Adjusting Tax Returns: Permissive Deductions

This is part 2 of a series by bestselling author Evelyn Jacks, President, Knowledge Bureau

The post-tax season often involves a specific type of “catch-up” for busy tax accounting offices:  filing returns for procrastinators and making adjustments for errors and omissions.  But this must be done carefully; especially because these adjustments can lead to a broader audit.  Further, there are special rules for claiming “permissive deductions” including CCA (Capital Cost Allowance).  That’s very important if the goal is to preserve tax reducers in the future or recover taxes paid in the past. 

What are permissive deductions? CCA is included in the definition, but so are capital gains reserves, special mortgage reserves and scientific research expenses that are capital in nature.

When can CCA be adjusted? A taxpayer may make a request for prior years’ adjustments to CCA in certain instances or when the CRA has issued a reassessment notice.  The rules for the adjustments have largely been in place since 1984; and IC 84-1 is a good reference.  Adjustments must be requested in writing. 

An important tax tip:  CCA can be claimed at the taxpayer’s option, up to a maximum amount.  Yet, it is generally not possible to decrease taxes payable with a claim for CCA when the taxpayer originally claimed less than the maximum amount. However, here are the instances when adjustments to CCA can be made:

1. There is an upward reassessment of tax and the taxpayer has not claimed the maximum CCA or home workspace expenses.
2. The assets were expensed instead of capitalized.
3. If more CCA was claimed in one class than is allowed, but less is claimed in another class, it is possible to transfer some of the excess claim to another class that has CCA room.
4. There were changes in the classes if the property was subject to certification.An example cited by the government is a motion picture certified as a feature film.
5. In taxable years, where CCA is being revised with offsetting adjustments in other permissive deductions so there is no net change in the taxable result, an adjustment request can be made.
6. Requests for adjustments in taxable years are possible, but these requests are only granted if the period in which a notice of objection can be filed has not passed – so 90 days from the date on the notice of assessment or reassessment.
7. Generally speaking, where there is a nil assessment, CCA can be revised and this is also true of statute-barred years.
8. Misclassified property can be adjusted for all years in the ownership period, providing a waiver is filed (Form T2029).This includes circumstances where there is a transfer of CCA between classes of property or the assets were put in the wrong CCA class.The Minister may decide to allow the deduction in the proper class from the date of correction only, if there was a prior claim made in the incorrect asset class.

Bottom Line:  Astute tax specialists will review the CCA claim for clients during the less hectic summer month to ensure the claims are correct, especially since we have recently seen several incentives to acquire depreciable assets that enjoy accelerated tax write-offs.

Additional Education Resources – sign up now to attend the CE Summit on September 21, when the subject of audit-proofing, audit-defence and sound adjustment protocol will be discussed in detail.