Rath v. The Queen, 82 DTC 6175, [1982] CTC 207 (FCA)

Thurlow, CJ:—This is an appeal from a judgment of the Trial Division which dismissed an appeal from the Tax Appeal Board which had confirmed reassessments of income tax and interest for the years 1974 and 1975.

On the principal question that arises on the appeal I agree entirely with the opinion of the learned trial judge that the loss sustained when household and other goods belonging to Otto John Rath were destroyed by fire when in a warehouse in Ottawa in the course of their transit from the Rath residence in Berkeley, California to a new residence in Ottawa “is simply not a moving expense in the natural and ordinary meaning of that term”. I am also of the view that expenditures necessitated by the loss and made after the fire to buy household goods are simply not moving expenses within the ordinary meaning of that expression. Further, in my opinion, neither the loss by fire nor the expenditures to buy household or other goods to replace goods lost in the fire can be regarded either as amounts paid “as or on account of moving expenses” within the ordinary meaning of that expression in subsection 62(1 )* [1] of the Income Tax Act or as expenses incurred “as or on account of the cost of storing household effects in the course of moving from his old residence to his new residence” within the meaning of paragraph 62(3)(b)t of the Act.

On the principal issue therefore, that is to say, the deductibility of the fire loss in computing income for tax purposes, the appeal, in my opinion, fails.

A further issue, however, was raised as to the liability of the taxpayer for the interest included in the reassessments. On this two submissions were made, one of which was that the Court has a discretion under section 177 of the Income Tax Act to vary an assessment and, under subsection 178(1), to order repayment to the taxpayer of interest paid and that in the circumstances of this case the discretion should be exercised by ordering repayment of the interest assessed and paid. While the wording of the relevant statutory provisions has changed on a number of occasions since the decision in Peter Birtwistle Trust v MNR, [1938-39] CTC 356; 1 DTC 419, in my opinion its reasoning on the point as to the court’s powers is still applicable. On the appeal to the Privy Council Lord Romer said:

It only remains to deal with the question of the interest chargd upon the tax prior to the date of assessment. The question turns upon ss 48, 49 and 66 of the Act.

(ii) ceased to be a student in full-time attendance at an educational institution in Canada that is a university, college or other educational institution providing courses at a post-secondary school level,

and commenced to carry on a business or to be employed at another location in Canada (hereinafter referred to as his “new work location”) or,

(b) has, at any time, commenced to be a student in full-time attendance at an educational institution (hereinafter referred to as his “new work location”) that is a university, college or other educational institution providing courses at a postsecondary school level,

and by reason thereof has moved from the residence in Canada at which, before the move, he ordinarily resided on ordinary working days (hereinafter referred to as his “old residence”) to a residence in Canada at which, after the move, he ordinarily so resided (hereinafter referred to as his “new residence”), so that the distance between his old residence and his new work location is not less than 25 miles greater than the distance between his new residence and his new work location, in computing his income for the taxation year in which he moved from his old residence to his new residence or for the immediately following taxation year, there may be deducted amounts paid by him as or on account of moving expenses incurred in the course of moving from his old residence to his new residence, to the extent that

(c) they were not paid on his behalf by his employer,

(d) they were not deductible by virtue of this section in computing the taxpayer’s income for the preceding taxation year,

(e) they would not, but for this section, be deductible in computing the taxpayer's income,

(f) the aggregate of such amounts does not exceed

(i) in any case described in paragraph (a), the taxpayer’s income for the year from his employment at his new work location or from carrying on the new business at his new work location, as the case may be, or

(ii) in any case described in paragraph (b), the aggregate of amounts required to be included in computing his income for the year by virtue of paragraphs 56(1)(n) and (o), and

(g) any reimbursement received by him for such expenses has been included in computing his income for the year.

+62. (3) In subsection (1), “moving expenses” includes any expense incurred as or on account of

(b) the cost to him of transporting or storing household effects in the course of moving from his old residence to his new residence,

section 48 is in these terms: “Every person liable to pay any tax under this Act shall send with the return of the income upon which such tax is payable not less than one-quarter of the amount of such tax, and may pay the balance, if any, of such tax, in not more than three equal bi-monthly instalments thereafter, together with interest at the rate of six per centum per annum upon each instalment from the last day prescribed for making such return to the time payment is made.”

section 49 provides as follows: “If any person liable to pay any tax under this Act pays as any instalment less than one-quarter of the tax as estimated by him, or should he fail to make any payment at the time of filing his return or at the time when any instalment should be paid, he shall pay, in addition to the interest at the rate of six per centum per annum provided for by the last preceding section, additional interest at the rate of four per centum per annum upon the deficiency from the date of default to the date of payment.”

In each of the years 1919 to 1934 the respondents failed to make any payment at the time of filing their returns or at the time when subsequent instalments under s 48 should have been paid. They became, therefore, chargable with the additional interest prescribed by s 49 in addition to the interest mentioned in s 48. This they do not deny. Their contention that in the circumstances the interest should not be charged is based upon s 66 which is in these terms: “Subject to the provisons of this Act, the Exchequer Court shall have exclusive jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act and in delivering judgment may make any order as to payment of any tax, interest or penalty or as to costs as to the said Court may seem right and proper.”

It is contended that this provision gives to the Court a discretion to determine whether interest shall or shall not be exacted from the taxpayer.

