Interprovincial Steel and Pipe Corporation LTD v. Her Majesty the Queen, [1985] 1 CTC 112, 85 DTC 5099

Muldoon, J:—In this case, the plaintiffs counsel asserts, as his primary principle, that which, in effect, was one of the basic slogans of a couple of revolutions: no taxation without representation. Here is how counsel put it in his own words, drawn from the transcript of the hearing:

The plaintiffs position . . . is that while [it would] indeed be fair in equity that they [the defendant and the minister] get the interest back, there’s absolutely nothing in the Income Tax Act that allows them to get the interest back.

It came to me, . . ., that put on its highest plane, what we are arguing today is, under our system of government, who has the right to impose a charge upon the citizenry?

By the assessment, Revenue Canada is saying the executive branch does. By his pleadings, my friend is saying the judiciary does.

I am saying that neither of those propositions are [sic] tenable, that the only person who can raise a charge on the citizenry is Parliament by the most specific words in the taxing statute.

That, if it be so, portends a debate on the highest plane, most assuredly.

Through their respective counsel, the parties have most helpfully agreed upon most, if not all, of the facts necessary to the adjudication. An agreed statement of facts, filed as Exhibit 1, runs, with slight abridgment, as follows:

1. The Plaintiff is a body corporate having its head office and principal place of business in the City of Regina, in the Province of Saskatchewan. The business of the Plaintiff is the manufacture of steel and steel products, including pipe.

2. From the time of its incorporation in 1956 up to and including the end of its 1978 taxation year, being August 31, 1978, the Plaintiff treated its spare parts, electrodes and refractories as inventory, and filed its returns up to and including its return for the 1978 taxation year on that basis.

3. In its audited financial statements for its 1977, 1978 and 1979 taxation years, the Plaintiff had treated the aforesaid supplies for financial statement purposes as inventory, which supplies consisted of the following:

	1977	1978	1978	1979	1979
[Totals]	$6,257,003.00	$6,647,042.00		$7,590,019.00

4. In 1980 the plaintiff filed its 1979 return and refiled its 1978 return on the basis that the said items were deductible expenses and not inventory and claimed the amounts of $6,647,042.00 and $942,977.00 respectively as prepaid expenses and further claimed in its Notice of Objection for its 1977 taxation year the following amounts as prepaid expenses:

[Total]

$6,257,003.00

5. On February 28, 1979 and February 28, 1980, being the day by which the Plaintiff was required to file its return for the 1978 and 1979 taxation years respectively, the Plaintiff had paid its taxes on the basis that the items in question were inventory. However, when the Plaintiff filed its return for the 1979 and refiled for 1978 it took the position that the items were deductible and not inventory claimed refunds of the taxes purportedly overpaid.

6. The sequence of events that ensued is recorded below:

1978

(a) On the date on which the Plaintiffs tax return for its 1978 taxation year was required to be filed, being February 28, 1979, the Plaintiff had paid on account of its taxes for 1978, $6,840,209.90. On July 29, 1979 the Minister of National Revenue assessed the Plaintiffs tax for the year as $6,833,462.30, and issued a refund to the Plaintiff of $6,747.60 tax and interest of $246.24.

(b) As a result of the Plaintiff refiling its return for its 1978 taxation year, the Minister of National Revenue reassessed the Plaintiff on March 31, 1980, with the tax assessed being $3,849,378.13. As a result of that reassessment a refund was issued to the Plaintiff on April 28, 1980 in the amount of $2,983,934.26 in tax and $331,864.46 in interest.

(c) On May 7, 1982 the Minister of National Revenue reassessed the Plaintiff, determining the tax for 1978 to be $6,745,992.74. This gave rise to an assessment of interest in the amount of $329,655.89.

(d) The interest of $329,655.89 assessed on May 7, 1982 is a claim for the recovery of interest that was paid to the Plaintiff on April 28, 1980.

1979

(a) On the date on which the Plaintiff's return for its 1979 taxation year was required to be filed, being February 28, 1980, the Plaintiff had paid on account of its taxes for 1979, $2,250,000.00. On May 15, 1980 the Minister of National Revenue assessed the Plaintiff tax for the year at $706,849.27 and issued a refund to the plaintiff of $1,543,150.70 for taxes and interest of $35,247.92.

(b) On May 7, 1982, the Minister of National Revenue reassessed the Plaintiff, determining the tax for 1979 to be $1,066,495.30. This gave rise to an assessment of interest of $6,377.33.

(c) The interest of $6,377.33 assessed on May 7, 1982 is a claim for recovery of interest that was paid to the plaintiff on May 15, 1980.

7. The interest of $329,655.89 for 1978 and $6,377.33 for 1979 was paid to the Plaintiff pursuant to subsection 164(3) of the Income Tax Act.

8. In its Statement of Claim filed on May 19, 1983, the Plaintiff claimed:

“(a) That this appeal be allowed and the Reassessments referred to in the foregoing paragraph 7 be varied on the basis that the amounts deducted by the Plaintiff for spare parts, refractories and electrodes are properly deductible expenses and that the said amounts are not properly included in inventory.

(b) That if the tax assessed pursuant to the Reassessments referred to in the foregoing paragraph 7 is exigible, then the interest charged in the said Reassessments is not exigible pursuant to any provision of the Income Tax Act or for any other reason.”

