Citation: 2016 TCC 190
Date: 20160901
Docket:
2014-1744(IT)G
BETWEEN:
QUINCO FINANCIAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Bocock J.
I. Introduction
[1]
On October 26, 2015, C. Miller J. of this Court
issued an order concerning section 58 of the Tax Court of Canada Rules
(General Procedure). He directed that the following question of mixed fact
and law be determined under that section (the “Rule 58 Question”):
If, as here,
the Minister of National Revenue has relied upon section 245 of the Income
Tax Act (Canada) (“Act”) to deny capital losses when reassessing the
Appellant’s income tax for a taxation year, can arrears interest payable under
subsection 161(1) of the Act apply to accrue in respect of any period of
time after the taxpayer’s balance-due day for that year and before the issuance
of such reassessment?
II. Brief
Summary of the Relevant Facts and Primary Issue in the Application
[2]
By notice of reassessment dated April 7, 2009 (the
“GAAR assessment issuance date”), the Minister of National Revenue (“Minister”)
reassessed the Appellant’s tax liability for its taxation year ending August
27, 2004, under the General Anti-Avoidance Rule (“GAAR”), by assessing that:
(a) a series of
transactions was undertaken that included transactions not undertaken for bona fide purposes
other than to obtain the tax benefit of a deduction of a revised capital loss
of $29,266,139; and
(b) such
transactions resulted in a circumvention of sections 38, 39 and 40 and a misuse
of such provisions and resulted directly or indirectly in an abuse having
regard to the provisions of the Act as a whole.
[3]
Under the reassessment, the Minister increased
Part I tax by $5,236,687, reduced Part I.3 tax by $163,890, increased Part IV
tax by $10,364,670, for a federal total net tax adjustment of $15,437,467, and
increased the amount of the dividend refund under section 129 by $9,359,494.
[4]
Under that same notice of reassessment, the
Minister assessed arrears interest payable by the Appellant. Beginning on
October 28, 2004, (the “balance-due day”), the Minister calculated the
difference between the Appellant’s Part I liability for the year and the total
amounts paid by the Appellant at or before that time.
[5]
By notice of objection dated June 19, 2009, the present
Appellant, in law the successor to the corporation originally assessed,
objected to the Notice of Reassessment.
[6]
No substantive issues concerning the applicable
provision of GAAR, aside from the commencement date for interest, are before
this Court. Relevant to the Appellant, the Rule 58 Question may be phrased
plainly: does arrears interest accrue on the Appellant’s tax payable
determined under GAAR from the balance-due day until the GAAR reassessment
issuance date?
III.
Underlying Sub-Issues relative to the Start Date of Arrears Interest under a
GAAR Reassessment
[7]
In submissions, the parties identified several
sub-issues to the main Rule 58 Question. These underlying sub-issues and the
parties’ respective submissions may be generally grouped and summarized in this
following section.
a) The Nature of Tax Liability Under GAAR
Appellant’
Submissions
[8]
The Appellant contends that tax liability arising
and reassessment methodology employed under GAAR constitute a distinct basis
for tax assessment in contrast to other provisions under the Act. Strict
compliance and technical conformity with the other provisions of the Act
are overridden by GAAR where the tax benefit achieved is in disaccord with the
overall object, spirit and purpose of the Act. Upon the application of
this override, the new tax liability arises through the denial of the tax benefit
(Copthorne Holdings Ltd. v R, 2007 TCC 481 (“Copthorne TCC
Decision”) at paragraph 77). When the Minister raises the GAAR assessment, she
must determine the tax consequences reasonably necessary in the circumstances
under subsection 245(5) to deny the tax benefit. The longstanding jurisprudence
holds that GAAR affords the imposition of tax consequences sufficient to deny
the tax benefit, but does not permit or extend to the recharacterization of the
transaction for any other tax purposes (Shell Canada Ltd. v R, 99 D.T.C.
5669 (SCC) at paragraph 39; Canada Trustco Mortgage Company v R., 2005
DTC 5523 (SCC) at paragraph 30).
