Herman A. Turkstra v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2405

Mogan, T.C.C.J.:— For the appellants 1990 taxation year, the Minister of National Revenue assessed interest of $7,036.43 and a penalty of $2,595.11 with respect to certain instalments of tax which the appellant did not pay on a quarterly basis during 1990. The appellant acknowledges that he did not pay the required quarterly instalments of tax but he disputes the right of the Minister to assess interest and penalty with respect to the deficient instalment payments in the circumstances of his case. The appellant has elected the informal procedure.

The appellant is a lawyer carrying on a successful practice of law in the City of Hamilton, Ontario. In the fiscal year of his practice ending February 28, 1990, his earnings from the practice of law were significantly in excess of $100,000 but his drawings from the practice were only 75 per cent of his earnings. He therefore claims that, by leaving 25 per cent of his earnings in the practice, borrowing from the bank was reduced; interest paid to the bank was reduced; and the net profit from his practice was higher. That proposition may be true but it does not answer the question as to why the required quarterly payments were not made out of his substantial drawings.

The relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in ordinary language are as follows:

Having regard to the above statutory provisions, the appellant falls within subsection 156(1) and he is not relieved of the obligation to pay quarterly instalments under the next three categories because (i) his tax payable for 1990 is greater than $1,000; (ii) he has no income from which tax is withheld at the source; and (iii) his chief source of income is not farming or fishing. The appellant has put forward two basic arguments for relief from the above statutory provisions.

First, he argues that he is at a disadvantage compared to many other persons engaged in a professional practice (e.g., engineering) or carrying on business in Canada because, as a lawyer, he is not permitted to incorporate. Although he made this argument, he specifically stated that he was not pleading the "discrimination" provisions of section 15 of the Charter of Rights and Freedoms. There are certain income tax advantages to incorporating a commercial enterprise, and lawyers are permitted to incorporate a law practice in certain provinces outside Ontario but that is a matter for the appellant to take up with the Law Society in Ontario. As a matter of common sense, I can agree with the appellant's submission that there are certain income tax disadvantages flowing from his inability to incorporate his practice of law but I cannot grant any relief from those disadvantages.

The appellant's second argument is based on what he alleges to be a change in policy by Revenue Canada Taxation without adequate notice to him concerning interest and penalty with respect to deficient instalment payments. For example, in his 1989 taxation year, his total tax payable exceeded $60,000 and more than 50 per cent of the $60,000 was not paid until he filed his 1989 return of income. According to his testimony, he was assessed instalment interest of only $150 for 1989 and no penalty. He stated that he had a long history of making deficient instalment payments but had never been assessed a penalty prior to the 1990 taxation year. This allegation was not challenged by the respondent.

In support of his argument against a change in the policy of Revenue Canada Taxation to assess a penalty for deficient instalment payments, the appellant relied on the decision of the House of Lords in Council of Civil Service Unions v. Minister of the Civil Service, [1985] A.C. 374, [1984] 3 All E.R. 935 in which Lord Fraser stated at page 401 (All E.R. 944):

Legitimate, or reasonable, expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.

Although the House of Lords decided in the case of the Civil Service Unions that considerations of national security outweighed legitimate expectations of prior consultation, I am inclined to give some weight to the appellant's argument that the so-called doctrine of reasonable expectations may be used as a shield with respect to the penalty although it cannot be used as a sword to support a claim. I accept his testimony that 1990 was the first taxation year when a penalty was assessed against him for deficient instalment payments.

The appellant does not dispute the computation of the interest or penalty that is in dispute. In substance, his argument is that the amount of the interest took him by surprise and he was surprised to be assessed any penalty at all. I cannot grant him any relief from the clear wording of the Income Tax Act in subsections 156(1) and 161(2) and section 163.1. In Planetta v. M.N.R., [1987] 2 C.T.C. 2258, 87 D.T.C. 554 (T.C.C.), Christie, A.C.T.C.C.J. stated at page 2260 (D.T.C. 556):

Where language employed by Parliament is clear, effect must be given to it by this Court. To do otherwise would be to infringe upon the functions of Parliament under the guise of interpretation of legislation. Further, as observed by Lord Greene in Howard de Walden (Lord) v. Inland Revenue Commissioners, [1942] 1 All E.R. 287, [1942] 1 K.B. 389 at page 289 (K.B. 397): “It is illegitimate to force upon that language (of a taxing statute) a strained construction merely because it may otherwise lead to a result which to some minds may appear to be unjust."

Under subsection 220(3.1) of the Income Tax Act, the Minister of National Revenue now has some discretion to waive the payment of certain interest or penalty that has been lawfully assessed under the Act. I am not inclined to recommend any relief from the interest of $7,036.43 which has been assessed because the liability to pay interest on deficient instalments has been in place for many years. See Culham v. M.N.R., [1985] 1 C.T.C. 2227, 85 D.T.C. 165 (T.C.C.). The penalty is different, however, because section 163.1 was enacted only in 1988 applicable with respect to instalments of tax payable for taxation years commencing after June 30, 1989. I believe the appellant when he states that he had no knowledge that he could be assessed a penalty for 1990 with respect to his deficient instalment payments. I would therefor recommend that the Minister of National Revenue consider waiving the penalty of $2,595.11 for 1990 because the legislation authorizing the penalty was so new and the appellant (with a long history of deficient instalments) had no knowledge of his penalty risk. In making this recommendation, however, I recognize that the Minister has unrestricted discretion under subsection 220(3.1). The appeal is dismissed.

Appeal dismissed.