Bakorp – Federal Court of Appeal finds that an overpayment of Part IV tax for a subsequent year did not cut off interest for an underpayment in the previous year, before application of the overpayment by CRA

Bakorp was found by CRA to have underpaid its Part IV tax for its 1993 taxation year, and overpaid Part IV tax for its 1995 taxation year. When CRA reassessed in February 2000, it applied the 1995 overpayment to the 1993 year and assessed interest from the 1993 underpayment date up to February 2000.

Bakorp unsuccessfully argued that interest should be computed as if the overpayment for its 1995 year had been retroactively applied at the time it paid its initially-computed Part IV tax liability for 1995 (i.e., shortly after its 1995 taxation year end rather than in February 2000) to the underpayment for its 1993 year, so that much of the interest that otherwise would have accrued on its underpayment for its 1993 taxation year was eliminated. Webb JA noted that this argument implied that Bakorp effectively would have been entitled to a double-interest benefit from the application of its overpayment for its 1995 taxation year – as that application would not only retroactively cut off interest on its underpayment for its 1993 taxation year but also generate refund interest respecting its overpayment for its 1995 year. This obviously could not have been intended.

Neal Armstrong. Summaries of Bakorp Management Ltd. v. MNR, 2016 FCA 74 under s. 187(2) and s. 248(28).