Reassessment Period – Non-Resident Non-Arm’s Length Persons
After a taxpayer files an income tax return for a taxation year, the Canada Revenue Agency (CRA) is required to perform an initial examination of the return and to assess tax payable, if any, with all due dispatch. The CRA then normally has a fixed period, generally three or four years, after its initial examination beyond which the CRA is precluded from reassessing the taxpayer.
If a taxpayer incurs a loss in a taxation year (say 2020) and carries the loss back to deduct against the taxpayer’s income in a prior taxation year (2017), the CRA has an additional three years to reassess that prior year (i.e., until 2023). This loss carry-back reassessment period is intended to ensure that where a loss arises in a taxation year and is carried back to be used in a prior taxation year, the loss carried back to the prior taxation year cannot become statute-barred before the end of the reassessment period for the taxation year in which the loss arose.
The loss carry-back reassessment period does not take into account the fact that an extended three-year reassessment period exists in respect of reassessments made as a consequence of a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length. As a result, for example, there may be situations where the CRA makes a transfer pricing adjustment in respect of a taxation year but is unable to make a consequential reassessment to a prior taxation year to which the taxpayer has carried back a loss. This is inconsistent with the policy underlying the loss carry-back reassessment period.
Budget 2018 proposes to amend the Income Tax Act to provide the CRA with an additional three years to reassess a prior taxation year of a taxpayer, to the extent the reassessment relates to the adjustment of the loss carryback, where: a reassessment of a taxation year is made as a consequence of a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length; the reassessment reduces the taxpayer’s loss for the taxation year that is available for carryback; and all or any portion of that loss had in fact been carried back to the prior taxation year.
- A loss arises in a taxpayer’s 2017 taxation year. The taxpayer carries back this loss and deducts it against income in its 2014 taxation year.
- In 2023, the CRA determines that the actual amount of the 2017 loss is less than the amount claimed as a consequence of an adjustment to a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length.
- The CRA would then be able to reassess the 2014 taxation year to the extent that the reassessment relates to the adjustment of the loss carryback.
This measure will apply in respect of taxation years in which a carried back loss is claimed, where that loss is carried back from a taxation year that ends on or after Budget Day.
Legislation Update in 2018
Assessment and reassessment
Subsection 152(4) of the Act is also amended by adding new paragraph (b.4). New paragraph (b.4) provides that an assessment, reassessment or additional assessment may be made within six years after the end of the normal reassessment period where:
- as a consequence of a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length, a reassessment of tax is made or a notice that no tax is payable for a taxation year is issued;
- the reassessment or notice that no tax is payable reduces the taxpayer’s loss for the taxation year that is available for carryback; and
- all or any portion of that loss had in fact been carried back to the prior taxation year.
New paragraph 152(4)(b.4) applies in respect of a taxation year if a reassessment of tax for the year was required under subsection 152(6), or would have been so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to in that subsection, in order to take into account a deduction claimed under section 111 of the Act in respect of a loss for a subsequent taxation year that ends on or after February 27, 2018.