Do you disagree with the business losses assessed by the Government of Canada? Are you looking for a way for the tax department to reconsider any of your business losses? If so, then you should consider requesting a loss determination. If you file a Canadian income tax return with a loss and receive a nil assessment from the Canada Revenue Agency (CRA), your claim of loss is subject to a federal audit under subsection 152(1.1) of the Income Tax Act. To trigger this audit, you must file a request for notice of loss determination.
You file such a request to reduce the risk of loss recalculation in subsequent years. These recalculations could result in unexpected liabilities and mounds of future paperwork to track different potential financial statements.
Request for a Loss Determination From the CRA
In most cases, taxpayers apply for a determination of losses after receiving a nil assessment. Since the courts have found that nil assessments are not subject to a taxpayer objection or appeal, the request for a loss determination from the CRA acts as a measure of last resort.
Why Challenging Loss Determination Works
Say you want to challenge a nil assessment. You can’t object directly, but you can send a loss determination request to the minister in writing – there’s no standard form. You may be able to force the CRA to issue a notice of determination/redetermination of losses, which then qualifies you to file a Notice of Objection.
After your request for loss determination, the CRA must determine two things:
- It needs to classify the type of loss incurred. Losses generally fall under the following categories: non-capital loss, net capital loss, restricted farm loss, farm loss, or limited partnership loss. Tax implications aren’t consistent among across all loss types.
- Verification of your amount of loss is mandatory. This is normally the crux of the issue. If you believe your nil assessment is incorrect or at least needs a degree of certainty around your final loss amount, the audit of your loss is crucial.
Record-Keeping and Impact on Future Financial Statements
The reason loss determination is so confusing is that the CRA is not bound by any given assessment of loss when reassessing for subsequent years. In other words, the income tax loss calculated for one statute-barred year can change for future years. If you or your business haven’t prepared for an adjustment in your loss, such reassessments may be jarring or financially stressful.
Other times, you can’t apply the losses during the present tax year or even over the next several years. In such circumstances, you’re responsible for maintaining additional income and tax records until the loss application occurs. Even when you’re eligible to claim the loss down the road, the CRA has the leeway to reassess the loss at the time of filing – referred to as “unfettered discretion.
Treatment of income tax losses is a complicated subject. Before communicating with the CRA or adjusting your record and financial statements, consider consulting a tax and/or legal expert for direction.
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