[9]
The Appellant acknowledges this is contrary to
the underlying conclusion of Justice Hogan in JK Read Engineering Ltd. v R.,
2014 TCC 309, 2014 DTC 1216. In that decision, the judge described Copthorne
TCC decision as: (i) the application of GAAR as a recharacterization of the
transactions (at paragraph 9); (ii) a finding that the taxpayer had failed to
fulfill its withholding obligations (215(1)) (at paragraph 14); and (iii) the striking
of the withholding penalty (227(8)), a technical violation, through the
exercise of due diligence (at paragraph 17). On this basis, the Appellant
suggests that JK Read Engineering and the conclusions should be overlooked
by this Court. Instead, the newly imposed tax consequences nullifying the tax
benefit are the sole bases for the GAAR assessment. In the present case this
would be the denial, per se, of the capital losses arising from the
otherwise unimpacted transactions.
Respondent’
Submissions
[10]
The Respondent states that GAAR (section 245) of
the Act is an integral part of the legislation and insinuates itself
into other Parts of the Act. Its entire structure references the Act
and all the inter-related provisions must be read as a whole. Where a
transaction satisfies the applicability conditions, GAAR automatically applies.
The denial of the tax benefit occurs because GAAR permits a consideration of
the object and spirit of the Act (Copthorn Holdings Ltd. v
R 2011 SCC 63 at paragraph 66 (“Copthorne SCC Decision”)). In
applying GAAR, the determination of tax consequences by the Minister permits
adjustment to certain broadly enumerated summative amounts (subsections 245(1)
(tax benefit definition) and 245(5) (determination of tax consequences)).
Through GAAR, the Minister effects an adjustment of tax otherwise payable under
another Part of the Act by applying the reasonable tax consequences necessary
to deny the tax benefit. It is one of the Minister’s tools when assessing under
other Parts of the Act (S.T.B. Holdings Ltd. v R., 2002 DTC 1254
(TCC), at paragraph 24; affirmed 2002 FCA 386; leave to appeal dismissed [2002]
SCCA No 513. In turn, Part I tax is frequently determined through utilization
of different provisions under the Act. The employment of GAAR is no
different. In this case, a capital loss was denied, taxable income increased
and outstanding “tax payable” consequentially came into existence.
[11]
Further, the Respondent argues that liability
for tax arises from the Act generally, not specifically from an
assessment (R v Simard-Beaudry Inc., [1971] FC 396 at paragraph 20). The
bi-furcation of GAAR and non-GAAR assessments is not consistent with the
fundamental principle that a year’s tax liability arises from the Act in
toto. Therefore, Justice Hogan in JK Read Engineering correctly
stated that GAAR operates from the outset. The invocation of GAAR by the
Minister does not create the “avoidance transaction”, “misuse” or “abuse”.
These are created by the legislation as is the necessary step of determining,
upon the occurrence of these events in a specific taxation year, the tax
consequences reasonable in the circumstances to deny the “tax benefit”; the tax
benefit itself having occurred in the taxation year. Delayed, incorrect or
revised assessments do not lessen the taxpayer’s ultimate liability under the Act.
b) Self-Assessment by a taxpayer of GAAR tax liability
Appellant
[12]
The Appellant submits a taxpayer cannot
self-assess using GAAR. As an example, under non-GAAR provisions, taxpayers may
file a lesser amount of reported income (or similar reported amount), but report
a higher amount of tax payable. Upon assessment, the taxpayer may appeal using
the lower reported income (or similar reported amount), but since the higher
amount of tax payable was paid no interest accrues against the taxpayer. With
GAAR this is not possible according to the Appellant for two reasons: the
Minister alone determines, firstly, the abuse or misuse of a provision and,
secondly, the reasonable circumstances leading to the denial of the “tax
benefit”. In short, the taxpayer cannot assume the Minister’s responsibility to
establish abuse or misuse or to determine what the reasonable consequences of the
GAAR assessment may be.
[13]
Subsection 254(4) describes obligations of the
Minister when invoking GAAR. These detailed requirements are the Minister’s
alone to assert, prove and rely upon when interpreting the provisions of the Act
(Canada Trustco Mortgage Company v R., 2005 SCC 54 at paragraphs 64 and
65). Similarly, the redetermined tax result, comprised of the reasonable tax
consequences disallowing the tax benefit, are uncertain and unpredictable (Copthorne
SCC Decision at paragraph 123). The taxpayer must await the Minister’s
assessment. The alleged “abuse/misuse”, “tax benefit” and “reasonable tax
consequences”, nullifying the tax benefit are embedded in that assessment, seen
and known by any taxpayer for the first time on the GAAR assessment issuance
date. The Appellant asks: how could it formulate all of those ministerial
obligations and, accurately calculate and pay tax on or before the balance-due
day and file in accordance with such position? In the present case, the GAAR assessment
issuance date occurred approximately four and a half years following the
balance-due day.
