Summary of Michael H. Lubetsky “Income Tax Disputes Involving Loss Years: Pitfalls, Foibles, and Possible Reforms” (2019) 67:3 Canadian Tax Journal 499-531.
This article won an award from the Canadian Tax Foundation as the best article it published in 2019.
It does not address the annoying and time-wasting position taken by the CRA respecting reassessments that do not impose tax (because the net result is still a loss for the year) but does impose gross negligence penalties. The CRA takes the position that the taxpayer can only object to the penalties imposed by such a reassessment. According to CRA Appeals, the taxpayer must object to the penalties in a timely manner, request a notice of loss determination (which the CRA, at least in Hamilton, does not issue promptly, and then object to the resulting notice.
Introduction
The Operative Provision
Subsection 111(1) – a deduction from taxable income of non-capital losses, net capital losses etc.
111(3): 1. Can only deduct a loss once. 2. Must deduct earliest loss available first in each category of losses.
The Assessing Provisions
Section 152.
Loss carryforward.
Loss carryback 152(6)(c). Form T1A for individuals and form T2A for corporations. Minister must process if the form is filed in a timely manner (ie on or before the filing-due date for the year generating the loss to be carried back).
Per Agazarian 2004 FCA 32, the Court decided that:
the minister [may] make further reassessments during the extended reassessment period to the extent that they reasonably relate to the reassessment allowing the carryback. This means, essentially, that the minister can audit the losses carried back and vary or disallow them during this period.
Minister can reject request for a carryback, and a taxpayer may not be able to dispute the decision. Greene 95 DTC 5684 (FCA), aff’g 95 DTC 5078 (FCTD).
The Nil Assessment Rule
Okalta Oils [1955] SCR 824
67:3 Reasons why Okalta Oils not persuasive.
Example of problems it can cause Joshi 2003 TCC 615. Tuition tax credits and moving expenses. Latter denied. Minister reassessed to substitute credits for expenses giving rise to a nil assessment but which reduced the credit carryforward available to the taxpayer.
Interior Savings: The ‘Second Branch’ of the Nil Assessment Rule
Interior Savings 2007 FCA 151, rev’g 2006 TCC 411.
an objection or appeal of an assessment is valid only if the taxpayer is seeking an actual reduction of tax, as opposed to an adjustment of some other tax balance or element of the assessment.
The New St James Principle
New St James 64 DTC 121 (TAB)
“The New St James principle allows the minister to reassess loss years indefinitely, even after the expiry of the normal reassessment period.” Flows from plain reading of 152(4).
Leading case today is Papiers Cascades Cabano Inc. 2006 FCA 419, rev’g 2005 TCC 396.
The Loss Dispute Provisions
The Enactment of the Provisions
Legislative history.
CRA Administrative Provisions on the Loss Dispute Provisions
CRA Audit Manual summary.
- Minister will issue an NODL only if there is a disagreement about losses.
- If losses adjusted at the taxpayer’s request, then no NODL. The adjusted loss is the “reported amount”.
- If the CRA reassesses to reduce net income or a nil year to a loss year, then the CRA will issue an NODL for the loss, if requested.
- If the CRA denies losses so that the year is a nil year, then it will issue an NODL if requested.
Case Law on the Loss Dispute Provisions
Aallcann Wood 97 DTC 1475 (TCC): A NODL Is Not Necessary to Dispute Losses
Reiterated by Bowman ACJ in Burleigh 2004 TCC 197
722540 Ontario 2001 CanLII 939 (TCC): A NODL Trumps Disputing Losses in Other Years
INCO: The NODL Provisions Presuppose a Dispute with the Taxpayer’s Filing Position
2004 TCC 373, aff’d 2005 FCA 44, leave denied 2005 SCCA 278.
See also Armstrong, 2006 FCA 119
Pitfalls
Extinguishment of the Right to Object or Appeal
Scenario 1
| Year | Income (loss) |
|---|---|
| 2010 | (100,000) |
| 2011 | 50,000 |
In 2011, tp deducts $50,000 of 2010 losses. Minister reassesses to deny 2011 expenses of $10,000. Tp requests another $10,000 of losses be carried forward from 2010, which results in a nil assessment to which no objection lies. “Solution”:
- Wait to dispute $10,000 loss from 2010 applied in 2011 when that loss is used in a subsequent year. Clibetre 2003 FCA 16, rev’g 99 DTC 3503 (TCC).
