Gordon Yr Allen v. Minister of National Revenue, [1981] CTC 2107, 81 DTC 104

D E Taylor:—This is an appeal heard in Toronto, Ontario, on December 9, 1980, against an income tax assessment for the year 1976, in which the Minister of National Revenue included in the taxable income of the appellant amounts of $900.08 and $88.61 as interest on instalments, and interest on arrears of tax respectively. At all times material to the appeal, the appellant was the president of a company known as Osborne Electric Company Limited (“the Company”). The appellant’s income tax returns showed the following for the year in question and certain previous years:

In the 1976 taxation year the appellant’s remuneration from the Company was in the amount of $80,750, and this was less than 75% of his total income in the amount of $113,290.45. In the 1976 taxation year, the amount of tax withheld was $32,500. The amount withheld in the year did not cover the entire amount of tax payable by the appellant for the year. In assessing the appellant, the respondent relied, inter alia, upon subsections 153(2), 156(1), 156(3), 161(1), 161(2) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and upon Part XLIII of the Income Tax Regulations.

Contentions

For the appellant:

— I had more than sufficient income tax deducted at the source and remitted (monthly) instead of making quarterly payments;

— The department actually owes me (interest) money;

— My salary is credited (to my drawings account) as at December 31 of each year.

For the respondent:

— In the circumstances, the appellant is required to make further payments on account of the remainder of his tax liability by way of interim instalments of tax on or before April 30, 1977;

— Interest is required to be paid in respect of unpaid or tardy instalments;

— For this purpose, the appellant is deemed to be liable for instalments computed on the basis of the lower of his actual tax payable for the taxation year or the preceding taxation year;

— The appellant did not pay any of the instalments of tax and consequently, interest is required to be paid on the balance of tax outstanding, as well as the arrears of instalments;

— Tax in the amount of $8,293.18 had not been paid by the time the statutory delay for the filing of the return of the appellant of income for the 1976 taxation year — that is April 30, 1977 — and the arrears interest in the amount of $88.61 is correctly assessed in accordance with subsection 161(1) of the Income Tax Act;

— The appellant failed to pay interim instalments of his tax when due as required by subsection 156(1) of the Income Tax Act, and the instalment interest in the amount of $900.08 assessed by the respondent pursuant to subsection 161 (2) of the Income Tax Act is properly payable. Evidence

The appellant testified with regard to the way he credited and withdrew the “company income” amounts, and the reasons for which he remitted by way of tax deductions at source — amounts designed to pay his income tax in advance. Essentially, the decision to award a salary ($80,750 in the year in question) was not made until (or after) the end of the year when the approximate net income earned by the Company and the relevant “cash position” could be ascertained. In simple terms, the appellant’s evidence was that he could not realistically determine the amount of his income until the end of the year, but nevertheless paid tax on a monthly basis assuming that his income would be a fairly substantial amount. Subsection 256(1) of the Act is of critical importance in this appeal and it reads:

Other individuals.

(1) Subject to section 156.1, every individual, other than one to whom subsection

153(2) or section 155 applies, shall pay to the Receiver General of Canada

(a) on or before March 31, June 30, September 30 and December 31 respectively, in each taxation year, an amount equal to % of

(1) the amount estimated by the individual to be the tax payable under this Part by him for the year, or

(ii) his instalment base for the immediately preceding taxation year, and

(b) on or before April 30 in the next year, the remainder of his tax as estimated under section 151.

Argument

Counsel both agreed that there was little in the way of jurisprudence available on the subject matter under appeal but they proposed that the relevant section of the Act should be viewed by the Board with these differing perspectives in mind.

For the appellant:

Subsection 156(1) of the Act provided an “option” to a taxpayer in the position of Mr Allen to pay instalments either on the amount estimated by him to be the tax payable, or to pay according to the instalment base for the preceding year. This appellant had chosen the first option, and made a realistic estimate (calling for instalments totalling $32,500 over the year) even though, because of the uncertain nature of the Company business, he was not assured of any such total income. It was not significant that in practice his “company income” has been about the same ($80,750) for several years. He was under no compulsion as a result of the provisions of subsection 156(1) of the Act to use or anticipate that amount for the year in question. Counsel noted that the “estimate” permitted under subsection 156(1) should be bona fide, and not unreasonable.

For the respondent:

Subsection 156(1) of the Act provided an option but a proper interpretation of the section would indicate that as long as the preceding years instalment base was used, a taxpayer could not be charged interest whereas, if the “estimate” method was used (subparagraph 156(1 )(a)(i)), the taxpayer took a risk that if the estimate proved to be low, he could be charged interest. Counsel also noted that no evidence had been brought forward by the appellant to show that the balance of $8,293.18 had been paid by April 30, 1977, and therefore the Board should uphold the assessment at least to the extent of the $88.61 interest charge on tax arrears.

Findings

First, the Board notes from the assessment dated July 4, 1977 that, in addition to the amounts of interest ($900.08 and $88.61) at issue in this appeal, the amount of tax only was assessed at $58,988.10. The total amount of tax paid by April 30, 1977 according to the appellant’s own return was $50,694.92 — a difference of $8,293.18. Since that amount has not been placed in issue in this appeal, the Board must conclude it was owing and unpaid at April 30, 1977, and the interest of $88.61 on the tax arrears was properly charged under subsection 161(1) of the Act.

Turning to the other point at issue — the interest on the instalments — I would note a recent decision of this Board for some general comments relevant to the question of “bonus” and “salary”: G W Dorman Pulp Chip Company Ltd v MNR, [1981] CTC 2005; 81 DTC 18. While I do not recall that reference to subsection 161 (4) was made at the hearing of this appeal, in my view that section throws considerable light on the matter. Subsection 161(4) reads as follows:

(4) Limitation respecting individuals. For the purposes of subsection (2), where an individual is required to pay a part or instalment of tax for a taxation year computed by reference to

(a) the amount estimated by him to be the tax payable under this Part by him for the year, or

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

he shall be deemed to have been liable to pay a part or instalment computed by reference to the lesser of

(c) the tax payable under this Part by him for the year, and

(d) his instalment base for the immediately preceding taxation year.

As I read the above-referenced section, individuals coming under the provisions of subsection 156(1) of the Act run the risk of an interest charge when instalments made do not equal or exceed the income tax paid for the previous year. In the instant case the amount of tax for the year 1975 was clearly in excess of the $32,500 remitted during the year 1976, leaving aside the question of whether or not the “tax deductions at source” (which the $32,500 represented) should be equated with “instalment payments” for purposes of the relevant sections of the Act. When the proportionate situation between “company income” and “other income” reached in 1975 placed this taxpayer outside the limits of subsection 153(2) of the Act, the taxpayer was subject to the provisions of subsection 156(1 ) of the Act for the year 1976.

Decision

The appeal is dismissed.

Appeal dismissed.