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Citation: 2004TCC268
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Date: 20040415
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Docket: 2003-1488(IT)I
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BETWEEN:
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CHIU-CHENG YANG,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Angers, J.
[1] The taxation years in issue in
these appeals are 1996 and 1997. The Appellant was assessed
arrears interest and late filing penalties in respect of unpaid
taxes for both taxation years. In so reassessing the Appellant,
the Minister of National Revenue (the Minister) relied on the
provisions of subsections 161(1), 161(7), 162(1) and 162(11) of
the Income Tax Act (the Act).
[2] The Appellant arrived in Canada as
an immigrant in 1989. He carried on a real estate development
business through two wholly owned corporations: Gen Hwa
Enterprises Ltd. and Shun Gen Developments Ltd. It is in the
course of an audit of these two corporations that certain facts
were discovered, which ultimately led to an audit of the
Appellant's personal income tax for both taxation years. It
was in fact discovered that rental income from both corporations
was deposited into the appellant's personal bank account and
that the appellant also had unreported income from two houses he
personally owned. The Appellant was assessed under subsection
15(1) of the Act for both taxation years.
[3] The Appellant did not file income
tax returns for both taxation years on appeal nor for 1998, 1999
and 2000. The auditor met with the Appellant's representative
on October 4, 2001, and was informed that the Appellant had
incurred non-capital losses from the 1998 Allowable Business
Investment Loss (ABIL). A written request was made on February
20, 2002, to apply the said non-capital loss as a carryback to
1996 and 1997 and as a carry forward to 1999 to offset taxable
income to nil. Since the Appellant's representative did not
have the T-1 forms to complete the Appellant's income tax
returns for 1996 to 2000, it was agreed that the auditor would
prepare the five outstanding years in issue. The assessment is
dated June 3, 2002, and the filing date is March 6, 2002.
[4] The unreported rental income and
shareholder appropriations for the 1996 and 1997 taxation years
are $82,170 and $123,176 respectively. On October 15, 2002, the
Minister reassessed both 1996 and 1997 taxation years to allow
non-capital losses of $82,170 and $123,176 for each taxation year
respectively to be carried back from the 1998 taxation year. The
carryback date used was September 27, 2002. The Appellant was
also assessed interest on arrears and late filing penalties.
[5] The Appellant filed Notices of
Objection on October 28, 2002, for both taxation years. On
February 26, 2003, the Minister reassessed the Appellant's
1996 and 1997 taxation years to adjust the balance of arrears
interest on taxes and late filing penalties by using March 8,
2002, to halt the accumulation of late filing penalties and
interest for those years instead of the September 27, 2002, date
initially used.
[6] The Appellant does not contest the
re-assessment based on the unreported income for both taxation
years. His appeals concern the late filing penalties and the
interest calculated on the unpaid taxes that were assessed for
both taxation years. The Appellant is asking this Court either to
reduce the interest and late filing penalties or to waive both
completely. The Appellant's representative submits that there
was no need to file income tax returns for both taxation years
since there was no income to declare initially and later, even
though there was income, the taxes owed became nil by applying
the carryback losses. As such, no late filing penalties and
interest should be assessed against the Appellant. He submits
that the Minister should have made the audit sooner and suggested
that the date on which to end the accumulation of interest and
late penalties should be the date the Appellant submitted his
carryback losses, namely on October 4, 2001. He submits that the
Appellant should be treated fairly.
Interest
[7] Subsection 161(1) of the Act
provides for the payment of interest by a taxpayer after the
taxpayer's balance-due day for a taxation year on the
excess:
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.
[8] In this fact situation, the excess
is actually the total amount of taxes payable by the Appellant
for both taxation years on appeal since no taxes were actually
paid before the balance-due day. The interest was therefore
calculated from the balance-due day which is April 30 of the
following taxation year for each year (see definition of
balance-due day in subsection 248(1)). The Appellant's
representative submits that the use of the carryback losses
resulted in no taxes being payable but subsection 161(7) of the
Act provides that carryback deductions used to reduce income tax
of a preceding taxation year will not affect the calculation of
interest until the day that is 30 days after the latest of four
possible days. Subsection 161(7) reads as follows:
For the purpose of computing interest under subsection (1) or
(2) on tax or a part of an instalment of tax for a taxation year,
and for the purpose of section 163.1,
(a) the tax payable under this Part and Parts I.3, VI
and VI.1 by the taxpayer for the year is deemed to be the amount
that it would be if the consequences of the deduction or
exclusion of the following amounts were not taken into
consideration:
(i) any amount deducted under section 119 in respect of a
disposition in a subsequent taxation year,
(ii) any amount deducted under section 41 in respect of the
taxpayer's listed-personal-property loss for a subsequent
taxation year,
(iii) any amount excluded from the taxpayer's income for
the year by virtue of section 49 in respect of the exercise of an
option in a subsequent taxation year,
(iv) any amount deducted under section 118.1 in respect of a
gift made in a subsequent taxation year or under section 111 in
respect of a loss for a subsequent taxation year,
(iv.1) any amount deducted under subsection 126(2) in respect
of an unused foreign tax credit (within the meaning assigned by
subsection 126(7)), or under subsection 126(2.21) or (2.22) in
respect of foreign taxes paid, for a subsequent taxation
year,
(iv.2) any amount deducted in computing the taxpayer's
income for the year by virtue of an election in a subsequent
taxation year under paragraph 164(6)(c) or (d) by
the taxpayer's legal representative,
. . .
