Omstead v. MNR, 91 DTC 1244, [1991] 2 CTC 2615 (TCC)

Sarchuk, T.C.J.: — By assessment, notice of which was mailed June 26, 1987, the respondent assessed the appellant to tax for the 1985 taxation year and levied interest of $10,790.88 pursuant to subsection 161(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the 'Act") on the basis that the appellant failed to remit the proper amount to the Receiver General as instalments of tax pursuant to subsection 156(1) of the Act.

There is no dispute about the essential facts. If tax was payable by the appellant in the 1985 taxation year he was required to make instalment payments on account of that tax in accordance with the provisions of subsection 156(1) of the Act which provides:

156.(1) Subject to section 156.1, every individual, other than one to whom subsection 153(2) or section 155 applies, shall pay to the Receiver General

(a) on or before March 31, June 30, September 30 and December 31, respectively, in each taxation year, an amount equal to 1/4 of

(i) the amount estimated by the individual to be the tax payable under this Part by him for the year computed without reference to sections 127.2 and 127.3, or

(ii) his instalment base for the immediately preceding taxation year, and

(b) on or before April 30 in the next year, the remainder of his tax as estimated under section 151.

To determine the amount of his instalment base the appellant was required to compute it in accordance with the provisions of paragraph 5300(1)(a) of the Income Tax Regulations (the Regulations). That paragraph of the Regulations was amended by section 15 of SOR/85-696 which was registered on July 25, 1985 and published on August 17, 1985. Prior to this amendment this Regulation read:

5300.(1) For the purposes of subsections 155(2) and 156(3) of the Act, the instalment base of an individual for the 1977 and subsequent taxation years shall be the amount by which the aggregate of

(a) the tax payable by him for the taxation year under Part I of the Act, and . . .'

while following the Regulation it read:

5300.(1) For the purposes of subsections 155(2) and 156(3) of the Act, the instalment base of an individual for the 1977 and subsequent taxation years shall be the amount by which the aggregate of

(a) the tax payable by him for the taxation year under Part I of the Act, computed without reference to sections 127.2 and 127.3 thereof and before taking into consideration any amount referred to in any of subparagraphs 161 (7) (a) (i) to (vii) thereof that was excluded or deducted, as the case maybe, for the year, and . . .

[Emphasis added.]

On December 31, 1984 the appellant acquired a scientific research tax credit which in his 1985 taxation year would amount to $144,500. In computing the amount of his instalment base the appellant did so after deduction of the scientific research tax credit. As a result Mr. Omstead concluded that he was not required to nor did he make any instalment payments on account of tax in taxation year 1985.

In assessing instalment interest the respondent computed the appellant's instalment base on the basis of the tax payable by him before deduction of the scientific research tax credit.

The appellant's position is that he complied with subsection 156(1) and Regulation 5300(1)(a) of the Act in calculating his instalment base for the 1985 taxation year as at March 31, 1985. He argues that the Minister retroactively applied the amending provisions to Regulation 5300 and, he says, this is contrary to fundamental principles of common law. The appellant further takes the position that subsection 221(2) of the Act provides that a regulation becomes effective only when published in the Canada Gazette or at an earlier date if the Regulation so states. Since in the appellant's view the amendment to Regulation 5300(1) did not provide an earlier application date, the effective date can only be the date of publication, August 17, 1985.

Counsel for the appellant also submitted that while the provisions of the Act require taxpayers such as the appellant to make quarterly instalment payments, it was impossible for the appellant to calculate his instalment base as demanded by the Minister since the statutory provision upon which the Minister relies was not in existence at that time. Counsel also argued that it was quite unreasonable to expect Mr. Omstead to compute his instalment base (which in the first instance would have to be done on or before March 30, 1985) on anything else but the statutory provisions in force at that time. In this context counsel relied on Raquette v. M.N.R., [1990] 2 C.T.C. 2016; 90 D.T.C. 1474. He submitted that the “impossibility argument” is a doctrine of statutory construction or interpretation, which requires “the clearest language for Parliament to intend mandatory compliance with an enactment when for all practical purposes this is not possible", and argued that such language is not present in the legislation in issue in this appeal.

The respondent's position is that paragraph 5300(1)(a) of the Regulation as amended is applicable to the computation of the appellant's instalment base for his 1985 taxation year by virtue of paragraph 22(9)(a) of SOR/85-696 with the result that the respondent properly computed the appellant's instalment base for the 1985 taxation year on the basis that the tax payable by him was determined before deduction of the scientific research tax credit. Counsel contended that the language of paragraph 22(1)(a) of SOR/85-696 is clear and unequivocal with the result that the amendment is applicable in respect of Scientific Research Tax Credits arising from securities issued after February 15, 1984. Since in the present case the scientific research debenture was acquired on December 31, 1984, accordingly the definition of "instalment base contained in amended paragraph 5300(1)(a) of the Regulation applies.

The Minister further takes the position that once it is established that a taxpayer is required to pay instalments of tax in accordance with subsection 156(1) of the Act this Court does not have jurisdiction to cancel or reduce interest properly levied in accordance with subsection 161(2) of the Act. The imposition of interest in such cases is mandatory.

Effective Date of the Amendment to Regulation 5300(1)

The relevant portion of SOR/85-696 is found in subsection 22(9) which reads:

(9) Sections 15 and 16 are applicable with respect to

(a) amounts deducted under sections 127.2 and 127.3 of the Act in respect of shares, debt obligations and rights acquired after February 15, 1984, other than shares, debt obligations or rights acquired before March 1, 1984 where arrangements, evidenced in writing, for the issue of the shares or debt obligations or granting of the rights were substantially advanced before February 16, 1984;

[Emphasis added.]

With respect to the effective date of the Regulation counsel for the appellant relied on the provisions of subsection 9(1) of the Statutory Instruments Act and subsection 6(1) of the Interpretation Act [to] govern. They read respectively:

9.(1) No regulation shall come into force on a day earlier than the day on which it is registered unless

(a) it expressly states that it comes into force on a day earlier than that day and is registered within seven days after it is made, or

(b) it is a regulation of a class that, pursuant to paragraph 20(b), is exempted from the application of subsection 5(1),

in which case it shall come into force, except as otherwise authorized or provided by or under the Act pursuant to which it is made, on the day on which it is made or on such later day as may be stated in the regulation.

6.(1) Where an enactment is expressed to come into force on a particular day it shall be construed as coming into force on the expiration of the previous day, and where an enactment is expressed to expire, lapse or otherwise cease to have effect on a particular day, it shall be construed as ceasing to have effect on the commencement of the following day.

Counsel argued that if there is a legislative intention to have an enactment apply to a date earlier than the date on which the enactment comes into force it is necessary for the particular enactment to express that date in clear and unambiguous terms. He urged the Court to find that SOR/85-696 merely identified a class of transactions but failed to set out an effective date and submitted that given its wording, Regulation 5300 as it affects scientific research tax credits purchased after February 15, 1984 cannot take effect until at least the date of proclamation, that is August 7, 1985.

I have concluded that the sections of the Statutory Instruments Act and the Interpretation Act referred to do not apply in view of the existence of a specific provision regarding regulations made by the Governor General in Council pursuant to the authority granted by section 221 of the Income Tax Act. In particular I refer to subsection 221(2) [1] thereof which at the relevant time read as follows:

221.(2) No regulation made under this Act has effect until it has been published in the Canada Gazette but, when so published, a regulation shall, i f it so provides, be effective with reference to a period before it was published.

[Emphasis added.]

The language of subsection 22(9) of SOR/85-696 makes Regulation 5300(1)(a) applicable to amounts deducted under sections 127.2 and 127.3 of the Act in respect of shares, debt obligations and rights acquired after February 15, 1984. The words used by the legislators in my view clearly express that the Regulation is to be effective with reference to a period before it was published, that period being all relevant times after February 15, 1984. These words are sufficient to comply with the requirement contained in subsection 221(2) of the Act.

Counsel for the appellant also argued that the amended Regulation had the effect of operating retrospectively in the sense that it was legislation that intended to change the future consequences of past transactions, not the past consequences of past transactions. He contended that retrospective laws are, no doubt, prima facie of questionable policy, and contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts, and ought not to change the character of past transactions carried on upon the faith of the then existing law [2] . Counsel advanced the position that Regulation 5300 should properly only have a prospective effect and be applied only to taxation years commencing after proclamation.

