Principal Issues: In the given situation, where a corporate taxpayer's (Opco) tax instalments pursuant to 157(1) for January and February 2004 are late, the March 2004 instalment becomes due on March 31st (the 3 instalments together is referred to below as Opco's liability), and the reassessment on March 30, 2004 of its T2- 2002 gives rise to an overpayment pursuant to 164(7) of an amount in excess of Opco's liability, (1) whether the CRA will apply the overpayment to Opco's liability? (2) if Opco makes the request, whether the CRA will accept the amount representing the amount of the overpayment in excess of Opco's liability as prepaid instalments? (3) for the purpose of computing interest charges on the late instalments pursuant to the contra interest (offset interest) method under 161(2.2), will the contra credit interest computation start date under 161(2.2)(b) be the first day of year 2004 or the date that is 30 days after filing the T2-2002? and (4) whether any interest is payable to Opco on its overpayment for the year 2002 under 164(3)?
Position: (1) and (2) Yes. (3) Neither, the contra credit interest computation start date under 161(2.2)(b) is the date of the day immediately following the day the instalment prepayment is made which, in the given situation, would be the day after the overpayment was assessed.
Reasons: (1) and (2) The law and CRA's practice (3) 161(2.2)(b) provides that the contra credit interest is the interest computed under 164(3), applied making the presumptions under 161(2.2)(b)(i) to (iv). In this context, 164(3) applies to the refund created by the application of the presumption under 161(2.2)(b)(i) in respect of the taxation year 2004 (not the refund of the overpayment related to a prior year, such as in this case, the refund in respect of the year 2002). 161(2.2) and 164(3) each provide a different period for the computation of interest. But, the presumption under 161(2.2)(b)(iv) in effect sets the interest computation period start date under 161(2.2) as the start date for the application of 164(3) i.e. the first day of the year. However, the contra credit interest computation start date is the first day of the year only if the instalment prepayment is made before begins the instalment year to which it is to be applied. Otherwise, the contra credit interest computation start date corresponds to the date of the day immediately after the day the instalment prepayment is made. (4) The interest computation period begins and ends on the same day (March 30, 2004) pursuant to 164(3)(d) and 164(5)(j)(k)(l)