1 May 1998 GST/HST Interpretation 1998-05-01[1] - Penalty and Interest on Instalments

                                                                        GST Returns Processing Section
Business Returns Processing Division
Assessment and Collections Branch

This is further to your E-Mail of January 12, 1998, regarding the application of penalty and interest to instalments.

Facts

An annual filer with a reporting period of October 1, 1996, to September 30, 1997, was required to make quarterly instalments on January 31, 1997, April 30, 1997, July 31, 1997, and October 31, 1997, on account of the net tax for the reporting period. In this particular case, the due date of the return and the net tax remittable for the reporting period was December 31, 1997.

The registrant made three instalments of XXXXX on April 16, 1997, July 14, 1997, and October 21, 1997, on account of the net tax for the reporting period. The registrant's return for the reporting period was filed on November 10, 1997, and based on the registrant's instalment base for the reporting period, it was determined that four instalments of XXXXX were in fact required to be made.

A refund of a net tax overpayment of XXXXX was paid to the registrant on November 14, 1997, after the penalty and interest balance on that date of XXXXX had been deducted. Offsetting credit interest continued to be calculated on November 15, 1997, in respect of the instalments despite the fact that a refund cheque had been issued, leaving a credit on the account. On December 3, 1997, the offsetting credit interest reached an amount that would have completely offset the penalty and interest of XXXXX that was deducted from the cheque. In other words, had the refund been paid to the registrant on December 3, 1997, the XXXXX in penalty and interest would not have been deducted from the refund cheque.

You indicate that this has previously not been an issue because a refund of an overpayment of net tax resulting from instalments would not be paid before the due date of the return for the reporting period.

Interpretation Requested

You have requested up to which of the following dates offsetting credit interest on instalments should be calculated:

•   the date on which the return is filed,

•   the date on which the refund is paid,

•   the due date of the return, or

•   another date.

Interpretation Given

Subsection 280(2) of the Excise Tax Act (ETA) provides that notwithstanding subsection 280(1), if a person fails to pay all of an instalment payable by the person under subsection 237(1), that person shall pay, on the amount of the unpaid instalment, a penalty of 6% per year, and interest at the prescribed rate. Penalty and interest is to be computed on this amount beginning on the first day following the due date of the instalment and ending on the earlier of the date on which the total of the unpaid instalment amount, penalty and interest are paid, and the due date of the net tax remittable on account of which the instalment was payable.

However, subsection 280(3) of the ETA provides that notwithstanding subsection 280(2), the total penalty and interest payable by a person under subsection 280(2) for the period beginning on the first day of the reporting period for which an instalment on account of tax is payable and ending on the due date of the net tax on account of which the instalment was payable is required shall not exceed the amount, if any, by which

(a) the total of the penalty and interest that would be payable under subsection 280(2) for the period by the person if no amount were paid by the person on account of instalments payable in the period exceeds

(b) the total of all amounts each of which is an amount of interest at the prescribed rate plus 6% per year, calculated on an instalment of tax paid in the period beginning on the day of that payment and ending on the date on or before which the net tax the instalment was payable is required to be remitted. Offsetting instalment credit interest under paragraph 280(3)(b) of the ETA is clearly required to be calculated up to the due date of the net tax remittance for the reporting period on instalments made on account of that net tax. In the particular situation you have presented, this means that offsetting credit interest should have been calculated up to December 31, 1997. As the penalty and interest calculated up to December 31, 1997, if no instalments had been made (280(3)(a)) did not exceed the total credit interest calculated up to this date on instalments that were made (280(3)(b)), penalty and interest was not applicable and should not have been deducted from the amount of the refund. A refund cheque of XXXXX should have been issued, representing the difference between the total amount of the instalments made and the total amount of the instalments required for the reporting period.

Although offsetting credit interest must be calculated on instalments paid up to the due date of the remittance of the net tax for the reporting period, this does not mean that a refund of any overpayment cannot be issued before this date (in fact, subsection 230(1) requires the refund to be issued with all due dispatch once the applicable conditions have been met). If the return is filed at a time before the due date of the net tax remittance, as in the case you have outlined, it is simply a matter of calculating at that time what the amount of offsetting credit interest would be on the due date of the net tax remittance and providing the person with the benefit of that amount to the extent that it offsets the penalty and interest on the instalments.

Finally, we should emphasize that offsetting credit interest under paragraph 280(3)(b) of the ETA is required to be calculated up to the due date of the net tax remittance for the reporting period as opposed to the due date of the return for the reporting period. Although the due date of the remittance generally coincides with the due date of the return for the reporting period, this is not always the case. Specifically, under subparagraph 238(1)(a)(ii) of the ETA, the due date of the return is June 15 for a registrant who is an individual with a fiscal year reporting period corresponding to the calendar year and who, for income tax purposes, carried on a business in the year and had a filing due date of June 15 of the following year. However, under subsection 228(2) of the ETA, the due date of the net tax remittance is April 30 of the year following the end of the reporting period and it is up to this date that the offsetting credit interest should be calculated.

Should you require any further information regarding this matter, please do not hesitate to contact me at (613) 952-8813.

Yours truly,

Patrick McKinnon
A/Senior Rulings Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate