Eric L. Smith v. Minister of National Revenue, [1991] 1 CTC 2362, 91 DTC 526

Margeson, T.C.J. [Orally]This is an appeal by the taxpayer, a doctor, from the assessment of the Minister of National Revenue dated August 23, 1988, for instalment interest in the amount of $2,770. The facts disclose, according to the appellant, that in the years 1987 and 1988 his accountant was unable to conclude with certainty what amount should be attributed to income in the year 1987 and what amount should be attributed to income in the year 1988. Therefore, on March 31, 1988, he made a payment of $120,630 to the Receiver General as an instalment payment intended to cover the 1987 payments required and any excess to be applied towards the 1988 instalments, that is, the 1987 taxes owing and any excess to be applied to the 1988 instalments.

After filing a 1987 T-1 return, he filed a letter with the Minister, Exhibit A-2. This letter is dated May 18, 1988, and is from the accountant, who was the agent for the taxpayer, to Revenue Canada, asking that the 1987 overpayment be applied to the 1988 instalments. There was no acknowledgement of this letter by the Minister at any time, what we will call a ” letter of instruction”. Counsel for the Minister today really did not dwell upon the fact that it was sent, so I presume he is saying the fact that it was sent posted no duty upon the Minister to reply and the Minister acted reasonably under all the circumstances. The appellant, of course, takes a much different stance than that. The Minister said that this notice was received by him on May 25, 1988, and it is clear that it was.

The appellant says that Revenue Canada set up taxable interest on the alleged underpayment for the 1988 instalments. The Minister's position is that he charged the sum of $2,270 as alleged interest due on instalment payments for 1988 on the basis that Revenue Canada had not received the funds, really— that is how he put it—that they had not really received the funds, not in the physical sense, because although they had the money in their possession, the funds were not applied or capable of being applied until the transfer was made by Revenue Canada of the 1987 surplus funds to the 1988 account, which was done on August 23, 1988, when the assessment was completed.

The appellant alleges in his pleadings, and by innuendo here today that this was merely a manipulation of funds to create additional tax revenues, and since the funds were in Revenue Canada's hands by March 31, 1988, there should not be any interest charged. The Minister's position is that, according to subsection 244(15) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the assessment is deemed to have been made on the date of the mailing of the notice of assessment. His position is that that should be the date that the overpayment should be applied to the account, and, consequently, interest was owing on the instalments up to that date.

The Minister refers to other sections of the Act: section 153 which generally deals with withholding duties; subsection 155(2) which deals with the instalment base; section 156 which deals with the quarterly payments which have to be made on March 15, June 15, September 15 and December 15 in each year; subsection 161(1) which deals with interest on the balance owing; subsection 161(2) which deals with interest instalment arrears; subsection 161(4) which requires a taxpayer to pay even part of an instalment that is due; section 164 dealing with refunds; and subsection 244(15), which I have earlier referred to, which is the section that says an assessment is deemed to have been made on the date of the mailing of the notice. He also refers in his pleadings to Regulation 4300, which states the interest rates, and Regulation 5300 which is again the instalment base.

There is nothing in the Income Tax Act which I can find, nor to which counsel for the Minister has referred, nor to which the agent for the appellant has referred, which would prevent the Minister from giving a credit for the interest when it was already in their possession since March 31. That is, there is no specific section which covers that. The Minister relies upon the cases which he presented before us, and I have considered them. Also, he argues, that the Minister acted reasonably under all the circumstances. The Minister was not advised until May 25, 1988, that the overpayment should be attributed to the 1988 account, even though he had the funds in his hands from March 31 to the date of the letter. The Minister argues that he was reasonable in his actions and that the Minister cannot do the taxpayer's work and decide what amounts to allocate without specific instructions. He says the instructions as to the application of funds need not refer to a specific amount, but there must be a formula or some method by which the Minister can reasonably calculate what amount is sought to be attributable to the instalments, in this case for the year 1988.

I agree that the cases cited by the Minister require that there be an allocation by the taxpayer. There is a duty upon him, if he is making a payment, to advise the Minister what to do with it. I do not think it helps the taxpayer any to say that the form on which he filed his income tax return has only one year's space on it where he can designate to the Minister to which year he wants the moneys that he sent in to be applied. There is only one place on the form, and he put in this one the year 1987. I do not think that helps him very much. Some other direction could nave been given with the remittance and the form, such as the letter which was filed later on in May, which obviously is what it was intended to do—to give instructions.

However, under all the circumstances that exist here, I do not think the Minister acted reasonably in not allocating the overpayment to 1988 tax instalments, especially in light of the letter and the instructions contained therein and the fact that the tax return already filed for 1987 showed what the refund was to be, which the appellant instructed should be applied to the 1988 taxes. As the Minister says, the Act is not necessarily equitable and need not be. It is quite harsh in many respects. However, my duty is to interpret it reasonably vis-a-vis the taxpayer and the Minister. I am satisfied that, having regard to all the circumstances, the taxpayer acted reasonably and that he gave specific instructions as to the amount of the refund to be applied to the 1988 taxation year or, I am satisfied he at least provided a formula for the Minister, acting reasonably, to allocate a specific amount to the 1988 taxation year.

The date from which the taxpayer acted reasonably was not until May 25, 1988, when the letter giving the instructions was received by the Minister. Consequently, I will allow the appeal in part and the matter will go back to the Minister for reassessment based upon this decision, that the appellant should not be charged interest from the date of receipt of the letter, which was May 25, 1988. The taxpayer has been successful in part, so I will allow him 75 per cent of his party-and-party costs if he has incurred any.

Appeal allowed in part.