Cominco LTD v. Minister of National Revenue, [1973] CTC 2240, 73 DTC 193

The Assistant Chairman:—The appeal of Cominco Ltd from tax assessments in respect of the 1966 and 1967 taxation years was heard at Vancouver on February 20, 21 and 23, 1973.

There are two issues in this appeal. The first is whether the respondent’s method of applying the payments of tax in the appellant’s 1966 and 1967 taxation years was proper and whether determining the interest to be paid by the appellant in those years was in conformity with subsection 54(1) of the Income Tax Act. The second issue is whether or not the amounts of $1,055,614 and $847,149 expended by the taxpayer in 1966 and 1967 respectively on scientific research should have been deducted in determining the basis for depletion allowances for purposes of Income Tax Regulation 1201.

At the hearing of this appeal counsel for the respondent requested, and was granted, the opportunity of making written submissions. However, in a letter dated August 2, 1973 counsel advised that the parties would not be making written submissions with respect to the applicability of subsection 54(1) of the Income Tax Act as it relates to interest for 1966, and a Consent to Judgment allowing the 1966 appeal as it pertains to interest was forwarded dated July 25, 1973. The depletion issue for the year 1966 and the interest and depletion issues for 1967 therefore remain to be decided.

Notwithstanding the aforementioned Consent to Judgment and because the whole litigation in this appeal arises principally from the method applied by the respondent in dealing with the appellant’s tax payments in 1966, I have decided for the sake of clarity and continuity to incorporate in my reasons for judgment the factors which prompted my decision on the interest issue for 1966 and which necessarily affects the amount of tax payable by the appellant in the 1967 taxation year.

The facts of the case are as follows:

1. During the 1966 taxation year the appellant paid on account of its taxes for 1966 an amount of $5,625,000. By letters dated August 29, 1966, September 19, 1966, October 27, 1966 and November 28, 1966 the appellant requested that prior years’ credit be applied to the current instalments for 1966 with the result that the appellant paid on account of taxes a total amount of $9,773,617 as at June 30, 1967.

2. In filing returns for 1966 the appellant estimated its taxes to be $5,920,115 which was confirmed by the Department on September 19, 1967, leaving an apparent overpayment of $3,853,502.

3. By reassessment of June 21, 1968 the tax payable was $5,971,427 and the overpayment of $3,853,502 was readjusted to $3,802,190.

4. For its 1967 taxation year, the appellant paid $300,012 and applied the apparent credit of $3,802,189.86 for a- total payment or credit of approximately $4,102,202. By assessment of August 2, 1968 the appellant for the 1967 taxation year was assessed at $4,027,822— giving rise to a credit balance of $74,598 for the taxpayer.

5. The appellant then drew the Department’s attention to an error in the Department’s favour for its 1966 and 1967 taxation years. By reassessment of March 20, 1970 the tax payable by the appellant was $6,651,556.13, increasing the last previous assessment for 1966 by $680,129.13 and for the 1967 taxation year the reassessed tax payable by the appellant was calculated at $5,313,856.03—an increase of $1,285,974.03 over its last previous assessment consequential upon the March 20,1970, reassessments which increased taxes payable for 1966 and 1967.

6. Interest in the amount of $101,167.85 for the 1966 taxation year and an amount of interest of $95,906.39 for the 1967 taxation year were charged to the appellant on the grounds that the appellant had made, on account of taxes, an underpayment in those years.

7. By the further reassessment of August 7, 1970 the tax payable for 1966 was decreased to $6,426,192.35 and the tax payable for 1967 decreased to $5,307,295.94 with an attendant decrease in the interest due for the year.

The first point at issue which is whether the method of appying the appellant’s payment of taxes and determining the interest charged on an underpayment of taxes in 1966 was proper, is one of strict law touching on the basic principles of taxation.

The appellant was charged interest for underpayment of taxes for the 1966 and 1967 taxation years pursuant to subsection 54(1) of the Income Tax Act.

Subsection 54(1) of the Income Tax Act reads:

54. (1) General.—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 on the difference between those two amounts from the expiration of the time for filing the return of income to the day of payment at the rate of 6% per annum.

