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The St. Benedict Catholic Secondary School Trust (the “Trust”) had a leasehold interest in the school bearing its name and surrounding land (class 13 property). From 1997 to 2003, the Trust claimed CCA and triggered non-capital losses (“NCLs”).
Those NCLs were left unused until 2014, 2015 and 2016. However, the CRA reassessed the Trust for those years on the basis that the NCLs had expired, meaning that the Trust could no longer use them to reduce its taxable income. In its notice of objection, the Trust did not challenge the CRA’s claim that the NCLs had expired, but instead raised the argument that it had realized a terminal loss in 2017 when it disposed of its leasehold interest, which it could carry back to 2014, 2015 and 2016.
Tax Court of Canada (“TCC”)
The question before the TCC revolved around the computation of the terminal loss. According to the CRA, the computation of the terminal loss had to be based on the CCA actually claimed by the Trust in its tax returns over the years. The Trust took the view that it was not bound by the CCA it claimed in its tax returns and could alter them since the amendments would not change the tax payable. The TCC dismissed the Trust’s appeal on the basis that what the Trust tried to do was “unilateral retroactive tax planning.”
Federal Court of Appeal (“FCA”)
The Trust appealed to the FCA, but without success. The FCA first pointed out that what the Trust was trying to do was to amend its prior years’ returns. However, the Trust was unable to point to any provision of the Income Tax Act (“ITA”) that allowed it to do so. Although the Trust pointed to an information circular, that circular only sets out the Minister of National Revenue’s administrative policy. An administrative policy is not binding on the Court, nor can it amend the ITA. The Trust responded that there is a difference between retroactive tax planning and amending one’s returns for the purpose of taking a deduction. Here, the FCA quoted the case of Canada v. Nassau Walnut Investments Inc. (1996), [1997] 2 F.C. 279, [1998] 1 C.T.C. 33 (C.A.) (Nassau Walnut), which drew the line between a “designation” and an “election”:
[31] In contradistinction to a designation, and as a general proposition, when an election is to be made the taxpayer must make a decision to forego one option in favour of another on the basis of an assessment of tax risks which may or may not materialize depending on uncertain events. In addition to this qualitative difference, the Act itself implicitly recognizes that a designation and an election are not one and the same.
The FCA then stated:
[38] The choice made by the Trust in deciding what amount of CCA to claim in each year is akin to an election as described above by this Court. The Trust, in filing its tax returns for 1997 to 2003, made decisions concerning the amount of CCA that it would claim in computing its income for these years. The Trust could have chosen to claim the amount of CCA that would have reduced its income to nil. But instead, the Trust chose to forego that option in favour of claiming CCA for each year that resulted in non-capital losses. The tax risk was that the losses could expire before they could be used by the Trust. If the Trust would have had sufficient income within the relevant time period to use the non-capital losses, then it would have benefited from carrying these non-capital losses forward to the year of profitability. In effect, the Trust would have been entitled to use several years of CCA to reduce its income, rather than only the CCA for the year in which it had a profit.
Thus, the Trust had a choice to make when it filed its tax returns for 1997 to 2003: claim CCA in order to generate NCLs to use in future years, knowing that those NCLs may expire, or not claim CCA and potentially have less NCLs to use, although a higher UCC balance that does not expire. The Trust made its decision and the FCA held it to its decision.
The rules regarding the carrying forward of NCLs have changed since the early 2000s. Taxpayers can now carry forward their NCLs 20 years.