ARCHIVED - Losses of Non-Residents and Part-Year Residents

What the "Archived Content" notice means for interpretation bulletins

NO: IT-262R2

DATE: November 28, 1996

SUBJECT: INCOME TAX ACT
Losses of Non-Residents and Part-Year Residents

REFERENCE: Section 114, subsection 111(9) and paragraphs 115(1)(c) and 115(1)(e) (also sections 3, 31 and 80 and subsections 2(3), 96(2.1), 111(1), 111(1.1), 111(3) and 111(8))

Application

This bulletin cancels and replaces IT-262R dated August 30, 1985.

Summary

The Income Tax Act contains a system of rules the purpose of which is to determine how and when a taxpayer's losses are to be applied against income. This bulletin discusses the primary loss application rules, particularly as they apply to a non-resident of Canada.

A non-resident is required to file a Canadian income tax return and report certain types of Canadian-source income (other types of Canadian-source income do not need to be reported but may be subject to non-resident withholding tax). For purposes of calculating income earned in Canada for a Canadian income tax return, the bulletin discusses the types and amounts of losses that can be deducted in the taxation year in which they are incurred. This discussion includes partnership losses from a business carried on in Canada and losses that result from carrying on a farming business in Canada.

The non-resident's Canadian-source losses for the year cannot reduce income earned in Canada below nil. However, the losses that cannot be used in the taxation year in which they are incurred can instead be carried over to and used in calculating the taxable income earned in Canada of other years. The bulletin discusses the various types of carried-over losses. It also discusses, for each type of carried-over loss, the carry forward and carry back rules for determining which other years to which the carried-over loss can be applied, as well as the types of income of those other years against which the carried-over loss can be applied.

In the case of an individual who is a resident of Canada for part of a taxation year and a non-resident for part of the year, the individual calculates worldwide income for the resident period, adds it to taxable income earned in Canada for the non-resident period, and subtracts deductions that are otherwise allowable in calculating taxable income to the extent that they apply to the resident period. The bulletin discusses the treatment of losses incurred in such an individual's resident and non-resident periods.

The current versions of the following other bulletins also contain information regarding the taxation of non-residents.

IT-221 Determination of an Individual's Residence Status

IT-420 Non-Residents -- Income Earned in Canada

IT-171 Non-resident Individuals -- Computation of Taxable Income Earned in Canada and Non-refundable Tax Credits

IT-393 Election re Tax on Rents and Timber Royalties -- Non-Residents

 

Discussion and Interpretation

PART I: RULES FOR FULL-YEAR NON-RESIDENTS OF CANADA

Treatment of Losses in the Taxation Year in Which They are Incurred

¶ 1. A non-resident of Canada is required to file a Canadian income tax return and report income described in section 115 of the Income Tax Act. The types of income described in section 115 are generally from sources in Canada (although not all types of Canadian-source income are reported under section 115, i.e., some are instead subject to Part XIII non-resident withholding tax). Section 115 income earned in Canada is discussed in detail in the current version of IT-420, Non-Residents -- Income Earned in Canada. When calculating section 115 income earned in Canada for a particular taxation year, the non-resident can deduct any losses incurred in the year that are described in paragraph 115(1)(c). There are three types of losses described in paragraph 115(1)(c):

  • any losses from performing in Canada duties of an office or employment;
  • any losses from carrying on business in Canada; and
  • any allowable business investment losses in respect of property if any gain from the disposition of that property would have been included in the non-resident's section 115 income earned in Canada -- an explanation of the nature and calculation of an allowable business investment loss ("ABIL") is contained in the current version of IT-484, Business Investment Losses.

Throughout the remainder of this bulletin, our reference to the "loss year" means the taxation year in which the particular loss was actually incurred.

¶ 2. A non-resident's loss from carrying on a business in Canada can be the non-resident's share of a partnership loss from a business carried on in Canada. If the non-resident is a "limited partner" as defined in subsection 96(2.4) and the partnership business carried on in Canada is not farming, the rules in subsection 96(2.1) may result in only a portion of the non-resident's share of the loss being deductible in the loss year under paragraph 115(1)(c). The portion of the limited partner's share of the loss that can be deducted in the loss year is based on the limited partner's "at-risk amount" (which is determined under subsection 96(2.2)) at the end of the fiscal period of the partnership that ends in the year less certain amounts specified in subsection 96(2.1). The portion of the limited partner's share of the loss that cannot be deducted in the loss year because of the limitation in subsection 96(2.1) is deemed by that subsection to be the limited partner's "limited partnership loss" for the year. The limited partnership loss for the loss year can be carried over to and deducted in other years in accordance with the rules discussed in ¶s 13 to 17 below.

¶ 3. If a non-resident incurs a loss from carrying on a farming business or businesses in Canada, section 31 of the Act may limit the amount of the loss that can be deducted in the loss year under paragraph 115(1)(c). The section 31 limitation rule applies if the non-resident's chief source of income (i.e., worldwide income) for the loss year is neither farming nor a combination of farming and some other source of income. The current version of IT-322, Farm Losses, mentions factors that should be considered for purposes of determining whether section 31 would apply in a particular case.

¶ 4. If section 31 does apply, the non-resident calculates the amount that can be deducted under paragraph 115(1)(c) in computing income for the loss year by following these steps:

Step 1:

Determine the amount of the loss incurred in the loss year from carrying on the farming business in Canada. For this purpose, calculate the loss before making any deduction for scientific research and experimental development ("SR&ED") under section 37 or 37.1.

Notes:

1. If the non-resident carries on more than one farming business in Canada, the income earned or loss incurred for the year from each farming business is calculated. Again, each calculation is made before making any deduction for SR&ED under section 37 or 37.1. If the incomes are greater than the losses, the losses (as well as the SR&ED deductions, if any, under section 37 or 37.1) are fully deductible in the loss year and the non-resident does not need to proceed with steps 2 to 5. If, on the other hand, the losses are greater than the incomes, the non-resident subtracts the incomes from the losses and the resulting net loss incurred in the year from all the farming businesses in Canada becomes the loss determined under step 1.

2. In the detailed Notice of Ways and Means Motion to amend the Income Tax Act that was released by the Minister of Finance on June 20, 1996, it is proposed that section 37.1 be repealed for the 1995 and subsequent taxation years.

Step 2:

Subtract $2,500 from the loss determined under step 1 and divide the answer by 2. That is, calculate the amount determined by the formula: ½ of (step 1 loss - $2,500).

Step 3:

Take $6,250 or the amount determined in step 2, whichever is less, and then add $2,500.

Step 4:

Take the loss determined in step 1 or the amount determined in step 3, whichever is less.

Step 5:

Take the amount determined in step 4 and add the amount of any deductions for SR&ED under section 37 or 37.1 that were excluded from the calculations in step 1. The result is the amount of the loss incurred in the loss year from carrying on the business of farming in Canada that can be deducted in the loss year.

If the loss determined in step 1 is greater than the amount determined in step 3, the difference is included in the non-resident's "restricted farm loss" for the year (see, however, the discussion of adjustments in ¶ 11 below). The restricted farm loss for the loss year can be carried over to and deducted in other years in accordance with the rules discussed in ¶s 13 to 17 below.

Example

Barry, a non-resident, files a Canadian tax return and reports income of $50,000 from a retail store business he carries on in Canada. He also incurs a loss of $10,000 from carrying on a farming business in Canada, and section 31 applies. The loss includes a section 37 SR&ED deduction of $2,000. Barry calculates the amount of the loss that he can deduct in the loss year as follows:

Step 1: Loss before claiming the $2,000 SR&ED deduction = $8,000.
Step 2: ½ of ($8,000 - $2,500) = $2,750.
Step 3: Lesser of $6,250 and $2,750, plus $2,500 = $2,750 + $2,500 = $5,250.
Step 4: Lesser of $8,000 and $5,250 = $5,250.
Step 5: Amount of loss Barry can deduct in the loss year = $5,250 + $2,000 = $7,250.

Barry's restricted farm loss for the loss year is equal to the $8,000 from step 1 less the $5,250 per step 3 = $2,750.

To summarize, of his $10,000 loss from the farming business, Barry can deduct $7,250 in the loss year (against the $50,000 income from the store), and the remaining $2,750 is his restricted farm loss for the loss year (assuming there is no adjustment as referred to in ¶ 11 below) that he can apply against income of other years in accordance with the rules discussed in ¶s 13 to 17 below.

¶ 5. When calculating section 115 income earned in Canada for the loss year, a non-resident cannot deduct losses for the year that are not referred to in paragraph 115(1)(c) as described above, regardless of whether the source of those other losses (if any) is in or outside Canada. It should be noted that this restriction imposed by paragraph 115(1)(c) can apply even to losses that come from a partnership, including a limited partnership, since partnership losses retain their source and nature when flowed out to members of the partnership. Thus, for example, the paragraph 115(1)(c) restriction would preclude a non-resident from deducting a loss from the rental of an apartment building (which is a loss from property rather than from carrying on a business), including a share of such a loss from a partnership, even if the property is located in Canada.

¶ 6. A non-resident's paragraph 115(1)(c) losses may be greater than the section 115 income earned in Canada for the year as calculated after deducting any subdivision e deductions (see the current version of IT-420) but before deducting the losses. When this occurs, the paragraph 115(1)(c) losses can be deducted in the loss year only to the extent that they reduce such section 115 income for the year to nil. As a general rule, a non-resident's paragraph 115(1)(c) losses that can be deducted in the loss year must be deducted in the loss year or forfeited. Any amount of unused losses (i.e., paragraph 115(1)(c) losses that cannot be deducted in the loss year because section 115 income cannot be reduced below nil) can instead be carried over to and used in other years in accordance with the rules described below.

¶ 7. Generally, a non-resident's "non-capital loss" for a particular loss year includes unused losses of any of the three types of paragraph 115(1)(c) losses mentioned in 1 above. By virtue of subsection 111(9), a non-resident's non-capital loss cannot include any other type of loss (see ¶ 12 below). Note that the non-resident's non-capital loss for the year can include unused partnership losses of the second and third types mentioned in 1 above (i.e., the non-resident's share thereof). The non-resident's non-capital loss cannot, however, include a "limited partnership loss" or a "restricted farm loss" (these carried-over losses are discussed in ¶ 2 and 4 above, respectively). See also the discussion of adjustments in ¶ 11 below, as well as the discussion of the "farm loss" in ¶ 8 below. The non-resident's non-capital loss for the loss year can be carried over to and used in other years in accordance with the rules in ¶s 13 to 17 below.

¶ 8. Unused paragraph 115(1)(c) losses from farming and fishing businesses carried on in Canada are initially included in the calculation of a non-resident's non-capital loss for the loss year as discussed in ¶ 7 above. However, the non-resident's "farm loss" for the year includes the lesser of two amounts:

(a) the amount (if any) of the net losses (i.e., losses net of incomes) for the loss year from all farming and fishing businesses carried on in Canada; and

(b) the amount of the non-capital loss for the year as initially calculated (i.e., including the unused losses from farming and fishing businesses).

For purposes of calculating a farm loss, see also the discussion of adjustments in ¶ 11 below. Once the amount of the farm loss for the year is determined, the non-capital loss for the year as initially calculated is then reduced by the farm loss. Note that the above-mentioned initial calculation of the non-capital loss as well as (a) above in the calculation of the farm loss both take into account the amount of a loss from a farming business carried on in Canada that is available for deduction in the loss year by virtue of section 31 (as determined in step 5 in ¶ 4 above); neither of these calculations, however, includes a restricted farm loss. The non-resident's farm loss for the loss year can be carried over to and used in other years in accordance with the rules discussed in ¶s 13 to 17 below.

Example

Blanche, a non-resident, incurs a loss of $16,000 from a farming business she carries on in Canada. Her chief source of income for the loss year is neither farming nor a combination of farming and some other source of income, but rather is a clothing business (which she carries on in her own country) and therefore section 31 applies. According to the rules in section 31, $8,750 of the loss from the farming business is available for deduction in the loss year (see ¶ 4 above). Assume in this example that there are no adjustments as referred to in ¶ 11 below. The remaining $7,250 is her restricted farm loss for the loss year, which can be carried over to other years. She also has, in the loss year, income of $8,000 from another business, which she carries on in Canada, and a Canadian-source ABIL (as described in ¶ 1 above) of $10,000. Blanche's losses that are available for deduction in the loss year under paragraph 115(1)(c) come to a total of $18,750, calculated as follows:

Loss from the farming business available for deduction in the loss year by virtue of section 31 $ 8,750
Plus: Canadian-source ABIL for the year   10,000
--------
Total losses available for deduction in the loss year under paragraph 115(1)(c) $ 18,750
=====

However, she is allowed to deduct only $8,000 of those losses in the loss year because she can only reduce her section 115 income earned in Canada for the year from $8,000 to nil. Her initial calculation of her non-capital loss for the year is as follows:

Total losses available for deduction in the loss year under paragraph 115(1)(c) $ 18,750
Less: Losses she deducts in the loss year to reduce her income earned in Canada to nil   8,000
--------
Initial calculation of the non-capital loss: $ 10,750
=====

Her farm loss for the year is equal to the lesser of

  • her $8,750 loss from the farming business available for deduction in the loss year by virtue of section 31; and
  • her non-capital loss for the year as initially calculated, i.e., $10,750.

Thus, her farm loss for the year is $8,750 and her non-capital loss for the year becomes $10,750 - $8,750 = $2,000.

To summarize, the losses for the loss year that Blanche can carry over to and use in other years (in accordance with the rules discussed in ¶s 13 to 17 below) are characterized as follows:

Non-capital loss for the year $ 2,000
Farm loss for the year   8,750
Restricted farm loss for the year   7,250
--------
Total losses for the loss year that can be carried over to other years $ 18,000
=====

¶ 9. Capital losses arising from a non-resident's disposition of property enter into the calculation of section 115 income earned in Canada only if the property constitutes "taxable Canadian property" (see the current version of IT-420, Non-Residents -- Income Earned in Canada). Subparagraph 40(2)(g)(iii) provides, with certain exceptions, that a taxpayer's loss from the disposition of a personal-use property (this type of property is defined in section 54) is deemed to be nil. This rule can apply to a non-resident's disposition of a personal-use property that is "taxable Canadian property" such as, for example, real property situated in Canada.

¶ 10. A non-resident's allowable capital losses (except ABILs -- see instead ¶ 1 above) from dispositions of taxable Canadian property, other than listed personal property, are deducted from the total of

(a) the non-resident's taxable capital gains for the loss year from dispositions of taxable Canadian property other than listed personal property, and

(b) the non-resident's taxable net gain for the year from dispositions of listed personal property which is taxable Canadian property.

However, the net result (which is included in the non-resident's section 115 income earned in Canada) cannot be less than nil. Note also that no amount of the above-mentioned allowable capital losses can be deducted from the other section 115 income earned in Canada for the year (i.e., from income other than the amounts described in (a) and (b) above). If any amount of the above-mentioned allowable capital losses cannot be deducted in the loss year (i.e., because the taxable portion of any capital gains is not great enough to absorb these losses), such unused amount is included in the non-resident's "net capital loss" for the loss year, which can be carried over to and claimed in other years in accordance with the rules discussed in ¶s 13 to 17 below.

¶ 11. The discussions above indicate the types of losses that, to the extent they cannot be deducted in the loss year, are included in the taxpayer's various losses for the loss year that can be carried over to other years. The definition of each of these carried-over losses is contained in a particular provision of the Income Tax Act, as follows:

  • a limited partnership loss -- see subsection 96(2.1);
  • a restricted farm loss -- see section 31;
  • a non-capital loss -- see subsection 111(8);
  • a farm loss -- see subsection 111(8); and
  • a net capital loss -- see subsection 111(8).

Some of these definitions mentioned above require that certain adjustments be made in calculating the various carried-over losses. Examples of some adjustments that can apply to non-residents are as follows:

  • Certain amounts that are deductible when calculating a non-resident's taxable income earned in Canada for the year also become additions in the calculation of the non-capital loss for the year. These deductible amounts relate to amounts already included in the non-resident's income earned in Canada for the year (such income amounts thus already having been subtracted from the paragraph 115(1)(c) losses incurred in the year for purposes of calculating the non-capital loss for the year).
  • The amount of any net capital loss (from another year) that is carried over to and deducted in a particular year becomes an addition in the calculation of the non-capital loss for that particular year. Thus, for example, if a non-resident deducts a paragraph 115(1)(c) loss incurred in a particular year from carrying on a business in Canada against section 115 taxable capital gains for the year (i.e., because of the rule mentioned in ¶ 6 above that a paragraph 115(1)(c) loss that can be deducted in the loss year must be deducted in that year or forfeited), the loss can be reinstated (i.e., as a non-capital loss for the year) to the extent that a net capital loss of another year has been carried over to and deducted in the particular year. The significance of this rule becomes apparent when considered in light of the subparagraph 111(1.1)(a)(i) limitation rule, discussed in ¶ 15 below, which applies on the application of a net capital loss (but not on the application of a non-capital loss).
  • As indicated in ¶ 7 above, a non-resident's non-capital loss for a loss year generally includes unused losses of any of the three types of paragraph 115(1)(c) losses. A non-capital loss therefore includes an unused allowable business investment loss ("ABIL"). However, as indicated in ¶ 14 below, a non-capital loss can be carried forward only for seven years whereas a net capital loss can be carried forward indefinitely. In order to ensure that they can be carried forward indefinitely, any unused ABILs included in a non-capital loss for which the carry-forward period has expired at the end of a particular year generally become additions in the calculation of (i.e., are effectively transferred to) the net capital loss for that year.
  • A taxpayer's (including a non-resident's) restricted farm loss, farm loss, net capital loss and non-capital loss are reduced as required by section 80. Generally, such a requirement can occur when there is a "forgiven amount" in connection with the settlement of a "commercial obligation" issued by the taxpayer.

¶ 12. Furthermore, when calculating a non-resident's carried-over losses under any of the above particular provisions, subsection 111(9) requires that the calculation be made as if

  • the non-resident had no income other than income described in subparagraphs 115(1)(a)(i) to (vi) (these are types of Canadian-source income that are included in the non-resident's income earned in Canada -- see the current version of IT-420);
  • the non-resident's only taxable capital gains and allowable capital losses were those from the disposition of taxable Canadian property; and
  • the non-resident's only losses were
    • ABILs;
    • losses from the duties of an office or employment performed by the non-resident in Canada; and
    • losses from businesses carried on by the taxpayer in Canada.

Example

Marie is a non-resident who reports a significant amount of income from a business she carries on in Canada. She incurs a loss from a business she carries on outside Canada as well as a loss from a rental property in Canada. She cannot apply either of the losses against the Canadian-source business income she reports for the year because neither loss is a loss described in paragraph 115(1)(c) (see the rule in ¶ 1 above). Furthermore, the rule in subsection 111(9) (discussed immediately above) prevents her from including either of those losses in her non-capital loss for the year. Thus, neither loss can be carried over to and deducted in another year, regardless of whether she is a resident or non-resident in that other year.

Application of Losses to Other Years

¶ 13. Section 111 provides for the deduction of the loss year's carried-over losses (if any) when calculating the taxable income or, in the case of a non-resident, the taxable income earned in Canada of another taxation year or years (which we will refer to below as the year or years "of loss application"). To determine which years can qualify as the years of loss application to which a particular type of carried-over loss can be applied, see ¶ 14 below. In the case of a non-resident, paragraph 115(1)(e) contains a restriction that any section 111 carried-over loss must reasonably be considered to be applicable to

  • the duties of an office or employment performed by the non-resident in Canada,
  • a business carried on by the non-resident in Canada, or
  • a disposition of property, any profit or gain on which would have been required by subsection 115(1) to be included in the non-resident's taxable income earned in Canada.

This restriction in paragraph 115(1)(e) applies even to a non-resident's carried-over losses that come from a partnership, including a limited partnership, since such losses retain their source and nature when flowed out to members of the partnership. It is also important to note that the use of a carried-over loss to reduce a non-resident's taxable income earned in Canada for a year of loss application is subject to the restriction in paragraph 115(1)(e) regardless of whether the taxpayer was a non-resident or a resident in the loss year.

Example

In a taxation year throughout which he is a resident of Canada, Ravi incurs a loss from property and a loss from carrying on a business outside Canada. He cannot fully use these losses in the loss year. The unused losses are included in his non-capital loss for the loss year. (Subsection 111(9) does not apply because he is a resident for the year.) Ravi could carry over the non-capital loss to another year in which he is a resident. However, he cannot carry it over to a year in which he is a non-resident because of the restriction in paragraph 115(1)(e).

When calculating taxable income earned in Canada for a particular year of loss application, the restriction in paragraph 115(1)(e) allows a non-resident to deduct (subject to the rules discussed in ¶s 14 to 17 below) any portion of a net capital loss that pertains to the disposition of property for which a gain would be taken into account in calculating the non-resident's taxable income earned in Canada (i.e., taxable Canadian property). This is the case regardless of whether the taxpayer was a non-resident or resident in the year in which the net capital loss was incurred.

¶ 14. Paragraphs 111(1)(a) to (e) provide the carry forward and carry back rules that apply to a taxpayer's (including a non-resident's) non-capital loss, net capital loss, restricted farm loss, farm loss and limited partnership loss. The rules for each type of carried-over loss for a particular loss year are as follows:

(a) A non-capital loss can be carried back 3 years and forward 7 years under paragraph 111(1)(a).

(b) A net capital loss can be carried back 3 years and forward indefinitely under paragraph 111(1)(b). When determining the amount of a net capital loss of a loss year that can be deducted in a particular year of loss application, see the rules discussed in ¶s 15 and 16 below.

(c) A restricted farm loss can be carried back 3 years and forward 10 years under paragraph 111(1)(c). However, by virtue of that paragraph, no amount in respect of restricted farm losses is deductible in a particular year of loss application except to the extent of the taxpayer's incomes for that year from all farming businesses carried on by the taxpayer (in the case of the non-resident, this would mean incomes from farming businesses carried on by the taxpayer in Canada because incomes from farming businesses carried on outside Canada are not included in the non-resident's section 115 income earned in Canada).

(d) A farm loss can be carried back 3 years and forward 10 years under paragraph 111(1)(d).

(e) A limited partnership loss cannot be carried back, but it can be carried forward indefinitely under paragraph 111(1)(e). However, by virtue of that paragraph, no amount is deductible in a year of loss application in respect of a limited partnership loss except to the extent of the taxpayer's "at-risk amount", as determined under subsection 96(2.2) as at the end of the last fiscal period of the partnership that ends in the year of loss application, less certain amounts specified in paragraph 111(1)(e).

¶ 15. If a net capital loss for a particular loss year is determined and the taxpayer decides to claim all or a portion of that net capital loss in a particular year of loss application, the amount of that net capital loss that is actually deducted under paragraph 111(1)(b) in the year of loss application is subject to the rules in subsection 111(1.1). Subparagraph 111(1.1)(a)(ii) contains what we will call an "inclusion rate" adjustment. (The inclusion rate is simply the rate that is used to determine the portion of a capital gain that must be reported as income. In other words, a taxable capital gain is equal to the capital gain multiplied by the inclusion rate.) The inclusion rate has changed over the years from 1/2 to 2/3 to 3/4. The inclusion rate adjustment in subparagraph 111(1.1)(a)(ii) adapts the net capital loss for the loss year to the year of loss application when the inclusion rates for the loss year and year of loss application are different. The inclusion rate adjustment is calculated by the following formula:

       B                                                          
A  × ---
 C
where
A is the amount of the net capital loss for the loss year that is "claimed" in (i.e., applied to) the year of loss application;
B is the inclusion rate in effect for the year of loss application; and
C is the inclusion rate in effect for the loss year.
      

Example

Willie, a non-resident, has a 1987 net capital loss of $6,000. He wishes to apply that net capital loss when calculating his 1995 taxable income earned in Canada. Since the 1987 inclusion rate was 1/2 and the 1995 inclusion rate was 3/4, the inclusion rate adjustment results in the following amount:

                   3/4                                          
$ 6,000 × -----
       1/2
  
        3 2
= $ 6,000 × ----- × ---
        4 1
  
= $ 6,000 ×
  
= $ 9,000  

Thus, although Willie intends to apply his 1987 net capital loss of $6,000 to the 1995 year, the inclusion rate adjustment causes that $6,000 amount to be multiplied by 1½ to come up with an amount of $9,000 for purposes of determining the amount that he actually would deduct in respect of the 1987 net capital loss when calculating his 1995 taxable income earned in Canada. (This is because the inclusion rate of 3/4 for 1995 is in fact 1½ times greater than the inclusion rate of 1/2 for 1987.)

However, the amount determined in subparagraph 111(1.1)(a)(ii), i.e., the amount resulting from the inclusion rate adjustment, is subject to a limitation rule contained in subparagraph 111(1.1)(a)(i). The limitation under that subparagraph is calculated as follows:

Taxable capital gains, for the year of loss application, from dispositions of capital property other than listed personal property

Plus

The taxable net gain, for the year of loss application, from dispositions of listed personal property

Minus

Allowable capital losses (other than ABILs), for the year of loss application, from dispositions of capital property other than listed personal property.

The subparagraph 111(1.1)(a)(i) limitation ensures that the loss year's net capital loss, as adjusted by the subparagraph 111(1.1)(a)(ii) inclusion rate adjustment, cannot be deducted against income that is not the net taxable portion of capital gains for the year or years of loss application. In the case of a non-resident, the loss year's net capital loss cannot be applied, for instance, against Canadian-source employment or business income reported in the year of loss application.

Example

Continuing on with the above example, assume that Willie's 1995 section 115 income earned in Canada includes a taxable capital gain of $10,000 and an allowable capital loss of $5,500, from dispositions of taxable Canadian property. This means that his subparagraph 111(1.1)(a)(i) limitation for 1995 is $10,000 less $5,500 = $4,500. As a result, Willie actually can deduct only $4,500, rather than the $9,000 calculated in the first part of this example, in respect of his 1987 net capital loss when calculating his 1995 taxable income earned in Canada. Note also that he actually only has to apply $3,000 of the $6,000 1987 net capital loss to the 1995 year in order to come up with the $4,500 amount he deducts in 1995 (i.e., because the inclusion rate adjustment multiplies the $3,000 by 1½ to come up with the $4,500 amount deducted). Thus, he still has $3,000 of the 1987 net capital loss (i.e., $6,000 less the $3,000 applied in 1995) that he can apply in other years.

¶ 16. There is an exception to the rule stated above that a net capital loss cannot be applied against income that is not the net taxable portion of capital gains for the year or years of loss application. This exception is contained in paragraph 111(1.1)(b) and it is relevant if the taxpayer is an individual, including a non-resident individual, who has a "pre-1986 capital loss balance". A pre-1986 capital loss balance, which is calculated under subsection 111(8), represents the individual's unused net capital losses from dispositions made before May 23, 1985 (subject to a grandfathering rule). By virtue of the exception rule in paragraph 111(1.1)(b), the portion of net capital losses that consists of the pre-1986 capital loss balance can be deducted under paragraph 111(1)(b), up to a maximum amount of $2,000 per year, against a non-resident individual's section 115 income earned in Canada that does not represent taxable capital gains, when calculating the taxable income earned in Canada for a year or years of loss application. A mechanism in paragraph 111(1.1)(b) ensures that an inclusion rate adjustment (as described in the paragraph immediately above) does not apply to any portion of a pre-1986 capital loss balance that is in fact deducted against income not representing taxable capital gains.

