Muscillo v. The Queen, docket 98-189-IT-G

Date: 19991027

Dockets: 98-189-IT-G; 98-191-IT-G; 98-192-IT-G; 98-194-IT-G

BETWEEN:

CARMELA MUSCILLO, MARIA MUSCILLO, PASQUALE MUSCILLO, DARIO MUSCILLO,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan J.T.C.C.

[1] The appeals of Carmela Muscillo (98-189(IT)G), Maria Muscillo (98-191(IT)G), Pasquale Muscillo (98-192(IT)G) and Dario Muscillo (98-194(IT)G) were heard together on common evidence. Because each taxpayer is an "Appellant" in her or his particular appeal, I shall for convenience refer to each taxpayer by her or his first name. The four Appellants participated in a real estate transaction which was concluded in 1987. All four Appellants were assessed under the Income Tax Act with respect to the real estate transaction and there were prior appeals with respect to (i) capital gain or income; (ii) valuation of land at July 6, 1987; and (iii) forward averaging. The prior appeals were heard by my colleague Hamlyn J. and decided on April 21, 1995. The decision in the prior appeals is reported at 96 DTC 1128.

[2] As a result of the prior appeals, the Minister of National Revenue issued reassessments to all four Appellants herein. Pasquale and Dario were reassessed on September 13, 1995. Carmela and Maria were reassessed on December 5, 1995. It is appeals from these four reassessments of September and December 1995 that I am deciding in these reasons for judgment. The issue in each appeal is whether the Minister has determined the correct amount of arrears interest or refund interest. There is no dispute in any of the appeals before me concerning the amount of tax assessed. The only dispute in each appeal is the computation of interest.

[3] The decision of Hamlyn J. in the prior appeals (96 DTC 1128) speaks for itself but, because the results in the prior appeals are connected with the computation of interest in the present appeals, I find it helpful to summarize the results in the prior appeals as follows:

1. The Appellants' profit on the disposition of the land was held to be a capital gain and not income;

2. The fair market value of the land at July 6, 1987 was not $l.4 million as claimed by the Appellants but $1.3 million;

3. The $100,000 difference in fair market value was a shareholder appropriation to Pasquale and Dario ($50,000 to each); and

4. Carmela and Maria were entitled to a forward averaging election.

[4] In the pleadings in the present appeals, Carmela and Maria claim the right to forward averaging for 1987 and the Respondent admits that Carmela and Maria are entitled to forward averaging in their recent reassessments for 1997. I assume from the pleadings that the reassessments issued to Carmela and Maria in December 1995 will have to be adjusted to permit forward averaging whatever the result on the main issue concerning computation of interest.

[5] The Appellants entered in evidence a binder containing Exhibits A-1 to A-15. Exhibit A-1 is a useful summary of the reassessments under appeal (issued in September and December 1995) and the respective claims of the four Appellants. Because Dario was the only Appellant to testify, I will use his amounts from Exhibit A-1 to illustrate the dispute between the parties in the current appeals. Part I of Exhibit A-1 shows the computation of Dario's taxable income as determined in the reassessment under appeal (September 1995) and compares it with his taxable income as originally reported.

REASSESSMENT SEPTEMBER 13, 1995
Taxable income as originally reported	$162,212.00
Add: Appropriation by shareholder	50,000.00
Income attributed re spouse (reduced)	12,420.00
Personal benefit	1,564.00
Marital exemption	3,700.00
Interest benefit	435.00
Deduct: capital gain reduction	(9,672.00)
REVISED TAXABLE INCOME	$220,659.00
Federal and provincial income taxes on revised taxable income	$106,750.21
Arrears interest charged	$52,729.92

In the above table, the amounts of federal and provincial income taxes ($106,750.21) and arrears interest ($52,729.92) are also shown on Dario's Notice of Reassessment for 1987 dated September 13, 1995 (Exhibit A-11).

[6] Part II of Exhibit A-1 compares the taxes originally reported in the income tax returns with the taxes assessed in September and December 1995, after the decision in the prior appeals.

RESULT OF TAX COURT DECISION APRIL 1995
1987 Federal and Provincial taxes as assessed Sept 13, 1995	$106,750,21
1987 Federal and Provincial taxes as originally filed	76,048.31
Increase of taxes	$30,701.90

The parties are in agreement that, for Dario, the increase in taxes from his original 1987 income tax return to the most recent reassessment (Exhibit A-11) is $30,701.90. It is from this point on that the current dispute arises with respect to the computation of interest.

[7] The Appellants place great reliance on a letter from Revenue Canada to Joe Pillo (the Appellants' accountant) dated January 31, 1989 and entered as Exhibit A-10. The letter is brief and I will set out its contents in full:

Re: The Muscillo Family

Income Tax Arrears

Pursuant to our telephone conversation this morning, I am sending you a copy of a summary for post-dated cheques, for the Muscillo Family.

The summary shows the date of each cheque, the amount, and the applicable Muscillo family member.

If there are any further inquiries, please do not hesitate to call.

Exhibit A-10 is signed by a "D. Falcon" for the Collections Section of Revenue Canada. The subject line of the letter refers to "Income Tax Arrears". In the summary or schedule enclosed with the letter, there is a list of 14 post-dated cheques dated on the last day of each month from March 31, 1989 to April 30, 1990. The enclosed summary shows how the amount of each post-dated cheque is allocated among 11 members of the Muscillo Family including the four Appellants. The aggregate of all 14 cheques is $254,788.57. I infer from the letter that the 14 post-dated cheques were intended to pay all of the taxes and interest owing by the 11 named members of the Muscillo Family as at January 31, 1989 (the date of the letter). I make this inference because the first three post-dated cheques were for precise amounts in dollars and cents; the next 10 cheques were for $19,000 each; and the last cheque was for $18,909.23.

[8] Dario briefly described the background of the letter (Exhibit A-10). In January 1989, Revenue Canada had garnisheed a large payment (approximately $50,000) in attempting to collect outstanding taxes owing by certain members of the Muscillo family for years dating back, in some cases, to 1982, 1983 and 1984. Dario and Mr. Pillo met with Revenue Canada and it was agreed that post-dated cheques would be delivered to Revenue Canada to pay off outstanding taxes. Exhibit A-10 was a letter from Revenue Canada describing how the post-dated cheques would be allocated. Having regard to Exhibit A-10, it was logical for Mr. Pillo to conclude that, when the 14 cheques were cashed, all taxes for 1988 and prior years would be paid in full.

[9] In Part III of Exhibit A-1, there is a statement that the Appellants paid their 1988 taxes in full on filing. According to the letter (Exhibit A-10), the post-dated cheques included an estimated amount of $8,000 for 1988 taxes for Dario and Pasquale. Therefore, it appears that 1988 taxes were paid in full on filing and any amounts of tax and interest owing (as at January 31, 1989) in respect of 1987 and prior years were paid with the post-dated cheques. It is important to remember that 1987 is the year under appeal.

[10] Mr. Pillo prepared a series of interest computations for the four Appellants which are Exhibits A-2 to A-9 inclusive. Exhibits A-2 and A-3 are for Dario. Mr. Pillo started his interest computation for Dario focussed on the amount $30,701.90 which is the amount by which the federal and provincial taxes assessed on September 13, 1995 exceed the federal and provincial taxes reported on Dario's 1987 income tax return. See paragraph 6 above. Relying on the letter of January 31, 1989 (Exhibit A-10) which indicated that all taxes and interest for 1987 and prior years (as determined on January 31, 1989) would be paid by the post-dated cheques, Mr. Pillo computed interest in Exhibit A-2 on the basic amount of $30,701.90 by applying the prescribed rate of interest (adjusted from time to time by regulation) to each day from May 1, 1988 (the day after Dario's 1987 income tax return was due) to September 13, 1995 (the date of Dario's reassessment under appeal). Mr. Pillo concluded that simple interest (not compound) was $37,578.46.

[11] In Part IV of Exhibit A-1, the amount of simple interest determined by Mr. Pillo for Dario ($37,578.46) is subtracted from the arrears interest ($52,729.92) assessed on September 13, 1995 (see Exhibit A-11) as part of the following computation:

EFFECT OF ARREARS INTEREST
Arrears interest charged on September 13, 1995 reassessment	$52,729.92
Arrears interest charged should be – see schedules	37,578.46
DIFFERENCE	15,151.46
Compound interest on DIFFERENCE to October 7, 1999 – see schedules	6,350.35
ADJUSTMENT REQUESTED	$21,501.81

In Exhibit A-3, Mr. Pillo took the difference of $15,151.46 from the above table and applied the prescribed rate of interest (adjusted from time to time by regulation) to that difference for each day from September 14, 1995 (the day after the reassessment under appeal) to October 7, 1999 (the day of hearing these appeals). Mr. Pillo concluded that compound interest for that period was $6,350.35. By adding the simple interest amount ($15,151.46) and the compound interest amount $6,350.35), Mr. Pillo concluded that the amount of interest owed by Dario at October 7, 1999 should not exceed $21,501.81. See the above table. In these appeals, Dario seeks to have his liability for interest reduced accordingly.

[12] What I have described above for Dario would apply equally to Pasquale because they both reported as total tax owing in their 1987 income tax returns amounts less than the total tax assessed on September 13, 1995. In other words, Dario and Pasquale each ended up owing more tax than originally reported. Carmela and Maria are different because the tax reported as owing on their 1987 income tax returns was greater than the tax finally assessed on December 5, 1995. Accordingly, Carmela and Maria were entitled to a refund of tax plus refund interest. Carmela and Maria claim that they have not received enough refund interest just as Dario and Pasquale claim that they have been assessed for too much arrears interest.

[13] Tessie Levac was a witness for the Respondent. Ms. Levac is employed by Revenue Canada at Sudbury, Ontario as a team co-ordinator for client services. She supervises a number of people who do accounting functions like explaining interest charges to taxpayers. She has been doing this work at Revenue Canada since 1983. Ms. Levac produced four booklets of tax and interest computations for the four Appellants. The booklets were marked as Exhibits R-1 to R-4 and they displayed tax and interest computations for Dario, Pasquale, Maria and Carmela, respectively. The booklets are the same in composition and I will discuss only Dario's (Exhibit R-1).

[14] Exhibit R-1 contains two very different computer print-outs. The first is a running history (18 pages) of Dario's account with Revenue Canada from January 1986 to June 1999 showing that, at May 6, 1999, there was a debit balance of $113,158.20 being the amount he owed to Revenue Canada. To indicate some idea of the detail, there are about 50 lines on each of the 18 pages. Ms. Levac isolated from the other details most of the entries relevant to the 1987 taxation year. For example, the running history shows only the following four payments with respect to 1987:

Page 3 $29,191.81

Page 5 7,479.00

Page 14 5,000.00

Page 17    19.03

Total $41,689.84

[15] The above payment of $29,191.81 was a portion of the garnishee amount (approximately $50,000) which the Revenue Canada computer allocated to 1987. The payment of $7,479 was one of the post-dated cheques referred to in Exhibit A-10.

[16] The second computer print-out in Exhibit R-1 is an interest calculation for only the 1987 taxation year. The theory is that interest is accrued daily on the outstanding balance of tax plus interest. In other words, it is compound interest on a daily basis. The first page shows the federal and provincial taxes assessed to Dario on September 13, 1995:

Federal Tax $ 71,266.81

Provincial Tax 35,483.40

Total $106,750.21

These are the amounts used by Mr. Pillo in Exhibit A-1 and they appear in Dario's Notice of Reassessment dated September 13, 1995 (Exhibit A-11). From this total, the Revenue Canada computer has deducted source deductions for 1987 which were remitted before April 30, 1998 leaving a balance owing of $74,121.94 as of April 30, 1988.

Total Tax $ 106,750.21

Source Deductions 32,628.27

Balance Owing 30/04/88 $ 74,121.94

[17] The computation in the preceding paragraph is very important because it starts with the federal and provincial taxes ($106,750.21) as finally assessed against Dario for 1987 and then deducts the source deductions ($32,628.27) which were actually remitted during 1987 or the first two months of 1988. It must be remembered, however, that the total tax ($106,750.21) was not computed and could not be computed until after the decision in the prior appeals (96 DTC 1128) which was delivered by Hamlyn J. on April 21, 1995. Therefore, although Dario's precise tax liability for 1987 could not be determined until after his prior appeal for 1987 was decided on April 21, 1995, that precise tax liability (less the source deductions actually remitted) was carried back to April 30, 1988 being the date when his income tax return for 1987 was required to be filed. Accordingly, after the reassessment of September 13, 1995 (Exhibit A-11), the balance owing of $74,121.94 could be carried back to April 30, 1988 and start to attract interest thereafter.

[18] The second computer print-out in Exhibit R-1 starts with the balance of $74,121.94 as at April 30, 1988 and accrues interest on that balance (plus accrued interest) over the succeeding years making allowance for any payments (credits) in Dario's favour. For example, the print-out shows the four payments listed in paragraph 14 above; and it also shows a credit of $2,242.48 on June 19, 1990 which Ms. Levac described as part of the "fairness package" in which Revenue Canada has some discretion.

[19] The second computer print-out in Exhibit R-1 concludes with a debit balance of $114,054.50 as at June 14, 1999. The interest portion of the debit balance is shown to be $83,864.87 and the remainder ($30,189.63) is tax. The tax is much reduced because all four payments and the "fairness package" credit were applied against the tax as shown below.

Tax Balance at 30/04/88 $74,121.94

Less four payments (para. 14 above) 41,686.84

32,435.10

Less fairness credit 2,242.48

Remainder at June 14, 1999 $30,192.62

There is an unexplained discrepancy of $2.99 ($30,192.62 less $30,189.63).

[20] The amounts in Exhibit R-1 may be reconciled in another way.

Final Taxes Owing at 30/04/88 $74,121.94

Plus Total interest for 1987 to 14/06/99

per Exhibit R-1 83,864.87

$157,986.81

Total Tax and Interest owing at 14/06/99 $114,054.50

Four Cash payments for 1987 41,689.84

Fairness Package Credit 2,242.48

$157,986.81

[21] The Respondent's computations in Exhibit R-1 are correct. Mr. Pillo made a fundamental but understandable mistake in his interest computations (Exhibits A-2 to A-9). Mr. Pillo assumed that Dario owed no tax or interest with respect to 1987 after all of the post-dated cheques were cashed on April 30, 1990. If there has been no reassessment for 1987 with respect to the real estate transaction, that assumption would be valid; but once the real estate transaction was assessed and appealed, then it could not be determined until after the appeal was decided (April 21, 1995) what were the precise amounts of taxes owing by Dario. The precise amounts of taxes owing by Dario were determined in the Notice of Reassessment dated September 13, 1995 (Exhibit A-11). After that date, the balance of tax owing for 1987 ($74,121.94 after allowing for source deductions as shown in paragraph 16 above) had to be carried back to April 30, 1988 as the cornerstone for accruing interest. Mr. Pillo used $30,701.90 as his cornerstone in Exhibit A-2 when he should have used $74,121.94. Also, compound interest commenced from April 30, 1998 and not from September 13, 1995, the date of the final assessment.

[22] The appeals of Dario and Pasquale are dismissed. In the appeals of Carmela and Maria, the Respondent has admitted that each is entitled to the application of her "forward averaging election". Therefore, I will allow the appeals of Carmela and Maria only for the purpose of applying the forward averaging election.

[23] Ordinarily, costs would follow the result but I will make no order as to costs in these appeals for the following reason. The computation of interest alone is complicated. The first print-out in Exhibit R-1 would have been incomprehensible if it were not for the clear and lucid explanation of Ms. Levac. If Mr. Pillo had had the benefit of Exhibit R-1 plus the lucid explanation of Ms. Levac soon after the reassessments of September and December 1995, these appeals would not have been necessary. I put a burden on Revenue Canada to find a computer program which explains the computation of interest in a manner which is easier to understand.

Signed at Ottawa, Canada, this 27th day of October, 1999.

"M.A. Mogan"

J.T.C.C.