Her Majesty the Queen v. Union Gas Limited, 90 DTC 6659, [1991] 1 CTC 1 (FCA)

Pratte, J.A.:—This is an appeal from a judgment of the Trial Division (Rouleau, J.) allowing an appeal by Her Majesty from a decision of the Tax Review Board relating to a reassessment of the appellant's income tax for the 1978 taxation year. The only issue on the appeal is whether the Minister of National Revenue was right in reassessing the appellant on the basis that it owed, in addition to its income tax for that year, a sum of $95,587.32 as interest under section 161 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Pursuant to subparagraph 157(1)(a)(i) of that Act, the appellant, during its fiscal year ending on March 31, 1978, paid to the Receiver General of Canada, on account of its income tax for that year, instalments totalling $8,916,000. In June 1978, realizing that it had overestimated its tax liability for the year, it made an arrangement with the Minister of National Revenue pursuant to which $2,168,000 of the instalments previously paid on account of the appellant's 1978 income tax liability was considered as instalments paid on account of the 1979 income tax. At the end of September 1978, the appellant filed its income tax return for 1978 and then paid an additional amount of $295,587.

By reassessment, notice of which was dated September 3,1980, the Minister first determined that the appellant had, in its 1978 return, underestimated its income tax by some $500,600. That determination is not challenged. The Minister also determined, and this is the only part of the reassessment that is in issue, that, as a result of the agreement of June 1978, reallocating to the 1979 taxation year instalment payments that had been made for the 1978 taxation year, the appellant owed a sum of $95,587.32 as interest under section 161 of the Act. [1] Of that sum, an amount of $11,986.23 was claimed under subsection 161(2), as interest on the instalments that were required to be made before the filing of the return; the balance of $83,601.09 was claimed under subsection 161(1) as interest on the balance of tax that remained unpaid on October 1, 1978, when the time for filing the appellant's 1978 income tax return expired.

The appellant contends that it does not owe any interest under section 161 because it in fact paid, before the filing of its income tax return, more than what it was required to pay. In support of that contention, counsel for the appellant argued that the Minister did not have the power to enter into the agreement of June 1978 and agree to the reallocation of the 1978 instalment; he also stressed the fact that the appellant did not have to pay any income tax for the 1979 taxation year and ultimately received a "nil" notice of assessment for that year.

The position of the respondent, which was adopted by the trial judge, is that, under general common law principles, the appellant could agree with the Minister that some of the instalment payments made for the 1978 taxation year would be allocated to 1979 and that, once that agreement had been entered into, the situation was the same as if these instalment payments had originally been paid in respect of the 1979 taxation year.

The appellant's counsel based his contention that the Minister did not have the power to enter into the agreement of June 1978 on the fact that the Minister cannot, under section 164, refund an amount paid on account of the tax before mailing the notice of assessment for the year. This argument has no merit. The reason why the Minister may only refund an overpayment of tax in the circumstances described in section 164 of the Act is found in section 26 of the Financial Administration Act, R.S.C. 1985, c. F-11 (formerly R.S.C. 1970, c. F-10, s. 19), which prescribes that "no payment shall be made out of the Consolidated Revenue Fund without the authority of Parliament.” It is clear that the agreement of June 1978 was not a payment out of the Consolidated Revenue Fund and was not, therefore, prohibited by that section.

As to the appellant's insistence upon the fact that it did not owe any tax for 1979, I find it unwarranted since, in my view, that fact is irrelevant. Under paragraph 157(1)(a) of the Act, the appellant was required, during its 1979 taxation year, to make monthly instalment payments. The only consequence of the fact that the appellant later received a "nil" notice of assessment for that year was that it then became entitled to a refund pursuant to section 164.

Did the appellant owe the interest that was assessed against it? In order to answer this question it is necessary to determine the effect of the agreement of June 1978 and to examine carefully the wording of section 161 since it is now well established that the only interest that may be claimed by the Minister by way of an assessment under the Income Tax Act is the interest owed pursuant to a provision of the Act. (See Rath v. The Queen, [1982] C.T.C. 207; 82 D.T.C. 6175; Interprovincial Steel and Pipe Corp. v. The Queen, [1986] 2 C.T.C. 473; 86 D.T.C. 6583.) When the appellant paid the instalments of tax during the 1978 taxation year, its tax liability was not then extinguished since that tax liability did not even exist at the time. What the appellant did in the 1978 taxation year was to pay moneys that were to be used to satisfy its income tax liability for that year when that liability would be determined. Its situation was comparable to that of a person who, expecting to owe something to another on a future date, pays that other person a sum of money on the understanding that the sum so paid will be used to extinguish the future debt if and when it arises. In that case, after the payment has been made the parties may, as long as the anticipated debt does not exist, agree to change the destination of the payment. In making such an agreement, the parties merely agree that a payment made in the past for a certain purpose and not yet used for that purpose will be used for another purpose.

If section 161 is read with those considerations in mind, it is impossible to avoid the conclusion, in my view, that the appellant did not owe any interest under subsection 161(2) but owed the interest claimed under subsection 161(1).

Under subsection 161(2), interest may be claimed if the taxpayer has failed to pay as required an instalment of tax that he was required to pay under Part I of the Act. Did the appellant pay as required the instalments that it was required to pay? It certainly did. The agreement of June 1978 allocating these instalment payments to another year could not alter that fact since a contract cannot have the effect of modifying a past event.

Under subsection 161(1), interest was due by the appellant if the amount paid by it "on account of tax payable” for the 1978 taxation year before October 1, 1978, was less than the amount of tax payable by it for that year. The way in which this subsection is drafted indicates, in my view, that in order to determine whether interest is payable one must place oneself at the moment when the time for filing the tax return has expired. When the instalment payments here in question were made they were to be applied to the 1978 income tax liability. As long as that tax liability remained undetermined, though, the parties could agree to change the destination of those payments. This is what the appellant and the Minister did in June 1978. From the date of that agreement, the instalment payments, which had not yet been used to extinguish the 1978 tax liability, were to be applied to discharge the 1979 tax liability. On October 1, 1978, therefore, as a consequence of the June 1978 agreement, the amount paid "on account" of the 1978 income tax did not include the amounts that had originally been paid for that purpose but had since been allocated to the 1979 taxation year.

I would allow the appeal in part, set aside the decision of the Trial Division, and refer the reassessment back to the Minister for reconsideration and reassessment on the basis that, for its 1978 taxation year, the appellant did not owe interest under subsection 161(2) of the Income Tax Act. I would not make any order as to costs.

Appeal allowed in part.