31 August 2000 Internal T.I. 2000-0036177 - CAL. OF INTEREST-TRANSFER OF REFUND

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

DOCUMENT TYPE: CCRA Documents; (Forms & Guides, Internal Queries, Appeals Referrals)

Principal Issues: Calculation of refund interest and instalment interest when overpayment transferred to another taxpayer's instalment account

Position: Overpayment and accumulated refund interest transferred effective on date of notice of assessment or reassessment.

Reasons: Subsection 164(1) only requires refund of overpayment to be made on or after date of notice of assessment.

		August 31, 2000

	Business Returns Processing Division	HEADQUARTERS
	25 McArthur Road	Wayne Antle
(613) 957-2102
	Attention: Hazel Stewart
		2000-003617

Calculation of Interest on Transfer of Refund

This is in response to your letter of July 5, 2000 concerning the calculation of interest when an overpayment of tax is transferred to another taxpayer's instalment account.

XXXXXXXXXX incurred a non-capital loss in XXXXXXXXXX, and requested that the loss be carried back and deducted against taxable income for its XXXXXXXXXX taxation years. XXXXXXXXXX further requested that the resulting overpayment of tax for those years be transferred to the instalment accounts of certain affiliated corporations. XXXXXXXXXX filed its XXXXXXXXXX income tax return on its filing due date of XXXXXXXXXX. The Canada Customs and Revenue Agency ("CCRA") delayed processing the carryback request because the XXXXXXXXXX returns of the company were under audit by the XXXXXXXXXX Tax Services Office. The CCRA indicated to the company that the XXXXXXXXXX returns would have been reassessed by XXXXXXXXXX if there had been no delay in processing the requests. XXXXXXXXXX feels that instalment interest should be calculated as if the overpayments were transferred on XXXXXXXXXX. The company argues that it was entitled to refund interest starting on this date and, therefore, the underlying refund must exist at this time for the purpose of making a transfer to another account. In your view, refund interest should accrue on the overpayments from XXXXXXXXXX until the dates of the reassessments, at which time the overpayments and associated refund interest, would be transferred to the affiliated corporations' instalment accounts.

Our Comments

Where a taxpayer's return is filed within three years from the end of the relevant taxation year, subsection 164(1) of the Income Tax Act (the "Act") allows the Agency to refund an overpayment of tax to a taxpayer on or after the mailing of a notice of assessment or reassessment. This provision requires the Agency to issue such a refund after a notice of assessment or reassessment is mailed, where the taxpayer has made written application before the return's statute-barred date. Instead of issuing a refund, the Agency may, pursuant to subsection 164(2) of the Act, apply the refund against another liability of the taxpayer.

Subsection 164(3) of the Act calculates interest on an overpayment of tax for the period beginning on the latest of:

• the day that is 120 days after the corporation's year-end,
• the date that the overpayment arose, and
• where the return was late filed, the date the return was filed,

and ending when the overpayment is refunded or applied against another liability of the taxpayer.

In the case of a loss carryback, subsection 164(5) of the Act deems the portion of the overpayment related to the loss carryback to have arisen on the latest of:

• the first day immediately following the year in which the loss arose,
• the day on which the tax return for the loss year was filed,
• the day on which an amended return or prescribed form was filed for the loss year, and
• the day on which a written request is made to carry back a loss from a subsequent year.

Subsections 161(2) and (2.1) of the Act charge instalment interest on late or deficient instalment payments, where the interest exceeds $25. This interest may be reduced if instalment payments are overpaid or paid early.

It is Agency policy, as outlined in the 1999 Corporation Instalment Guide, to allow a taxpayer to transfer an overpayment of tax to another corporation's instalment account. In this case, the overpayment, and the accumulated refund interest, would be transferred on the date of the notice of assessment or reassessment.

In your correspondence, you expressed concern that certain jurisprudence does not support our policy, as outlined in the above guide. In particular, you cite Koenig v. R (97 DTC 3281) and Munich Reinsurance Company (Canada Branch) v. MNR (91 DTC 1137). In the Munich case, Rip, T.C.J states that "a right to a refund arises....on the day that a return is filed". This is stated in the context of determining whether a taxpayer who overpays his instalments has a right to receive refund interest. In the Koenig case, the issue was whether interest on a refund for one year could be applied against a liability of the taxpayer for another year. This issue was addressed by legislation effective for 2000 and later years. New subsection 161.1 enables a corporation to avoid paying non-deductible arrears interest for a period for which refund interest is being calculated in the corporation's favour in respect of an equal but opposite underlying balance. The Koenig case, and the new legislation, do not address the calculation of interest where an overpayment is transferred to the instalment account of another taxpayer.

In our view, pursuant to subsection 164(1) of the Act, an overpayment of tax can only be refunded, or applied against another account, on or after the mailing of a notice of assessment or reassessment. Accordingly, the earliest time that an overpayment can be transferred to another instalment account is when the notice of assessment or reassessment is issued. Subsection 164(5) of the Act would deem XXXXXXXXXX overpayment of tax to have arisen on XXXXXXXXXX being the date that the XXXXXXXXXX return was filed. Subsection 164(3) would calculate refund interest on the overpayment for the period from XXXXXXXXXX until the overpayment was transferred to the affiliated corporations' instalment accounts. The effective interest dates for calculating the affiliated corporations' instalment interest would be the date of the transfers.

Based on our review of the legislation, as outlined above, we agree with your view, and with the policy on transfers of overpayments as enunciated in the 1999 Corporation Instalment Guide.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 3 -