Their Lordships cannot accede to this contention. The powers given to the Court by the section are in terms given subject to the provisions of the Act and therefore subject to the provisions of ss 48 and 49. The Court has no more power under the sections to waive the payment of the interest than it has to waive the payment of any tax imposed by the Act, or to impose a greater rate of interest or a larger amount of tax than the Act provides. The section is merely an enactment conferring upon the Exchequer Court exclusively the jurisdiction of dealing with disputes arising in connection with assessments made under the Act; and, as regards tax, interest and penalties, its powers are confined to seeing that they are only charged in strict accordance with the Act. As regards costs the court has no doubt a complete discretion.

The reasoning of Maclean, J in the Exchequer Court [supra] and of Kerwin, J in the Supreme Court of Canada is to like effect.

The other submission, which was not put forward in the appellant’s memorandum, challenges the calculation of the interest assessed. To describe the point it will be convenient to cite the applicable statutory provision and to state certain facts appearing in the record.

The only applicable provision of the Act imposing liability for interest on unpaid taxes that was cited, and I have not found any other, is subsection 161(1). It reads:

161. (1) Where the amount paid on account of tax payable by a taxpayer under this Part for a taxation year before the expiration of the time allowed for filing the return of the taxpayer’s income is less than the amount of tax payable for the year under this Part, the person liable to pay the tax shall pay interest at a prescribed rate per annum on the difference between those two amounts from the expiration of the time for filing the return of income to the day of payment.

At the material time the rate of interest as prescribed by Regulation 4300(1) was 6% per annum.

In the taxation years in question Otto John Rath was an employee of the Government of Canada from whose salary deductions on account of income tax were being made. When filing his income tax returns for 1974 and 1975, which were due on April 30, 1975 and 1976 respectively, he was entitled to and claimed credit for the amounts of such deductions. For the year 1974 his total credit for deductions amounted to $11,756.50. His taxes for the year, as finally reassessed on March 4th, 1977, were $13,514.70. It would seem therefore that the difference, in respect of which he was liable to pay interest for somewhat less than two years was at most $1,758.20. Nevertheless he was assessed an amount of $736.50 for interest.

For the year 1975 his total credits were $12,275.30 and the taxes assessed on March 8th, 1977 were $13,779.10 leaving a balance of $1,503.80 on which at most, as it seems to me, interest for ten months and eight days would be payable. Interest assessed, however, was $722.31. I have said at most with respect to the amount for each year as it is not clear and no point was made relating to it, that the amounts should not be further reduced by the amounts of Ontario Tax Credits.

The explanation for the apparently excessive interest assessments is that when filing his income tax returns the taxpayer claimed deductions for moving expenses which included the loss sustained as a result of the fire and in the original assessments deductions of amounts in respect of the loss had been allowed. The result in respect of both years was to show an overpayment of tax for which a refund was paid under subsection 164(1) and probably with interest, as provided in subsection 164(3)*. [2] As I understand the explanation given by counsel for the respondent, upon reassessment the refunded amounts were treated as taxes that were unpaid as of April 30, 1975 and 1976 when the returns for 1974 and 1975 respectively were due and interest was computed and assessed accordingly.

I can find nothing in the wording of subsection 161(1) which authorizes such a computation or imposes an obligation to pay interest so computed. The wording which, as it seems to me, is as plain and ordinary as any that is in the Act, has been virtually unchanged since the coming into force of the 1948 Income Tax Act. Immediately prior to that a corresponding provision of the Income War Tax Act had been somewhat differently worded. It read:

53. (1) Unless otherwise provided, all taxes found due and unpaid shall bear interest at the rate of four per centum per annum from the day prescribed for the filing of the return to the day of payment.

There was also a provision in section 56 for refunding overpayments of tax but not with interest thereon. It may have been possible to justify a computation and assessment such as was made in this case under the wording of subsection 54(3) but it does not appear to have been contemplated by that Act, the 1948 Act or the present Act that refunds would be made that would later be found to have been unwarranted. In any case, no provision imposing an obligation to pay interest on such amounts appears to have been enacted in either the 1948 Act or the present Act.

The facts as I view them are that as of April 30, 1975 and 1976 the amounts of the deductions had been paid on account of the taxes payable by the taxpayer for the previous year, within the meaning of subsection 161(1), and in my opinion neither an erroneous assessment nor a refund made as a result of it can avail to change these facts or render unpaid what had in fact been paid by the relevant date. It may be that when a refund with interest has been made as a result of an erroneous assessment, and more particularly where the error results at least in part from an erroneous claim by the taxpayer for deductions in computing income, a taxpayer, who has had the use of the refunded amount for a time until the erroneous assessment was corrected, should in equity pay interest on the refund for that period. But this is not a matter of equity. There is no equity in a tax. Under a taxing statute the Crown is entitled only to such exactions as the statute imposes. the case, as I see it, is simply one in which the department, with full knowledge of the facts, made erroneous assessments and unwarranted refunds. As there was no statutory provision imposing an obligation to pay interest for the use of the refunds until the errors were corrected by reassessments, the taxpayer, in my opinion, was not liable for such interest or to be assessed for it.

I would allow the appeal in part and refer the reassessments back to the Minister for reconsideration and reassessment on the basis that the amounts of taxes for the years 1974 and 1975 in respect of which Otto John Rath was liable to pay interest under subsection 161(1) of the Income Tax Act were not more than the amounts of $1,758.20 and $1,503.80 respectively.

As the appeal succeeds only to a minor extent and on a point not raised in the appellant’s memorandum of argument, I do not think an award of costs against the Crown is warranted. The Crown does not ask for costs. In these circumstances no costs should be awarded to either party.