Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: What is the meaning of "is, or is about to become" as referenced in s. 164(2).
Position: Once the amount of the tax liability can be ascertained, the Minister may apply the amount of the refund or repayment to this liability.
Reasons: While in principal the tax debt comes into existence when the income is earned, the amount of the liability can only be properly determined or estimated at the end of the fiscal year when the income, deductions, and credits can be quantified.
June 17, 2010
Accounts Receivable Tax HEADQUARTERS
Programs Division Income Tax Rulings
Attention: Anne Morin, Manager Directorate
International and Aggressive Tax Richard Aronoff
Planning Section (613) 941-7239
2009-032693
Interpretation of Subsection 164(2)
This is further to your request for the interpretation of the words "is, or is about to become" as they appear in subsection 164(2) of the Income Tax Act. Subsection 164(2) provides:
"Instead of making a refund or repayment that might otherwise be made under this section, the Minister may, where the taxpayer is, or is about to become, liable to make a payment to Her Majesty in right of Canada or in right of a province, apply the amount of the refund or repayment to that other liability and notify the taxpayer of that action" (italics added).
We have been unable to locate any cases where the highlighted words "is, or is about to become" have been judicially interpreted with respect to subsection 164(2). However, we were able to find a judicial interpretation dealing with former subsection 52(6) of the Excise Tax Act, R.S.C. 1970, c. E-13, pursuant to which the Minister may issue to a third party a demand to pay. Subsection 52(6) provided:
"When the Minister has knowledge or suspects that any person is or is about to become indebted to a licensee he may, by registered letter, demand of such person that the moneys otherwise payable to the licensee be in whole or in part paid over to the Receiver General on account of the licensee's liability under this Act" (italics added).
In The Queen v. Creative Graphic Services, [1974] C.T.C. 381 (F.C.T.D.), it was held that the highlighted words "is or about to become indebted" as they appeared in former subsection 52(6) provide guidance as to when and on what basis a demand to pay may be issued. The Court held that before the Minister could issue such a demand, he must have knowledge or suspicion of an indebtedness or of an indebtedness that is imminent. In other words, the moneys sought to be attached by the demand to pay must arise out of an already existing debt, or an imminently pending debt.
The case of The Queen v. Simard-Beaudry Inc., 71 DTC 5511 (F.C.T.D.), is helpful in that it stands for the principle that an "assessment does not create the debt, but is at most a confirmation of its existence". The liability arises by operation of the Income Tax Act. Applying this principle, a tax debt accrues as income is earned regardless of whether or not it has been assessed. Once the tax has been assessed, there is by operation of section 158 a liability to make payment.
On the other hand, the issue of when a taxpayer is about to be liable to make a payment is dependant on the circumstances and particular facts of each case. Based on the principle in Simard-Beaudry the tax debt comes into existence when the income is earned; however, the amount of the liability can, generally, only be properly determined or estimated at the end of the fiscal year when the income, deductions, and credits can be quantified. Accordingly, it is arguable that on the last day of a fiscal year a taxpayer may be about to become liable.
In cases involving subsection 227.1(1) the situation is different in that a director's liability can arise at any time in the fiscal year. A director could be considered to be about to become liable for the purposes of subsection 164(2) when the amount of the liability has been ascertained, all the required legislative pre-requisites have been complied with, and all that remains is for the assessment to be issued. Since the process of issuing the assessment at this stage would not take long it could be viewed as being imminent. In this situation, a refund due to a director could be withheld pending the issue of the assessment. This would also apply to other derivative liabilities, including those under subsections 159(3), 160(1), and 224(4).
These are general rules and each case will be dependent on its own particular facts. Hence, for the purposes of subsection 164(2), once the amount of the tax liability can be ascertained, the Minister may apply the amount of the refund or repayment to this liability. Should you have any questions or require clarification, please do not hesitate to contact Richard Aronoff at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
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