Her Majesty the Queen v. Union Gas Limited, [1987] 2 CTC 32, 87 DTC 5296

Rouleau J.:—This is an appeal commenced by way of statement of claim against a decision of the Tax Review Board dated February 11, 1983, allowing the defendant's appeal of a notice of reassessment dated September 3, 1980 with respect to the defendant's 1978 taxation year.

The defendant is a corporation amalgamated and continued under the laws of the Province of Ontario. At all material times, the taxation year of the defendant ended March 31 of each year.

For its 1978 taxation year, the defendant paid to the Receiver General of Canada by way of instalment payments the aggregate sum of $8,916,000. These payments were remitted at fairly regular intervals between April 1977 and March 1978.

Subsequent to these payments having been made, the defendant's treasurer concluded that the defendant company had overpaid the sum of $2,168,000 on account of its 1978 taxation year and on June 7, 1978, prior to filing the company's annual return, he wrote to Revenue Canada requesting that the overpayment be applied to the company's 1979 taxation year. The defendant's request came about because of a Revenue Canada policy which provides that since overpayments may only be determined after the tax payable for the year is established, no refund is possible until such time as the return is filed and the tax established. Accordingly, by letter dated June 7, 1978 and received by the Minister of National Revenue on June 12, 1978, the defendant stated:

As discussed with you, please apply $2,168,000.00 of the Company's 1978 instalments to the 1979 fiscal year. Please apply the March 16, 1978 payment of $409,710, February 28, 1978 payment of $1,362,948 and $395,342 of the January 31, 1978 payment of $2,000,000 to the 1979 instalment period (fiscal period ending March 31, 1979).

The Minister of National Revenue acceded to the defendant's request and on his books and records of account transferred $2,168,000 to the credit of the defendant's instalment payments of tax for the 1979 taxation year. This transfer of $2,168,000 resulted in the tax paid on account of the defendant's instalment payments of tax for the 1978 taxation year being $6,748,000.

On September 27,1978 the defendant filed its 1978 income tax return and calculated its tax payable to be $7,110,095. The Minister, in an assessment dated April 23, 1979 declared that as of May 31, 1978 there was left owing by the plaintiff for its 1978 taxation year the amount of $325,468.09 and charged interest thereon in the amount of $8,947.27 in accordance with subsection 161(2) of the Income Tax Act.

By notice of reassessment dated December 17, 1979, the Minister reassessed the federal tax payable by the defendant for its 1978 taxation year as being $7,521,600.30 and also assessed interest payable in the amount of $11,968.23 under subsection 161(2) of the Income Tax Act in respect of the period June 1,1978 to September 30, 1978 and a further amount of $83,601.09 for interest under subsection 161(1) of the Act in respect of the period October 1, 1978 to September 10, 1980 (the amount outstanding having remained unpaid or transferred to the credit of the 1979 fiscal year).

The defendant appealed the reassessment, primarily the interest claimed, to the Tax Review Board which allowed the appeal and referred the matter back to the Minister of National Revenue for reconsideration and reassessment. It is that decision which is now under appeal. The defendant's position is that interest is not chargeable against the defendant under either subsection 161(1) or (2) of the Act because neither the scheme of the Act nor the wording of the subsections contemplates the charging of interest where the taxpayer has duly remitted sufficient instalments of tax, even if there has been a subsequent “application” to another taxation year or refund of part or all of those instalments by the Minister.

Further, the defendant argues that no interest is chargeable because the defendant had paid within the time prescribed and the Minister retained amounts actually in excess of the taxes owing in the year under assessment and in the next subsequent year.

The plaintiff's position is that the facts of this case do not relate to an overpayment or refund as defined by section 164 of the Income Tax Act. The facts of the case fall within the ordinary principles governing debtor and creditor relationships: the debt owed by the defendant is for a particular taxation year and is recoverable for that taxation year. The plaintiff argues that the defendant company paid approximately $8.9 million on account of its income tax obligation for its 1978 taxation year but the defendant then requested that the amount of $2,168,000 be allocated to another debt, its 1979 taxation year, a request to which the Minister acceded in June 1978. Given these facts, the plaintiff argues that the defendant cannot now say that its 1978 debt obligation was paid and that the Minister is not entitled to charge interest on the amount left owing at the end of the defendant's 1978 taxation year. In the plaintiff's opinion, what the defendant is asking the Court to do is to agree that a taxpayer can avoid interest charges by allowing sufficient funds to stand on account of a credit for a particular taxation year, just up until the last instalment date, and then use the amount to satisfy another year's liability at a time when it is impossible to determine what the tax liability will be because the tax return is not due.

In 1978 subsections 161(1) and (2) of the Income Tax Act provided as follows:

161. (1) Where the amount paid on account of tax payable by a taxpayer under this Part for a taxation year before the expiration of the time allowed for filing the return of the taxpayer's income is less than the amount of tax payable for the year under this Part, the person liable to pay the tax shall pay interest at a prescribed rate per annum on the difference between those two amounts from the expiration of the time for filing the return of income to the day of payment.

(2) In addition to the interest payable under subsection (1), where a taxpayer, being required by this Part to pay a part or instalment of tax, has failed to pay all or any part thereof as required, he shall, on payment of the amount he failed to pay, pay interest at the rate per annum prescribed for the purposes of subsection (1) from the day on or before which he was required to make the payment to the day of payment or the beginning of the period in respect of which he becomes liable to pay interest thereon under subsection (1), whichever is earlier.

It is the submission of the defendant that the word "paid" in subsection 161(1) does not mean the net balance in a running account, but rather it has the same meaning as the word “remitted”, so that the subsection does not operate where sufficient payments were remitted to the Receiver General, even though such payments may subsequently be applied to another account. This interpretation, the defendant argues, is also consistent with subsection 161(2) which uses the words “failed to pay" which contemplates an action rather than an accounting entry.

With respect, I do not agree with the defendant's interpretation of subsections 161(1) and (2), the wording of which is patently clear. There is nothing in the statute itself or in the case law to support the defendant's contention that the word “paid” has the same meaning as "remitted". In support of its argument the defendant relied on the Federal Court of Appeal decision in Rath v. The Queen, 82 D.T.C. 6175. In that case the taxpayer included in his incurred moving expenses the loss, by warehouse fire, of certain goods and the replacement cost of those goods. The Minister originally allowed the taxpayer's deduction of the loss and made the appropriate refund for overpayment of tax. On the Minister's subsequent reassessment the deduction was disallowed and interest was assessed on the refunded amounts as taxes owing from the end of the first relevant taxation year. The Court held that the taxpayer was not properly assessed for interest as there was no statutory provision imposing an obligation on the taxpayer to pay interest for what was essentially the use of a tax refund pending the Minister's correction of his error. On page 6179 Thurlow, C.J. stated:

The facts as I view them are that as of the 30th of April 1975 and 1976 the amounts of the deductions had been paid on account of the taxes payable by the taxpayer for the previous year, within the meaning of subsection 161(1), and in my opinion neither an erroneous assessment nor a refund made as a result of it can avail to change these facts or render unpaid what had in fact been paid by the relevant date. It may be that when a refund with interest has been made as a result of an erroneous assessment, and more particularly where the error results at least in part from an erroneous claim by the taxpayer for deductions in computing income, a taxpayer, who has had the use of the refunded amount for a time until the erroneous assessment was corrected, should in equity pay interest on the refund for that period. But this is not a matter of equity. There is no equity in a tax. Under a taxing statute the Crown is entitled only to such exactions as the statute imposes. The case, as I see it, is simply one in which the department, with full knowledge of the facts, made erroneous assessments and unwarranted refunds. As there was no statutory provision imposing an obligation to pay interest for the use of the refunds until the errors were corrected by reassessments, the taxpayer, in my opinion, was not liable for such interest or to be assessed for it.

Although I am in agreement with the principles of law as set out by the Chief Justice in the Rath case, the facts of that case are, in my opinion, clearly distinguishable from the facts in the case at bar. In the Rath case, the money owed by the taxpayer to Revenue Canada had been paid and was sitting on account of the debt for the taxation year involved. Here, the defendant had instructed the plaintiff to transfer a specific sum from the money paid on account of its 1978 taxation year and apply it to the defendant's 1979 taxation year. There is no question that the result was a debt, an amount left owing by the defendant, for its 1978 taxation year.

The general scheme of the Income Tax Act, in my view, imposes an obligation on each taxpayer to correctly determine the amount of income tax owed by him to the state and to pay that amount before the end of his taxation year. Subsections 161(1) and (2) of the Income Tax Act are clear: if a taxpayer fails to meet this obligation, interest is then charged by Revenue Canada on the amount left owing.

In terms of debtor/creditor principles of law, a debtor is free to have money paid by him on account of his debt allocated as he wishes. In Polish Combatants' Association Credit Union Ltd. v. Moge et al. (1984), 9 D.L.R.

(4th) 60, the Manitoba Court of Appeal in discussing this principle stated as follows (at page 70):

It is well settled that a debtor who owes money to a creditor on different accounts may direct his payments to be applied as he pleases: McArthur v. McMillan (1886), 3 Man. R. 377, and Nash-Simington Co., Ltd. v. Caldwell, [1931] 1 W.W.R. 183. Where, as here, each instalment due represents a separate cause of action, the debtor would be entitled to designate on what outstanding instalment his payment should be applied.

In the McArthur case, Dubuc J. for the Manitoba Court of Queen's Bench en banc stated that (p. 378):

It is equally settled that, in the absence of any appropriation made by the debtor, the creditor may apply the money as he thinks fit.

In Frankel v. The Queen, [1984] C.T.C. 259; 84 D.T.C. 6220 the taxpayer and his four companies all had outstanding tax liabilities. The taxpayer forwarded six cheques to the Department of National Revenue in the amount of $1,000 each towards retirement of the debt. The cheques were drawn on the account of one of the companies but the taxpayer alleged the notations on the cheques indicated that he was allocating the payment to his personal tax liability. The Minister, however, allocated the payments to the tax liability of one of the other companies. In 1979 the Crown seized the sum of $7,774.80 from the taxpayer's personal bank account and applied it to the amount still owed by the taxpayer since 1973. The taxpayer commenced an action in the Federal Court for unlawful seizure. The Court dismissed the action finding that the taxpayer had failed to allocate the payments to his personal tax liability. The Court held that under the circumstances it was quite appropriate for the Department to use its discretion in choosing which account the payment would be applied to. At page 264 (D.T.C. 6224) Madam Justice Reed stated:

These cases illustrate that when a debtor makes a payment he may allocate it to any debt he pleases and the creditor must apply it accordingly but if the debtor does not so allocate then the creditor has the right to allocate the payment as he pleases. [Emphasis added.]

Therefore, I am bound to conclude that once the defendant in this case directed the plaintiff to apply $2,168,000 of the company's 1978 instalments to its 1979 taxation year, the plaintiff was obliged to do so. Accordingly, in September of 1978 when the defendant filed its income tax return for its 1978 taxation year, though it had remitted it had not paid the $7,110,095 which was owing for the taxation year. What the defendant company had paid was $8,916,000 minus $2,168,000 for the debt owed in its 1978 taxation year and a further sum of $2,168,000 towards the debt owed for its 1979 taxation year. It is true that the defendant had "remitted" a total amount of $8,916,000 but that in itself does not lead to a finding that the defendant had “paid”, as that word is used in subsections 161(1) and (2) of the Act, the amount owing in respect of its 1978 taxation year. The facts are clear that the defendant caused the plaintiff to allocate a portion of the money remitted to the company's 1979 taxation year debt because the defendant company had improperly calculated the amount owing for its 1978 taxation year. As a result, a debt remained for the 1978 taxation year.

For the above reasons the decision of the Tax Review Board is overturned and the appeal is allowed with costs.

Appeal allowed.