Example

Once again continuing on with the above example, assume that Willie's $6,000 net capital loss resulted from a disposition of taxable Canadian property in 1985 (rather than 1987) that was before May 23, 1985. Based on the calculations given earlier, he applies $3,000 of his 1985 net capital loss (like 1987, the inclusion rate for 1985 was 1/2) against his 1995 net taxable capital gains (remember that, although he actually applies $3,000, he deducts $4,500 in 1995 because of the inclusion rate adjustment). Assume that he also reports in 1995 $20,000 income from carrying on a business in Canada. Since the $6,000 net capital loss for 1985 consists entirely of his pre-1986 capital loss balance, he can also apply the maximum amount of $2,000 of that balance against his 1995 business income when calculating his 1995 taxable income earned in Canada. This $2,000 is not subject to an inclusion rate adjustment. Thus, he ends up applying $5,000 of his 1985 net capital loss of $6,000:

              Amount
      Applied
Amount   
Deducted 
Against 1995 taxable capital gains $ 3,000   $ 4,500
Against 1995 business income $ 2,000 $ 2,000
-------- --------
Total reduction to 1995 taxable income earned in Canada     $ 6,500
=====
Total applied in 1995 $ 5,000  
Available to be applied in other years $ 1,000  
--------
$ 6,000  
=====

¶ 17. When following the above rules, the carried-over losses do not have to be used to the maximum extent possible in calculating the non-resident's taxable income earned in Canada for a particular year or years of loss application. Nor do the carried-over losses have to be used in any particular order. However, the following rules in subsection 111(3) must be observed:

(a) An amount of carried-over loss cannot be claimed more than once.

(b) A carried-over loss of a particular type for a particular loss year cannot be deducted until the deductible carried-over losses of the same type for all previous loss years have been deducted.

PART II: RULES FOR AN INDIVIDUAL WHO IS A NON-RESIDENT OF CANADA FOR ONLY PART OF THE TAXATION YEAR

¶ 18. An individual who is a resident of Canada throughout part of a taxation year and throughout some other part of the year is a non-resident calculates taxable income under section 114. That provision requires the individual, when calculating taxable income for the whole taxation year, to treat

(a) the period or periods in the year throughout which the individual is a resident of Canada (for the sake of simplicity, we will refer to such period or periods, collectively, as the "paragraph 114(a) period") as though it were a whole taxation year for the purpose of calculating the individual's income for that period; and

(b) the period or periods in the year throughout which the individual is a non-resident of Canada (for the sake of simplicity, we will refer to this period or periods, collectively, as the "paragraph 114(b) period") as though it were a whole taxation year for the purpose of calculating the individual's taxable income earned in Canada for that period.

It should be noted that there is, nevertheless, only one taxation year for a part-year resident because the paragraph 114(a) and 114(b) periods are not actually separate taxation years.

¶ 19. Step 1: The individual calculates the income (not taxable income) for the paragraph 114(a) period by following the rules in section 3 of the Act that a full-year resident would follow. Thus, the individual reports income for the paragraph 114(a) period from all sources in and outside Canada (i.e., worldwide income). Also, the individual's losses incurred in the paragraph 114(a) period from all sources in and outside Canada are deducted in calculating income for that period, subject to the rules in section 3. Note that section 3 does not contain the type of restriction on loss deductions in the loss year that is found in paragraph 115(1)(c) (as described in ¶ 5 above). Thus, for example, the individual can deduct a loss from property in the paragraph 114(a) period. The deduction, in the paragraph 114(a) period, of losses incurred in the period is of course subject to any limitation on the deduction of a loss in the loss year that would apply to a resident, such as, for example

  • the rules limiting the deduction, in a loss year, of losses from farming businesses when section 31 applies; and
  • the rules in section 96 limiting the deduction, in a loss year, of a limited partner's loss -- these rules are essentially the same as those described in ¶ 2 above if one ignores the references in that paragraph to a "non-resident" and to paragraph 115(1)(c) and if one does not restrict the application of those rules to a limited partner's share of partnership income from "carrying on a business in Canada".

¶ 20. The income for the paragraph 114(a) period also includes taxable capital gains for that period from dispositions of capital property located in or outside Canada. Similarly, losses for the paragraph 114(a) period from dispositions of capital property located in or outside Canada are taken into account when calculating income for that period, subject to the limitation rules found in paragraph 40(2)(g) (for "personal-use property"), section 41 (for "listed personal property") and section 3 (for other capital property). These limitation rules are essentially the same as those described in ¶s 9 and 10 above if one ignores the references in those paragraphs to a "non-resident" and to "section 115 income earned in Canada" and if one does not restrict the application of those rules to "taxable Canadian property".

¶ 21. Gains and losses resulting from any deemed dispositions of property under subsection 128.1(4) (prior to 1993, under section 48) in connection with the individual's ceasing to be a resident of Canada are also taken into account in the paragraph 114(a) period.

¶ 22. Step 2: The individual then calculates the taxable income earned in Canada for the paragraph 114(b) period by following the section 115 rules that a full-year non-resident would use. The current version of IT-420 and IT-171 give details on the rules (except for losses) for calculating a non-resident's section 115 income earned in Canada and taxable income earned in Canada, respectively. If the individual incurs a loss in the paragraph 114(b) period, the rules in ¶s 1 to 6, 9 and 10 above generally apply for purposes of determining the extent to which the loss can be deducted in that period.

