25 September 2000 External T.I. 2000-0044415 - Refund Interest - M&P Deduction

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.

Principal Issues: Response to question for the 2000 CTF Conference concerning the recent decision of the Tax Court of Canada in the Irving Oil Limited case. In particular, as a result of this decision, does the CCRA accept that refund interest arising in respect of an overpayment of income tax may constitute active business income to be included in adjusted business income for M & P purposes?

Position: No.

Reasons: An appeal has been filed to the Federal Court of Appeal in respect of the above decision. The CCRA remains of the view that the above refund interest constitutes income from property.

Q & A for the 2000 Canadian Tax Foundation Conference

Re: Irving Oil Limited case (2000 DTC)

The corporation included refund interest arising in respect of an overpayment of income tax in its adjusted business income for purposes of the M & P deduction. Upon appeal to the Tax Court of Canada of the Minister's reassessment to treat such interest as income from property, the Court was of the view that the corporation had made the overpayment of income tax out of business profits that would otherwise have been used in its business. The Court went on to find that the refund interest in question was active business income and was to be included in adjusted business income, for purposes of calculating the corporation's manufacturing and processing profit deduction.

Question

Does the CCRA accept that, depending on the facts, refund interest can be included in active business income or adjusted business income?

Response

No. The CCRA does not accept that refund interest from overpayment of income tax can be included in active business income or adjusted business income. It is our view that such refund interest constitutes income from property. The scheme of the Income Tax Act is such that refund interest on income tax overpayments is not received in the course of carrying on an active business. It is received after the business activity is completed and income tax is assessed on the income from the business activity.

The decision of the Tax Court of Canada in the Irving Oil Limited case has raised doubt about our position. In the decision from the Court, Judge Rip decided that the refund interest received by the taxpayer was business income. The Judge conducted a "scheme of the Act" analysis and concluded that the refund interest will be interest from a business if the origin of the funds that was used to pay the related income tax overpayment was the business of the taxpayer, and if the "probable intended use" of those funds (in the absence of an assessment) would have been the business of the taxpayer.

The reasoning of Judge Rip is consistent with that of Judge Bowman in Munich Reinsurance Co. in which the taxpayer's appeal was dismissed. Both judges are of the view that it is a question of fact whether refund interest is income from a taxpayer's business, and both judges conclude that, on the facts before them, the refund interest is income from the taxpayer's business.

This case is important because refund interest received by companies (except companies that have resource activity) would be taxed at the lower income tax rate that applies to M & P companies.

At the time when companies in the mining and oil and gas sectors were receiving large amounts of refund interest on income tax overpayments and similar non-deductible payments, a specific legislative amendment was made to ensure that such companies would not be able to increase their M & P deduction with respect to such refund interest. These amendments were not to be construed as implying that the receipt of refund interest previously had the result of increasing entitlement to the M & P deduction.

In light of the uncertainty raised by the decision of the Tax Court of Canada, we are seeking clarification of the issue from the Federal Court of Appeal.

2000-004441
A.A. Cameron
September 25, 2000