It is an accepted principle that the taxpayer’s liability arises from the operation of the Act and not from the process of assessment. Jurisprudence has also determined that it is the last assessment made which is valid and that any previous assessments are nullities so that the taxpayer’s liability to pay the amount of tax payable for a particular year is established by the Minister’s last assessment.

In the present instance the only valid assessment is that of August 7, 1970, which effectively fixed the appellant’s tax liability for 1966 at $6,426,192.35—the previous assessments being null and void. According to the Agreed Statement of Facts, on June 30, 1967, which was within the required time limit, the appellant had paid on account of its taxes for the 1966 taxation year an amount of $9,773,617. The appellant’s tax liability for 1966 being $6,426,192—the appellant made for the 1966 taxation year not an underpayment but an overpayment of $3,347,425. Regardless of the accounting methods applied by the Department of National Revenue, subsection 54(1), in my opinion, is simply not applicable to the facts of this case because the appellant’s only valid tax liability or tax payable for 1966 was that fixed by the August 7, 1970 reassessment in the amount of $6,426,192.35 and that full amount and more was paid by the appellant in 1966 on account of its tax liability for that year. How can one justify the retroactive charging of interest for underpayment when the appellant had in 1966 paid more than the amount of tax payable for that year as established by the Minister in his August 7, 1970 reassessment? In a letter to the appellant dated September 24, 1970 the Director of Taxation stated:

The variance in interest between your calculations and ours seems to arise from methods of applying instalment payments. You have used a chronological basis by utilizing credits and instalments for the full period under review but it is our interpretation of the legislation that each year is a separate calculation giving effect to the instalments designated for a specific year against the tax for the same year. An over-payment for a year resulting from this method does not occur until the date the return was due to be filed or the date of the last payment whichever is the later. Where we have a request to apply such an overpayment to another year the effective date of the credit is determined in that manner.

I believe you were told verbally when you were in this office that a taxpayer could request a transfer of instalment credits between years prior to an original assessment but subsequent to that event the credits cannot be re-allocated between years.

It is true that an amount calculated on the basis of previous assess- ments had been applied by the Minister as “over-payment” to the appellant’s 1967 tax payable. However, in my view, the overpayment can be calculated and applied to a subsequent year only after the appellant’s 1966 tax payable has been firmly established by the Minister’s latest reassessment. Had the appellant’s overpayment in 1966 not been sufficient to cover the increase in the tax payable for that year as a result of the Minister’s last assessment, the situation would, to my mind, be quite different, but in the circumstances of this case, to charge interest for an underpayment in 1966 appears to me to be not only contrary to the law but an unwarranted and unfair imposition on the taxpayer.

The respondent claims that the Department of National Revenue had applied the appellant’s apparent overpayment for 1966 to the appellant’s 1967 taxation year and that the department, as a result of subsequent reassessments, was not bound to move the moneys around to the appellant’s advantage.

In my view it is not a question of moving moneys around to anyone’s advantage. It is a question of applying the letter and the principle of the law. The amount of tax payable by the appellant in 1966 as established by the respondent’s last assessment is the appellant’s only valid tax liability for that year. All previous assessments for 1966 being nullities, it would seem to me that no accounting methods and no departmental policy can possibly base any of its calculations on assessments which are non-existent.

The letter of the law and the principles of taxation create a liability for the taxpayer (subject to variation, objection or appeal) to pay the tax payable for a specified period as established by the most recent assessment of the Department of National Revenue on the basis of which the interest charges and/or refunds must necessarily be calculated. No matter how many previous assessments may have been made, they do not effectively establish the appellant’s "tax payable” as defined by the Act.

In this instance the amount of overpayment for the 1966 taxation year, which is the source of conflict in the present issue, could be calculated and applied to a subsequent year only after the tax payable by the appellant for the 1966 taxation year has been finally established by the department’s last assessment. Similarly, any further reassessment by the respondent of the appellant’s 1966 taxation year fixing the appellant’s tax payable for that year at a figure different from that of a previous assessment would, in my view, become the new basis on which all pertinent calculations and adjustments would have to be made.

There is a good deal in the observation made by counsel for the appellant in which he claims, and I believe rightly so, that the position taken by the Minister is untenable because on the one hand the Minister holds that in the 1966 taxation year in paying, on account of taxes for that year, an amount of $9,773.617 the appellant made an overpayment which was credited to the appellant’s 1967 taxation year pursuant to subsection 57(2) of the Income Tax Act and on the other hand that the appellant made an underpayment which gave rise to a charge for Interest under subsection 54(1). It is my opinion that there can be but one valid tax payable as determined by assessment or reassessment for a particular taxation year. Therefore, there cannot be an overpayment and underpayment at the same time. In this instance there was undoubtedly an overpayment in the appellant’s 1966 taxation year which must be calculated on the basis of the tax payable as determined by the Minister’s last assessment and it is this amount only which can be applied to the appellant’s 1967 taxation year pursuant to subsection 57(2). I have therefore come to the conclusion that the method employed by the respondent in applying the appellant’s payments on account of taxes for the 1966 and 1967 taxation years is improper and contrary to the law and to the basic principles of taxation and that the determination of interest thereon pursuant to subsection 54(1) is not applicable to the facts of this case as they relate to the 1966 taxation year.

For these reasons, the interest issue of this appeal for the 1966 taxation year is allowed. For the 1967 taxation year, the quantum of tax payable, the determination of whether or not an underpayment was made in that year and the amount of interest payable, if any, pursuant to subsection 54(1) of the Income Tax Act can only be determined in the light of the last assessment made for the taxation year 1967, taking into account the overpayment made in 1966, consequential upon the last assessment for that year.

The second issue in this appeal is whether or not certain expenditures by the taxpayer in 1966 and 1967 on scientific research should have been deducted in determining the base for depletion allowance for purposes of Income Tax Regulation 1201.

The evidence is that the appellant in 1966 expended $1,055,614 and in 1967 spent $847,149 on scientific research in order to acquire new knowledge, to devise and develop new processes or to improve existing processes. These expenditures were claimed by the appellant as deductible capital expenditures pursuant to sections 72 and 72A and by virtue of paragraph 11 (1)(j) of the Act. However, in determining the base for the appellant’s depletion allowance for purposes of income Tax Regulation 1201 the respondent deducted these expenditures in computing the appellant’s profits for 1966 and 1967. Had these amounts not been deducted in determining the base for the depletion allowance for purposes of Regulation 1201, the tax levied in respect of the taxation years 1966 and 1967 would have been $6,254,259 and $5,169,393 respectively, and the calculation and application of the appellant’s overpayment in 1966 and resulting changes in the appellant’s tax payment for the 1967 taxation year would necessarily vary accordingly.

Counsel for the respondent presented no argument on the second issue and did not deny that the expenditures of $1,055,614 and $847,149 incurred by the appellant in 1966 and 1967 respectively were for scientific research. He merely claimed that these expenditures were properly deducted in determining the base for the appellant’s depletion allowance for purposes of Regulation 1201.

The facts of the second issue of this appeal are on all fours with the pertinent facts of the International Nickel Company of Canada, Limited V MNR, [1971] FC 213 at 234; [1971] CTC 604 at 633; 71 DTC 5332 at 5349, where it was held by the Trial Division of the Federal Court “that the appellant’s expenditures on scientific research which it claimed as deductions under Sections 72, 72A and by virtue of Section 11(1)(j) in computing its taxable income for the year are nonetheless expenditures of a capital nature and consequently are not deductible in determining the base for the depletion allowance for the purposes of Regulation 1201”.

The pertinent and uncontested facts of the case at bar being identical to those of the main issue in the above-cited case, the Board has no alternative but to follow the principle enunciated and the decision rendered therein. Consequently the Board holds that the expenditures incurred by the appellant in the taxation years 1966 and 1967 for scientific research are not deductible in determining the base for the depletion allowance for the purposes of Regulation 1201 and this second issue is therefore allowed.

In conclusion, therefore, the appeal for the 1966 taxation year is allowed. The appeal for the 1967 taxation year is allowed in part and the whole matter referred back to the Minister for reconsideration and reassessment.

Appeal allowed In part.