Intertan Canada Ltd. v. MNR, 96 DTC 6522, [1996] 3 CTC 257 (FCTD)

Jerome J.T.C.C.: — This is an appeal from a decision of the Tax Court of Canada which upheld the Assessment of the Minister of National Revenue for interest on insufficient instalment payments in respect of the plaintiffs 1985 taxation year.

The following are the facts as agreed to by the parties. The plaintiff, a Canadian corporation, had a fiscal year ending of June 30 and was required to pay its tax by way of instalments. Before commencing instalment payments for its 1985 taxation year, the company calculated its first instalment base by reference to the aggregate of federal income tax and provincial income tax payable for 1984 after deduction of a $8,225,000 scientific research tax credit under section 127.3 of the Income Tax Act. This calculation was in accordance with subsection 5301(1) of the Regulations, which read at the time as follows:

5301. Subject to subsections (6) and (8), for the purposes of subsections 157(4) and 161(9) of the Act, “first instalment base” of a corporation for a particular taxation year means the amount equal to the product obtained when the tax payable by the corporation under Part I of the Act, computed without reference to sections 123.3 to 123.5 thereof, for its taxation year immediately preceding the particular year, is multiplied by the ration that 365 is of the number of days in that preceding year.

As a result, the plaintiff paid twelve monthly instalments of $500,000 each for the 1985 taxation year.

On February 15, 1984, the Department of Finance issued a press release with respect to a proposed amendment affecting the calculation of tax instalments by requiring that the instalment base for a taxation year be calculated before deducting a scientific research tax credit or share purchase tax credit investment. The release read in part as follows:

SPECIAL INVESTMENT TAX CREDITS WILL NOT REDUCE TAX INSTALMENT REQUIREMENTS

The proposed amendments require that the instalment base for a taxation year be calculated before deducting these tax credits. Further, where a taxpayer acquires a scientific research tax credit or share purchase tax credit investment during his taxation year, the amount of the tax credit shall not be taken into account in estimating his tax instalment for the year.

The proposed amendments will not affect scientific research tax credits and share purchase tax credits earned on investments before February 16, 1984. Also, the proposed amendments will not apply with respect to scientific research or share purchase tax credits in respect of investments acquired before March 1, 1984, providing arrangements for the issue of the security are substantially advanced today.

Subsection 5301(1) of the Regulations was subsequently amended by section 16 of P.C. 1985-2277, to define first instalment base as tax payable under Part I of the Act for the immediately preceding taxation year computed without reference, inter alia, to section 127.3 of the Act. This amendment, which was made on July 24, 1985, and registered on July 25, 1985, as SOR/85-696, was published in the Canada Gazette Part II on August 7, 1985. It reads as follows:

5301(1) Subject to subsection (6) and (8), for the purposes of subsections 157(4) and 161(9) of the Act, the “first instalment base” of a corporation for a particular taxation year means the product obtained when the tax payable by the corporation under Part I of the Act, computed without reference to sections 123.3 to 123.5, 127.2 and 127.3 thereof and before taking into consideration any amount referred to in any of subparagraphs 161 (7)(a)(i) to (vii) thereof that was excluded or deducted, as the case may be, for its taxation year immediately preceding the particular year, is multiplied by the ration that 365 is of the number of days in that preceding year.

Subsection 22(9) of SOR/85-696 reads:

22(9) Sections 15 and 16 are applicable with respect to

(a) amounts deducted under sections 127.2 and 127.3 of the Act in respect of shares, debt obligations and rights acquired after February 15, 1984, other than shares, debt obligations or rights acquired before March 1, 1984 where arrangements, evidenced in writing, for the issue of the shares or debt obligations or granting of the rights were substantially advanced before February 16, 1984; and

(b) amounts referred to in subparagraphs 161 (7)(a)(i) to (vii) of the Act for subsequent taxation years ending after the date these Regulations are published in the Canada Gazette.

[Emphasis added. ]

The plaintiffs scientific tax credit deductions under section 127.3 of the Act for its 1984 and 1985 taxation years were in respect of debt obligations acquired by the plaintiff after March 1, 1984.

The Minister of National Revenue reassessed the plaintiff for its 1985 taxation year on the basis that the amended subsection 5301(1) of the Income Tax Act Regulations was applicable in computing the plaintiff’s first instalment base for its 1985 taxation year and that the $8,225,000 scientific research tax credit was therefore not deductible in computing the first instalment base. Accordingly, the Minister assessed interest in respect of insufficient instalment payments for the plaintiffs 1985 taxation year pursuant to subsection 161(2) of the Act.

The plaintiff filed a Notice of Appeal in the Tax Court of Canada on the grounds that the amendment to subsection 5301(1) of the Regulations did not come into effect until after the plaintiffs 1985 taxation year had ended on June 30, 1985, and accordingly could not be applied in calculating its first instalment base for the 1985 taxation year. By decision dated February 8, 1993, the Tax Court dismissed the appeal holding that the Minister’s assessment was correct and authorized by law.

The issue to be determined in this appeal is whether subsection 5301(1) of the Regulations as amended by P.C. 1985-2277 applies to the calculation of the plaintiffs first instalment base for 1985 taxation year.

The plaintiff’s argument is based on the presumption that statutes and regulations are not to be construed as having retroactive operation unless such retroactivity is expressly provided for. Paragraph 22(9)(a) of P.C. 1985-2277, it is submitted, does not expressly state that the relevant portion of section 16 of P.C. 1985-2277 is to apply retroactively and it should not therefore be given such an interpretation. It further argues that a retroactive regulation is ultra vires and invalid unless the statute pursuant to which the regulation is made, expressly or by necessary implication, authorizes the making of retroactive regulations.

I am not persuaded by the plaintiff’s arguments. There was clear authority here for the making of the retroactive regulation in question. Subsection 9(1) of the Statutory Instruments Act provides that:

No regulation shall come into force on a day earlier than the day on which it is registered unless

(a) it expressly states that it comes into force on a day earlier than that day and is registered within seven days after it is made, or

(b) it is a regulation of a class that, pursuant to paragraph (b) of section 27, is exempted from the application of subsection (1) of section 5,

in which case it shall come into force, except as otherwise authorized or provided by or under the Act pursuant to which it is made, on the day on which it is made or on such later day as may be stated in the regulation.

[Emphasis added.]

At the relevant time, subsection 221(2) of the Income Tax Act read as follows:

221(2) No regulation made under this Act has effect until it has been published in the Canada Gazette but, when so published, a regulation shall, if it so provides, be effective with reference to a period before it was published.

[Emphasis added.]

Subsection 221(2) of the Act, therefore, clearly authorizes the making of Income Tax Act regulations which have a retroactive effect. In turn, subsection 22(9) of SOR/85-696, explicitly states that the amended regulation is to apply to scientific tax credit deductions in respect of debt obligations that were acquired by the taxpayer after February 15, 1994. Contrary to the plaintiff’s submission, there is no ambiguity here nor are there two possible interpretations. Parliament has expressly stated that the amended regulation was to be effective with respect to transactions which occurred prior to its enactment.

For these reasons, I am satisfied that the Tax Court was correct in its determination and the plaintiff’s appeal must be dismissed.

Appeal dismissed.