The correspondent provided two loss carryover examples in which there were carryovers of allowable capital losses for application against taxable capital gains which had been increased to 100% of the capital gains amount pursuant to s. 100(1)(b). The computations effectively increased the allowable capital losses to equal 100% of the related capital losses that had been realized, i.e., they were not treated as being ½ of such capital losses pursuant to ss. 38 and 111(1.1)(a)(ii). In rejecting this approach, and (per its summary) finding that “the net capital losses will be applied to reduce the taxable capital gains based on the applicable inclusion rate in section 38 and subparagraph 111(1.1)(a)(ii), independent of whether the taxable capital gains are subject to a 100% inclusion rate under paragraph 100(1)(b),” the Directorate stated:
Section 100 only deals with the computation of the amount of the taxable capital gain that is included in computing the taxpayer’s income under paragraph 3(b) from a disposition of a partnership interest in a taxation year in the circumstances described in paragraphs 100(1.1)(a) to (d). The provision does not deal with, and the computation is not [a]ffected by, the carry-over of net capital losses under paragraph 111(1)(b). … [The s. 111(1.1)] adjustment is based on the fraction under section 38 at the relevant times referred to in subparagraph 111(1.1)(a)(ii). While paragraph 100(1)(b) deems a higher amount of a taxable capital gain from the disposition of a partnership interest to be included in income, it does so by ignoring and not adjusting the fraction under section 38 for purposes of determining the allowable capital loss (or taxable capital gains). The amount of the allowable capital loss (including for a taxation year where there has been an inclusion of a taxable capital gain under paragraph 100(1)(b)) is then still determined under the ordinary rules in section 38.