Nottawasaga Inn Ltd. v. R. – TCC: Court Has No Jurisdiction to Review Interest Based on Challenge to Nil Assessment

Bill Innes on Current Tax Cases New Window

Nottawasaga Inn Ltd. v. The Queen[1] (November 27, 2013) is a fascinating and very arcane piece of jurisprudence dealing with an attack by the taxpayer on a $6,027 interest charge for its 2007 taxation year arising out of a nil assessment.  Equally unusual is that the matter was decided on the basis of the Crown’s preliminary challenge to the court’s jurisdiction in the matter.  In a nutshell, the Minister’s first reassessment of the taxpayer’s 2007 taxation year reclassified some depreciable property of the taxpayer resulting in tax and interest payable.  The taxpayer chose not to contest the reclassification;  it carried non-capital losses back to the 2007 taxation year resulting in a nil assessment of tax but interest in the amount of $6,027 remained payable:

Background Facts

[3]             By way of background, the Appellant is generally in the business of operating hotel and recreational facilities, including twin ice-rinks, in Alliston, Ontario, in effect leasing the buildings from which it operates from a sister corporation having the same parent corporation. The Appellant added the sum of $1,609,215 to its Class 13 pool of assets in respect of which it claimed $160,922 in capital cost allowance in 2007. The Appellant also claimed other expenses and in aggregate the Appellant reported nil income for the 2007 taxation year.

[4]             The Minister initially assessed the Appellant as filed for the 2007 taxation year and issued a Notice dated February 19,2008 that no tax was payable. The Minister reassessed the Appellant on February 14, 2011 to deny various other expenses totalling $77,028.33 as well as reduced its capital cost allowance by $67,138 due to the aforementioned reclassification of capital assets into different classes that had a lower rate of depreciation. The net result of this reassessment was to increase the Appellant’s taxable income by $144,166 and require payment of arrears interest of $6,027.

[5]             On April 20, 2011 the Appellant filed a request that a loss carry-back of $144,166 from the 2010 taxation year be applied against its 2007 taxation year reducing the taxable income to nil.

[6]             On May, 2011 the Appellant filed a Notice of Objection in respect of its 2007 taxation year, obviously in reference to the Reassessment of February 14, 2011 before the Minister had responded to its request to amend its 2007 taxation year by applying the non-capital loss carry-back. By letter dated August 8, 2012, the Minister advised the Appellant that she would uphold the income inclusion of $144,166 but give effect to the Appellant’s request to apply the offsetting non-capital loss in order to reduce tax payable for 2007 to $nil and advised a reassessment would follow. Such reassessment was issued on September 26, 2012 showing nil taxes payable but making no adjustment to the arrears interest of $6,027 earlier reassessed. On November 8, 2012 the Appellant filed a Notice of Appeal as amended on March 11, 2013 pursuant to which the Appellant appeals the arrears interest only but on the basis the Minister erred in reclassifying the class of capital assets from Class 13 to Class 1 or 8.

[7]             I take note of the fact that there was no need on the Appellant’s part to file a specific notice of objection to the second reassessment dated September 16, 2012 as pursuant to paragraph 165(7) of the Income Tax Act (the “Act”) the Appellant can file an appeal directly in these circumstances without filing another objection. It should also be noted that the Appellant amended its initial Notice of Appeal to change the relief requested from allowing it to appeal the reclassification of capital assets, thus challenging the taxes assessed, as well as to appeal arrears interest to simply challenging the arrears interest, but on the basis the Minister erred in her reclassification thus in effect setting the wrong tax amount on which arrears interest was calculated.

As an initial matter, the court concluded that the Tax Court has a limited jurisdiction over interest assessments with respect to interpretive and computational issues arising in income tax appeals:

[25]        As the Respondent has argued however, this Court has limited jurisdiction in dealing with appeals to interest assessments. In Moledina c R 2008 CTC 2139, Bowman C.J. confirmed the limits of this Court’s jurisdiction in appeals of interest assessments at paragraph 5:

… It is appropriate however, that at this point I deal briefly with the matter of this Court’s jurisdiction in respect of interest. It is sometimes said, inaccurately in my view, that we have no jurisdiction when a taxpayer objects to the imposition of interest on income taxes. This statement is too broad. If the issue in an appeal is whether the interest was properly calculated, or whether it was imposed in accordance with the provisions of the Act, patently the Tax Court has jurisdiction to hear such an appeal….

[26]        These limitations on the Court’s jurisdiction regarding interest assessments was echoed in J Cloud v Canada 95 DTC 547 where Garon C.J. found the interest assessed was upheld because “the appellant was not able to establish that the interest levied by the reassessment of January 2, 1990, was wrongly calculated mathematically speaking or computed by reference to erroneous principles.”

The taxpayer’s challenge in this case however did not attack the computation of interest or the interpretation of the statutory rules regarding interest, rather it attacked the underlying computation of tax out of which the interest charge arose:

[27]        Such a limit on jurisdiction clearly suggests that the Court has no jurisdiction to hear a challenge to the underlying taxable income calculated by the Minister on which interest is calculated in accordance with the Act when there is no appeal against taxes assessed or a nil assessments of tax.

[28]        There has been no claim by the Appellant that the Minister calculated the interest in dispute incorrectly based on the deemed taxable amount of income of $144,166 pursuant to subparagraph 161(7)(a)(iv) above discussed. The Appellant’s only claim is that the taxable amount of income was in error due to the Minister’s error in reclassifying capital assets of the Appellant.

In the result the taxpayer was unsuccessful and the appeal was dismissed:

[35]        The Appellant has argued in effect that even if its is successful in challenging the reclassification in the future, that it will be penalized due to the fact it has no remedy to obtain a refund of the arrears interest assessed that is in issue here. This may well be true and it is unfortunate for the Appellant that the Act gives no relief in the event of future success, but the Appellant was the one who chose to pursue the path of requesting the application of loss carry-backs to his 2007 taxation years, presumably to eliminate payment of taxes or reduce interest on outstanding balances at such time, rather than pursue the appeal on that issue at this time so must accept the consequences of its decision.

[36]        I find that the Court has no jurisdiction to hear a challenge to an assessment of interest on the basis of challenging the underlying tax assessment when there exists a nil assessment of taxes. Accordingly, I have no choice but to dismiss this appeal as there was no other basis given in the Notice of Appeal for challenging the calculation of interest.

Comment:  Quaere – Whether the taxpayer could have pursued the appeal of the first reassessment (the reclassification issue) and agreed with the Crown that if the appeal were unsuccessful the losses would have been applied to the 2007 taxation year with effect from the date of the commencement of the appeal, i.e., nunc pro tunc?

[1] 3013 TCC 377.