¶ 23. The rules in ¶s 13 to 17 above generally apply for purposes of deducting carried-over losses of other years when calculating taxable income earned in Canada for the paragraph 114(b) period. For this purpose, one should keep in mind that

  • the year of loss application mentioned in those paragraphs would in this case be the paragraph 114(b) period; and
  • the subsection 115(1)(e) restriction still applies. Thus, for example, an unused loss from carrying on a business outside Canada or from property (i.e., when the individual was a resident of Canada) cannot be carried over to the paragraph 114(b) period.

Also note that an unused loss from the paragraph 114(a) period cannot be deducted in calculating the taxable income for the paragraph 114(b) period. This is because, even though the calculations for the paragraph 114(a) and 114(b) periods are made "as though" those periods were separate taxation years, neither of those periods is a "taxation year"-the rules in subsection 111(1) provide only for the deduction, in a year of loss application, of a carried-over loss from a loss year.

¶ 24. Step 3: The individual then adds together:

(a) the income for the paragraph 114(a) period, and

(b) the taxable income for the paragraph 114(b) period,

and subtracts

(c) any deductions that are otherwise allowable for purposes of calculating taxable income, to the extent that they pertain to the paragraph 114(a) period.

The result obtained is the individual's taxable income for the whole taxation year. The deductions referred to in (c) above include the application to the paragraph 114(a) period of any carried-over losses from other taxation years, to the extent that such losses could be deducted by a full-year resident when calculating taxable income in accordance with the rules in section 111. These are essentially the same rules that are described in ¶s 14 to 17 above, if one ignores the comments in those paragraphs regarding the specific application of those rules for purposes of determining a non-resident's section 115 taxable income earned in Canada. Note that, for purposes of applying a carried-over loss from another year to the paragraph 114(a) period, there is no restriction like that in paragraph 115(1)(e) (as described in ¶ 13 above). Note also that an unused loss from the paragraph 114(b) period cannot be deducted in the paragraph 114(a) period. This is because, even though the calculations for the paragraph 114(a) and 114(b) periods are made "as though" those periods were separate taxation years, neither of those periods is a "taxation year" -- the rules in subsection 111(1) provide only for the deduction, in a year of loss application, of a carried-over loss from a loss year. Further particulars regarding the loss rules for a resident can be found in the current version of IT-232, Non-Capital Losses, Net Capital Losses, Restricted Farm Losses, Farm Losses and Limited Partnership Losses -- Their Composition and Deductibility in Computing Taxable Income.

¶ 25. An amount of an unused loss from another taxation year that is one of the types of losses described in paragraph 115(1)(e) as described in ¶ 13 above (regardless of whether the loss was incurred when the individual was a resident or a non-resident of Canada) could be deducted, in a loss application year to which section 114 applies, either in the paragraph 114(a) period or the paragraph 114(b) period or partly in both periods, as long as the total amount deducted does not exceed the unused loss.

¶ 26. For purposes of determining any limited partnership loss, restricted farm loss, non-capital loss, farm loss or net capital loss for a taxation year to which section 114 applies,

  • the definitions for these carried-over losses apply, as found in subsection 96(2.1) (for the limited partnership loss), section 31 (for the restricted farm loss) and subsection 111(8) (for the non-capital loss, net capital loss and farm loss); and
  • the rules in subsection 111(9) (see ¶ 12 above) apply to the paragraph 114(b) period.

¶ 27. Section 114 can apply only to individuals. An "individual" is defined in subsection 248(1) as "any person other than a corporation". An "individual" therefore includes a trust. However, under section 128.1, if a trust becomes or ceases to be a resident of Canada at a particular time, then for purposes of the Income Tax Act:

  • the trust's taxation year that would otherwise include that particular time shall be deemed to have ended immediately before that time, and
  • a new taxation year shall be deemed to have begun at the particular time.

Therefore, section 114 cannot apply to a trust. This is because the requirement for the operation of section 114, that the individual be a resident of Canada throughout part of a taxation year and throughout some other part of the year be a non-resident, cannot be fulfilled. The above-mentioned rule in section 128.1 also applies to a corporation.

Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Reasons for the Revision

This bulletin is revised to reflect amendments to the Income Tax Act that were enacted under S.C. 1985, c. 45 (formerly Bill C-72); S.C. 1986, c. 6 (formerly Bill C-84); S.C. 1986, c. 55 (formerly Bill C-23); S.C. 1988, c. 55 (formerly Bill C-139); S.C. 1994, c. 7 (formerly Bill C-15 and before that Bill C-92); S.C. 1994, c. 21 (formerly Bill C-27); and S.C. 1995, c. 21 (formerly Bill C-70). Except for the note in italics in ¶ 4, the bulletin is not affected by draft legislation released as of September 27, 1996.

Legislative and Other Changes

In the new bulletin, we have rearranged the order of discussion found in portions of many of the paragraphs of the former bulletin, IT-262R. For this reason, the explanations given below generally do not refer to the former paragraph numbers.

In ¶ 1 , the first and third type of loss described in paragraph 115(1)(c) were added to that provision for the 1991 and subsequent taxation years. This amendment is also reflected in the subsequent paragraphs of the bulletin that refer to paragraph 115(1)(c).

¶ 2 , which is new, mentions provisions that contain loss rules for a limited partner, including the "limited partnership loss" (see also ¶ 11 ). The introduction of these provisions into the Act took effect after February 25, 1986.

In ¶ 3 , there is a clarification to the effect that when the "chief source of income" test (which is used for determining whether section 31 applies) is considered, worldwide income is taken into account.

In step 1 of ¶ 4 , there is a note regarding the proposed repeal of section 37.1. In step 3 of ¶ 4 , the amount $6,250 was changed from $2,500 for fiscal periods commencing after 1988.

¶s 7 and 12 make a reference to subsection 111(9), which modifies the various subsection 111(8) loss definitions for a particular year if the taxpayer was a non-resident during the year. ¶s 7 and 12 reflect an amendment to subsection 111(9) that was consequential upon the amendment reflected in ¶ 1 (as described above) and which took effect for the 1991 and subsequent taxation years. The amendment to subsection 111(9) made it possible to carry over to other years a non-resident's unused losses of not only the second type described in ¶ 1 but also the first and third types described in ¶ 1.

¶ 8 discusses the calculation of a "farm loss". Although there have not been any legislative changes to the subsection 111(8) "farm loss" definition, it interacts with the subsection 111(8) definition of "non-capital loss", as modified by subsection 111(9) for non-residents. In view of the legislative change to subsection 111(9) (see ¶ 7 and comment thereon immediately above), an illustration of the interaction of the "farm loss" and "non-capital loss" is now given in an example at the end of ¶ 8.

¶ 10 reflects an amendment as a result of which taxpayers were no longer able to apply the excess of allowable capital losses over taxable capital gains against income from other sources up to a maximum amount of $2,000 per year. This amendment took effect with respect to dispositions after May 22, 1985 (subject to a grandfathering rule).

In ¶ 11 :

  • The rule that a non-capital loss for a particular year be increased by any net capital loss of another year that is carried over to and deducted in the particular year took effect for the 1991 and subsequent taxation years.
  • The rule regarding the transfer of unused ABILs from an expired non-capital loss to a net capital loss took effect for the 1985 and subsequent taxation years.
  • The rule that a taxpayer's restricted farm loss, farm loss, net capital loss and non-capital loss be reduced as required by section 80 has been specifically provided for in the definitions for those losses for taxation years ending after February 21, 1994. (It should be noted, however, that the amendments to these definitions for this purpose were clarifying amendments because section 80 itself currently provides, and did provide as it read for taxation years ending before February 22, 1994, for reductions to these losses.)

¶ 12 , in addition to reflecting the amendment to subsection 111(9) mentioned above, also reflects (indirectly) an earlier amendment to that provision whereby the "limited partnership loss" was added to the list of losses to which it applies. This amendment took effect after February 25, 1986 and was the result of the addition of the "limited partnership loss" (as mentioned above in the explanation of changes regarding ¶ 2).

In ¶ 13 , the position in the last two sentences represents a change in interpretation that is favourable to taxpayers. Previously (in the last sentence of ¶ 8 of the previous bulletin), we said that any net capital losses incurred while the taxpayer was a resident of Canada may not be carried to years in which the taxpayer is a non-resident.

¶ 14(e) gives the carry over rules for a limited partnership loss. These rules are found in paragraph 111(1)(e). The addition of paragraph 111(1)(e) to the Act was applicable after February 25, 1986.

The rules discussed in ¶s 15 and 16 generally came into effect for the 1985 and subsequent taxation years.

¶ 17 reflects (indirectly) an amendment to subsection 111(3) whereby its rules were extended to also apply to a "limited partnership loss." This amendment took effect after February 25, 1986 and was the result of the addition of the "limited partnership loss" as mentioned above in the explanation of changes regarding ¶ 2.

¶ 18 and subsequent paragraphs reflect an important amendment to section 114. Before the amendment, the period or periods in paragraph 114(a) was "the period or periods in the year throughout which the individual is resident in Canada, is employed in Canada or is carrying on business in Canada". Since the amendment, the period or periods in paragraph 114(a) has simply been "the period or periods in the year throughout which the individual is resident in Canada". This amendment took effect for the 1992 and subsequent taxation years; however, an election was available which enabled the individual to go back, for the 1992 year, to the pre-amendment structure in section 114.

¶ 21 reflects that section 48, containing rules pertaining to a taxpayer's ceasing to be a resident of Canada, was repealed and section 128.1, containing similar rules, was added to the Act, generally effective after 1992.

It should be noted that in the second bullet in ¶ 23 , there is no indication that all net capital losses from a taxation year in which the individual was a resident of Canada cannot be carried over to the paragraph 114(b) period. Previously we did make such a statement -- in the last sentence of ¶ 17 of the previous bulletin, we said that all net capital losses incurred while the taxpayer's income is computed as that of a resident may not be carried to any years, or part of years, where the taxpayer's income is computed as that of a non-resident. The elimination of such a statement in the new bulletin represents a change in position which is favourable to taxpayers (such change is consistent with the favourable change in ¶ 13 as mentioned above).

¶ 27 briefly discusses a rule in section 128.1 that applies when a trust or a corporation becomes or ceases to be a resident of Canada. The addition of section 128.1 to the Act was generally effective after 1992. In the case of a corporate emigration, former section 88.1 (the repeal of which was also generally effective after 1992) contained a somewhat similar rule to the rule in section 128.1 that is discussed in ¶ 27.

Other changes have been made to the bulletin to improve its readability, to provide additional relevant information and to remove information now considered outside the scope of the bulletin.

Notice -- Bulletins do not have the force of law

Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff. In cases where an IT has not yet been revised to reflect legislative changes, readers should refer to the amended legislation and its effective date. Similarly, court decisions subsequent to the date of the IT should be considered when determining the relevancy of the comments in the IT.

An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in a previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.

A change in a departmental interpretation may also be announced in the Income Tax Technical News.

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