Seaspan International Ltd, Genstar Marine LTD v. Minister of National Revenue, [1984] CTC 2102, 84 DTC 1075

Taylor, TCJ:—These are appeals heard on common evidence in Vancouver, British Columbia, on February 20, 1981, by the late learned assistant chairman of the Tax Review Board, Mr Frank Dubrule, QC. They are against income tax assessments for the year 1978 in each case. The parties have agreed that the issue should be decided by a judge of the Tax Court of Canada (formerly the Tax Review Board) on a review of the transcript of the hearing.

In my opinion, the precise amounts at issue are not relevant in themselves to a determination of the issue. That issue is whether the Minister has properly and legally calculated the interest under subsection 161(4.1) of the Act, SC 1970-71- 72, c 63, as amended, on instalment of tax owing and/or paid under subsection 157 (1) of the Act. The dispute has arisen because the fiscal year of each appellant for 1978 was of only five months’ duration (January 1 to May 31) due to corporate mergers which took place as of June 1, 1978. Both parties suggested that the “strict application’’ of the provisions of subsection 157(1) of the Act (wherein a 14-month payment period was allegedly envisaged) would produce absurd results under these circumstances. Counsel for the appellants noted as an example that if that section were to be applied literally, a new corporation, which for some reasons had as its fiscal year a period of less than 12 months, would find itself liable to pay instalments even before it was incorporated. The Minister’s method of dealing with that perceived absurdity (which could arise out of subsection 157(1)) of the Act was to calculate the instalments on account of tax payable based upon the foreshortened fiscal period of five months rather than twelve months. To the equity and the mathematics of that approach, both parties seemed in general agreement. The Court makes no comment on this method of calculation used by the Minister and the fact that it appeared more equitable or was agreeable to the appellants is irrelevant. The appellants say that the Minister allegedly having used the departmental policy in applying such subsection 157(1) of the Act to a “short year’’, only used it with regard to paragraph 157(l)(a) of the Act, whereas continuing to apply the same principle to paragraph 157( l)(b) of the Act would have worked to the taxpayer’s advantage to an even greater degree.

For the records the relevant parts of the Act (as they then read) are:

157. (1) Every corporation shall, during the 15 Month period ending 3 months after the close of each taxation year, pay to the Receiver General of Canada,

(a) either

(i) on or before the last day of each of the first 12 months in that period, an amount equal to /,, of the amount estimated by it to be the tax payable under this Part by it for the year computed without reference to section 123.2,

(ii) on or before the last day of each of the first 12 months in that period an amount equal to */ of its instalment base for the immediately preceding taxation year, or

(iii) on or before the last day of each of the first 2 months in that period, an amount equal to l/l2 of its instalment base for the second taxation year preceding the year, and on or before the last day of each of the next following 10 months in that period, an amount equal to 1/l() of the amount remaining after deducting the amount computed pursuant to this subparagraph in respect of the first 2 months of the period from its instalment base for the immediately preceding taxation year; and

(b) the remainder of the tax as estimated by it under section 15],

(i) on or before the last day of the period, where an amount was deducted by virtue of section 125 in computing the tax payable under this Part by the corporation for the year or for its immediately preceding taxation year, or

(ii) on or before the last day of the fourteenth month of the period in any other case.

161. (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.

161. (4.1) For the purpose of subsection (2), where a corporation is required to pay a part of instalment of tax for a taxation year computed by reference to a method described in subsection 157(1), the corporation shall be ;deemed to have been liable to pay a part or instalment computed by reference to

(a) the tax payable under this Part by it for the year computed without reference to section 123.2,

(b) its instalment base for the immediately preceding taxation year, or

(c) its instalment base for the second taxation year preceding the year and its instalment base for the immediately preceding taxation year,

whichever method gives rise to the least amount required to be paid by the corporation on or before the days referred to in subparagraphs 157( l)(a)(i) to (iii).

To continue the examination of the question posed in this appeal, one must also look at Regulation 5301, which defines “instalment base” and reads as follows for the purposes of this appeal (as it then read):

5301. (1) ...The instalment base of a corporation for a particular taxation year ending after 1975 shall be. . .

(a) the tax payable by it for the particular taxation year . . .

Subsection 161(4.1) of the Act is not precisely a recapitulation of subsection 157(1) of the Act, since the calculation of the “amount estimated by it to be the tax payable” (italics mine) has been replaced by the simple term “tax payable”. It would appear that in the event the estimate made a priori under subparagraph 157( l)(a)(i) was less than the amount determined post facto to be the tax payable, the corporation runs the risk of liability for interest on the deficiency. it might also appear at first glance that in the event the corporation has made instalment payments by reference to either of subparagraphs 157(l)(a)(ii) or (iii) rather than under 157( l)(a)(i), that could also be the case because the alternative chosen would probably be the least amount dertermined ‘‘a priori". In any event, when the total of the instalments paid turns out to be less than the tax payable, at least a calculation is required by the Minister to determine if indeed (and if so, how much) interest is payable by using the formula in subsection 161(4.1) of the Act. That was done in this matter, the three alternative calculations were provided to the Court and it was the conclusion of the Minister that interest was owing, and further that the amount of such interest, when calculated with reference to paragraph 161(4. l)(a), was at least, and therefore most favourable to the appellants.

The quarrel arises, as I see it, from the view that the Minister, in the determination of that interest, considered that not just the normal instalment was required on May 31, 1978, but the balance of the tax payable was due on that date. That had the effect of putting the “amount of balance of tax payable” paid by the appellants on July 31, 1978, outside the totals agreed to as “instalment payment” by the Minister. At the risk of oversimplification, it would appear to me that the appellants’ position might be stated as saying that they were not liable for the amount paid on July 31 until July 31, certainly not as May 31. In addition, the Minister has taken the position that any instalment should have commenced January 31, 1978, where the company commenced these instalments March 31, 1978, allowing for two months when allegedly no payments were required under subparagraph 157(l)(a)(iii) of the Act. While the number differ, the principle is the same for the two appellants and the following schedules for Seaspan (A-l) prepared by the appellant, R-3 prepared by the respondent) indicate graphically the difference in perspective and interpretation.

EXHIBIT R-3

Schedule C

SEASPAN INTERNATIONAL LTD

INSTALMENT LIABILITY UNDER POLICY FOR ‘SHORT YEAR’

	Instalments
Date		per	Instalments	Instalments	Instalments
required		161(4. l)(a)	per policy	per policy	per policy
			(a)	(b)	(Cc)
June 30, 1977	$	183,887.83	$	$	$
July 31, 1977		183,887.83
August 31, 1977		183,887.83
September 30, 1977		183,887.83
October 31, 1977		183,887.83
November 30, 1977		183,887.83
December 31, 1977		183,887.83
January 31, 1978		183,887.83	183,887.83	246,342.52	0
February 28, 1978		183,887.83	183,887.83	246,342.52	0
March 31, 1978		183,887.83	183,887.83	246,342.52	295,611.03
April 30, 1978		183,887.83	183,887.83	246,342.52	295,611.03
May 31, 1978		183,887.83	1,471,103.24	1,970,740.22	2,364,888.30
Total Instalments	2,206,654.54		2,206,654.54	2,956,110.30	2,956,110.30
July 31, 1978		0	0	0	0
Total Tax	$2,206,654.54		$2,206,654.54	$2,956,110.30	$2,956,110.30

