The capital cost allowance (“CCA”) regime allows taxpayers to claim depreciation against certain capital properties, which then reduces a taxpayer’s income. CCA is discretionary – taxpayers can choose to claim it in one year, and not in the next. In St. Benedict Catholic Secondary School Trust v The Queen, 2020 TCC 109, the Tax Court considered the degree of flexibility related to adjusting CCA previously claimed.
From 1997 through 2003, St. Benedict Catholic Secondary School Trust (the “Taxpayer”) claimed the maximum amount of CCA for a Class 13 property. During those years, the Taxpayer had was in a loss position and did not pay any tax. In its 2014 to 2016 tax returns the Taxpayer sought to deduct the remaining balance of tax losses that it had incurred between 1997 and 2003, even though these losses had expired. Not surprisingly, the Minister reassessed the Taxpayer to deny these losses on the basis that they had expired.
The Taxpayer conceded that the tax losses had expired, but it argued that, in 2017, it had incurred a terminal loss of approximately $3.5 million that could be carried back to offset the income in its 2014 to 2016 tax years. The Taxpayer was able to achieve this by unilaterally reducing the CCA it had previously claimed in its 1997 to 2003 tax returns, which had the effect of creating the terminal loss when the Class 13 property was sold. The Minister disagreed with the Taxpayer’s position and contended that the terminal loss was only $679,683.
The Court’s Decision
The Tax Court agreed with the Minister and characterized the Taxpayer’s actions as “unilateral retroactive tax planning”. While it is within a taxpayer’s discretion to choose the amount of CCA deducted for any given tax year, “the exercise of discretion entails the possibility of risks and rewards.” The Tax Court concluded that if the unilateral adjustments were accepted, the Taxpayer would have the ability to either create losses or defer CCA expenses depending on what created a better result in future years.
Application of Information Circular 84-1
Interestingly, the Tax Court did not mention Information Circular 84-1 Revision of Capital Cost Allowance Claims and Other Permissive Deductions, which provides for adjustments to previously claimed CCA in certain circumstances. In particular, paragraph 10 of the Circular states that in tax years in which a nil assessment has been issued, a taxpayer’s request for revision of CCA, “will be allowed provided there is no change in the tax payable for the year or any other year filed, including one that is statute barred, for which the time has expired for filing a notice of objection.” Presumably, there would have been tax payable by the Taxpayer in the 2014 to 2016 tax years and the time for filing the notice of objection for such years would have expired. Accordingly, the Taxpayer may not have met the CRA’s administrative conditions for such an adjustment. The Taxpayer may have been able to adjust the CCA previously claimed if it had submitted a request before 2014, as nil assessments were issued in the 1997-2013 taxation years, or if it had submitted a notice of objection on time. However, the point is now moot given that the time has passed to do either.