http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108048/index.do
Bakorp Management Ltd. v. The Queen (February 12, 2015 – 2015 TCC 36,Pizzitelli J.).
Précis: On June 30, 1995 the taxpayer paid $13,333,059 on account of Part IV tax for that year. On January 31, 2000 CRA reassessed both the 1993 and 1995 taxation years of the taxpayer which resulted in a substantial increase in liability in 1993 and a reduction in liability in 1995. CRA applied the resulting 1995 overpayment to the new 1993 liability on February 3, 2000. CRA treated the overpayment as having been paid on February 3, 2000 and accordingly charged the taxpayer with roughly 6 ½ years of interest on the underpayment (rather than 2 years if the payment date was taken to be June of 1995 – which was in fact the case). The taxpayer argued that the payment should have been applied in 1995 on the day it was made. The Tax Court agreed with CRA and held that notwithstanding the fact that CRA had the funds in its possession since 1995, subsection 187(2) of the
Income Tax Act (the “Act”) required that interest be paid on the “underpayment” from June 30, 1993 until February 3, 2000.
Decision: The facts in this case were quite simple and not in dispute:
[2] The parties filed an Agreed Statement of Facts in this matter and there are really no facts in dispute. The Appellant was assessed Part IV taxes in connection with dividends received for its 1993 and 1995 taxation years, initially as filed. There is no dispute that the balance due date for payment of Part IV taxes for the 1993 year was June 30, 1993 and that the balance due date for payment of such taxes for the 1995 year was June 30, 1995. There is also no dispute that the Appellant tendered payment of $13,333,059 on account of such taxes payable in 1995 when he filed his 1995 T2 tax return on June 10, 1995.
[3] On January 31, 2000 the Minister of National Revenue (the “Minister”) reassessed the Appellant for both its 1993 and 1995 taxation years with the effect that the Minister increased the Appellant’s Part IV taxes for 1993 substantially but reduced the Appellant’s 1995 Part IV taxes by $6,333,059 (the “Overpayment”). On February 3, 2000 the Minister applied the Overpayment to the Appellant’s 1993 taxation year without having been asked to do so prior to that time as she was permitted. The Appellant objected to the reassessments which were confirmed, and after several reassessments and objections thereto in respect of the 1993 taxation year, the final reassessment in 2012 assessed the Appellant’s 1993 Part IV taxes at $11,221,656 more than originally filed in 1993, which is not in dispute, as well as arrears of interest pursuant to subsection 187(2). With respect to the Overpayment, the Minister treated the said sum as “paid” on February 3, 2000 for the purpose of calculating the arrears interest for the 1993 taxation year under said provision and the Appellant appeals on the basis that an amount equal to said sum should be treated as having been paid on June 10, 1995 being the date of its actual initial payment in respect of the 1995 taxation year which was subsequently found to have been overpaid and applied to its 1993 tax bill.
The applicable provision of the Act was subsection 187(2):
187(2) Interest. Where a corporation is liable to pay tax under this Part and has failed to pay all or any part thereof on or before the day on or before which the tax was required to be paid, it shall pay to the Receiver General interest at the prescribed rate on the amount that it failed to pay computed from the day on or before which the tax was required to be paid to the day of payment.
The Court rejected the appellant`s argument that the phrase “day of payment” was ambiguous:
[10] In fact, the Minister did not and could not apply the Overpayment to the Appellant’s 1993 tax liability until it exercised it rights to do so under subsection 164(2) on February 3, 2000, a few days after the Overpayment crystallized on January 31, 2000, being the date of the last reassessment for the 1995 taxation year in question. Until such time, the prior assessment for the 1995 taxation year is deemed to be valid and binding according to the provisions of subsection 152(8) and subsection 248(2) treats the tax payable by a taxpayer to be fixed by an assessment. Accordingly, the tax paid by the Appellant on June 10, 1995 assessed as filed, was fixed for the 1995 tax year and not any other year and did not and could not become an overpayment until the date of reassessment for such year on January 31, 2000. In short, an overpayment did not exist prior to January 31, 2000 so no amount existed to be applied to an assessment fixed for 1993. Parliament has in fact said so through the above provisions. Accordingly, the date of payment could simply not have been June 10, 1995 for the purposes of crediting the Overpayment to the taxpayer’s 1993 tax liability.
[11] I frankly do not agree with the Appellant’s interpretation of the plain meaning of subsection 187(2) and find no ambiguity in the interpretation of same; however even if I agree that the Appellant’s position creates an ambiguity in interpretation, I could not find in the Appellant’s favour based on a textual, contextual and purposeful approach to interpretation for several of the reasons the Respondent has well argued.
The Court held that the re-application of payments in the manner suggested by the appellant would render many provisions of the Act redundant:
[19] Finally, I must agree with the Respondent that to interpret subsection 187(2) in a manner as to require application of funds as in subsection 161(1) discussed above, would result in rendering many other provisions of the Act inconsistent and useless or create unnecessary conflicts within the Act.
[20] As the Respondent has pointed out, section 221.2 of the Act is a specific section that allows the Minister, on application by the taxpayer, to transfer a payment made on account of one year to another year and treat the payment as if always having been made on account of the other year, the same result the Appellant is trying to reach here. Section 221.2 is a mechanism in the Act that allows just the result the Appellant here seeks, except that the Appellant has never made any such application before February 3, 2000 when the Minister applied the Overpayment in 1995 to the 1993 tax liability. If subsection 187(2) were to be read as automatically achieving this result as a matter of simple interpretation then there would be no need for section 221.2 and its existence would create conflict within the Act. As the Minister under section 221.2 may only exercise his discretion to reapportion a payment on application of the taxpayer, then to allow such apportionment to occur without application of the taxpayer under subsection 187(2) can lead to conflict and absurd results. Surely if the Minister argued that he could avail himself of such reapportionment of tax payments for Part IV tax so that an earlier payment should be applied to a later tax liability so as to create a greater arrears interest amount for the earlier year’s tax liability this would be challenged as abusive. It certainly justifies why the taxpayer should have to ask for such treatment.
Finally the Court rejected the notion that the result was patently unfair:
[25] I also wish to comment on what I perceive to be the Appellant’s main underlying argument in this matter, that it is patently unfair for the Minister to have been in possession of the Overpayment since January 10, 1995 and still allow the taxpayer to be assessed interest at a rate 2 percent higher on that sum of money than the Minister paid out due to the workings of interest calculation under Regulations 4301(a) and (b) respectively. The Appellant has not questioned the validity of these provisions nor am I aware of any basis for doing so. If there was no interest differential between interest charged on taxes owing to the Minister and interest paid on overpayments of tax liabilities, the Appellant would not have any reason to have appealed this reassessment. Unfortunately, such interest differential results in the Appellant being required to pay more in interest on the same amount he was paid interest on. This however is the law as enacted by Parliament to encourage prompt payment of taxes owing and only Parliament has the right to change it. This Court has no jurisdiction to allow a different calculation based outside the law.
As a result the appeal was dismissed with costs.
Comment: This decision may be correct but it is difficult to understand. It is hard to see how the Court found the phrase “day of payment” to be unambiguous in the context of the facts of this case. The decision seems to struggle to justify a level of certainty that is not apparent from the statutory materials. While ultimately perhaps the courts do not have jurisdiction to remedy the situation, it seems patently clear that making the taxpayer bear the 2% compound interest spread for 4 ½ years would not regarded as fair by the average citizen. (In fact the effective rate would have been higher since the interest paid by CRA is taxable to the taxpayer and that paid to CRA is not deductible.) Here CRA exercised its discretion to apply the overpayment to 1993 rather than simply refunding it. Had the amount been refunded in 2000 the taxpayer would have had no case. By electing to retain the funds and apply them to 1993 CRA seems to have wanted to both have its cake and eat it. While the result may or may not reach the level of absurdity it certainly would seem to merit higher scrutiny. This decision would benefit from a review by the Court of Appeal.