Interprovincial Steel and Pipe Corp. v. The Queen, 86 DTC 6583, [1986] 2 CTC 473 (FCA)

Pratte, J.:—This is an appeal from a judgment of the Trial Division (Muldoon, J.) dismissing an appeal brought by the appellant from income tax reassessments for the 1978 and 1979 taxation years.

The appellant company is in the business of manufacturing steel and steel products. Its fiscal year terminates on August 31. Until the end of 1979, it had always treated certain spare parts, electrodes and refractories as inventory and paid income tax on that basis. Early in 1980, however, before filing its income tax return for 1979, the appellant changed its position and decided that those items were deductible expenses rather than inventory. It therefore filed its return for 1979 on that new basis and, on the same basis, filed an amended return for the year 1978. According to those returns, the appellant had paid too much tax for each one of those years. The Minister agreed with the new position of the appellant. In 1980, he therefore reassessed the appellant’s 1978 income tax on that new basis. As a result, for the 1978 taxation year, the Minister then refunded the appellant a sum of $2,983,934.26 in tax and paid it an amount of $331,864.46 as interest on that overpayment; for the year 1979, the Minister issued a refund of tax of $1,543,150.70 and paid the appellant $35,247.92 as interest on that overpayment.* [1]

In May 1982, however, the Minister changed his mind and reverted to his original position; he reassessed the appellant for the 1978 and 1979 taxation years on the basis that the spare parts, electrodes and refractories were inventory. According to those new assessments, the appellant’s income tax was $6,745,992.74 for 1978 and $1,066,495.30 for 1979. In addition, however, the Minister assessed interest for each one of those years: a sum of $329,655.89 for 1978 and a sum of $6,377.33 for 1979.

It is from those reassessments that the appellant appealed to the Trial Division after having paid the contested amounts as required by subsection 158(1) of the Income Tax Act. At the hearing before the Trial Division, the appellant abandoned its contention that the spare parts, electrodes and refractories should have been treated as deductible expenses and merely attacked the assessments of interest for 1978 and 1979 on the ground that, in the circumstances, no interest was exigible under the Income Tax Act.

It is common ground that, at that time, there was no provision in the Income Tax Act that imposed on the appellant the obligation to pay the interest claimed by the Minister in the two reassessments.! [2] In spite of that, the Trial Judge dismissed the appeal. He considered that the assessments of interest in question were means used by the Minister to recover the sums that he had paid the appellant in 1980 as interest on what was then perceived as tax overpayments. In his view, that interest had been paid to the appellant by mistake and the Minister was clearly entitled to recover it.

We are all of the view that this judgment cannot stand.

The appeal to the Trial Division was an appeal from income tax reassessments. The only issue to be decided on that appeal was whether those reassessments had been made in accordance with the law. Now, it is clear that the only amounts that can be claimed by way of assessment under the Income Tax Act are those that are payable under that Act. The Minister cannot use his power of assessment under the Income Tax Act to collect sums that are not exigible under that Act. In this case, it is common ground that the amounts that were assessed as interest were not exigible under the Act. It follows that those amounts could not be claimed by way of assessment. If the Minister felt that he was, under the common law, entitled to recover the interest that he had previously paid to the appellant, he should have sued the appellant before a Court of competent jurisdiction.

For those reasons, the appeal will be allowed, the judgment of the Trial Division will be set aside, the appellant’s appeal against the reassessments, dated May 7, 1982, of its income tax for the years 1978 and 1979 will be allowed and those assessments will be varied by deleting from the 1978 assessment the assessment of interest in the sum of $329,655.89 and by deleting from the 1979 assessment the assessment of interest in the sum of $6,377.33. The appellant shall be entitled to its costs both in this Court and in the Trial Division.

At the hearing of the appeal as well as in his memorandum, counsel for the appellant argued that this was a case where the Court should make an order pursuant to subsection 178(1) of the Income Tax Act directing the respondent to repay to the appellant the sums that were illegally assessed as interest. However, the appellant did not ask for such an order in its statement of claim and, for that reason, we are of opinion that no such order should be made.

Appeal allowed.