9. The Plaintiff agrees to the treatment of spare parts, refractories and electrodes as being a part of its inventory for the 1977, 1978 and 1979 taxation years and, accordingly, agrees to abandon claim (a) as set forth in paragraph 8 above.

A further, but briefer, statement of fact was also the subject of the parties’ agreement. It is filed as Exhibit 2 and in essence goes like this:

... the parties hereto agree that the interest amounts of $329,655.89 for 1978 and $6,377.33 for 1979 have been paid by the Plaintiff to the Minister of National Revenue.

In terms of possession of the interest amounts, the Minister has them: it is the plaintiff corporation which seeks to get them back.

It appears that over the course of about 22 years, from its incorporation in 1956 to the end of its 1978 taxation year, the plaintiff in its role of taxpayer had included the spare parts, electrodes and refractories in its inventory. However, the plaintiff filed its 1979 return and refiled its 1978 return on the basis that those items were deductible expenses, and not inventory. It further claimed in its notice of objection for the 1977 taxation year amounts totalling some $6.257 million for those same kinds of items as prepaid expenses. Accordingly the plaintiff claimed refunds of the taxes purportedly overpaid. At the appropriate earlier times noted in paragraph 6 of Exhibit 1, the Minister agreed with the plaintiffs assertion of deductions and refunded the tax purportedly overpaid and also paid interest on it to the plaintiff, pursuant to subsection 164(3) of the Act.

However, again as noted in subsequent subparagraphs of paragraph 6 in Exhibit 1, the Minister reassessed the plaintiff and the consequences and contentions are noted in that paragraph 6 under 1978 in subparagraph (d) and under 1979 in subparagraph (c). So, what the Minister paid over in interest at first, the Minister claimed back later. Then, as indicated in paragraph 9 of Exhibit 1-, the plaintiff abandons its appeal as to whether the spare parts, refractories and electrodes be part of inventory, agreeing that they were and are inventory; but the plaintiff seeks to retain or recover the interest which the Minister paid on the amounts which the plaintiff now perforce agrees were not overpayments after all.

The taxpayer and the Minister have certainly been indulging in to-and-fro here but their respective positions appear to have stabilized at last. The upshot is a windfall of interest money for the plaintiff according to the plaintiffs view of the matter, even although the amount of that interest, reposes in the Minister’s hands. The plaintiffs counsel invokes constitutional propositions on the highest plane of principle partly because, he says, there was at the material time no provision in the Income Tax Act whereby the plaintiff could be compelled to “disgorge” its windfall. He emphasizes that argument by pointing to subsection 164(3.1) which deals with this subject and which was added by SC 1983-84, Chap 1, applicable with respect to interest paid or applied after April 19, 1983. That is not the plane of principle to invoke here, because any real usurpation of the taxing power in these circumstances by the executive or the judiciary would be effected only through acceptance of the plaintiffs claim. To express the matter in the plaintiffs counsel’s terminology, the citizenry of Canada can rest assured that the Minister is not giving their hard-earned tax money to the plaintiff for no good reason.

Nor is there any question of inserting equitable principles into the administration of the income tax law by denying the plaintiffs claim. If there be no provision of the Income Tax Act to make the plaintiff disgorge its notional windfall of baseless interest on an ephemeral tax overpayment which has evaporated by the plaintiffs own agreement, then even more importantly there is no provision whereby the Minister can be compelled to make a gift of what is clearly other taxpayers’ money since the interest has no basis in any tax overpayment ever made by the plaintiff. Nemo dat quod non habet. The money for that interest has obviously come from other taxpayers and it would be a scandal to compel — or even to permit — the Minister to lavish that money upon the plaintiff, since the plaintiff now agrees that it made no tax overpayment which could generate the interest.

That is not just a matter of fairness or equity, which according to the authorities of The King v BC Electric R’way Co Ltd, [1945] CTC 162; 2 DTC 692 at 173 [697] and The Queen v Malloney’s Studio Ltd, [1979] 2 SCR 326; [1979] CTC 206; 79 DTC 5124 at 336-7 [212], has no place in interpreting fiscal statutes, but it is surely a proposition of law. When the plaintiff abandons its claim to the alleged tax overpayment, then the interest which is payable only in regard to that supposed overpayment cannot lawfully be paid to or retained by the taxpayer. That money belongs to the Government of Canada on behalf of all taxpayers, and the Minister would be seriously in error to pay it back or over to the plaintiff. That money must remain in the Minister’s possession. No overpayment of tax was ever established, either by agreement or adjudication. Since there never was any tax overpayment, as the plaintiff now agrees, then it follows that no interest could lawfully be paid or credited to the plaintiff for a non-overpayment. Even if the interest money were presently in the plaintiffs hands it could not lawfully keep and convert that money to its own use. But for a very temporary colour of right, when the Minister temporarily agreed with the plaintiffs view, such keeping and converting could amount to theft by conversion. Now that the plaintiffs colour of right has disappeared, not by adjudication, even, but by the plaintiffs abandonment of its claim of overpayment, the plaintiffs posture is not more lawful, but less.

It follows that the plaintiffs appeal must be dismissed. Since the earlier uncertain situation whereby the interest became the parties’ football was attributable to both the plaintiff and the Minister, the court in the exercise of its discretion regarding the costs of this action, declines to award any costs to either party.