CRA Reassessments: The Trap in Eliminating the Extra Tax by a Loss Carryback

If a taxpayer is reassessed for a previous year and taxes are deemed to be payable, the taxpayer may want to offset that taxable income with a loss carryback. However, unless more than $2.00 of federal tax is left in that year after the carryback has been applied, the taxpayer will generally relinquish the right to challenge the reassessment. This is a consequence of the principle that one cannot appeal a nil assessment.

In Canada v. Interior Savings Credit Union (2007 FCA 151), the court stipulated that a nil assessment cannot be appealed, because it does not meet the inherent standard of an assessment. The court opined that all appeals must be directed against an assessment, and an assessment that assesses no tax fails to meet the definition of “assessment.”

More recently, in Nottawasaga Inn Ltd. v. The Queen (2013 TCC 377), the taxpayer was unable to challenge the interest owing when a nil tax assessment was created by a loss carryback. Presumably, the interest could have been challenged if there had been a calculation error, but in this case the issue was the principal owing (the amount of the reassessment). A challenge of the principal owing was not permitted because it amounted to appealing a nil assessment.

Fortunately, taxpayers can easily avoid the trap associated with utilizing loss carrybacks: choose the amount of the loss carryback so that some taxable income is left in the reassessment year. This planning will leave open the option of pursuing an appeal to the reassessment while still achieving the goal of using the carryback, thereby preventing significant further interest from accruing. The amount of federal tax left owing should be more than $2.00 so that it will not be deemed to be nil (subsection 161.4(1)).

The trap described above can also apply in a loss carryforward situation. Suppose that a taxpayer is reassessed for the 2013 taxation year, but the taxpayer has a non-capital loss for the year 2012. Carrying forward the 2012 loss to 2013 and completely eliminating 2013 taxable income will also result in the loss of appeal rights. Furthermore, the trap is not limited to non-capital losses. Any application of a net capital loss carryforward or carryback can create a nil assessment if no taxable income remains.

If a taxpayer implements these recommendations in tax-preparation software, a manual override may be necessary: the software may be set to automatically reduce taxable income to zero through the available carryover deductions.

The taxpayer will generally be charged interest on the outstanding balance of taxes owing for a period of 30 days after a request is made to the minister to carry back a loss. The taxpayer should submit this request as early as possible in order to minimize the amount of interest that will accrue on the balance of taxes payable.

The preceding discussion relates to the situation in which tax is payable after the reassessment. If that is not the case, the taxpayer is in a nil assessment situation even without a loss carryback. To appeal the reassessment in those circumstances, the taxpayer should apply for a determination of losses under subsection 152(1.1), in response to which an objection may be filed.

Alex Klyguine
Borden Ladner Gervais LLP, Toronto

Canadian Tax Focus
Volume 4, Number 4, November 2014
©2014, Canadian Tax Foundation