rations had continued for the full twelve-month normal fiscal period, the amount of instalments paid would have been equal to that required in the subparagraph 157(l)(a)(iii). On the other hand, it appears that the Minister is saying, even if the corporations had continued throughout a normal fiscal period to pay the instalments as required under subparagraph 157( l)(a)(iii), but that the total paid had been less than the tax payable, interest would have been due and payable under subsections 161(2) and 161(4.1). That logic can be further reduced to a view held by the Minister that the effect of subsection 161(4.1) of the Act bears no relationship to the earlier application of the provisions of subsection 157(1) of the Act. Specifically, in the event a corporation has underestimated its tax payable but paid according to the schedule set in subparagraph 157( l)(a)(i), interest would still be exigible under paragraph 161(4. l)(a) of the Act. (assuming that the alternate calculations of interest under paragraph 161(4. l)(b) or (c) were greater.) With that I agree, but I can think of no reason that a corporation would choose the method of instalment payment outlined in subparagraph 157(l)(a)(i) if either of the two methods (157(1)(a)(11) or (iii)) were legitimately available to it, and either of these resulted in a lesser total instalment payment during the fiscal year of the corporation. It can be said that, if a corporation does underestimate its tax payable at the start of the fiscal year, and makes instalments accordingly, it may have an interest obligation. However, that is not the situation in this appeal, and it might be inferred that the Minister has extended the principle too far by presuming that even if the method for instalment payment chosen arises out of subparagraphs 157(l)(a)(ii) or (iii), and those payments were properly made, if the total tax payable is a greater amount, the corporation is still liable for interest. I do not believe that can be a view properly held by the Minister, nor do I believe it is one to be read into the relevant section of the Act. It is fundamental to my perspective of sections 157 and 161, that if a

choice of instalment payment method was legitimately available to a corporation at the critical date (the last day of the first month of the fiscal year) and instalments were made according to that method, that no recourse is available to the Minister to re-examine that choice in the light of subsequent information (eg: the actual profit as opposed to an estimated profit); or to determine that the corporation should have made a choice of a different method of instalment payments. Still leaving aside consideration of the impact of the “five-month period” on this issue, as I see it, that is what happened in the assessment under appeal. The Minister disregarded the fact that the appellants were entitled to make instalments under subparagraph 157(l)(a)(iii), and did so. Instead, the Minister decided that irrespective of the method of payment selected at the start of the fiscal period, the final payment (allegedly an instalment) was due on the last day of the final period, and that the final payment was the difference between the tax payable and the amount of instalments paid. All three interest calculations under paragraphs 161(4. l)(a), (b) and (c) were made according to this policy, and the Minister determined that the calculation under paragraph 161(4. l)(a) would be most favourable to the appellants, and assessed accordingly. The flaw in that logic, as I see it, is — there is no basis in law for the Minister to require payment of the balance of the tax payable on the last day of the fiscal year of a corporation, when that corporation has been properly paying its instalments according to any of the three methods under subsection 157(1) of the Act, certainly not if those payments have been made correctly under subparagraphs 157( l)(a)(ii) or (iii). Again, I repeat, I am not aware of any obligation on a taxpayer to make instalment payments under subparagraph 157(l)(a)(i) of the Act, if one of the alternate calculations under subparagrah 157( I)(a)(ii) or (iii) is a lesser amount, and no such argument was made at the hearing.

HELD:

Plainly stated the reason the notice of objection to the assessment had not been filed within the 90-day period was because during that period the applicant had no objection to the assessment. Application dismissed.

J I Dean for the applicant.

IE Lloyd for the respondent.

Taylor, TCJ:—This is an application for extension of time within which to file a notice of objection in connection with an income tax assessment for the year 1981. The application reads in part as follows:

1. The Applicant is a nonprofit organization within the meaning of paragraph 149( 1)(1) of the Income Tax Act and deemed to be an inter vivos trust by the provisions of subsection 149(5).

2. At all material times, the main purpose of the Applicant was the provision of dining and recreational facilities for its members.

3. On or about October 22, 1979 the clubhouse facilities of the Applicant were destroyed by fire.

4. The Applicant commenced arrangements for construction of replacement facilities forthwith following the loss and the replacement facilities were completed in or about December 1982.

5. The cost of construction of the replacement facilities was paid out of the proceeds of insurance received in respect of the original loss and the proceeds of sale by the Applicant of certain of its property to its members.

6. The said insurance proceeds and sale proceeds were received by the Applicant prior to completion of construction of the replacement facilities and were held by it in interest bearing short term deposit receipts pending distribution.

7. In its return of income for its 1981 taxation year the Applicant reported interest earned on the said deposit receipts.

8. By notice of Assessment dated June 15, 1982 the Minister of National Revenue assessed the Applicant for tax on income for its 1981 taxation year on the basis that the said interest constituted income from property and was taxable.

9. The Applicant submits that the said interest constitutes income from its business of providing dining and recreational facilities to its members.

10. In or about October of 1982 the Applicant’s auditor, Robert McDonald, CA reviewed the said assessment and advised the Applicant that the same was in error. At the time of this review the limitation period set out in section 165 of the Income Tax Act for serving a Notice of Objection on the Minister of National Revenue in respect of the Notice of Assessment dated June 15, 1982, had expired.

16. At the time the said assessment was reviewed by Robert McDonald the limitation period set out in section 165 of the Income Tax Act had expired and, thus, it was not possible to serve the Notice of Objection within the time otherwise limited by the Act for so doing.

The Minister rested his opposition on each one of the three subparagraphs (i), (ii) and (iii) of paragraph 167(5)(c) of the Income Tax Act, SC 1970-71-72, c 63, as amended. In my view, the evidence is not sufficient to support dismissing the application on either of subparagraphs (ii) or (iii). Subparagraph (i) which remains reads as follows:

167 (5) No order shall be made under subsection (1) or (4) . . .

(c) unless the Board or Court is satisfied that,

(i) but for the circumstances mentioned in subsection (1) or (4), as the case may be, an objection or appeal would have been made or taken within the time otherwise limited by this Act for so doing,

The testimony of Mr McDonald (see application above) was that both the 1980 and 1981 income tax returns filed for the applicant had been prepared based on the view that the amounts of interest received were subject to tax. It was agreed between the parties that the year 1980 was not part of this dispute, because a period of more than one year in addition to the original 90 days allowed had passed since the date of the 1980 tax assessment.

Counsel for the applicant asserted that the Court could hold that Richmond fulfilled subparagraph (i) above, because the state of the law was uncertain during the critical year, and therefore the applicant should not now be denied an opportunity of arguing the merits of the application, simply because Mr McDonald at a subsequent time (beyond the 90-day time limit for the year 1981) looked at the matter differently. Further, it was the contention of counsel that the law regarding the merits of the case (whether the amount of interest should be taxable) had become more clear during the period of time after filing of the tax returns.

As I see it, the “circumstances” referenced in subparagraph (i) above go back to the “reasons” noted in subsection 167(1) of the Act. Plainly stated the reason the notice of objection to the assessment at issue had not been filed within the 90-day period was because during that 90-day period the taxpayer had no objection to the assessment. I do not accept as satisfactory the contention of the taxpayer that the review of the assessment by Mr McDonald after the 90-day period has any bearing on the responsibility of the applicant during the 90-day period; nor do I agree that there has been any major clarification of the law, and even if there had been, I fail to see the relevance to the point at issue. The basic argument of counsel for the applicant, therefore, could be rephrased as: “If Richmond had had an objection, it would have filed a notice of objection”. To accept that as fulfilling the condition precedent in subparagraph 167(5)(c)(i) of the Act, in my view, would negate the major purpose of that section, as I interpret it, which is to reinforce and require immediate, serious and virtually final consideration of the assessment when it is received. The judgment of the Federal Court of Appeal in Tic Toe Tours v MNR, [1981] CTC 2776; 81 DTC 660, certainly demonstrated that this court has the responsibility and authority to carefully examine the circumstances which impinged upon a lack of filing the notice of objection within that period of time, and when warranted, to grant appropriate relief. I do not read Tic Toe Tours, (supra), to cover a situation when the taxpayer did not intend to file such a notice of objection, because there was no objection to the assessment of tax.

The application is dismissed.

Application dismissed.