Respondent
[14]
The Respondent asserts that the Appellant had a
choice: consider the GAAR and the “reasonable tax
consequences”, both of which flow from the abused or misused section,
refrain from the transactions giving rise to the “tax benefit” and file
accordingly. Not only does the Act not preclude this, but it mandates
that every taxpayer must estimate tax payable under any provision of the Act
(Lambert v R [1977] 1 FC 99 at paragraph 10). This would include GAAR. All
tax payable is ultimately determined by assessment or reassessment in
accordance with the Act’s provisions. Self-assessment is inherently
uncertain, but provides relief and rights of independent judicial determination
(Lipson v R, 2009 SCC 1 at paragraph 52). Again, section 245 is no
different.
[15]
The Respondent submits that notions of the
difficulty of self-assessment under GAAR arise from subsections 245(6) to (8)
inclusive. Specifically, subsection 245(7), which requires impacted third
parties (non-GAAR assessed taxpayers) to apply to the Minister to utilize GAAR
provisions, through its enactment as a distinct section buttresses and does not
derogate from the argument that all other directly assessed taxpayers must
consider GAAR when filing. To suggest otherwise, would render unnecessary the
passage of subsections 245(6 through 8) (Matthew v Canada, 2005 SCC 55
and Canada, Department of Financial Technical Notes (Income Tax Act),
245 (1987 TRSI)).
[16]
Moreover, the Respondent argues the portions of Copthorne
TCC Decision referenced by the Appellant did or not comment on interest payable
after a GAAR assessment, but whether a withholding penalty arising under Part
XIII, caused by the application of one of the very “tax
consequences” leading to the denial of a tax benefit, ought to have been
vacated. The Court held that the taxpayer’s filing position was consistent with
the technical application of the Act. All such related conclusions in Copthorne
TCC Decision related to the Part XIII penalty and not to interest accrual.
c) Statutory Framework for Arrears Interest Payable under GAAR
Appellant
[17]
The Appellant asserts that if Parliament had desired
arrears interest to accrue prior to the GAAR issuance date, then it would have
enacted a specific provision. By contrast, specific provisions do exist for interest
on penalties. Like GAAR, the Minister assesses penalties. Before legislative amendments
under subsection 161(11), no such interest on penalties accrued until
assessment. This is still the case for certain penalties under paragraph
161(11)(c), being the residual provision. From a policy perspective, penalties
arising within the taxpayer’s control or knowledge accrue interest from the
balance-due day while others do not. Similarly, the Appellant argues GAAR’s
application is not within the control or knowledge of the taxpayer. Returning to
Copthorne TCC Decision, Justice Campbell found no Part XIII penalty could
arise until after reassessment.
[18]
Further, when precisely should accruing interest
be applied? The Appellant contends this is not ascertainable in a series of
transactions where several abuses or misuses have occurred over several
taxation years (Triad Gestco Ltd v R, 2011 DTC 1254(TCC) at paragraph 72,
affirmed 2012 DTC 5156 (FCA)). Similar confusion would arise factually in Copthorne.
By default, the only certain commencement point for arrears interest is the
GAAR assessment issuance date. Consistency prevails because there are no
increased “taxes payable” owing under subsection
161(1) until the GAAR assessment issuance date. Only this new liability arising
at that date effectively generates taxes payable. Without this “principal sum” owing, there can be no interest (Reference
as to the Validity of Section 6 of the Farm Security Act, 1944 of Saskatchewan
[1947] S.C.R. 394 (SCC) at page 412).
Respondent
[19]
The Respondent asserts that the Act
imposes interest in a simple way: a taxpayer owes and pays interest at a prescribed
rate where the taxpayer has outstanding taxes at a particular point which are
in excess of taxes paid at or before the time after the balance-due day
(subsection 161(1) “total of the taxpayer’s taxes payable” and subsection
248(1) “balance-due day”). Taxes payable under section 245 are not
differentiated under subsection 161(1). In any event, section 245 in the
present case determined tax liability under Part I of the Act. Further,
subsection 161(1) references payments for taxes payable “for the year” exceeding amounts paid or applied
against the tax liability “for the year”. Longstanding authorities have held
that tax payable for the taxation year is the tax finally or ultimately fixed
by assessment or reassessment for the year (Irvine v MNR, (1961) 28 Tax
ABC 151 at paragraphs 23 – 25 and Whent [2000] 1 CTC 329 (FCA) at
paragraph 109 and 110).
[20]
Subsection 161(1) is distinguishable from the
penalty subsection 161(11). The absence in subsection 161(1) of the words “but
only after the Minister’s assessment” which are additional in subsection
161(11), renders a consistent application to all taxpayers of the concept of
balance-due day for the year. There is no textual justification to separate
GAAR from other assessments.
[21]
Lastly, an interpretation that interest not
apply until the issuance date of a successful GAAR assessment rewards the
taxpayer with the time-value of the tax otherwise payable for the period
between the balance-due day and the GAAR reassessment issuance date. This
occurrence would be contrary to the overall purpose of restraining what is
abusive tax avoidance.
IV. Analysis
[22]
As with all such deconstructive analysis, there
is overlap and correlation.
a) GAAR under the Income Tax Act
Relevant
Statutory Provisions
[23]
Excerpts of the relevant and applicable
provisions of GAAR which were referenced by counsel are found throughout section
245 of the Act as follows:
245 (1) In this
section,
“tax benefit”
tax benefit means
a reduction, avoidance or deferral of tax or other amount payable under this
Act or an increase in a refund of tax or other amount under this Act, and
includes a reduction, avoidance or deferral of tax or other amount that would
be payable under this Act… (avantage fiscal)
“tax consequence”
tax consequences
to a person means the amount of income, taxable income, or taxable income
earned in Canada of, tax or other amount payable by or refundable to the person
under this Act, or any other amount that is relevant for the purposes of
computing that amount; (attribut fiscal)
…
General
anti-avoidance provision
(2) Where a
transaction is an avoidance transaction, the tax consequences to a person shall
be determined as is reasonable in the circumstances in order to deny a tax
benefit that, but for this section, would result, directly or indirectly, from
that transaction or from a series of transactions that includes that
transaction.
…
Application of
subsection (2)
(4) Subsection
(2) applies to a transaction only if it may reasonably be considered that the
transaction
(a) would, if this Act were read without reference to this section,
result directly or indirectly in a misuse of the provisions of any one or more
of
(i) this Act,
(ii) the Income Tax Regulations,
(iii) the Income Tax Application Rules,
(iv) a tax treaty, or
(v) any other enactment that is relevant in computing tax or any
other amount payable by or refundable to a person under this Act or in
determining any amount that is relevant for the purposes of that computation;
or
(b) would result directly or indirectly in an abuse having regard to
those provisions, other than this section, read as a whole.
…
Determination of
tax consequences
(5) Without
restricting the generality of subsection (2), and notwithstanding any other
enactment,
(a) any deduction, exemption or exclusion in computing income,
taxable income, taxable income earned in Canada or tax payable or any part
thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, exemption or exclusion, any income, loss or
other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be
recharacterized, and
(d) the tax effects that would otherwise result from the application
of other provisions of this Act may be ignored,
in determining
the tax consequences to a person as is reasonable in the circumstances in order
to deny a tax benefit that would, but for this section, result, directly or
indirectly, from an avoidance transaction.
Request for adjustments
(6) Where with
respect to a transaction
(a) a notice of assessment, reassessment or additional assessment
involving the application of subsection 245(2) with respect to the transaction
has been sent to a person, or
(b) a notice of determination pursuant to subsection 152(1.11) has
been sent to a person with respect to the transaction,
any person (other
than a person referred to in paragraph (a) or (b)) shall be entitled, within
180 days after the day of sending of the notice, to request in writing that the
Minister make an assessment, reassessment or additional assessment applying
subsection (2) or make a determination applying subsection 152(1.11) with
respect to that transaction.
Exception
(7)
Notwithstanding any other provision of this Act, the tax consequences to any
person, following the application of this section, shall only be determined
through a notice of assessment, reassessment, additional assessment or
determination pursuant to subsection 152(1.11) involving the application of
this section.
Duties of
Minister
(8) On receipt of
a request by a person under subsection 245(6), the Minister shall, with all due
dispatch, consider the request and, notwithstanding subsection 152(4), assess,
reassess or make an additional assessment or determination pursuant to
subsection 152(1.11) with respect to that person, except that an assessment,
reassessment, additional assessment or determination may be made under this
subsection only to the extent that it may reasonably be regarded as relating to
the transaction referred to in subsection 245(6).
