Is the computation of “adjusted taxable income” (ATI), defined in s. 18.2(1), iterative if a taxpayer wishes to claim sufficient non-capital losses under s. 111(1)(a) such that taxable income is nil after accounting for a deduction limitation under s. 18.2(2)? The core of this question is whether taxable income used in computing para. (b) of variable D in computing variable A of the definition of ATI can be negative or can it only be nil or positive having regard to the definition of “taxable income” in s. 248(1)? If it can be negative for the purposes computing ATI, then this can lead to an iterative computation of the deduction claimed under s. 111(1)(a) and the limitation of interest and financing expenses under s. 18.2(2).
CRA noted that ATI is determined by the formula
A + B – C,
and A is determined by the formula
D – E.
with variable D in general terms referring to the taxpayer’s taxable income for the year determined without regard to s. 18.2(2). As per s. 248(1), the taxpayer’s “taxable income” has the meaning assigned by s. 2(2), except that it cannot be less than nil. This meant that the taxable income of a taxpayer for purposes of computing (D - E) can only be nil or positive.
CRA indicated that this result may not be consistent with policy in all circumstances, and it has been brought to the attention of the Department of Finance.