Marilyn Wichartz v. Her Majesty the Queen (Informal Procedure), [1995] 1 CTC 2866, 96 DTC 3251

Sobier J.T.C.C.:—The appellant appeals from the assessments by the Minister of National Revenue (the "Minister”), for her 1988 taxation year whereby the Minister disallowed the deduction of the amount of $8,499 as a net capital loss for other years ("loss carryforward”) and assessed the appellant a late-filing penalty in the amount of $3,573.65 pursuant to subsection 162(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the’’Act”).

Subsection 162(2) of the Act at the material time read as follows:

Every person

(a) who fails to file a return of income for a taxation year as and when required by subsection 150(1),

(b) on whom a demand for a return for the year has been served under subsection 150(2), and

(c) by whom, before the time of failure, a penalty was payable under this subsection or subsection (1) in respect of a return of income for any of the three preceding taxation years

is liable to a penalty equal to the total of....

It can therefore be seen that to be liable for a penalty for repeated failure to file a return, three conditions must be met.

That the appellant failed to file her 1988 return on time was admitted. The question then becomes whether the other two conditions were met, 1.e., was a demand for a return served on her under subsection 150(2) of the Act and before the time of failure, was a penalty payable by her in respect of a return of income for any of the three preceding years.

I will deal first with the last condition. The appellant argues that, at the time she should have filed her return for the 1988 taxation year, namely April 30, 1989, no penalties were payable by her since the assessment of the penalties for late filing of her 1984, 1985, 1986 and 1987 returns was made on June 2, 1989.

Subsection 162(2) formerly read:

Every person

(a) who has failed to file a return of income for a taxation year as and when required by subsection 150(1),

(b) on whom a demand for a return for the year has been made under subsection 150(2), and

(c) who, at the time of failure, had been assessed for a penalty under subsection (1) or this subsection in respect of a return of income for any of the three preceding taxation years,

is liable to a penalty equal to the total of....

[Some differences between new provisions and old are highlighted.]

To be liable for a late-filing penalty under the old provisions, at the time of the failure, the taxpayer must have been assessed for a penalty in respect of a return of income for any of the three preceding taxation years.

The change from "had been assessed" to "was payable" creates the present problem of interpretation.

An analogy to liability for income taxes might be helpful. It is clear that an assessment does not create liability for income tax. The provisions of the Act create the liability for that tax. Similarly the Act creates the liability for the penalty. Simply because the taxpayer is liable for a penalty upon failure to file a return, it does not necessarily follow that the penalty is payable at that time.

Paragraph 162(2)(c) of the Act speaks of the penalty being payable "before the time of failure". While the Act creates the liability for the penalty at the time of failure, it becomes payable by reason of an assessment. The definition of "tax payable" in subsection 248(2) of the Act shows that "tax payable" means that the taxes are payable by a taxpayer "as fixed by an assessment". While the phrase tax payable has no bearing on the liability for tax, it is important when dealing with the question of when this liability must be paid. It must be paid after an assessment has been made and not before.

The same reasoning would seem reasonable here. Although the appellant was liable for the penalty with respect to the three taxation years preceding, such penalties were not payable by her until after the assessment, namely June 2, 1989, while the failure to file occurred on April 30, 1989. Accordingly, at the time of the failure, no penalty was payable by the appellant, and therefore the appellant was not liable for a penalty under subsection 162(2) of the Act, since one of the three conditions was not met. On this issue, the appeal is allowed and the assessment of the penalty is vacated.

I will deal now with the issue of the loss carryforward.

The appellant’s evidence and that of her husband was that in order to secure a loan made to her by The Canadian Trust Company ("C.T."), the appellant pledged 1,000 shares of Terra Mining and Exploration Ltd. (the "shares") in favour of C.T. Her husband also borrowed from C.T. The appellant maintains that the pledge of the shares was totally unrelated to his loan and that there was no guarantee by her of her husband’s debt nor did she pledge the shares in support of his debt. The evidence was that C.T., without authority, appropriated the shares from the appellant’s account and sold them to help satisfy Mr. Wichartz indebtedness to C.T. The appellant claims not to have received any of the proceeds of disposition of the shares, but disposed of they were.

The original cost to her of the shares was $8,499 which resulted in a capital loss of the same amount. I find that there was a capital loss suffered by the appellant either in 1981 or 1982 amounting to $8,499. It was this loss which she attempted to deduct in 1988.

While the appellant claimed a deduction of $8,499, both counsel conceded that according to the Act, if she could establish the capital loss, she was only entitled to deduct $2,000 per year against other income.

The appeal on this part of the assessment is allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to carry forward and deduct from other income in the 1988 taxation year the sum of $2,000 of the net capital losses incurred, either in the 1981 or 1982 taxation year.

The appellant is entitled to her costs.

Appeal allowed.