http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/180708/index.do
Quinco Financial Inc. v. The Queen (September 1, 2016 – 2016 TCC 190, Bocock J.).
Précis: In J.K. Read Engingeering Ltd. v. The Queen (October 21, 2014 – 2014 TCC 309, Hogan J.), a case blogged earlier on this site, the Tax Court held that in the case of a GAAR assessment interest ran from the payment date for the taxation year being assessed not from the date of the assessment. The taxpayer in this case took another run at the issue asking the Court to revisit the matter in an application on a point of law under section 58 of the Tax Court of Canada Rules (General Procedure). It came as no great surprise that the taxpayer’s submissions were again rejected. The Court held that in the case of a GAAR assessment interest commenced to run from the taxpayer’s “balance-due date”, not from the date of the assessment. Costs were awarded to the Crown in accordance with the Tariff subject to the parties having 30 days to make submissions on costs.
Decision: The taxpayer’s argument was essentially the same as that raised in J.K. Read:
[8] The Appellant contends that tax liability arising and reassessment methodology employed under GAAR constitute a distinct basis for tax assessment in contrast to other provisions under the Act. Strict compliance and technical conformity with the other provisions of the Act are overridden by GAAR where the tax benefit achieved is in disaccord with the overall object, spirit and purpose of the Act. Upon the application of this override, the new tax liability arises through the denial of the tax benefit (Copthorne Holdings Ltd. v R, 2007 TCC 481 (“Copthorne TCC Decision”) at paragraph 77). When the Minister raises the GAAR assessment, she must determine the tax consequences reasonably necessary in the circumstances under subsection 245(5) to deny the tax benefit. The longstanding jurisprudence holds that GAAR affords the imposition of tax consequences sufficient to deny the tax benefit, but does not permit or extend to the recharacterization of the transaction for any other tax purposes (Shell Canada Ltd. v R, 99 D.T.C. 5669 (SCC) at paragraph 39; Canada Trustco Mortgage Company v R., 2005 DTC 5523 (SCC) at paragraph 30).
[9] The Appellant acknowledges this is contrary to the underlying conclusion of Justice Hogan in JK Read Engineering Ltd. v R., 2014 TCC 309, 2014 DTC 1216. In that decision, the judge described Copthorne TCC decision as: (i) the application of GAAR as a recharacterization of the transactions (at paragraph 9); (ii) a finding that the taxpayer had failed to fulfill its withholding obligations (215(1)) (at paragraph 14); and (iii) the striking of the withholding penalty (227(8)), a technical violation, through the exercise of due diligence (at paragraph 17). On this basis, the Appellant suggests that JK Read Engineering and the conclusions should be overlooked by this Court. Instead, the newly imposed tax consequences nullifying the tax benefit are the sole bases for the GAAR assessment. In the present case this would be the denial, per se, of the capital losses arising from the otherwise unimpacted transactions.
The Court’s decision was pithy:
[53] If interest were not charged until after the GAAR assessment issuance date, the underlying tax avoidance or reduction would be reversed at that time, but a tax deferral is created and authored during that period between the balance-due day and the GAAR assessment issuance date. Definitionally under section 245, a tax benefit includes a deferral of taxes. Payment of tax by the Appellant four and half years after the tax benefit occurred, but without interest on the balance due, is, within the Act’ s very own definition of “tax benefit”, a deferral of tax payable per se. The deferred payment of that otherwise payable tax liability confers a benefit to the taxpayer, both logically and under the definition of GAAR itself. To not impose interest from the balance-due day, in the absence of some provision even vaguely directing such a hiatus, renders GAAR ineffective in nullifying the deferral portion of the “tax benefit”. Parliament provided for this not just in framing the definition of tax benefit, but arguably and possibly in the language which suggests direct authority to impose interest as a tax consequence within the expressed words “…other amount payable by… a person under the Act” found in the combined effect of the definitions and subsection (2) of section 245.
[54] This “tax benefit” relating to the deferral of tax payable, when examined in a textual, contextual and purposive manner, having regard to the harmonious scheme and object of the Act as a whole and the intention of Parliament, leads to an effective conclusion. Interest under subsection 161(1) in relation to an assessment under GAAR, referable itself to Part I of the Act, should accrue on a GAAR assessment from the day after the balance-due day for the relevant taxation year.
Costs were awarded to the Crown in accordance with the Tariff subject to the parties having 30 days to make submissions on costs.