A. Humenuk
(613) 957-2135
August 4, 1989
Dear Sirs:
Re: Adjusted Taxable Income under section 127.52 and the Treatment of non-capital losses of other years.
We are responding to your letters of February 23, 1989, and June 7, 1989, concerning a deduction under paragraph 111(1)(a) of the Income Tax Act (the "Act") and the calculation of minimum tax under Division E.1 of the Act.
We apologize for the inconvenience caused by the delay in our response; however, it would appear that your original letter of February 23, 1989, has gone astray.
In the situation you describe, a taxpayer has a taxable capital gain of 24(1) in 1986. The taxpayer had other income net of deductions and exemptions of 24(1) which resulted in a taxable income for 1986, before the application of any non-capital loss, of 24(1) .
The taxpayer then applied a 1987 non-capital loss of 24(1) for a revised taxable income for 1986 of nil. However, for the purpose of the minimum tax calculation under Division E.1 of the Act, the taxpayer's 1986 adjusted taxable income after the application of the non-capital loss is 24(1). It is your view that the taxpayer should be entitled to increase the non-capital loss applied in 1986 to the extent available in order to reduce or eliminate the minimum tax liability arising from the adjustment to the taxable capital gain.
We do not agree. Clause 127.52(1)(i)(i)(A) of the Act limits the deduction of a non-capital loss, restricted farm loss, or farm loss otherwise available for the purpose of Division E.1 of the Act to the amount actually deducted under paragraph 111(1)(a), (c) or (d) of the Act respectively. As you point out in your letter, the taxpayer's deduction for a non-capital loss for the purpose of computing tax payable under Division E of the Act is limited to the amount required to reduce his taxable income to nil by virtue of the definition of taxable income in subsection 248(1) of the Act. Accordingly, the deduction of a non-capital loss for the purpose of calculating adjusted taxable income cannot, in any event, exceed the amount required to reduce income to nil for the purpose of Division E of the Act.
You have compared the application of non-capital losses with that of current year losses as it applies to the calculation of minimum tax and have suggested that there is a contradiction in the interpretation of the legislation. You suggest that the practice of allowing otherwise unapplied current year losses to offset the increases to adjusted taxable income as determined by subsection 127.52(1) of the Act contradicts the statement that taxable income cannot be less than nil.
However, there is no provision similar to clause 127.52(1)(i)(i)(A) of the Act relating to non-capital losses which would limit the application of current year losses for the purpose of Division E.l of the Act to the amount required to reduce net income to nil before the adjustments in subsection 127.52(1) of the Act. Therefore, it is our view that the difference in the application of non-capital losses and current year losses for the purpose of Division E.l of the Act is not a contradiction in interpretation but rather appears to be a specific design of the legislation.
In summary, it is our view that the maximum that may be deducted in determining a taxpayer's adjusted taxable income under clause l27.52(1)(i)(i)(A) of the Act is limited to the amount of non-capital loss actually deducted under Division C which amount in turn cannot be greater than that which is required to reduce his taxable income under Division C to nil for the purposes of computing tax payable under Division E of the Act. You will note, however, that the wording of clause 127.52(1)(i)(ii)(A) is substantially different from that of clause 127.52(1)(i)(i)(A) of the Act in that a taxpayer is permitted to offset an adjustment to the taxable capital gain for minimum tax purposes by any net capital losses available from other years to the extent permitted by subparagraph 127.52(1)(i)(ii) of the Act.
We trust our comments have clarified our position.
Yours truly
ILLEGIBLE SIGNATURE for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Appeals Division, Edmonton District Taxation Office.