Joan Patricia Ramsay v. Minister of National Revenue, [1984] CTC 2341

Goetz, TCJ:—[ORALLY] This is an appeal by the appellant with respect to her 1980 taxation year. The appellant was employed as a systems’ analyst in 1980 and had a remuneration from this position in the sum of $29,773.92 from which amounts were deducted pursuant to section 153 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The total income of the appellant for the 1980 taxation year was a sum of $40,979.09; her federal tax in 1980 totalled $7,750.49, whereas it amounted to $6,594.06 in 1979. The respondent alleges that the appellant failed to make payments of instalments on account of her tax payable for the taxation year 1980 as required by subsection 156(1) of the Act and relies, inter alia, upon subsections 156(1), 161(2) and regulation 4300 of the Income Tax Regulations:

Subsection 161(2) reads as follows:

Interest on instalments. 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 date 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.

The appellant states that the tax on her salary was paid throughout the year. Simply put, the appellant says her interpretation of this section is that she would be required to make instalment payments only from the time her income exceeded the 25 per cent rule. That does not happen, she says, until the year is finished, or whenever it happens. She states that if one finds that one is a little bit over the 25 per cent instalment, that person would be assessed an undue penalty because he/she would now have to pay interest on the whole instalment, 25 per cent for the whole year.

The appellant did not dispute that she was liable for the instalment payments, she states and I quote:

As you know, a taxpayer is allowed 25 per cent of their income to be in effect free of penalty, interest penalty if instalments are not made, regardless of whether they were due or not. But if a taxpayer has 25.001 per cent of their income, that is, does not have tax withheld at source, they then become liable for the interest, not just on the amount that was over the 25 per cent, but on the entire amount.

She argues quite eloquently that if the taxpayer exceeds the 25 per cent by only two cents, then that taxpayer would become liable for interest, not on the two cents but on the entire amount of the instalment payment, and for the entire period of one year, in effect generating many hundreds of dollars on two cents of additional income. She argued:

However, it does not spell out specifically on what amount that interest should be paid, and my contention is that it would be unreasonable to assume that the interest would be payable on the entire amount for the entire year, because of the difficulty of justifying the very large tax on such a small percentage of difference; in my case it amounts to an effective rate of 49.1 per cent tax, because the difference between the 75/25 rule in my case, is $940.00.

She argues, and in my view, properly so, that the Act is ambiguous. The respondent, on the other hand, argued that the matter was quite simple and that the issue is solely the interpretation of the interest on instalments.

Unless the Crown in a charging section brings the taxpayer squarely within that section, the taxpayer is entitled to escape paying tax or interest as the case may be. The appellant was an extremely competent person and argued quite forcefully that the tax base upon which interest is assessed should be the difference of the excess over the original tax base — that is to say, the difference between 75 per cent with a tax deducted at source where there is a small difference over the 25 per cent instalment payment. This generates in effect a retroactive taxation penalty. She stated that it would be unreasonable to interpret the Income Tax Act to say that a person would be assessed on the entire amount rather than on the difference because it generates such an unjust penalty if you miscalculate by such a tiny amount.

In reading 161(2), everyone is required to pay the instalment payments which, in fact, the appellant did. Then we come to the key words “has failed to pay all or any part there was required” and the appellant paid virtually all. As stated previously, the appellant claims that the 25 per cent rule does not mean the balance exceeding the 25 per cent rule does not happen until the year is finished or whenever it happens. And as she says, one could go the whole year and be a little bit over the 25 per cent, and quoting her again, “if you are a little bit over, you will be assessed an undue penalty because you would now have to pay interest on the whole 25 per cent for the whole year. Whereas, if you were just under the 25 per cent, you would have to pay no penalty on any of it at all”. Further she states: “It seems illogical to apply it that way because the Crown could then assess the taxpayer hundreds and hundreds of dollars on simply a matter of a few cents or a few dollars difference with the 25 per cent rule”. There being no jurisprudence on this matter and on the facts of this case, and on the eloquent argument of Ms Ramsay, I allow her appeal.

Appeal allowed.