporation may no longer object to the assessment of its tax payable for Year 1+5, as the time for filing a Notice of Objection in respect of such assessment has expired.
Your questions, your position and your analysis
You asked us, in the situation you have referred to us, whether subsection 152(4.3) allows the CRA to reassess, at the request of the Corporation, the tax payable by the Corporation for Year 1+2 in order to grant the carryforward of the Determined Amount # 2 for Year 1 to Year 1+2, pursuant to paragraph 111(1)(a).
To the extent that the answer to question 1 is "no", can the CRA reassess pursuant to subsection 152(4) the tax payable by the Corporation for Year 1+5 to allow a carryforward of the Determined Amount #2 for Year 1 to Year 1+5 pursuant to paragraph 111(1)(a) and refund to the Corporation its overpaid tax for that year? Is the answer to this question different if, in its Notice of Objection in respect of the Determined Amount # 1 for Year 1, the Corporation (i) did not request a Year 1 loss carryforward, or (ii) requested a Year 1 loss carryforward without specifying which year, or (iii) requested a Year 1 loss carryforward specifically to Year 1+2?
Your position is described in your letter as follows:
We believe that the Minister must, in response to the Corporation's request, issue a reassessment or a reassessment that there is no tax payable by the Corporation, for Year 1+2, if the Corporation has made a timely request to the Minister pursuant to subsection 152(4.3) since it is reasonable to consider that the Year I reassessment relates to a balance applicable to the Corporation for Year 1, being its non-capital loss balance.
We are also of the view that, to the extent that a reassessment could not be made for Year 1+2 pursuant to a request made by the Corporation pursuant to subsection 152(4.3), because it is determined that that provision does not provide the Minister with that authority, the Canada Revenue Agency (the "CRA") should agree to carry forward the loss incurred in Year 1 to Year 1+5, pursuant to subsection 152(4), and its administrative policy as set out in paragraph 4 of Information Circular IC 75-7R3.
Furthermore, in this latter case, we consider that the Corporation did not have to request in its Notice of Objection the carryforward of the loss incurred in Year 1 in order to obtain that carryover. Subsection 165(1.11) requires, inter alia, that the taxpayer specify in its Notice of Objection in respect of each issue, the relief sought, expressed as the amount of a change in a balance within the meaning assigned by subsection 152(4.4). There is no mention of the taxpayer having to specify the amount of a consequential adjustment in a subsequent year. On the other hand, subsection 152(4) provides the Minister with the ability to make such a carryforward and such a carryforward would also be consistent with the CRA's policy as expressed in Information Circular IC 75-7R3.
In essence, you provide three reasons to support the conclusion that in the particular situation the Minister must, at the request of the corporation, issue a reassessment or a new notice that there is no tax payable to the corporation, for Year 1+2, pursuant to subsection 152(4.3).
The first reason you give is that the criteria for the application of subsection 152(4.3) are satisfied. In particular, you discuss the test that "... the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.” In that regard you state, on page 4 of your letter:
It is clear to us that there is a clear link between a reassessment or redetermination for a particular taxation year that results in a change in a loss balance for that particular year, since subsection 152(4.4) explicitly provides that a balance for the purposes of subsection 152(4.3) includes "a loss of the taxpayer for the year".
Your conclusion is based on the CRA's position in Technical Interpretation E9524846 with respect to the meaning of the phrase "... the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.” In this regard, you quote, inter alia, the following excerpt from Technical Interpretation E9524846:
Traditionally, the use of the word "reasonable" in the context of the administration of the Act allows for some considerable latitude. It is our view that as long as the connection between two things or actions is easily discernible then the two things or actions could reasonably be considered to be related.
You are also of the view that subsection 152(4.3) applies in the situation you have referred to us because the CRA has indicated that it agrees that subsection 152(4.3) applies in a comparable situation in the response to question 4.7 of the 1992 APFF Conference Roundtable on Federal Taxation.
Furthermore, you believe that subsection 152(4.3) applies because the CRA applied it in a situation that you believe is similar to the one you presented to us, in Sherway Centre Limited v. The Queen, 2003 DTC 5082.
Our Comments
Subsection 152(4.3) allows the CRA to reassess the tax payable by the Corporation for Year 1+2 in order to allow the carry forward of the Determined Amount #2 for Year 1 to Year 1+2, pursuant to paragraph 111(1)(a). Our conclusion is based on the following observations.
Section 152(4.3) reads as follows:
Notwithstanding subsections 152(4), 152(4.1) and 152(5), where 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, or where the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable, or redetermine an amount deemed to have been paid or to have been an overpayment, under this Part by the taxpayer in respect of the subsequent taxation year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
[emphasis added]
The term "balance", for the purposes of subsection 152(4.3), is defined in subsection 152(4.4) as follows:
For the purpose of subsection 152(4.3), a balance of a taxpayer for a taxation year is 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.
[emphasis added]
Subsection 152(4.3) provides that where an assessment or appeal decision has the effect of changing a "balance" (as defined in subsection 152(4.4)) of a taxpayer for a particular taxation year, the Minister has the power or duty to reassess, within the time limit set out in subsection 152(4. (3), tax payable under Part I of the Act by the taxpayer in respect of the subsequent taxation year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
In the situation you have referred to us, it is reasonable to consider that the reassessment of tax payable by the Corporation for Year 1+2 to be in respect of the change in a "balance", as defined in subsection 152(4.4), applicable to the Corporation for Year 1 (i.e., the Corporation's loss for Year 1), since the said reassessment is required to be made in order to allow for the carryforward of the Determination Amount #2 for Year 1 to Year 1+2, pursuant to paragraph 111(1)(a)
Therefore, the CRA should reassess the tax payable by the Corporation for Year 1+2, pursuant to subsection 152(4.3), as requested, in order to grant the carryforward of the Determined Amount #2 for Year 1 to Year 1+2, under paragraph 111(1)(a), provided that the reassessment for Year 1+2 is made before the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of Year 1.
Finally, please note that our comments do not constitute an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on the CRA with respect to any particular situation.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch