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Tax and Revenue Administration
Alberta Corporate Tax Act
Information Circular CT-7R2


Released: April 1999
Produced by: Alberta Treasury Board and Finance, Tax and Revenue Administration
For more information: tra.revenue@gov.ab.ca

CT-7R2 / April 1999

ALBERTA CORPORATE TAX ACT INFORMATION CIRCULAR:
CALCULATION AND DEDUCTION OF LOSSES

NOTE: This information circular is intended to explain legislation and provide specific information. Every effort has been made to ensure the contents are accurate. However, if a discrepancy should occur in interpretation between this Information Circular and governing legislation, the legislation takes precedence.

This Information Circular discusses the rules and procedures to be followed by a corporation in calculating and deducting losses under the Alberta Corporate Tax Act (the "Act"). It also describes the effect of a loss carry-back on interest and penalty charges and interest credits under the Act. The topics discussed include:

With some modification, the Act adopts the definitions for losses and the rules for their use from the federal Income Tax Act (the "federal Act"). While this Circular assumes that the reader is familiar with many of the federal concepts concerning losses, it will describe those loss rules that, in the experience of Tax and Revenue Administration ("TRA"), are frequently applied incorrectly. It will also describe loss calculation and loss use rules and effects that are specific to Alberta.

The Circular focuses on non-capital and net capital losses, those being the most common losses. (Most of the rules for non-capital losses apply to farm losses as well.)

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CALCULATING LOSSES

  1. In its calculation of income or loss for a year, a corporation may claim different discretionary amounts for Alberta purposes than the corresponding amounts claimed for federal purposes. It could therefore create a non-capital loss for Alberta purposes that is different in amount from that, if any, created for federal purposes.

  2. The amount of non-capital loss calculated for Alberta purposes may also differ from the amount of the federal loss because of the modifications in the Act to the federal definition of non-capital loss. The modifications relating to the calculation of losses are:

      a) Section 110.5 of the federal Act permits a corporation to increase its taxable income in order to claim additional foreign tax credits. The amount added to taxable income is also added to the corporation's non-capital loss for the year. A corporation may choose to increase its taxable income for Alberta purposes by any amount up to the amount used to increase taxable income for federal purposes. The non-capital loss, if any, for the year for Alberta purposes will be increased by the same amount as the increase to taxable income for Alberta purposes.

      b) In 1992, federal legislation implemented a "Loss Offset Program". Under this program, eligible transportation businesses could claim a rebate of 75% of federal excise tax paid on diesel and aviation fuel purchased in 1991 and 1992. Taxpayers which claimed the rebate had the option of reducing their non-capital loss for one of the seven years preceding the year of rebate by 10 times the amount of the rebate. This adjustment to non-capital losses for fuel tax rebate loss abatement for federal purposes is not applicable for Alberta purposes.

      c) The definition of net capital loss under subsection 111(8) of the federal Act includes a reference to federal Part IV tax. As discussed in paragraph 10 below, the reference to Part IV tax is not applicable for Alberta purposes.

  3. A common error noted by TRA in the calculation of a non-capital loss occurs when charitable donations are involved. In calculating taxable income on the federal tax return (T2) charitable donations and other items such as taxable dividends, are shown as deductions from net income to arrive at taxable income. However, although charitable donations are deductible in the calculation of taxable income, they cannot be used to create or increase a non-capital loss. In contrast, taxable dividends are deductible in the calculation of taxable income and are added in the calculation of non-capital loss. The difference in the treatment arises because the definition of non-capital loss in subsection 111(8) of the federal Act specifically includes taxable dividends but does not include charitable donations. The following table illustrates the treatment of charitable donations and contrasts the treatment of taxable dividends:

    Case 1 Case 2 Case 3
    Net income (loss) from business $ 100 $(100) $     5
    Charitable donations 20 20 20
    Taxable Dividends Received 15 15 15
    _________ _________ ________
    Taxable income $   65 $       0 $      0
    Non-capital loss $     0 $(115) $  (10)
    Charitable donations available for carry-forward to subsequent years $     0 $     20 $    20

    Charitable donations that cannot be deducted in the year they are made can be deducted in the five following taxation years. A schedule that shows charitable donations carried forward should be included with the AT1 return.

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DEDUCTING LOSSES IN YEARS OTHER THAN THE LOSS YEAR

  1. The number of taxation years back and forward to which a loss may be applied are summarized in the following table.

    TYPE OF LOSS

    BACK

    FORWARD

    Net capital

    3 taxation years

    Indefinite

    Non-capital

    3 taxation years

    7 taxation years

    Restricted farm and farm

    3 taxation years

    10 taxation years

    The difference in the carry-forward period is the major difference between the rules for farm losses and those for non-capital losses.

  2. Non-capital losses can be deducted against any source of income and in the amount needed to minimize taxable income.

  3. Net capital losses carried over are deductible in a taxation year up to the amount that taxable capital gains in that year exceed total allowable capital losses in that year. The taxpayer should maintain a record of all net capital losses applied to a year in order to ensure that this limit is not exceeded. For example, assume that the excess of taxable capital gains over allowable capital losses in 1995 is $5,000 and a $2,000 net capital loss from 1994 is deducted against this excess. A record should be kept to show that, in the future, no more than $3,000 in net capital losses can be deducted in 1995.

  4. Since 1988, the portion of a capital gain (loss) that is included in (or deductible from) income has changed from 50% to 66 2/3 % to 75%. An adjustment may be required to a net capital loss which is carried over to another year if the capital gains inclusion rate differs between the year the loss arose and the year the loss is applied. The net capital loss is multiplied by the inclusion rate for the year in which the loss is to be deducted and the result is divided by the inclusion rate for the year in which the loss arose. The adjustment, in effect, converts the net capital loss to what it would have been had it been calculated at the inclusion rate that is in effect in the year of deduction.

  5. Historically, losses from all sources incurred in a taxation year were required to be deducted from all income earned in that year, including net taxable capital gains, before net capital losses from other years could be deducted. For 1991 and subsequent years, net capital losses from other years may be deducted against net taxable capital gains first. Any losses from other sources incurred in the year of the taxable capital gain are then deducted from all other income including any remaining taxable capital gain. The remainder of any loss from other sources not deducted in the year then becomes a non-capital loss.

    For example: Assume that the corporation has a taxable capital gain of $100 and a loss from business of $100 in 1992, and a net capital loss of $100 in 1995. It will likely have few capital gains and so it wants to apply the net capital loss against the taxable capital gains it had in 1992. The following table provides a summary of the results.

    1992 Filed 1992 Revised
    Taxable capital gain $    100 $   100
    1995 Net-capital loss deducted (100)
    Loss from Business (100)    (100)
    ______ ______
    Net income $       0 $       0
    Taxable income $       0 $       0
    Non-capital loss $       0 $(100)

    By deducting the 1995 net capital loss in 1992, 1992 taxable income is still $0 but a non-capital loss is created in 1992. This loss can be applied against any source of income in the three years preceding and the seven years following 1992.

  6. Subject to the limitations described in paragraphs 27 to 29 below, a corporation may, in a year, deduct a different amount of loss for Alberta purposes from that deducted for federal purposes. This could be advantageous for a corporation that, for instance, has earned federal tax credits and wishes to use those before deducting its losses. It can carry forward its losses federally while maximizing its loss claims for Alberta purposes.

  7. For federal tax purposes, a private corporation may deduct all or part of a non-capital loss against its Part IV tax base instead of its income. Since Alberta does not have the equivalent of a Part IV tax, this use of losses does not apply for Alberta tax purposes. The non-capital losses available for Alberta tax purposes are not reduced by the amount deducted from the Part IV tax base for federal tax purposes.

  8. Unlike taxable income which must be allocated among jurisdictions in which a corporation has a permanent establishment, a loss is not allocated in the year it is incurred. When the loss is carried to another year, it is deducted from net income for tax purposes to arrive at the taxable income for that year. The resultant amount is then allocated among the jurisdictions for that year.

    For example: Assume that a corporation has permanent establishments in Alberta and Manitoba in both taxation years. In Year 1, 60% of taxable income is allocated to Alberta and 40% to Manitoba. Year 2 is a loss year, but had there been taxable income in Year 2, it would have been allocated 80% to Alberta and 20% to Manitoba.

    Year 1
    Initial
    Assessment


    %
    Year 2
    Initial
    Assessment


    %
    Year 1
    After Loss
    Deduction


    %
    Taxable income (loss) $10,000 $(5,500) $4,500
    Allocated to Alberta    6,000 60% 80%   2,700 60%
    Allocated to Manitoba    4,000 40% 20%   1,800 40%

      a) Note that the loss deduction is made before allocation. That is, the taxable income of $10,000 as originally assessed less the loss of $5,500 results in a revised taxable income of $4,500. It is the $4,500 that is allocated to the provinces.

      b) The allocation is made according to the factors that exist in 1991 (the taxation year in which the loss is deducted). The allocation percentages in 1992 (the year of the loss) are not relevant to the allocation of taxable income in Year 1.

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LOSS CLAIMS AFTER REORGANIZATIONS

Acquisition of Control

  1. The right of a corporation to use its losses in years other than the loss year is restricted once there is an acquisition of control of the corporation. (The term "control" is discussed in federal Interpretation Bulletin IT-64R3, "Corporations: Association and Control".) Furthermore, the corporation's taxation year is deemed to end immediately before the acquisition of control occurred and this taxation year is included as a full year in any count for determining a loss carryover period. A loss incurred in this taxation year is, along with other losses, affected by the limitations described in this section.

  2. Net capital losses incurred before the acquisition of control cannot be deducted in years following the acquisition of control. Net capital losses incurred following the acquisition of control cannot be deducted in taxation years before the acquisition of control.

  3. A non-capital loss incurred before an acquisition of control can be deducted in a taxation year after the acquisition of control only if:

      a) the loss was a loss from carrying on a business; and

      b) the business in which the loss was sustained ("That Business") is carried on for profit or with a reasonable expectation of profit throughout the taxation year in which the corporation wishes to deduct the loss.

  4. A non-capital loss incurred after an acquisition of control can be deducted in a taxation year before the acquisition of control only if:

      a) the loss is a loss from carrying on a business; and

      b) the business in which the loss was sustained ("That Business") was carried on for profit or with a reasonable expectation of profit, both throughout the taxation year in which the loss was sustained and during the taxation year in which the corporation wishes to deduct the loss.

  5. Once the criteria described in paragraphs 14 or 15 are met, the loss that may be deducted in the taxation year is limited to:

      a) the total income arising in the taxation year from That Business; and

      b) the total income arising in the taxation year from another business, if:

        (i) before the acquisition of control, That Business included the selling, leasing, renting or developing property or rendering services; and

        (ii) substantially all of the income from that other business was derived from the sale, lease, rental or development of similar properties or the rendering of similar services.

    Amalgamations

  6. Generally, losses incurred by predecessor corporations cannot be deducted by a corporation formed by the amalgamation of those predecessor corporations. Nor can losses incurred by the amalgamated corporation be deducted by the predecessor corporations. Exceptions, which apply to amalgamations of taxable Canadian corporations only, are described in this section.

  7. Subsection 87(2.1) of the federal Act permits losses of the predecessor corporations to be carried forward for use by the new corporation. For the purposes of this subsection the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. As a result any loss of a predecessor corporation will be treated as the loss of the new corporation. However, any loss of the predecessor would "age" by one year since each of the predecessor corporations has a taxation year ending immediately before the amalgamation and that year is counted in the loss carryover period.

  8. If, after 1989, there is an amalgamation of a parent corporation and one or more of its wholly-owned subsidiaries, losses incurred by the amalgamated corporation within its first three taxation years can be carried back and deducted in the calculation of the parent corporation's taxable income. The taxpayer should maintain a record of these losses separate from losses that the subsidiary brought into the amalgamation since the pre-amalgamation losses of the subsidiary cannot be used by the parent in its pre­amalgamation taxation years.

  9. The restrictions that are placed on loss use following an acquisition of control take priority over the relieving provisions for amalgamations. For example, if an amalgamated corporation inherits a net capital loss carry-forward from a predecessor, that loss will expire if, later, there is an acquisition of control of the amalgamated corporation.

    Wind-ups

  10. Normally, if a corporation is wound up, its losses will simply expire. However, section 88 of the federal Act provides relief when a taxable Canadian corporation (the "subsidiary") is wound up into another taxable Canadian corporation (the "parent"). Immediately before the winding-up, the parent must have owned at least 90% of each class of the subsidiary's capital stock and any shares not owned by the parent must have been owned by persons with whom the parent was dealing at arm's length.

  11. Certain of the subsidiary's losses can be deducted by the parent in the taxation years beginning after the commencement of the winding-up. (The winding-up generally commences with the shareholder's resolution authorizing the winding-up.) The parent acquires for its use, the losses that:

      a) were not deducted by the subsidiary in any year; and

      b) would have been deductible by the subsidiary in computing its taxable income in a taxation year of the subsidiary beginning after the commencement of the wind-up.

  12. Any subsidiary loss that flows to the parent is deemed to be a loss incurred by the parent in its taxation year in which the subsidiary's loss year ended. The losses retain their identity as net capital, non-capital, farm, etc.

  13. If a subsidiary has a loss in a taxation year that starts after its winding-up has commenced, the parent can elect under paragraph 88(1.1)(f) of the federal Act to move that loss into a year that is one earlier than the year in which it would otherwise be deemed to have been incurred. This may hasten its deductibility to the parent. In the typical case where the winding-up process is of limited duration, the loss, like other subsidiary losses, will be available to the parent in its first taxation year commencing after the winding-up commenced.

  14. To illustrate the points relating to winding-up, the following example is provided.

    Assume:

    • The normal taxation year end of the subsidiary is October 31 and that of the parent is January 31.
    • The winding-up of the subsidiary commences on September 1, 1995 and dissolution occurs on February 15, 1996.
    • The subsidiary has unused non-capital losses from the taxation years and in the amounts that follow:
      Subsidiary's
      Year
      End
      Subsidiary's
      Unused
      Non-Capital Loss
      Tax Year in Which
      Loss is Deemed Incurred by Parent
      Beginning of First
      Tax Year that Loss is
      Available for Use
      by Parent
      October 31, 1992 $(1,200) January 31, 1993 February 1, 1996
      October 31, 1995     (800) January 31, 1996 February 1, 1996
      February 15, 1996 (1)     (500) January 31, 1997 February 1, 1997 (3)
      (final year end on dissolution)
      February 15, 1996 (2)     (500) January 31, 1996 February 1, 1996 (final year end on dissolution)

    The following assumptions are made:

      (1) an election under paragraph 88(1.1)(f) is not made;

      (2) an election under paragraph 88(1.1)(f) is made; and

      (3) the parent has no short taxation years during the period under discussion.

    Summary of Results:

    • The loss for the subsidiary's 1992 year is deemed to be a non-capital loss incurred by the parent in its year ended January 31, 1993 and the loss for the subsidiary's 1995 year is deemed to be a non-capital loss incurred by the parent in its year ended January 31, 1996. The parent cannot use these losses before its taxation year ending January 31, 1997. (This year, which begins February 1, 1996, is the first year of the parent that starts after the winding-up commenced on September 1, 1995.)

    • Without the election referred to in paragraph 24, the loss for the short year ended February 15, 1996 would be deemed to be a non-capital loss incurred by the parent in its year ended January 31, 1997. It cannot be deducted in that year because a non-capital loss cannot be deducted in the year in which it is incurred.

    • The result of the election is that the loss for the February 15, 1996 year is deemed to be incurred in the parent's 1996 year. It can then be deducted in the parent's 1997 year.

  15. The parent's use of subsidiary losses is restricted or eliminated if there is an acquisition of control of the parent during the period in which the losses could otherwise be deducted. Net capital losses expire and non-capital loss deductions are restricted as described in paragraphs 14 and 16 above. The same restrictions apply if there was an acquisition of control of the subsidiary after its loss year and before the winding-up.

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EFFECT ON LOSSES OF A CHANGE IN PERMANENT ESTABLISHMENT

  1. A corporation that moves into Alberta, becoming subject to the Act, brings its federal loss balances with it. Losses deducted for federal purposes in taxation years before a corporation has a permanent establishment in Alberta are deemed by section 85(4.1) of the Act to have been deducted for Alberta purposes.

    For example: A corporation incurred a non-capital loss of $25,000 in 1993. It deducted $10,000 for federal purposes in 1994. In 1995, it acquired a permanent establishment in Alberta. The $10,000 is deemed to have been deducted under the Act and the balance that is available for Alberta purposes is the same as that for federal purposes, namely $15,000.

  2. Similarly, if a corporation incurs a loss while it is subject to the Act and, for federal purposes, applies that loss back to a year in which the corporation was not subject to the Act, that application is deemed to have occurred for Alberta tax purposes.