Jurisprudence
[24]
While the GAAR provisions and the related
legislative “scheme” are comparatively simple, their application contains the
devilish details (Copthorne SCC Decision at paragraph 32). Justice
Rothstein in Copthorne SCC Decision describes the necessary components
of GAAR: an avoidance transaction, giving rise to a tax benefit; whose primary
purpose was to achieve the tax benefit; and, which tax benefit is nullified
where a resulting abuse or misuse of the Act has occurred.
[25]
From certain authorities, Canada Trustco and
Copthorne SCC Decision, the questions, onus and evidentiary requirements
are established for any judicial inquiry into the application of GAAR.
[26]
On the issue of a tax benefit, the Minister
makes the assumption and the taxpayer carries the burden of disproving it. A
court must examine the path chosen, the avoidance transaction, against a
possible path not taken, an alternative arrangement. The path not taken, by
comparison, highlights the effect of the tax benefit from the non-tax object of
the taxpayer. (Copthorne SCC Decision at paragraphs 34 and 35).
[27]
Once a tax benefit is established, the Court
turns to a determination as to whether the transaction resulting in the tax
benefit was an avoidance transaction. Avoidance transactions may be singular or
in a series. The Minister assumes the transaction or series gave rise to the
tax benefit. The taxpayer must dislodge this assumption. As such, the taxpayer
bears the onus of establishing, on balance, that the transaction (or series)
was executed primarily for bona fide purpose aside from the obtainment
of a tax benefit. (Copthorne SCC Decision at paragraph 40).
[28]
The last determination is then made: is the
avoidance transaction abusive or misusive of the Act? It is recognized
that formalistic and legalistic compliance otherwise commonplace and prevalent
throughout the Act are, in this final GAAR analysis, set aside where
technical compliance is contrary to the object, spirit or purpose of the Act’s
utilized provisions or any combination thereof (Copthorne SCC Decision paragraphs
68 and 69 citing Canada Trustco at paragraphs 50 and 55). At this stage
of the GAAR analysis, the Minister bears the onus of proving, on balance,
having regard to the text, context and purpose of a provision, that its
identifiable object, spirit or purpose have been abused or misused. The words
of the provisions may be clear enough, but the rationale springs from the
analysis of its reason for enactment. (Copthorne SCC Decision at
paragraph 70).
[29]
Thereafter, viewing the avoidance transaction against
the identified purpose will reveal abusive tax avoidance where the transaction:
achieves an outcome the provision sought to prevent; defeats the underlying
rationale of the provision; or, where the transaction frustrates or defeats a
provision’s object, spirit or purpose (Canada Trustco at paragraph 45; Lipson
at paragraph 40).
GAAR is Part of the Whole
[30]
While all of the foregoing illustrate that GAAR
is “quite a different sort of provision”…“engrafted”
upon the Act, it is nevertheless part of it, both incorporating within
it and incorporated into other provisions of which GAAR seeks to prevent abuse
or misuse. As such, the Court “must to the extent
possible, contemporaneously give effect to both the GAAR and the other
provision of the…[Act]…relevant to a particular transaction”.
Interpretation of the Act functions “as a coherent whole, with respect to
the particular statutory scheme engaged by the transactions” (Canada Trustco
at paragraphs 13 and 39).
[31]
An assessment under GAAR, whether alone or in
conjunction with another technical omission or non-compliant act, is not an
assessment divorced from the other provisions of the Act. Quite to the
contrary, GAAR is entirely dependent upon a textual, contextual and purposive
analysis of the object, spirit or purpose of the very provisions which allegedly
confer the tax benefit. Where the transaction is reasonably within the object,
spirit or purpose, not of GAAR, but of the transgressed non-GAAR provisions,
there is no abuse. (Canada Trustco at paragraph 45).
[32]
The other two components of GAAR, a tax benefit
and avoidance transaction, remain the purview of the taxpayer who authors,
executes, and bears the onus at trial of disproving. These are within the
taxpayer’s records, affairs and viewscape.
[33]
Canada Trustco and,
subsequently Copthorne SCC Decision, provide authoritative guidance from
the Supreme Court of Canada on a textual, contextual and purposive analysis of
GAAR within the Act. While those analyses identify onuses, tests and
limitations specifically for the GAAR, the Appellant is not correct in
suggesting the methodology for nullifying the tax benefit creates an
independent, stand-alone and novel assessment of a taxpayer. The determination
of tax consequences through employment of other non-GAAR provisions of the Act
is the means by which the Minister nullifies the tax benefit, itself arising
under those other provisions and “Parts” of the Act at the time of the
transaction.
[34]
The Appellant, as noted, critiques Justice
Hogan’s analysis of GAAR within JK Read Engineering. The Appellant
focuses on Justice Hogan’s comments on Copthorne TCC Decision that
describe: the application of GAAR as a “recharacterization
of the transactions”; the taxpayer’s failure to fulfill its withholding
tax obligations; and, the taxpayer’s diligent actions resulting in the vacating
of the penalty. The Respondent contends that Justice Hogan correctly analyzed
the portions of Copthorne TCC Decision which determined that the time when
the GAAR assessment arose was the time of the abusive transactions. GAAR,
therefore, was operative at the time of the transactions and impacted the
subsequent assessment of tax payable for the taxation year in question.
[35]
A validating analysis by this Court of Justice
Hogan’s legal analysis of the Justice Campbell’s decision at trial in Copthorne,
on which the Supreme Court of Canada has already spoken, is neither this
Court’s role nor directly productive in the analysis of this Rule 58 Question.
That was the role for an appeal court. Such an appeal was not pursued in JK
Read Engineering.
GAAR nullifies the Part I Tax
Benefit
[36]
Factually, the tax benefit in this Rule 58
Question relates to the nullification of the capital loss and the correlated
increase in taxable income by means of determination of the reasonable tax
consequences. In Copthorne SCC Decision, as noted above, this was upheld
by the Supreme Court when the “double counting”
of paid up capital was nullified, being the reasonable tax consequences,
because the artificial preservation of that paid up capital, the tax benefit,
frustrated the purpose of subsection 87(3) of the Act. Essentially the
analysis regarding the Part XIII penalty was limited to the trial decision and
not countenanced by the Supreme Court of Canada. The Court agrees with both
counsel that no recharacterization took place in the Part I GAAR assessment
which was upheld in Copthorne SCC Decision.
[37]
In the present case, the same can be said. In
considering GAAR, referable to the tax benefit and avoidance transactions
arising in the relevant taxation year, the Minister applied reasonable tax
consequences to nullify the tax benefit, namely the capital loss(es). This assessment,
purely and simply, is incorporated by reference as “tax(es) payable” or
“taxpayer’s liability” under the Act generally. It raised an assessment
utilizing GAAR, but insinuated itself into Part I of the Act to reassess
the taxpayer otherwise in the normal course.
b)
Can a taxpayer approach and anticipate GAAR
liability?
Jurisprudence
[38]
GAAR assessments, like all other assessments,
under the Act require adherence and recognition to be effective. The
different components, onuses and burdens under GAAR do not overly mystify the
provision to the point of vagueness. All aggressive or complicated tax saving
or tax planning initiatives carry some level of uncertainty. This is inherent
with the GAAR and other situations where the law must be applied to a given
fact pattern (Lipson at paragraph 52).
[39]
The taxpayer has within its knowledge, records and
view the tax benefit and the avoidance transaction(s). Again, these
consistently arise from complicated, well-planned and documentary-intensive
steps. Tax advisors involved in such planning exercises must weigh the
consequences of a GAAR reassessment like any other assessment. The sole risk
with GAAR is the nullification of the tax benefit and, even then, once, and
only after the Minister has proven an abuse of the spirit, intent or object of
the Act.
[40]
Similarly, in Copthorne (at both trial
and on appeal), no determination was made regarding the payment of interest
after, but not before the issuance date of the GAAR assessment. The success of
the Appellant in Copthorne TCC Decision, related to the imposition of a
technical penalty and not the liability to pay interest on additional tax liability
due arising from the consequential nullified abusive paid up capital preservation.
GAAR to be anticipated and to be
considered by taxpayers
[41]
In short, the Appellant, in the present case as
a taxpayer possibly subject to GAAR, could have filed by deducting the future-impugned
capital loss, but applying GAAR for the purposes of calculating tax payable.
Upon assessment under GAAR, interest would not accrue. Moreover, thereafter the
Appellant could have objected and appealed. The Court would then determine the
application of the GAAR, in the first instance and the reasonableness
(including timing) of the reasonable tax consequences as determined by the
Minister. To suggest such an option is unavailable or dissimilar from such an option
with non-GAAR provisions is not correct.
[42]
Implicit within this conclusion, is this Court’s
determination of GAAR’s clear intent and inference that all taxpayers, who are
directly subject to GAAR assessments, that is, non-third parties, are required
to consider and apply GAAR. Taxpayers who are directly or may be directly
subject to the nullification of a tax benefit need not ask the Minister for
permission to apply GAAR (STB Holdings Ltd. at paragraph 23).
[43]
In conclusion, while not simple or uncomplicated,
a taxpayer is able to approach, anticipate and account for GAAR as a taxpayer is
obligated to do with all other taxing sections of the Act to which GAAR,
by necessity, must correlate. If the Minister reassesses, nothing precludes a
taxpayer’s appeal to this Court.
(1)
Is Arrears Interest different under GAAR?
Relevant
Statutory Provisions
[44]
Excerpts of the relevant and applicable arrears
interest provisions are summarized below:
152(1) The
Minister shall, with all due dispatch, examine a taxpayer’s return of income
for a taxation year, assess the tax for the year, the interest and penalties,
if any, payable and determine
(a) the amount of refund, if any, to
which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133
for the year; or
(b) the amount of tax, if any, deemed
by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 122.7(2) or (3), 122.8(2)
or (3), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid
on account of the taxpayer’s tax payable under this Part for the year.
161 (1) Where at any time after a taxpayer’s
balance-due day for a taxation year
(a) the total of the taxpayer’s taxes
payable under this Part and Parts I.3, VI and VI.1 for the year
exceeds
(b) the total of all amounts each of
which is an amount paid at or before that time on account of the taxpayer’s tax
payable and applied as at that time by the Minister against the taxpayer’s
liability for an amount payable under this Part or Part I.3, VI or VI.1 for the
year,
the taxpayer shall pay to the Receiver
General interest at the prescribed rate on the excess, computed for the period
during which that excess is outstanding.
248(1) In this Act,
balance-due day of a taxpayer for a taxation year means,
…
(d)
where the taxpayer is a corporation,
(i) the day
that is three months after the day on which the taxation year (in this
subparagraph referred to as the “current year”) ends, if…
“Tax payable”
(2) In this Act,
the tax payable by a taxpayer under any Part of this Act by or under which
provision is made for the assessment of tax means the tax payable by the
taxpayer as fixed by assessment or reassessment subject to variation on
objection or on appeal, if any, in accordance with the provisions of that Part.
Plain Language Analysis
[45]
On the basis of a plain reading of the interest
provisions of the Act, the Appellant is required to pay interest beginning
on the day after the balance-due day under a GAAR assessment.
[46]
Simply, tax payable is fixed by “assessment or
reassessment” subject to appeal. The balance-due day occurs, in the case of a
corporation, two or three months after the taxation year ends. Interest accrues,
where at any time after the taxation year balance-due day, the taxpayer’s taxes
payable for the year are greater than amounts paid on or before the balance-due
day on account of tax payable for the year as determined at any time (subject
to the usual reassessment limitations, if any).
[47]
Applied to the facts of this case, the GAAR
assessment fixed or added, as the case may be, to the Appellant’s tax payable
the impact of disallowing the capital loss. That impact, by virtue of the use
of the words “the total…taxes payable…for the year…exceeds…the total paid at
that time on account of tax payable…for the year” is clear. Taxes payable for a
year may arise by assessment or reassessment, which was the case upon the GAAR assessment
issuance date. The suggestion that no taxes payable existed before the GAAR
assessment issuance date, again depends upon the rejected argument that a GAAR
assessment only creates tax liability upon its issuance.
Intention of
Parliament’s Interest Provision Omission for GAAR
[48]
The Appellant’s argument that Parliament did not
enact a specific provision imposing arrears interest on GAAR assessments is
rejected. GAAR assesses tax and interest under the provisions of the Act
generally. This is not unlike other provisions which do not contain distinct or
specific interest accrual provisions. The consequential GAAR tax payable arises
by an assessment. This basis for liability is contemplated specifically by the
section 248 definition of “tax payable” and reference to “balance-due day” in
subsection 161(1). A delay in raising an assessment or reassessment and the
argument that no “excess amount” exists until reassessment has been rejected by
the Federal Court of Appeal (Irvine v MNR, (1961) 28 Tax ABC 151 and
Whent v R, [1996] 3 CTC 2542).
