TCC on Retrospective Modification of Tax Positions for Loss Years

There is a view that, unless a notice of determination of losses has been issued for a year in which no tax was payable, a taxpayer can retrospectively modify its tax positions for that year—even after the expiry of the normal reassessment period—where doing so is relevant to its tax liability in a future, taxable year (see Michael Lubetsky’s article in the Canadian Tax Journal [2019] 67:3). However, in St. Benedict (2020 TCC 109), the TCC appears to at least qualify this proposition, interpreting differently a decision that may have been thought to support it (Clibetre Exploration Ltd. v. Canada, 2003 FCA 16). St. Benedict is consistent with the CRA’s negative view of adjusting CCA claims for past years to revive expired losses (CRA document no. 2013-0474111I7, March 25, 2013). The correctness of this decision remains uncertain, since the taxpayer has appealed to the FCA.

In St. Benedict, the taxpayer claimed CCA on class 13 depreciable property in its 1997-2003 taxation years. The minister issued nil assessments in respect of those years. In filing its tax returns for the 2014-2016 taxation years, the taxpayer carried forward non-capital losses from its 1996-2007 taxation years. The minister reassessed the taxpayer for 2014-2016, denying the non-capital loss claims on the basis that the losses had expired. In its notice of objection, the taxpayer accepted the expiry. However, it reduced its class 13 CCA claims for the 1997-2003 and 2010 taxation years to increase its future UCC balance; its tax payable for those years continued to be nil. This adjustment created a terminal loss in the 2017 taxation year, which the taxpayer sought to carry back to reduce the amount of the reassessments. The sole issue before the TCC was whether the taxpayer could retrospectively adjust its CCA claims in this way.

The taxpayer argued that the facts in Clibetre were similar to those before the court. In Clibetre, the taxpayer had, in past years, claimed as ordinary business expenses amounts that should have been classified as Canadian exploration expenses (CEE). The taxpayer would have had non-capital losses in those years, even without CEE deductions. In a later year, the taxpayer filed its return on the basis that it had an available cumulative CEE balance, which it deducted in that year. The FCA accepted this recharacterization.

The court in St. Benedict observed that Clibetre “stands for the proposition that neither the taxpayer nor the Minister is bound by a mistake made regarding the tax treatment of expenses” (paragraph 30), stating further that “the outcome would have been different had the taxpayer properly included the expenses in the CEE pool at the outset and then claimed a deduction from the pool” (paragraph 31). Because the facts in St. Benedict did not involve the correction of a mistake, Clibetre was held not to be relevant.

In dismissing the taxpayer’s appeal, the court concluded that once a taxpayer claims a deduction for CCA on its income tax return, variable E of the definition of UCC operates on a “purely mechanical basis”: the “total depreciation allowed to the taxpayer . . . before that time” automatically reduces the UCC balance and cannot subsequently be changed unilaterally.

The court indicated that the taxpayer’s interpretation of the law would, if correct, have broad implications under the Act that Parliament may not have intended. The Act has many regimes similar to the CCA rules, which allow for the accumulation and subsequent deduction of expenses on a discretionary basis. Accordingly, the court noted that effective management of our self-assessment system might be compromised if taxpayers could unilaterally choose which discretionary deductions to adjust in later years, adding that the taxpayer’s proposal seemed to be “unilateral retroactive tax planning.”

Daniel A. Downie
Osler Hoskin & Harcourt LLP, Calgary
ddownie@osler.com


Canadian Tax Focus
Volume 11, Number 1, February 2021
©2021, Canadian Tax Foundation