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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: In a situation where a Taxpayer late-filed T1 returns for XXXXXXXXXX , and, before the filing deadline for the XXXXXXXXXX T1 return (the relevant time), the Taxpayer was liable for late-filing penalties in respect of the T1 returns for XXXXXXXXXX but the penalties were not assessed, whether the penalty in respect of the XXXXXXXXXX T1 return, for repeated failure to file a T1 return under ss. 162(2) applies ?
Position: No.
Reasons: The condition under paragraph 162(2)(c) is not met because the penalties in respect of XXXXXXXXXX were not "payable", as they were not assessed at the relevant time.
Le 10 janvier 2003
Centre fiscal de Shawinigan-Sud Administration centrale
Service à la clientèle T1 Direction des décisions en impôt
Aide-Technique Section des réorganisations des sociétés
et de l'industries des ressources
À l'attention de Mme Danielle Gélinas Marc LeBlond
(613) 946-3261
2002-017870
XXXXXXXXXX
Le paragraphe 162(2) de la Loi de l'impôt sur le revenu
La présente est en réponse à votre lettre du 9 décembre 2002 dans laquelle vous demandez notre opinion concernant l'application du paragraphe 162(2) de la Loi de l'impôt sur le revenu dans la situation décrite ci-après. Comme vous l'avez demandé dans votre lettre, nous avons rédigé le corps de notre réponse en anglais.
Our opinion is based on the relevant facts of the situation which we understand as follows.
Facts
1. XXXXXXXXXX (hereinafter the "Taxpayer") lives in XXXXXXXXXX, Ontario.
2. The Taxpayer was requested to file income tax returns (hereinafter "T1") for the taxation years XXXXXXXXXX, by the Canada Custom and Revenue Agency (hereinafter the "CCRA"), on XXXXXXXXXX, respectively.
3. The CCRA issued demand notices (TX14-D) to the Taxpayer, pursuant to subsection 150(2) of the Income Tax Act (hereinafter the "Act"), to file T1 returns for the taxation years XXXXXXXXXX, on XXXXXXXXXX, respectively.
4. On XXXXXXXXXX, the CCRA arbitrarily assessed the Taxpayer's tax payable under Part I for XXXXXXXXXX, pursuant to subsections 152(4) and (7) of the Act. The assessment for the taxation year XXXXXXXXXX also included an amount in respect of the penalty for late-filing the XXXXXXXXXX T1 return, pursuant to subsection 162(1) of the Act. In respect of the assessment for XXXXXXXXXX, the CCRA assessed a penalty for the repeated failure to file a T1 return, pursuant to 162(2) of the Act.
5. On XXXXXXXXXX, the Taxpayer filed T1 returns for the taxation years XXXXXXXXXX.
6. On XXXXXXXXXX, the Taxpayer's tax payable under Part I of the Act for XXXXXXXXXX was reassessed, pursuant to subsection 152(4) of the Act, to reflect the T1 returns that were filed.
7. The Taxpayer's XXXXXXXXXX T1 returns were assessed XXXXXXXXXX, respectively. The assessment for the taxation year XXXXXXXXXX also included an amount in respect of the penalty for failing to file the XXXXXXXXXX T1 return, as and when required by subsection 150(1) of the Act, pursuant to subsection 162(1) of the Act.
Shawinigan Taxation Center Question
You request our interpretation regarding the application of the penalty for the repeated failure to file a return of income under subsection 162(2) of the Act, as it relates to the Taxpayer's XXXXXXXXXX T1 return.
The penalty for a first occurrence of failure to file a return of income under subsection 162(1) of the Act can vary from 5 % to 17 % of the unpaid tax payable under Part I of the Act (depending on the number of completed months the return is late). Generally, the subsequent occurrences of failure to file a return of income, within a period of four taxation years, can be subject to a higher penalty varying between 10 % and 50 % of unpaid tax payable under Part I of the Act (depending on the number of completed months the return is late), pursuant to subsection 162(2) of the Act.
The penalty for the repeated failure to file a return of income applies provided the conditions under paragraphs 162(2)(a), (b) and (c) of the Act are met. These conditions can be summarized as follows.
First it must be established that the taxpayer has failed to file a return of income for a particular taxation year within the deadline specified in subsection 150(1) of the Act. Generally, an individual's T1 return for a taxation year must be filed at the latest by April 30th of the following year, pursuant to subparagraph 150(1)(a)(i) of the Act. Therefore, filing a T1 return for a particular taxation year after April 30th of the following year generally constitutes a failure to file and the time of failure to file would be May 1st of that year.
Under the second condition, the CCRA must be able to prove having issued a demand for the return of income for the particular taxation year to the taxpayer pursuant to subsection 150(2) of the Act. Generally, this demand is made using form TX14-D.
Lastly, the penalty under subsection 162(2) of the Act, to apply to a particular taxation year, must be preceded by a penalty under subsection 162(1) or (2) of the Act (the previous penalty) for any of the three taxation years preceding the particular taxation year and the previous penalty must be payable before the time of failure to file the return of income for the particular taxation year.
A way to ensure that the third condition is met is to always assess late filing penalties under subsections 162(1) and (2) of the Act in respect of a taxation year before the filing deadline for the return of income for the next taxation year.
In the Taxpayer's situation, all the conditions to apply subsection 162(2) of the Act were met except the third. The first and second conditions were met as (1) The XXXXXXXXXX T1 return was filed on XXXXXXXXXX , well past the applicable filing deadline, April 30, XXXXXXXXXX, under subparagraph 150(1)(d)(i) of the Act and (2) The CCRA issued a demand for the XXXXXXXXXX T1 return by notice TX14-D on XXXXXXXXXX.
However, the third condition was not met as no penalty was payable by the Taxpayer, under subsections 162(1) or (2) of the Act, in respect of the XXXXXXXXXX T1 returns, before May 1, XXXXXXXXXX, the time of failure to file the XXXXXXXXXX T1 return. Late filing penalties were payable in respect of the years XXXXXXXXXX, pursuant to subsection 162(1) of the Act, but not before XXXXXXXXXX, since the penalties were assessed on XXXXXXXXXX, respectively.
We are of the view that the phrase "a penalty was payable" in paragraph 162(2)(c) of the Act should be interpreted as meaning "a penalty was assessed". The Technical Notes of the Department of Finance for subsection 162(2) of the Act clearly indicates this is the intended interpretation. Furthermore, this interpretation was adopted by the Tax Court of Canada in the informal procedure decision M. Wichartz v. The Queen, 96 DTC 3251.
In Wicharzt, the taxpayer contested the penalty raised for the repeated failure to file a T1 return, pursuant to subsection 162(2) of the Act, in respect of the 1988 taxation year. In that case, the taxpayer late filed its T1 returns for 1984 to 1988, and, the late filing penalties for the 1984, 1985, 1986 and 1987 T1 returns were assessed on June 2, 1989, hence, after the 1988 T1 return should have been filed, namely April 30, 1989.
Judge Sobier decided, in the Wicharzt case, by analogy to when income taxes under the Act become payable, that a penalty becomes payable when it has been assessed. We reproduce below the grounds for Judge Sobier's decision.
An analogy to liability for income taxes might be helpful. It is clear that an assessment does not create liability for income tax. The provisions of the Act create the liability for that tax. Similarly the Act creates the liability for the penalty. Simply because the taxpayer is liable for a penalty upon failure to file a return, it does not necessarily follow that the penalty is payable at that time.
Paragraph 162(2)(c) of the Act speaks of the penalty being payable "before the time of failure". While the Act creates the liability for the penalty at the time of failure, it becomes payable by reason of an assessment. The definition of "tax payable" in subsection 248(2) of the Act shows that "tax payable" means that the taxes are payable by a taxpayer "as fixed by an assessment". While the phrase tax payable has no bearing on the liability for tax, it is important when dealing with the question of when this liability must be paid. It must be paid after an assessment has been made and not before.
The same reasoning would seem reasonable here. Although the appellant was liable for the penalty with respect to the three taxation years preceding, such penalties were not payable by her until after the assessment, namely June 2, 1989, while the failure to file occurred on April 30, 1989.
[emphasis added]
In summary, the penalty for the repeated failure to file a return of income, under subsection 162(2) of the Act, does not apply in relation to the Taxpayer's XXXXXXXXXX T1 return since the third condition was not met, because on April 30, XXXXXXXXXX, the day before the time of failure to file the XXXXXXXXXX T1 return, no penalty was payable by the Taxpayer (as none had been assessed) in respect of its XXXXXXXXXX taxation years.
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Nous espérons que ces commentaires vous seront utiles. Si vous désirez des informations additionnelles concernant le contenu du présent document, n'hésitez pas à communiquer avec nous.
Maurice Bisson, CGA
Gestionnaire
Section des réorganisations des sociétés
et de l'industrie des ressources
Division des réorganisations des sociétés
et de l'industrie des ressources
Direction des décisions en impôt
Direction générale de la politique
et de la législation
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