13 January 2011 Internal T.I. 2011-0410961I7 - Re-appropriation of Statute Barred Amounts

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.

Principal Issues: Can a re-appropriation under s. 221.2 be applied to produce a refund?

Position: No; but an otherwise statute barred amount may be re-appropriated either to an amount that is payable or to an amount that may become payable.

Reasons: Section 221.2 does not permit a refund of an overpayment of tax; rather, it permits the Minister to re-appropriate an amount from one debt to another.

            January 13, 2011

      Appeals Branch                                  HEADQUARTERS
      Tax and Charities Appeals Directorate           Income Tax Rulings
                                                            Directorate
      Attention: Barry Hassar, Manager                Bob Skulski
                 International Tax and Tax Avoidance  (613) 957-9767

                                                      2011-041096

XXXXXXXXXX

This is further to my email of January 11, 2011, wherein Maggie Martel was provided with an overview of our position on this matter and was further advised that a formal interpretation would follow to provide the reasoning for the position taken.

The facts are not in dispute and suffice it to say that XXXXXXXXXX (the "Company") has a very substantial overpayment of tax stranded in the 2003 taxation year the refund of which amount is statute barred by operation of subsection 164(1) of the Income Tax Act (the "Act"). A number of adverse interpretations have been provided in response to the Company's efforts to have the amount refunded. XXXXXXXXXX

The thrust of the various initiatives has been directed at having the amount in question re-appropriated pursuant to section 221.2 of the Act to a year from which a refund would not be statute barred. Subsection 164(1.5) gives the Minister the discretion to refund an overpayment of tax to an individual or to a testamentary trust outside the three year limitation in subsection 164(1) provided the tax return is filed within ten years after the end of the taxation year in respect of which the refund is sought. However, that discretion does not extend to corporations seeking a refund outside the three-year limitation. Nonetheless, it has been suggested by one commentator that section 221.2 provides a way around the three year limit on refunds where a corporation's return is late filed. The commentary in this regard may be somewhat overly optimistic.

The wording in each of subsections 221.2(1) and (2) clearly provides that the re-appropriation can only be made to a year in which an amount "is or may become payable". The provisions do not contemplate the refund of the statute barred amount, but rather its re-appropriation to an amount that is either payable or that may become payable. In this regard, a re-appropriation pursuant to section 221.2 would not override the three-year time limitation provided in subsection 164(1).

The fact that in similar circumstances a tax services office may have previously agreed to apply administrative relief and simply issued a refund without relying on section 221.2 is of no assistance here. A re-appropriation under this section cannot be used to produce a refund. The Minister has a statutory duty under subsection 220(1) to administer and enforce the Act. In this respect, the Minister is not bound by any an agreement made erroneously by his officials, see Cohen v. The Queen, [1980] C.T.C. 318, 80 DTC 6250 (F.C.A.). It follows that the historic existence of any such agreement offers no precedential value or compulsion for purposes of the administration and enforcement of the Act in future similar circumstances.

The inclusion of the words "may become payable" suggests a reasonable anticipation of an indebtedness in the subsequent year. In this regard, the re-appropriation would need to be proportionate to the anticipated indebtedness. For instance, a statute barred overpayment of tax in the amount of $100,000 could not be re-appropriated in anticipation of a $1,000 amount payable. Such a re-appropriation would amount to nothing less than a backdoor override of subsection 164(1). Likewise, the repayment of an amount already paid in order to create an amount payable for the purpose of enabling the re-appropriation of a statute barred tax overpayment would be equally offensive and would amount to a complete disregard of subsection 164(1). Another example where section 221.2 could not be applied might be in the context of a bankruptcy. For instance, should a trustee in bankruptcy ascertain that there had been an overpayment of tax, the refund of which was statute barred, the most that could be done would be to re-appropriate the amount to another tax debt. Under no circumstances could the money be refunded to satisfy the claims of other creditors.

The application of a statute barred overpayment of tax to other liabilities payable to the Crown was considered in Landmark Auto Sales Ltd. v. The Queen, [2008] 5 C.T.C. 2651, 2008 DTC 2966 (T.C.C.); however, there the remedy sought was under subsection 164(2) of the Act. Under that provision, a refund or repayment that might otherwise be made under section 164 may be applied to another debt due the Crown. Given that the refund was statute barred, the Court held that it could not otherwise be made; hence, it could not be applied to another debt. Re-appropriation under subsection 221.2(1) does not appear to have been argued, as a result the Court did not opine on application of that provision.

The provisions of section 221.2 are discretionary, see Emcon Services Inc. v. The Queen, [2009] 3 C.T.C. 2121, 2008 DTC 4854 (T.C.C.), at para. 20. Those provisions do not permit a refund of an overpayment of tax, rather they give the Minister the discretion to re-appropriate an amount from one debt to another. As was stated earlier, should the Minister agree to a taxpayer's re-appropriation request, the amount would have to be re-appropriated to an amount that is payable or may become payable. While the Minister's decision to re-appropriate is discretionary, that discretion cannot be improperly fettered. The decision to deny re-appropriation is open to judicial review by the Federal Court and should the Court find that the decision was not made in accordance with the principles of procedural fairness, the matter could be sent back for reconsideration.

Subsection 221.2(1) provides for re-appropriation to an amount payable under an enactment referred to in paragraphs 223(1)(a) to (d) of the Act, which in addition to the Act, includes the Employment Insurance Act, the Unemployment Insurance Act, the Canada Pension Plan, and the provincial income tax statutes administered by the Minister under tax collection agreements.

Similarly, subsection 221.2(2) provides for re-appropriation to an amount payable under any of the Excise Tax Act, the Air Travellers Security Charge Act, or the Excise Act, 2001. Accordingly, it is suggested that should there be a subsequent taxation year in respect of which an amount is or may become payable, the Company could request that the tax overpaid in the 2003 taxation year be re-appropriated to the year in respect of which the tax or an amount is or may become payable. The Minister's decision to re-appropriate would be discretionary; however, the request could not be denied on the basis of the three-year limitation in subsection 164(1).

Lastly, given that such a re-appropriation would not constitute a refund, interest under subsection 164(3) would not be exigible. Whether subsection 220(3.1) might be applied in respect of the debt to which this amount is re-appropriated, perhaps in a manner analogous to the operation of subsection 164(3), is a matter for the tax services office to consider.

Hopefully, these comments will be of assistance. Meanwhile, should you have any queries or require additional information concerning this matter, please do no hesitate to call Bob Skulski, the manager of the Insolvency and Administrative Law Section, at the number provided at the top of the first page of this memorandum.

Phil Jolie
Director
International and Trusts Division
Income Tax Rulings Directorate