Principal Issues: Can a taxpayer request adjustments to a non-taxable year in order to change an amount previously reported as business income so that it is treated as a capital gain?
Position: Yes.
Reasons: The limitations provided in subsection 152(4) do not apply to notifications that no tax is payable. However, the Minister cannot be compelled to accede a taxpayer’s request to amend a tax return where it would not be appropriate to do so.
January 25, 2024
Compliance Programs Branch HEADQUARTERS
International and Large Business Directorate Income Tax Rulings Directorate
Domestic Tax Division P. Girard
Legislative Application Section 2023-097390 Attention: Elizabeth Manning
Taxpayer Adjustment Request and Interest Reversal
Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”), as amended to the date hereof.
We are writing in reply to your inquiry of April 25, 2023 in relation to the application of subsection 152(4) in the context of a taxpayer’s request to amend an income tax return for a particular taxation year that is statute-barred.
More precisely, you have requested our views as to whether the Minister can accept such a request, provided the adjustments sought for by the taxpayer for the particular taxation year result in tax payable remaining nil.
Moreover, where there is a balance of interest owing for that statute-barred year, you have asked whether a reassessment would be required to reverse the interest should the taxpayer’s request to amend the return be accepted by the Minister.
Our comments
According to the facts submitted, the assessment of the taxpayer’s income tax return for a particular year resulted in an amount of tax payable. In addition, part of that tax payable remained unpaid for the given year and interest accrued on that unpaid balance. During the second subsequent taxation year, the corporation incurred non-capital losses and requested a loss carryback to the particular year pursuant to subsection 152(6). The request was accepted and a notification that no tax was payable (i.e. nil assessment) was sent to the corporation for the particular year.
However, the taxpayer has made a request to amend its income tax return for the particular year, which is now statute barred. The purpose of the request is to recharacterize as a capital gain an amount that was previously reported as business income.
You have requested our views as to whether the Minister can accept the request to amend the return despite the fact the particular taxation year is statute barred. In response to this question, we offer the comments below.
The filing of a return of income for a taxation year triggers the Minister’s obligation under subsection 152(1), which includes the duty to examine the return of income for the year and assess the tax, interest and penalties, if any, payable. However, this obligation does not automatically transpose to a request to amend the income tax return. Upon receiving a request to amend a return, the Minister is required to examine the amended return and issue a reasonable decision. Where it would not be appropriate for the Minister to accept the taxpayer’s request to amend the return, the Minister can deny the request.
As noted in your inquiry, acceding to the taxpayer’s request to amend the return filed for the particular year would require the loss carryback to be eliminated and would have no impact on the tax payable for that year. More precisely, the tax payable for that year would remain nil, and no reassessment would be required. Accordingly, none of the limitations provided under paragraphs 152(4)(a) to (d) would apply to the particular taxation year, and the Minister may, at any time, notify again the taxpayer that no tax is payable.
You have also requested our views on whether a reassessment would be required to reverse the interest payable for the particular year, should the taxpayer’s request to amend the return be accepted by the Minister. In that regard we offer the following comments.
Pursuant to subsection 161(1), interest is computed when there is an excess of tax payable over the tax paid on account of tax payable by a taxpayer. In the case at hand, the acceptance of the taxpayer’s request to recharacterize part of the income it previously reported in its tax return would result in the Minister acknowledging that the income was of capital nature from the moment it was earned rather than business income. In light of the facts submitted, had the taxpayer filed its initial tax return on that basis, the tax payable would be nil and a notification of no tax payable would be issued. In such a case, there would be no excess of tax payable over the tax paid on account of tax payable by the taxpayer and thus, no interest can accrue pursuant to subsection 161(1). Therefore, we are of the view that the interest reversal in the situation you submitted would not constitute a “reassessment” for the purpose of subsection 152(4).
Finally, while in general the decision whether to accept taxpayers’ request to amend a return of income for a particular year that is statute barred, to the extent that tax payable in the particular year remains nil, is not one within the Income Tax Rulings Directorate’s mandate, we would emphasize the fact that there is nothing in the Act that compels the Minister to automatically accept such requests.
We trust these comments will be of assistance.
Yours truly,
Gillian Godson
Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch