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.