- Request that only $9,500 be carried forward to 2011 and then object.
- Let Minister reassess with no carryforward then claim add’l carryforward in the objection (but leave $500 of taxable). BUT for large corporation, must pay one-half of debt reassessed.
Arrears Interest on Disputed Tax Debts
Scenario 2
| Year | Income (loss) |
|---|---|
| 2010 | 50,000 |
| 2011 | (100,000) |
Taxpayer carries back $50,000 loss to 2010 but then in 2015 the Minister audits and disallows $25,000 in 2010. Taxpayer intends to dispute 2010 but asks Minister to carryback an add’l $25,000 of losses from 2011. Minister does so by issuing an interest-only assessment, with interest calculated from 2010 filing due date to the date of the loss carryback request in 2015.
Can appeal interest-only assessment? Nottawasaga Inn 2013 TCC 377: no. Shreedhar 2016 TCC 254: yes. Both informal procedure. I think Shreedhar is correct. 1. Interest has been assessed in this case, and so it is part of the assessment. 2. Nottawasaga implies that the TCC has no jurisdiction to hear appeals re penalties. Minister seems to accept Shreedhar: it accepts objections to interest-only assessments.
Revival of Issues Relating to Statute-Barred Years
Scenario 3 – 2010 taxation year filing and audit
| 10,000 | Net income assessed as filed |
| Audit commences | |
| +7,000 | Audit denied expenses |
| +5,000 | Audit undeclared income |
| 22,000 | Reassessed by auditor |
| Taxpayer objects | |
| (25,000) | Appeals decision |
| (3,000) | Reassessed by appeals |
Taxpayer objects to $22,000 reassessment: (1) Re $5,000, gave waiver to auditor only re claimed ($7,000) and unclaimed ($25,000 found after audit started). (2) Taxpayer is entitled to $25,000 + $7,000 expenses and no $5,000 undeclared income.
Appeals decision is just to allow $25,000 previously unclaimed expenses. Ie so denies $7,000 claimed expenses and adds undeclared income of $5,000.
After appeals reassessment, taxpayer cannot object. Can object in future year, presumably on the basis that $7,000 expenses were valid and $5,000 was not income. BUT now can’t argue that $5,000 income issue barred! No cases on point. NODL probably doesn’t help. Maybe Agazarian helps? Maybe proceed directly to TCC and don’t allow Appeals to reassess?
Duplication of Remedies and the Large Corporation Rules
The three scenarios described below are similar. They illustrate situations where a large corporation taxpayer with a dispute concerning losses (whether the quantum of losses in a particular year or the use of carryovers to offset disputed amounts in taxable years) files multiple objections in different taxation years covering the same disputed adjustment.
…
The procedural issue presented by scenarios 4a, 4b, and 4c is whether a large corporation taxpayer can adduce new facts and reasons in its various objections.
…
However, there do not seem to be any reported cases that discuss whether a large corporation taxpayer that essentially files objections in different taxation years pertaining to the same underlying adjustment, as a result of the application of the nil assessment rule and/or the loss dispute provisions, can raise new facts and reasons in subsequent objections.
Conclusion: Reflections and Options for Reform
There are good reasons for the nil assessment rule: “The nil assessment rule and the New St James principle ensure that disputes over losses can be pursued only when the losses have an actual impact on the amount of tax due.”
NODL’s have gaps.
Other ideas:
- Section 173 references? Requires change in attitude of the Minister.
- Taxpayer can seek NODL for loss year once its losses are claimed.
- Permit taxpayer to object to nil assessment that arise as a result of loss carryovers.
- “notice of determination of taxable income prior to application of loss carryovers” (a NOTIPALC)”
- Reform to prevent “the statute-barred period essentially restart[ing] if the taxpayer requests a NODL, thus reviving issues that the minister would otherwise be barred from adjusting.”
Addendum
Bakorp Management Ltd 2019 FCA 195.