[49]
The Appellant’s suggestion that arrears interest
on penalties provides the Court with guidance is not persuasive for several
reasons. Aside from sections 162, 163, 163.1, 235 and 237.1(7.4) relating to
specific penalties, interest accrues on other penalties from the day of mailing
of the penalty assessment under paragraph 161(11)(c). The Appellant suggests
that this residual provision is analogous to GAAR assessments because taxpayer
uncertainty and ignorance prior to assessment is common to both these liabilities
under the Act. This analogy is not consistent. Assessment under the GAAR
imposes tax liability, not a penalty for non-compliance. Consistently,
Parliament has not enacted separate interest provisions for other assessment provisions.
[50]
Additionally, specifically with respect to
penalties, before the enactment of subsection 161(11) in 1986, there simply was
no interest applicable to penalties imposed under the Act. The pre-enactment
authority cited by the Appellant contains a broad statement by Acting Master
Anglin in Ontario Master’s Court. The Acting Master states that interest is not
exigible on penalties payable under the Act (Miller v Harron,
56 DTC 1053 (Ont S.C.) at paragraph 5). The reasoning of the Appellant that
interest began accruing only once the penalty was assessed is not correct. Prior
to the enactment of 161(11), interest on penalties simply did not exist at all.
[51]
The more persuasive argument is that subsection
161(1) is the default provision governing interest accrual for all tax
liability arising under assessments and reassessments under the Act. It
imposes interest “at any time after a taxpayer’s balance-due day” where tax
payable exceeds amounts paid on account of tax for the year. The argument that
Parliament intended interest to accrue only after the GAAR assessment issuance
date through this legislative omission has no support legislatively by virtue
of a plain interpretation of subsection 161(1).
Contextual
and Purposive Analysis
[52]
Moreover, using a contextual and purposive
analysis in analyzing both section 245 and subsection 161(1), the argument in
favour of no interest before the GAAR assessment issuance date is also not
convincing. The context and purpose of section 245 is to counteract and nullify
the utilization of an abusive avoidance transaction to achieve a tax benefit. The
GAAR definition of tax benefit employs wording which consists of any
“reduction, avoidance or deferral of tax or other amount that would be payable
under the Act…”. Similarly, “tax consequence”…means the amount of
income, taxable income or other income amount payable by the person under the Act”.
[53]
If interest were not charged until after the GAAR
assessment issuance date, the underlying tax avoidance or reduction would be reversed
at that time, but a tax deferral is created and authored during that period
between the balance-due day and the GAAR assessment issuance date.
Definitionally under section 245, a tax benefit includes a deferral of taxes.
Payment of tax by the Appellant four and half years after the tax benefit
occurred, but without interest on the balance due, is, within the Act’ s
very own definition of “tax benefit”, a deferral of tax payable per se.
The deferred payment of that otherwise payable tax liability confers a benefit
to the taxpayer, both logically and under the definition of GAAR itself. To not
impose interest from the balance-due day, in the absence of some provision even
vaguely directing such a hiatus, renders GAAR ineffective in nullifying the
deferral portion of the “tax benefit”. Parliament provided for this not just in
framing the definition of tax benefit, but arguably and possibly in the language
which suggests direct authority to impose interest as a tax consequence within
the expressed words “…other amount payable by… a person under the Act”
found in the combined effect of the definitions and subsection (2) of section
245.
[54]
This “tax benefit” relating to the deferral of
tax payable, when examined in a textual, contextual and purposive manner,
having regard to the harmonious scheme and object of the Act as a whole
and the intention of Parliament, leads to an effective conclusion. Interest
under subsection 161(1) in relation to an assessment under GAAR, referable
itself to Part I of the Act, should accrue on a GAAR assessment from the
day after the balance-due day for the relevant taxation year.
V. Conclusion
[55]
For the reasons above, the Court answers the
Rule 58 Question as follows:
Where, as here,
the Minister of National Revenue has relied upon section 245 of the Income
Tax Act (“Act”) to deny capital losses when reassessing the Appellant’s
income tax for a taxation year, arrears interest payable under subsection
161(1) of the Act accrues during that period from the taxpayer’s
balance-due day for the year and to the issuance of such reassessment.
[56]
Costs are payable to the Respondent in accordance
with the tariff, subject to the right of either party to make further
submissions within 30 days of the date of this Order.
Signed at Toronto,
Ontario, this 1st day of September 2016.
“R.S. Bocock”
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