21 February 1997 Internal T.I. 9636526 - INTEREST ON DEFICIT INSTALMENTS

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:

whether client should have been assessed interest and penalties for insufficient instalments

Position:

yes

Reasons:

several issues discussed

            February 21, 1997

      Appeals Branch    HEADQUARTERS
      Income Tax Appeals      Sandra Short
(613) 957-8953
      Attention:  Ken Berini
            963652

Interest on Deficit Instalments

This is in reply to your memorandum dated October 28, 1996, which asks for our comments in a situation concerning an appeal against instalment interest and penalties.

In brief, the client received notices requesting instalment payments for

XXXXXXXXXX

but the transitional rules announced in the April 1993 Budget Supplementary Information applied so that the combined XXXXXXXXXX instalments only had to cover one-half of the year's total instalment liability, rather than the full amount. The "prior year" method (156(1)(a)(ii)) was used by the Department because it resulted in the lowest instalment request when compared to the "current year" method (156(1)(a)(i)) and the instalment reminder amount (156(1)(b)).

The client remitted $XXXXXXXXXX each quarter. Interest was charged on the insufficient instalments (as well as a penalty and arrears interest). The client's appeal relates to the interest and penalties charged on deficient instalments.

The client's representative has made several arguments, summarized, as we understand them, below:

1.The wording of the Act implicitly requires that account be taken, or credit given, for amounts withheld at source from a taxpayer during a particular year under subsection 153(1). Withholdings in the particular year reduce the amount required to be paid by instalments, whether the taxpayer is paying instalments under the "current year" method (156(1)(a)(i)) or the prior year method (156(1)(a)(ii)). Alternatively, the representative appears to be arguing that amounts withheld under subsection 153(1) of the Act are "instalments."

2.If the Act is ambiguous or otherwise unclear with regards to the arguments made in 1, the Department's position that Regulation 5300 requires instalments to be calculated by reference to a preceding taxation year be based on actual total tax liability with no allowance for amounts withheld at source, is contrary to the rules set out for the interpretation of tax statutes set out by the Supreme Court of Canada in the case of Corporation Notre-Dame de Bon-Secours v. Communauté urbaine de Québec and City of Québec, (1994) 3 S.C.R.

3.If the above two arguments fail, which the representative does not concede should happen, then the Minister should exercise the discretion available under the fairness legislation to cancel all penalty and interest charges because of the Department's failure to adequately advise the public of its change in administrative policy. The policy referred to by the representative is the one which, for years prior to 1992, permitted taxpayers, when calculating instalments due under the prior-year option, to reduce taxes payable by the greater of taxes withheld at source in that prior year or by an estimate of current year withholdings (the "greater than" policy). The greater than policy was rescinded with the introduction of the Instalment Reminder System in 1992.

Our Comments

We believe that the provisions of subparagraph 156(1)(a)(ii) of the Act - the "prior year" method - required the client to make instalments of $XXXXXXXXXX in each quarter and, therefore, an interest charge for insufficient instalments is warranted. A calculation under either subparagraph 156(1)(a)(i) or paragraph 156(1)(b) would have resulted in higher instalments due.

We disagree that the Act legislatively requires, when determining the amount of instalments required under subsection 156(1), that instalments be reduced by amounts withheld in accordance with subsection 153(1) of the Act. We maintain that it is Departmental practice which permits reducing instalment requirements by the amount of source withholdings. We believe that the Act does make a distinction between an "instalment" of tax and other types of payments on account of Part I tax where such distinction is necessary (those sections relating to withholding, requirements to make instalments, payments of remainder, calculation of interest for late or deficient instalments and so on).

Further, we do not agree that, when applying the ordinary rules for statutory interpretation, that the ordinary meaning of "tax payable" is necessarily or even ordinarily a reference to the balance owing (or refund due) amount after deducting for taxes paid on account of tax payable. We believe that the intent of Parliament is that a reference to "tax payable" may mean a reference to the amount payable before deducting amounts paid on account of that liability (by way of instalment or withholding). When taxes withheld at source are required to be taken into account, this is usually specified, for example, see subsection 156.1(4) or the definition of "net tax owing" in subsection 156.1(1). Subsection 156(1), in referring only to tax payable under Part l, and not providing for the accounting for source withholdings (as it does do in other provisions in section 156), means, in our view, that there is no obligation to reduce instalments due by the amount of tax withholdings at source even though it is administratively feasible to do so.

We do not understand the representative's comments that somehow the provisions of subsection 161(4.01) work in the client's favour. Subsection 161(4.01) limits the interest charged when an individual makes tax instalments in accordance with a notice sent for that purpose so long as the individual makes tax instalments in accordance with the notice sent by the Minister (which the client chose not to do in this situation).

The representative's third argument is essentially that no interest or penalty charges should apply, even if there is no technical or interpretive obligation for accounting for source withholdings under subsection 156(1) and Regulation 5300, because the Department changed an administrative policy without sufficiently advising the public and the client has suffered as a result. Had the greater than policy been in effect, the client's charges would be minimal. While the representative has in no way implied that the client relied on the information discussing the greater than policy, nor that the client or representative was even aware of the policy which existed prior to 1992 when calculating instalments in the 1994 taxation year, the implication is that the Department's apparent failure to sufficiently advise staff and public is reason to apply the fairness legislation.

The taxpayer was sent a request to pay instalments, for September and December, in the amount of $XXXXXXXXXX each quarter, in August of XXXXXXXXXX and was advised at that time that the amount was calculated in accordance with the prior year option. He was invited to contact the Department if he had any questions at that time. He did not do so, despite the fact that his calculations under the prior year option apparently indicated that only $XXXXXXXXXX was due each quarter.

When the instalment reminder system was put in place in 1992, a number of changes took place, including the rescission of the greater than policy and an end to the publication of instalment guides (the pamphlet "Paying Your Income Tax by Instalments" was substituted however). The November 27, 1991 Press Release, which explained the changes to simplify the payment of quarterly income tax instalments, was clear that instalment remitters could choose to base all their instalments on the prior year tax payable or on an estimate of the current year's tax payable. It also stated that those individuals whose income, deductions or credits fluctuated significantly from year to year would still be able to seek assistance to establish a schedule of instalments that reflected the current year estimated tax liability. However, the press release also advised that if the actual current year tax liability was larger than the instalments paid, interest could be charged on the shortfall. If the amounts requested in the notices sent to taxpayers were paid on time, there would be no interest charged. The client chose not to pay the amount requested, did not seek clarification or assistance, and, it would appear, did not refer to the instalment pamphlet or the worksheet (T1033-WS) to assist him in these calculations. It is our understanding that one reason for rescinding the greater than policy was that few taxpayers made use of the policy (the client, we believe, was not a remitter prior to 1994) and its demise assisted in the simplification of the instalment system.

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch