Reemark Chelsea Terraces Project Ltd. v. The Queen, 93 DTC 469, [1993] 1 CTC 2727 (TCC)

Beaubier, T.C.C.J.:—This matter was heard in Toronto, Ontario on March 11,1993. It is an appeal pursuant to the general procedure of this Court.

The only evidence consisted of an agreed statement of facts which reads as follows:

1. The appellant was incorporated on August 11, 1986 as 313150 B.C. Ltd. and changed its name to Reemark Chelsea Terraces Project Ltd. on September 11, 1987.

2. The appellant is a taxable Canadian corporation within the meaning of subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Its taxation year ended on December 30 in each year.

3. Pursuant to paragraph 150(1)(a) of the Act, the appellant was required to file with the Minister of National Revenue (the "Minister") a return of income for its 1988 taxation year within 6 months from the end of the year.

4. By June 30, 1989, no return of income for the appellant's 1988 taxation year had been filed and no federal tax under Part I of the Act had been paid.

5. On March 21, 1991, the appellant filed a return of income for its 1988 taxation year. On that return, the appellant reported that its taxable income for that year under Part I of the Act was $188,776.

6. By notice of assessment dated June 28, 1991, the Minister assessed federal tax of $61,248.21 under Part I of the Act in respect of the appellant's 1988 taxation year, with provincial tax and interest thereon.

7. By the same notice of assessment, the Minister assessed a late-filing penalty in the amount of $14,905.94 pursuant to subsection 162(1) of the Act in respect of the late filing of the return of income for the appellant's 1988 taxation year. Interest on the penalty was assessed pursuant to subsection 161(11) of the Act.

8. On April 16, 1991, the appellant filed a return of income in respect of its 1989 taxation year. In that year, the appellant sustained a non-capital loss in the amount of $299,314.

9. By notice of reassessment dated September 6, 1991, the Minister reassessed, at the appellant's request, reducing the appellant's 1988 taxable income to nil by carrying back $188,776 of the appellant's 1989 non-capital loss pursuant to paragraph 111(1)(a) of the Act.

10. Although he reassessed to reduce the appellant's taxable income to nil in respect of its 1988 taxation year, the Minister did not reassess to reduce the late filing penalty and the interest thereon in respect of that year.

The issues to be decided, as set forth by the appellant are as follows:

1. Whether late filing penalties levied pursuant to subsection 162(1) of the Act should be adjusted upon a reassessment of a tax year from the application of a loss carryback; and,

2. Whether interest levied pursuant to subsection 161(11) of the Act, and section 4300 of the Income Tax Regulations (hereinafter referred to as the "Regulations") should be adjusted upon a reduction of the penalties.

Subsection 162(1) which was deemed effective on September 13, 1988, read as follows:

162(1) Every person who has failed to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of

(a) an amount equal to five per cent of the person's tax payable under this Part

for the year that was unpaid when the return was required to be filed, and

(b) the product obtained when one per cent of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, from the date on which the return was required to be filed to the date on which the return was filed.

The leading decision respecting the question relating to the penalty is Leach Bros Stores Ltd. v. M.N.R., [1985] 1 C.T.C. 2067, 85 D.T.C. 94. In that case, Associate Chief Judge Christie of the Tax Court of Canada stated as follows at page 2069 (D.T.C. 95):

Whatever the date may be when a penalty is levied pursuant to subsection 162(1), these three steps must be taken. First, the time when the return was required to be filed is determined. Second, the amount of tax that was unpaid at that time is calculated. Third, the amount of the penalty is settled upon by adding five per cent of the amount arrived at in the second step and the product obtained when one per cent of the tax that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, between the date on which the return was required to be filed and the date on which it was filed. I can find no place in this legislative scheme for taking into account noncapital losses which arose after the time when the return was required to be filed.

The appellant’s counsel submitted as his basic premise that the appellant's tax for the year is one amount as ultimately determined and ultimately fixed. He argues that the judgment of Associate Chief Judge Christie is in error because subsection 162(1) levies a penalty. Therefore if there is an alternative meaning which is favourable to the taxpayer, that meaning should be adopted. The appellant's counsel submits that there are two ways in which no penalty could possibly lie: The first is where the appellant has paid all of its tax by instalments. The second is where the tax payable for the year is nil and therefore the principal amount on which the penalty can be calculated is also nil.

In essence the appellant argues that, because of later events that happened to the taxpayer, there was an ^error" in the original determination of the tax unpaid at filing time. Paragraph 111(1)(a) states that to determine taxable income one can deduct non-capital losses for the three immediately following years. Therefore in such circumstances, the actual amount of tax for a year cannot be determined until all the subsequent events that would result in a recalculation have occurred.

As a consequence, the appellant argues there is uncertainty in the way that the Income Tax Act should be interpreted, and this should be resolved in favour of the taxpayer.

As Associate Chief Judge Christie pointed out in Leach Bros, supra, crucial words for the purposes of the appellant, in subsection 162(1), are “when the return was required to be filed”. These words refer to the appellant who has "failed to file a return of income for a taxation ear”. Thus the reference is to the income tax return for that taxation year and the calculations are based on what was unpaid at the time the return was required to be filed.

This Court fails to see any ambiguity in subsection 162(1) since, as Associate Chief Judge Christie pointed out, the key question is the amount of tax that was unpaid at that time.

In these circumstances the appeal is dismissed.

The respondent is awarded party-and-party costs.

Appeal dismissed.