  3. If a corporation leaves Alberta so that it is no longer subject to the Act, it can carry back, for Alberta purposes, losses incurred within three years of the last year it was subject to the Act. TRA will process a loss carry-back if the Canada Revenue Agency ("CRA") has allowed a corresponding deduction.

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FILING FOR A LOSS DEDUCTION

  1. A loss carry-back is claimed by filing the prescribed form AT1 Schedule 10, Loss Carry-Back Application. This includes a corporation that is exempt from filing an Alberta Corporate Income Tax Return (as described in Information Circular CT-2, "Filing Requirements"); for the year of the loss. The loss carry-back request may not be processed if the effect on the corporation's Alberta tax payable, interest and penalties is minimal and the request does not accompany other adjustments.

  2. When a loss is deducted in a taxation year that is two or more years before the year in which the loss occurred, it may affect the calculation of Alberta tax for the intervening years. TRA will process the changes required in all of the years affected.

    For example: A corporation is in the oil and gas industry. It initially had taxable income and claimed Royalty Tax Deductions in 1993 and 1994. It incurs a non-capital loss in 1995 which it carries back to 1993. If the Royalty Tax Deduction for 1993 is reduced as a result of the loss deduction, TRA will increase the amount of Attributed Royalty Income Carry-forward balance available to the corporation in 1994. If the increase can be used in 1994, TRA will automatically reassess 1994, as well as 1993, processing a larger Royalty Tax Deduction for 1994.

  3. When a corporation deducts a loss from an earlier year in its federal T2 return, the loss deduction will apply for Alberta purposes (providing there are losses available for Alberta purposes) unless the corporation specifies otherwise.

  4. In any year in which any loss applied and/or any opening loss balance for Alberta purposes differs from the corresponding loss applied and/or opening loss balance for federal purposes, the corporation must file an AT1 Schedule 21, Calculation of Current Year Loss and Continuity of Losses, and an AT1 Schedule 12, Income/Loss Reconciliation.

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EFFECT OF A LOSS CARRY-BACK ON THE CORPORATION'S TAX ACCOUNT

  1. A loss carry-back does not alleviate any late filing penalty previously assessed.

  2. For purposes of calculating interest and penalties on late or deficient instalments, a reduction in tax for a year resulting from a loss carry-back is deemed to be a payment on account of tax for the year. The effective date assigned to this deemed payment is the latest of:

      a) the first day following the loss year;

      b) the day on which the return for the loss year is filed (if not exempt from filing as discussed in Information Circular CT-2, "Filing Requirements");

      c) the day on which the AT1 Schedule 10 is filed; and

      d) the day on which a request was made for the loss carry-back.

    "The day on which a request was made for a loss carry-back" is considered to be the day the request is received by TRA providing that the request is processable. Examples of requests that are not processable are:

      a) a Loss Carry-back Application form received by TRA that is blank or contains amounts that cannot be supported; and

      b) assessments to date show no income from which to deduct the loss.

  3. If a corporation requests a change to a discretionary amount originally claimed in the taxation year (e.g. capital cost allowance) to make room for a loss carry-back, there may be interest implications as follows:

      a) if the adjustment to discretionary deductions is acceptable, tax is recalculated, taking into consideration the higher taxable income resulting from the change in the discretionary amount but not taking into account the loss application. (See Information Circular CT-6, "Reassessments" for a discussion on when an adjustment to a discretionary deduction is acceptable:);

      b) interest is charged on the revised tax payable from the day tax for the year was originally due to the effective date of the loss carry-back as discussed in paragraph 35; and

      c) the tax reduction as a result of a loss carry-back is applied as a payment on account as of that effective date and interest is further calculated on any balance remaining.

    This can result in interest owing for a period preceding the effective date of the loss carry-back even though the tax payable after the loss carry-back is nil. In addition, if the return for the year was late-filed, the substitution of the loss carry-back for some other discretionary deduction may result in the creation of, or increase in, a late-filing penalty.

  4. Any overpayment which arises from a loss carry-back will be automatically applied to any unpaid balances on the corporation's account. The corporation may request that the remainder, or any portion of a remainder, be applied as an instalment for a subsequent tax year. Any amount remaining will be refunded. However, if a taxpayer's account has a balance of less than $20.00, TRA will not refund nor charge the balance unless specifically requested to do so. This avoids the cost to taxpayers and to TRA of dealing with minor balances.

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