(b) the amount by which the tax payable under this Part
and Parts I.3, VI and VI.1 by the taxpayer for the year is
reduced as a consequence of the deduction or exclusion of amounts
described in paragraph (a) is deemed to have been paid on
account of the taxpayer's tax payable under this Part for the
year on the day that is the latest of
(i) the first day immediately following that subsequent
taxation year,
(ii) the day on which the taxpayer's or the taxpayer's
legal representative's return of income for that subsequent
taxation year was filed,
(iii) where an amended return of the taxpayer's income for
the year or a prescribed form amending the taxpayer's return
of income for the year was filed in accordance with subsection
49(4) or 152(6) or paragraph 164(6)(e), the day on which the
amended return or prescribed form was filed, and
(iv) where, as a consequence of a request in writing, the
Minister reassessed the taxpayer's tax for the year to take
into account the deduction or exclusion, the day on which the
request was made.
[9] The Federal Court of Appeal in
Connaught Laboratories Ltd. v. Canada, [1994] F.C.J. No.
1681, ruled that there was no ambiguity in the wording of
subsection 161(7) nor did it find its interpretation to be
offensive to the purpose or objectives of the Act. The
Appellant's 1996 and 1997 tax returns were filed on March 5,
2002, which is the latest day applicable under the subsection.
The Minister therefore used the proper date to reduce the amount
of taxes payable and on which interest was to be calculated. The
wording of subsection 161(7) makes it quite clear that the
Minister correctly assessed the interest payable on the tax that
would have been payable but for the carryback loss up to the date
the returns were filed.
Late Filing Penalties
[10] Subsection 162(1) of the Act reads as
follows:
Every person who fails 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 5% 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 1% 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.
[11] The other relevant subsection is
162(11). It reads:
For the purpose of computing a penalty under subsection (1) or
(2) in respect of a person's return of income for a taxation
year, the person's tax payable under this Part for the year
shall be determined before taking into consideration the
specified future tax consequences for the year.
[12] Specified future tax consequence is
defined in subsection 248(1) and means the consequence of the
deduction or exclusion of an amount referred to in paragraph
161(7)(a) referred to above.
[13] This Court has dealt with this issue
before. The leading decision on late filing penalties is Leach
Bros Stores Ltd. v. M.N.R., [1985] 1 C.T.C. 2067. At
paragraph 5, Associate Chief Judge Christie of the Tax Court of
Canada as he then was stated the steps to take in levying a
penalty under subsection 162(1) of the Act. That paragraph reads
as follows:
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 5% of the amount arrived at in the second
step and the product obtained when 1% 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 non-capital losses which arose after the time
when the return was required to be filed.
[14] The issue was further dealt with by
this Court in Reemark Chelsea Terraces Project Ltd. v. R.,
93 D.T.C. 469, and in Jonathan Cloud v. Canada, 95 D.T.C.
547. This latter decision is somewhat similar in that, by virtue
of subsection 15(2) of the Act, the Minister included an amount
in the taxpayer's income for the 1985 taxation year. The
taxpayer had not filed his 1985 tax return until November 26,
1986. The taxpayer argued that as a result of a non-capital loss
from a subsequent year being applied to his 1985 taxation year,
the interest and penalty should be reduced. The Court held that
the amount included in his income under subsection 15(2) had to
be included in the taxpayer's income at the time the
taxpayer's return was required to be filed, namely on April
30, 1986. The same reasoning applies to the present case in that
the income assessed under subsection 15(1) had to be included in
the appellant's income at the time the appellant's tax
return was required to be filed, namely on April 30, 1997, and on
April 30, 1998. Under subsection 162(21), the penalty is to be
computed on the appellant's tax payable for the year before
taking into consideration the carry-back losses. There is no
ambiguity in these subsections.
Fairness
[15] It has been said numerous times that
this Court is not a Court of equity. It is within the discretion
of the Minister under subsection 220(3.1) to waive or to cancel
all or any portion of any penalty or interest payable under the
Act. In Floyd Estate v. M.N.R., 93 D.T.C. 5499, the Court
stated:
At the outset, I should point out that it is not for the Court
to decide whether the interest otherwise payable by the taxpayer
ought to be waived or cancelled. It is within the discretion of
the Minister.
[16] This Court has no jurisdiction in this
case to cancel or to waive both the penalty and the interest. For
the foregoing reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 15th day of April 2004.
Angers, J.
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