Principal Issues: Whether it is possible to open a statute-barred year to deny a carried-back business loss arising from an aggressive tax planning subject to tax shelter investments of section 143.2 ITA.
Position: Yes.
Reasons: [TaxInterpretations translation] Subsection 143.2(15) is interpreted broadly. It is therefore possible to open a statute-barred taxation year in order to deny the carryback of a business loss resulting from abusive tax planning subject to the tax shelter investment rules in section 143.2.
Roxane Comeau, CPA, M. Fisc. 2024-100655 XXXXXXXXXX Y. Barrak Headquarters Canada Revenue Agency
June 18, 2024
Dear Madam,
Subject: Opening a statute-barred year to deny a loss carried back from a subsequent taxation year subject to section 143.2 of the Income Tax Act.
This is in response to your request for an interpretation received on February 1, 2024, in which you asked for our comments regarding the opening of a statute-barred taxation year to deny the carryback of a business loss resulting from abusive tax planning that was subject to the tax shelter investment rules.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the “Act”).
The Facts Submitted
Our understanding of the relevant facts can be summarized as follows:
- An individual (the “Taxpayer”) realized a business loss (the “Loss”) in his 2019 taxation year;
- The Loss was carried back to the Taxpayer's 2016 taxation year;
- Both the 2019 and 2016 taxation years are statute-barred;
- The Taxpayer's 2019 taxation year will be reassessed under section 143.2 of the Act to deny the Loss on the basis that it resulted from abusive tax planning representing a tax shelter investment of the Taxpayer.
Question
The question is whether the 2016 taxation year can be reassessed in order to deny the Loss carryback, despite the limitation provided for in subsection 152(4) and paragraph 152(6)(c).
Our Comments
Subsection 143.2(15) specifies that, notwithstanding subsections 152(4) to (5), the Minister may make such assessments, determinations and redeterminations as are necessary to give effect to section 143.2.
Given the complexity of the area of tax shelters and the duration of this type of investment, Parliament has vested the Minister with a broad discretionary power of assessment to determine to make a reassessment in respect of a taxation year in order to prevent abuses related to specified tax shelters and to give full effect to the application of section 143.2.
In Tolhoek v. R., 2006 TCC 681 (footnote 1) , the Tax Court of Canada (the “TCC”) conducted a textual, contextual and purposive analysis of subsection 143.2(15) and concluded at paragraph 95 that “... the provision grants discretionary power to the Minister to reassess beyond the limitation period in order to fulfil the purpose of the section and combat abusive tax shelters.” Thus, that decision instructs that a broad interpretation of subsection 143.2(15) is to be recommended since it is drafted in general terms to combat potential abuses related to tax shelters in accordance with and in the context of the deeming provisions set out in section 143.2.
Furthermore, in ODea v. R., 2009 TCC 295, the TCC concluded that the Minister was entitled pursuant to subsection 143.2(15) to reassess prior years for which there had been a loss carryback resulting from losses subsequently denied by the application of subsection 143.2(6).
Thus, based on subsection 143.2(15) and the jurisprudence, we are of the view that the Minister may reassess after the expiry of the normal assessment period for the Taxpayer's 2016 taxation year in order to deny the carryback of the Loss since such carryback is closely linked to an adjustment in connection with a tax shelter investment and is necessary and required for the purposes of section 143.2.
We hope you find our comments helpful.
Best regards,
Sophie Larochelle
Manager
Specialized Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 Decision upheld by the Federal Court of Appeal in Tolhoek v. Canada, 2008 FCA 128.