In support he referred to Agnew Estate v. The Queen, [1976] C.T.C. 460; 76 D.T.C. 6277 and Gustavson Drilling (1964) Ltd. v. M.N.R., [1976] C.T.C. 1; 75 D.T.C. 5451.

I do not find counsel's submissions persuasive. In Gustavson Drilling Dickson, J. (as he then was) made the following comments regarding retrospective construction. At page 6 (D.T.C. 5454) he said:

First, retrospectivity. The general rule is that statutes are not to be construed as having retrospective operation unless such a construction is expressly or by necessary implication required by the language of the Act. An amending enactment may provide that it shall be deemed to have come into force on a date prior to its enactment or it may provide that it is to be operative with respect to transactions occurring prior to its enactment. In those instances the statute operates retrospectively.

[Emphasis added.]

The Court then went on to find that the facts in Gustavson only superficially resembled the second instance referred to by Dickson, J.

The amendment before me clearly provides that it was to be effective with respect to transactions occurring prior to its enactment. The intention of the legislators is not uncertain and its expression in the amendment to the Regulations is not ambiguous. In the words of Dickson, J. "the statute operates retrospectively".

Is there authority to interfere with an assessment of interest under section 161 of the Act?

If the submissions of counsel for the respondent regarding the right of this Court to disturb an assessment of interest levied pursuant to subsection 161(2) are well founded Mr. Omstead cannot succeed in this appeal. Therefore I propose to deal with this issue before considering the submissions with respect to "impossibility".

Counsel for the respondent argued that

. . .whether or not it was impossible to comply with the requirements of subsection 156(1) of the Act this Court does not have jurisdiction to cancel or reduce interest properly levied in accordance with subsection 161(2) which runs automatically once a taxpayer has not made the instalment payments which were required under subsection 156(1) of the Act. Moreover there is no provision in the Act which empowers the Court to cancel or reduce such interest.

This position is premised on a series of decisions arising out of the operation of subsection 162(1) of the Act. It was argued that the courts have read and interpreted this subsection to mean that they could not interfere with the penalty imposed once it was established that the taxpayer failed to duly file a return as required by subsection 150(1) unless it could be shown that the penalty was incorrectly calculated (e.g., if the tax on which the penalty was calculated was shown to be excessive). Counsel cited: Meikar and Meikar v. M.N.R., [1979] C.T.C. 2810; 79 D.T.C. 683; Georgia Medical-Dental Building Ltd. v. M.N.R., [1974] C.T.C. 888; 73 D.T.C. 1316; Vaillant v. M.N.R., [1969] Tax A.B.C. 62; 69 D.T.C. 60; The Hughes-Owens Co. (Ltd.) v. M.N.R., 6 Tax A.B.C. 191; 52 D.T.C. 161, and submitted that these decisions applied by analogy to section 161 of the Act.

Reference was made to Eyamie v. M.N.R., [1983] C.T.C. 2708; 83 D.T.C. 649, in which appeal respondent's counsel said, in addition to determining the subsection 162(1) penalty issue the Court specifically dealt with the question of interest levied pursuant to subsection 161(1). This subsection, counsel contends, contains the same mandatory term “shall pay" as found in subsection 161(2). In Eyamie v. M.N.R. the Court stated at 2709:

Even though the alleged treatment received by the appellant at the hands of the accountants may be regarded as reprehensible, this affords no grounds for excusing the appellant from paying the interest. For a number of months he continued to have the benefit of an amount of money which should have been paid to the

respondent. It is in respect of that benefit that the interest is levied and in my opinion this Court has no jurisdiction in this case to interfere with the action taken by the respondent in this regard.

[Emphasis added.]

Counsel submitted that this principle was correct and ought to be applied in the present appeal.

Counsel contended that the respondent applied the provisions of the Income Tax Act in the only way open to him as subsection 161(2) is mandatory in the case of a failure to make the required instalment payments. That being the case the interest was properly assessed.

It was also contended that interest levied pursuant to section 161 is payable notwithstanding the fact that interest was assessed as the result of a subsequent event, which could not have been foreseen: C.D. Irvine v. M.N.R., 28 Tax A.B.C. 151; 61 D.T.C. 706; No. 384 v. M.N.R., 16 Tax A.B.C. 300; 57 D.T.C. 67; Icanda Ltd. v. M.N.R., [1972] C.T.C. 163; 72 D.T.C. 6148; Industrial Trailer Rentals Ltd. v. M.N.R., [1974] C.T.C. 775; 74 D.T.C. 6577.

Counsel for the appellant did not dispute that the wording of the relevant sections (i.e., 156 and 161(2)) is mandatory. He argues, however, that this merely underlines the impossibility of the position in which his client was placed with respect to the instalments due prior to the amendment of Regulation 5300. He submits that on both March 31, 1985 and June 30, 1985 his client calculated his instalment base properly in accordance with the definition of "instalment base” as set out in subsection 156(3) and Regulation 5300 (as it then read). He argues that the interest levied by the Minister under subsection 161(2) was improperly levied in that the taxpayer did not fail to do what he was required to do at the time that he did it.

The relevant portions of the sections of the Income Tax Act referred to read as follows:

161.(1) Where at any time after the day on or before which a return of a taxpayer's income was required to be filed under this Part for a taxation year,

(a) the amount of his tax payable for the year under this Part exceeds

(b) the aggregate of all amounts each of which is an amount paid at or before that time on account of his tax payable and applied as at that time by the Minister against the taxpayer's liability for an amount payable under this Part for the year,

the person liable to pay the tax shall pay interest on such excess, for the period after April 19, 1983 during which it is outstanding, at such prescribed rates per annum as are in effect from time to time during the period.

(2) In addition to the interest payable under subsection (1), where a taxpayer being required by this Part to pay a part or instalment of tax, has failed to pay all or any part thereof as required, he shall, on payment of the amount he failed to pay, pay interest at the rate per annum prescribed for the purposes of subsection (1) from the day on or before which he was required to make the payment to the day of payment or the beginning of the period in respect of which he becomes liable to pay interest thereon under subsection (1), whichever is earlier.

162. (1) Every person who has failed to file a return as and when required by subsection 150(1) is liable to a penalty equal to the aggregate of. . .

It is apparent that a distinction can be made between the language utilized in subsection 162(1) and that used in subsections 161(1) and 161(2). While an argument might be made that the legislative intent in each is identical I am not prepared to regard Meikar v. M.N.R., Georgia Medical v. M.N.R., Vaillant v. M.N.R. and Hughes-Owens v. M.N.R. as either binding or necessarily to be followed as decisions of courts of co-ordinate authority.

Turning to subsections 161(1) and 161(2), I see no practical distinction between the two. The legislative intent of the subsections is obvious. I have considered the nature of the two subsections and concluded that they are substantive and that the word "shall" in each subsection is intended to be mandatory. The language chosen requires the payment of interest upon the happening or occurrence of the default described in each subsection. Interest is payable in such case regardless of the reasons for the delay or failure. The legislative language chosen does not provide room for relief on the grounds that due diligence was used or that it was not possible to comply, nor does it permit the respondent to exercise discretion in assessing pursuant to these provisions.

Although the appellant with respect to the first two quarterly payments did what he appears to nave been authorized to do, it is also clear that as a result of the amendment to Regulation 5300 which as I have held was in effect at the relevant time, he failed to pay all or any part of the instalments of tax required by law. The Minister is mandated in such circumstances to assess interest, which he did. As well, as was the case in Eyamie, for a period of time this appellant had the benefit of money which should have been paid to the respondent by way of quarterly instalments. As Christie, J. noted, since it is only in respect of that benefit that the interest has been levied, the assessment of the Minister, made as it was in accordance with the statute, is one in respect of which no relief can be granted to the appellant. This is simply a matter of a statutory obligation requiring the appellant to pay interest once it has been established that tax has not been paid in accordance with the provisions of the Income Tax Act.

The Impossibility Argument

In view of the foregoing conclusion it is not necessary for me to consider or deal with counsel's submissions in this regard. Any comment by me would be obiter and unnecessary.

A comment with respect to the procedure followed by counsel in this appeal. At the commencement they set out orally what they perceived to be facts not in dispute. No further evidence was called. Subsequently in the course of providing me with written argument counsel for the respondent referred to facts not before the Court. This lapse, I am absolutely certain, was purely inadvertent. However it would not have occurred if counsel had taken the time, well in advance, to consider the issues and to agree and prepare a statement of agreed facts to be filed at the commencement of the hearing.

The appeal of Leonard H. Omstead is dismissed.

Appeal dismissed.