Aco first applied a $1,000 non-capital loss from Year 1 to offset a $1,000 taxable capital gain realized in Year 2. However, it then realized a $1,000 allowable capital loss in Year 3 and filed an amended Year 2 return to deduct that net capital loss under s. 111(1)(b), thereby restoring its $1,000 non-capital loss from Year 1. Does CRA still apply its policy in 9504905 of not assessing interest where there is a substitution of losses?
After summarizing s. 161(7)(b), CRA stated:
Accordingly, where a loss carry forward has been applied to a taxation year to reduce tax payable to nil, and is later substituted with a loss carry back, the calculation of interest under paragraph 161(7)(b) would result in a calculation of interest from the balance due date of the taxation year to which the loss is applied until 30 days after the latest of the dates noted above.
Nevertheless, it remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore, for a situation like the one outlined in the example above, the CRA would not assess interest.