Principal Issues: Whether interest would be charged pursuant to subsection 161(7) on the subsequent application of a loss carry forward.
Position: No.
Reasons: Subsection 161(7) only applies to a loss carry back. 161(1) applies and the non-capital losses incurred in previous years will simply offset the increase in income. Consequently, the tax calculation will not change, and there will be no arrears interest charged on the reassessment.
May 11, 2023
Dominic Laroche HEADQUARTERS Manager—Tax Avoidance Income Tax Rulings Tax and Charities Appeals Directorate Directorate 112 Kent St., Place de Ville Sophie Larochelle Ottawa, ON, K1A 0L5
2022-093670
Subsection 161(7) and loss carry forward under section 111
We are writing in reply to your email of May 11, 2022, requesting our comments concerning the application of interest pursuant to subsection 161(1) and subsection 161(7) of the Income Tax Act (the “Act”) in a situation where a taxpayer request to carry forward available non-capital losses to a previously assessed taxation year. More specifically, in the example you have given us, a taxpayer creates a 50 million dollars capital loss in year 1. He uses the 50 million dollars capital losses created to offset a 1 million dollar capital gain in year 1 and a 49 million dollars capital gain in year 2. The taxpayer also has a balance of non-capital losses exceeding 50 million dollars in both years 1, and 2. Following an audit, the 50 million capital loss created in year 1 is denied. The taxpayer request therefore to carry forward it’s available non-capital losses in year 1 and year 2 to fully offset the capital gain realized in year 1 and year 2. You asked whether interest should be charged on the requested changes.
In your view, subsection 161(7) of the Act should not apply in this given example as it provides that for the purpose of computing interest under subsection 161(1) or (2) of the Act, the tax payable for the year is deemed to be the amount that it would be if the consequences of any amount deducted under section 111 in respect of a loss incurred in a subsequent taxation year were not taken into consideration (loss carry back). However, you also pointed out that CRA’s interpretations 2010-0360181E5 provides that subsection 161(7) of the Act does also apply in respect of a loss incurred in a previous taxation years (loss carry forward), hence your request for clarification.
Unless otherwise noted, all statutory references herein are to the Act.
Our comments
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. Subsection 161(7) deals with the effect of various carry backs on interest calculations for late balances. Under paragraphs 161(7)(a) and (b) of the Act, if tax payable for a year is reduced because of certain deductions arising, among others, from carry back of losses incurred in subsequent years, interest on any unpaid tax for the year is calculated without regards to the reduction until 30 days after the latest of four points in time.
Paragraphs 161(7)(a) and (b) do not address at all the consequences of the deduction of any amount under section 111 in respect of a loss that was incurred in previous taxation year and that is carried forward. Accordingly, we agree with your view that in the example given paragraphs 161(7)(a) and (b) of the Act do not apply and assuming that the non-capital losses are sufficient to completely offset the increase in income, the taxpayer’s taxable income will not change. Thus, the non-capital losses incurred in previous years will simply offset the increase in income in the same way the original capital gains deduction offset the taxable capital gain. Consequently, the tax calculation will not change, and there will be no arrears interest charged on the reassessment.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca.
We trust that these comments will be of assistance, and thank you for your enquiry.
Sophie Larochelle
Section Manager
Speciality tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch