John W. Hutchins v. Minister of National Revenue, [1991] 1 CTC 2510, 91 DTC 790

Margeson, T.C.J. [Orally]:—This is an appeal of the taxpayer from the imposition of interest of $157.03 on instalments unpaid and $3.79 for arrears of interest in the year 1989. The Minister made the assessment on the basis that in the year 1989, the appellant had taxes due in the amount of $25,975.95 on an income of $79,150.08. Further, total taxes deducted at source for the year was in the amount of $15,465.52. Taxes were not withheld from at least three quarters of the appellant's income for his 1989 taxation year.

The Minister further proceeded on the assumption that the taxes payable for the year 1988 were $22,857.73. The appellant's chief source of income was neither farming nor fishing. He was required to pay instalments of $435.12 quarterly for the year 1989 and he did not.

There appears to be no question about the facts of the case and the assumptions by the Minister were borne out by the evidence and the only question before me is whether or not the interest on instalments and arrears interest are properly assessable.

The taxpayer acted for himself and testified that in the taxation year in question he calculated his income for the year, and on the basis of his calculation arranged to have tax deducted at source to such an extent that he felt he had covered 98 per cent of his income and consequently he felt he would not be required to make any instalments and presumably could rely upon the provisions of subsection 153(2) and pay any remainder on April 30, 1990. As it turned out, the taxpayer sold a condominium in October 1989 and as a result of recaptured depreciation his income for the year increased to $79,150.08 from $56,543 as he had predicted.

In a nutshell his argument is that he had no way of knowing at the instalment dates in 1989 that his income would be that high and, therefore there was no way he could have known that he should have made instalment payments.

Minister's Position

The Minister's position is that he was properly assessed in 1989. She refers to the relevant sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), section 156, subsections 161(1), 161(2), 161(4), 248(1) and sections 4300 and 5300 of the Income Tax Regulations. The Minister argues that the taxpayer does not fall within the exceptions in subsections 156(1), 153(2) or section 155. There can be no question here that these submissions are correct.

The respondent says that the taxpayer could have used the 1988 taxation year as his base for the year 1989. The choice was his and he chose 1989 and he was wrong. If he had chosen to use the year 1988 as his tax base he would have been home free and there would have been no interest chargeable.

The Minister says that the statute is clear and concise and unambiguous. It resulted in a disadvantage to the taxpayer but there was nothing that made it impossible for him to go back to the previous year for his base. She says that the taxpayer's argument here is that he would have been wrong even if he had used the previous year as a base does not help him because if he had there would have been no interest chargeable.

Analysis and Decision

It is clear that the problem was triggered by the sale of the condominium in October 1989 by the conscious act of the taxpayer, a case not dissimilar of the factual situation found in Gordon Parker v. M.N.R., [1985] 1 C.T.C. 2129; 85 D.T.C. 143 where Taylor, J. found that the taxpayer became responsible for the penalty and interest when he assumed that a secondary source of income would not exceed 25 per cent of his total income. In his analysis of the case Judge Taylor stated at 2131 (D.T.C. 144):

I do not find the dilemma as acute as it was portrayed at this hearing or in Ramsay, (supra). First, no taxpayer is required (by virtue of subparagraph 156(1)(a)(ii)) to make instalments unless there is an “instalment base” arising out of a similar situation from the previous year, . . . and even then, the taxpayer can choose to pay the instalments which arise out of that instalment base, not out of the current income, if it is to the taxpayer's advantage so to do. Therefore, once faced with the existence of an "instalment base” a taxpayer who does not send in instalments at least to that level, does so on the assumption and presumption that he will not have such secondary income in a current year in excess of 25 per cent of the total income. If he turns out to be wrong, that responsibility rests with him.

The question at issue in the case of Glen ford E. Culham v. M.N.R., [1985] 1 C.T.C. 2227; 85 D.T.C. 165 was basically the same as here. In that case, Christie, A.C.J.T.C. rejected the argument that interest should only be charged on the unpaid instalments at the prescribed rates from the day on which the taxpayer became liable to pay the instalments to the date of payment and not for the whole year.

The learned judge said at 2228 (D.T.C. 166):

Very fine lines must often be drawn in legislation and this is particularly so regarding enactments in relation to the taxation of incomes. An individual may be on one side of the line or the other by a narrow margin. This can enure to his benefit as well as operate to his detriment. Applying the ordinary rules of statutory interpretation, the pattern which emerges from the statutory provisions referred to is clear. This Court has no jurisdiction to rewrite legislation.

The Minister also referred to the decision of Chief Judge Couture in David G. Steer v. M.N.R., [1985] 2 C.T.C. 2265; 85 D.T.C. 589 where a student taxpayer made instalment payments in the 1982 taxation year but then received an unexpected and unsolicited bursary in October of $3,600. He also had investment income in RRSP withdrawal income. Tax was deducted at source on the latter amount only. The Minister assessed the taxpayer interest on the basis that there were no source deductions with respect to more than three-quarters of his income and he did not make quarterly instalments. The taxpayer argued that on March 31, June 30 and September 30 of the total tax payable in 1982 less than $1,000 was due on each occasion and that therefore instalments were not required. He argued it was only when he received the unexpected bursary in October that he realized that his tax would be over $1,000, and therefore he had paid tax on three-quarters of his income as it was received.

That case is admittedly different from the case at bar in that the taxpayer there had not arranged to have tax deducted at source and Chief Judge Couture concluded that subsection 153(2) did not apply to instalment payments but only to source deductions. In the case at bar of course source deductions were made. However, the Chief Judge went on to say at pages 2267-68 (D.T.C. 591):

Admittedly in some instances it is impossible for an individual to estimate his income for the year accurately and in some situations the disparity between the estimated tax payable and the actual liability would be substantial. Subparagraph 156(1)(a)(ii) however, provides that instalments may also be established on the basis of the taxpayer's instalment base for the immediately preceding year which amount should normally be known by March 31st of the year, barring a subsequent upward reassessment by the Minister, in which event the taxpayer has no recourse under the Act and would be liable under the provisions of subsection 161(2).

In the case of Maria Zannetos v. M.N.R., [1986] 2 C.T.C. 2182; 86 D.T.C. 1643, Judge Kempo referred to the above authorities and dismissed an appeal where the taxpayer earned both employment income from which tax was deducted and interest income from which no tax was deducted at source. She found the taxpayer clearly liable to pay the assessment.

The case of Jean-Pierre Paquette v. M.N.R., [1990] 2 C.T.C. 2016; 90 D.T.C. 1474, decided by Lamarre Proulx, J., gives me much more concern as it is very close to the factual situation found in the case at bar. In that case the learned judge allowed the appeal where the appellant sold a 48-unit apartment building on September 3, 1986 and consequently subsection 153(2) no longer applied to him.

The evidence disclosed that if it were not for the real estate transactions of September 3, 1986, 75 per cent of the appellant's income would have been the subject of source deductions and the appellant would not have had to pay any interest. The appellant argued that on March 1 and June 15, 1986 it was not possible for him to perform the duty imposed upon him by subsection 156(1) of the Income Tax Act.

Judge Lamarre Proulx adopted the Latin maxims"lex non cogit ad impos- sibilia" or“ lex non intenditaliquid impossibile", which simply put means that the law cannot require one to do the impossible. She refers to many of the cases above but concludes that it was impossible for the appellant to know that subsection 156(1) would apply to him before the real estate transaction took place and consequently subsection 156(1) did not apply to him until that time.

She said the factual situation in Steer, supra, was the only one which related to her case and she considered she was not bound by that case.

In the case decided by Judge Lamarre Proulx, I can see nothing in the reported version which indicates whether or not the taxpayer could have chosen the previous tax year as his base and if he could not then that case is distinguishable from the one at bar, but further on the facts of the present case I do not feel that the taxpayer was asked to do the impossible here. He had a very real choice and that was to use the previous year as his base, he chose not to do so and to his detriment. The statute did not create the situation for him, his conscious acts of not choosing the previous year and of selling the condominium did. I do not find that unjust.

In the case at bar the Minister further argues that subsection 161(4) of the Income Tax Act was not pleaded or relied upon and he says that is a distinguishable feature because in this case she pleaded subsection 161(4) and relied upon it. If that were the case I am still not satisfied that it distinguishes the case but in any event I need not distinguish it further.

In the case at bar I am satisfied that the wording of the referred to sections of the statute are clear and unambiguous, that they apply to the instant taxpayer. On the facts submitted he was clearly required to make instalment payments pursuant to these provisions, that he did not do and for those reasons the appeal is dismissed.

Appeal dismissed.