Bank of Nova Scotia – Tax Court of Canada finds that interest accrued from the time of “failure” to report income even though a proximate year’s loss had been available for offset

On March 12, 2015, the Bank wrote to the Minister to ask that $54 million of non-capital loss from its 2008 taxation year be carried back to its 2006 taxation year (ending October 31, 2006) to offset the increase to its income for the 2006 year that would occur when the Minister implemented a concurrent settlement agreement regarding a transfer-pricing audit. The Minister did so, but calculated interest on the increased balance of tax owing for the Bank’s 2006 year up to the date of the written request pursuant to s. 161(7)(b)(iv) (i.e., for the period of around eight years up to March 12, 2015). Thus, interest was caculated on a balance that was not ultimately owed.

Wong J rejected the Bank’s submission that, pursuant to s. 161(7)(b)(iv), such interest should not have accrued after the filing due date for the 2008 loss year return (i.e., April 28, 2009), “that Parliament did not intend for a taxpayer to be subject to interest during periods when a loss was available for carryback but the taxpayer does not know to do so until the conclusion of an audit” and that the loss carryback was as "a consequence of" the CRA audit rather than the Bank's carryback request. She considered the wording of s. 161(7)(b) to be unambiguous, but was fortified in her conclusion by her view that the scheme of the Act is to establish a “self-assessing income tax system under … which the onus is put on the taxpayer,” stating in this regard that:

The Act contemplates retroactive/retrospective liability following reassessment in a self-assessing system. Subsection 152(3) says that liability for tax is unaffected by an incorrect/incomplete assessment or by the fact that no assessment was made. In other words, one is liable for tax owing regardless of the assessment status.

Thus, she considered that the Bank owed tax from the moment it filed its 2006 return on a basis that failed to recognize the income later subject to the transfer-pricing adjustment, and the subsequent non-capital loss could not be recognized until, many years later, that need for its application was identified.

She stated that an Alberta Court of Appeal decision going the other way on a similar provincial provision was “either wrongly decided” or inapplicable federally.

Neal Armstrong. Summary of The Bank of Nova Scotia v. The Queen, 2021 TCC 70 under s. 161(7)(b)(iv).