BNS – Federal Court of Appeal finds that interest on an audit adjustment accrued up to the time that the taxpayer, learning of the adjustment, requested a loss carryback to offset it

In 2015, the taxpayer Bank requested to carry back $54 million of non-capital loss from its 2008 taxation year to its 2006 taxation year 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 (before application of the loss carryback) for the period of approximately eight years ending, pursuant to s. 161(7)(b)(iv), with the date of the Bank’s carryback request, rather than (pursuant to s. 161(7)(b)(ii)) with the return filing date for the loss year. The Bank submitted that s. 161(7)(b)(iv) was inapplicable because the reassessment of its 2006 year did not occur “as a consequence of [its carryback] request” as required by s. 161(7)(b)(iv) but “[r]ather, the reassessment was made in order to process the audit adjustment”.

The various reasons of Woods JA for rejecting the Bank’s position included:

• Given that “Parliament seeks certainty, predictability and fairness in tax legislation … [i]f Parliament did not intend to impose interest when a loss carryback is claimed as a result of an audit adjustment, it is likely that Parliament would have provided for this with explicit language”.
• The Bank’s position could produce anomalous results, e.g., if the Minister implemented the audit adjustment and the loss carryback in two separate reassessments rather than one, the “interest clock” would continue until the loss carryback was requested, whereas with a single reassessment, the “interest clock” would stop when the return for the loss year was filed: “There is no principled reason why the issuance of one or two reassessments should lead to diverse outcomes …”.
• It was “likely that Parliament knew that subparagraph (b)(iv) could function in a manner similar to a penalty … [and] that substantial interest could accrue under subparagraph (b)(iv) if the carryback request resulted from an audit”.

It also may be of interest that, in the course of dismissing a Bank argument not summarized above, Woods JA indicated that the “Minister has the right to reject a taxpayer’s request for a loss carryback” to offset an audit adjustment.

Neal Armstrong. Summaries of Bank of Nova Scotia v. Canada, 2024 FCA 192 under s. 161(7)(b)(iv), s. 111(1)(a), and Statutory Interpretation – French and English Version.