8 October 1998 GST/HST Interpretation HQR0000834 - Application of Section 237

In reply to the facts contained in your e-mail of September 4/97 concerning the calculation of penalty and interest on instalments where an entity changes its fiscal year end.

Facts

XXXXX net tax = $5,600 for fiscal year 1995

•   In 1996 the registrant predicts the net tax to be owing as $4,000 which means there will be quarterly instalments of $1,000.

•   The registrant makes instalment payments in March and June of $800.

•   In June 1996 the registrant changes the fiscal year end to June 30 and files a return for January 1996 to June 30th 1996 for $2,200 net tax.

Legislative Analysis

General - The calculation of the instalment base for the current fiscal year is the lesser of two amounts (generally the net tax for the prior year or the estimated net tax for the current year). The first part of subsection 237(2)11 deals with the net tax amount for the current reporting period. Since this amount is an unknown quantum until the reporting period has been completed, the practice is to take an informed estimate so that instalment payments can be estimated for the reporting period. For example, a registrant who anticipates net tax to decline in the next year may calculate instalment payments on an estimate of the future net tax rather than the actual amount of the preceding year's net tax.

Subsection 280(2) deals with the situation of a person who fails to pay all, or a portion, of an instalment payable under subsection 237(1) within the time specified. Since the method of calculation of an instalment concerns the lesser of two (2) amounts, one of which is known (the previous year's net tax) the other amount is unknown (the current year's aggregate net tax during the course of the year) this provision cannot become operative until the completion of the current year, when the net tax for the year becomes factual information. It is at this point, where subsection 280(2) becomes operative. During the interim period where factual information is absent such that the Department cannot ascertain which is the lesser amount, a registrant cannot be assessed penalty and interest.

To illustrate, a registrant in the previous year has a net tax of $12,000 but in the subsequent year estimates net tax to be $1,200 and at the completion of the current year the net tax turns out to be $1,400. The preceding year, for which we have a definite net tax figure to work from, indicates that the registrant should be making instalment payments of $3,000. However, the current year is unknown and the registrant decides not to make any payments as it is estimated that the instalment base should be less than $1,500/22. At the end of the fiscal year the registrant remits the correct net tax. No penalty and interest can be applied since the instalment base calculation is the lesser of the two amounts, one of which has been deemed to be nil. As a corollary to this example, if a business was subject to wide variations in net tax such that a relatively large amount was due in one year and virtually none in alternate years, the legislation would support this business continually paying net tax only once per year without attracting penalty and interest.

Application to Facts Submitted - The general application of this provision becomes complex due to the short period from January to June 30th 1996. When the new fiscal year is declared in June 1996, the appropriate interpretation would require subsection 237(2) to be read in the following manner:

•   the formula of subpara 237(a)(i) is inoperative since the reference to subsection 248(3) requires that the annual filing election ceases to have application, (or after April 1, 1997, a person must cease to be an annual filer)

•   under subpara. 237(2)(a)(ii) the net tax for the particular reporting period in this case is the resultant short period from January to June 30th 1996, when the fiscal year has changed is $2200,

•   the net tax for twelve month reporting period referred to as "C" under para 237(2)(b) is $5600 for the year 1995,

•   there is a complete twelve month period for 1995 the formula C x 365D would be completed as $5600 x 365/365 = $5600

•   subsection 237(2) requires the instalment base to be the lesser amount of the above amounts, which in this case is $2200,

•   subsection 237(1) requires instalments of 1/4 of the instalment base, which in this case is $22004 = $550

•   Since instalments of $800 were made which are in excess of the required $550, the under payment between the instalment and the net tax for the period will not attract penalty and interest.

The person now has a new fiscal year beginning after June 30, 1996 and the instalment payments may be required for the new fiscal year. In this case the appropriate interpretation for the calculation of the instalment base would be:

•   similar to the above, the formula of subpara 237(a)(i) is inoperative since it requires the election made under subsection 248(3) to cease having application,

•   under subpara. 237(2)(a)(ii) the net tax for the particular reporting period in this case is the period from July 1st 1996, to June 30th 1997,

•   the formula under 237(2)(b) will take into consideration both the net tax for the twelve month period for 1995 ($5600) plus the immediately preceding period which is the short period of January to June 30th 1996, ($2200) which will result in an instalment base of C x 365/D or [($5600 + $2200) ÷ 365 (365 + 183)] = $5196 (rounded)

•   Subsection 237(2) requires the instalment base to be the lesser amount of the above amounts which can only be determined once the net tax for fiscal year 96/97 becomes known.

Should you have any questions or require clarification on any of the contents of this memorandum, please contact me at 954-7931.

David Crawford
General Operations Unit
General Operations & Border Issues Division

NCS Subject Code(s):

1. E-mail of Sept 497 from P. Kckinnon to M.Boivin

2. Research

•   Q & A 8b.40

•   Q & A 6a.8

•   Explanatory notes