P.R. Dussault T.C.J.:
1 This appeal was heard under the informal procedure of this Court. It is an appeal from an assessment with respect to the appellant's 1995 taxation year whereby the Minister of National Revenue (the “Minister”) found him liable for instalment interest of $231.30 and interest arrears of $2.16 pursuant to subsection 161(2) of the Income Tax Act (the “Act”).
2 In assessing the appellant, the Minister made the assumptions of fact stated in paragraphs 4a) to h) of the Reply to the Notice of Appeal which read:
a) during the 1995 taxation year, the Appellant's total income was $178,666;
b) during the 1995 taxation year, the Appellant did not earn any income from fishing or farming;
c) during the 1995 taxation year, the Appellant's income from which amounts were deducted at source was $93,045;
d) the Appellant's net tax owing for the 1995 taxation year was $11,493.90;
e) the Appellant's net tax owing for the 1993 and 1994 taxation years were $32,786.85 and $14,341.66 respectively;
f) on January 7th, 1995, the Appellant was informed that his provisional account payable based on the 1993 taxation year was $32,786.85 which consisted of payments of $8,196.71 payable on the 15th of March and June 1995.
g) on July 8th, 1995 the Appellant was advised that his provisional account payable based on the 1994 taxation year was $14,341 which consisted of quarterly payments of $3,585 on the 15th of March, June, September and December 1995;
h) the Appellant instead chose to pay instalments as follows:
| in March 1995 | $1,767.00 |
| in June 1995 | 2,032.00 |
| in September 1995 | 3,031.00 |
| in December 1995 | 2,277.00 |
| $9,107.00 |
3 The appellant does not challenge these assumptions except for paragraph 4g) as he does not know whether or not he was so advised.
4 Instead, relying on the decision of this Court in Paquette[FN1: <p><em>Paquette c. Ministre du Revenu national</em>(1990), 90 D.T.C. 1474, [1990] 2 C.T.C. 2016 (T.C.C.). The original French version is reported at(1990), 90 D.T.C. 1472 (Fr.).</p>] the appellant points to the fundamental unfairness in the application by the Minister of the provisions relating to quarterly instalments and interest on deficient instalments. The gist of the appellant's argument is the same as was raised in Paquette (supra) namely that a taxpayer should not be made liable to make instalments based on unearned or unrealized and unknown future income that will materialise only later in the year and that was unforeseen at a date when he should normally have been required to make an instalment. In Paquette (supra), Judge Lamarre Proulx allowed the appeal holding in effect that the requirement pertaining to quarterly instalments embodied in subsection 156(1) was not applicable to the taxpayer until the time the real estate transaction giving rise to the capital gain occurred. In stating her position, despite the clear language of the Act, she relied on the principle expressed in the Latin maxims lex non cogit ad impossibilia or lex non intendit aliquid impossibile which means “that legislation must be interpreted so as not to require the impossible”.
5 In the present case, the appellant states that the problem is particularly acute not only with respect to unforeseen capital gains but also with respect to unforeseen investment income arising in the second part of the year and even more so in the last quarter of the year.
6 Although the appellant recognizes that there are alternative methods for computing quarterly instalments based on preceding years figures, he contends, in presenting detailed calculations, that he is facing a no win situation because his yearly income is steadily decreasing. He either had to forego the use of important sums of money or face interest charges.
7 In his brief, the appellant stated the following:
I believe that system shortcomings would be corrected if Revenue Canada did the following:- Allow Current Year instalment taxpayers to pay tax on capital gains on 30 April (i.e. Taxable Capital Gains X Taxpayer's Highest Marginal Rate), provided that all other taxes have been paid by 31 December. This is philosophically the same privilege granted to Prior Year option taxpayers.
- Evaluate Current Year penalties using a modified tax, based on income equal to Total Income Less Taxable Capital Gains. Revenue Canada's instalment synthesising process may be used without significant negative impact (ref. Table 6).
- Use the modified tax to calculate instalments for all options in future years.
On the basis of the foregoing compelling arguments, I request that this Court orders Revenue Canada toi) Cancel the instalment interest penalty plus interest charged to my tax account.
ii) Review and correct aspects of the instalment process which do not respond in an equitable manner to this Court's Paquette ruling.
8 The position of the respondent is straightforward in that the appellant was required to make quarterly instalments pursuant to subsection 156(1) as he could not benefit from the exceptions mentioned in subsection 156.1(2). The respondent's representative states that the Act and section 5300 of the Regulations provide for quarterly instalments based on the estimate of tax payable for the current year or on two alternative methods computed by reference to the instalment base for the preceding year or years without any distinction with respect to different sources of income. A taxpayer can also choose to base his instalments on amounts stated to be payable in notices, if any, sent by the Minister. Subsection 161(2) provides that interest is payable on insufficient quarterly instalments but subsection 161(4.01) limits the interest on insufficient instalments by reference to the lesser of the four amounts mentioned namely, the actual tax payable for the year, the instalment base for the preceding year, the amounts computed by reference to the instalment base for the two preceding years and the amounts stated in notices, if any, sent by the Minister. In the present case, it is argued that the appellant chose to make his instalments based on his estimate, revised from time to time, of his current year tax liability. As that liability was underestimated, the appellant has to bear the interest resulting from his own choice.
9 In support of her arguments, the respondent's representative referred to the decisions of this Court in Hutchins[FN2: <p><em>Hutchins v. Minister of National Revenue</em>, [1991] 1 C.T.C. 2510, 91 D.T.C. 790 (T.C.C.).</p>] , Efremedis[FN3: <p><em>Efremedis v. Canada (Minister of National Revenue)</em>(IT)(T.C.C.).</p>] and Elkharadly[FN4: <p><em>Elkharadly v. R.</em>(1994), [1995] 1 C.T.C. 2273 (T.C.C.).</p>] .
10 First, I must mention that the provisions relating to quarterly instalments and interest of insufficient instalments have been amended several times since 1990. For one thing, the exception to the requirement to make quarterly instalments found in former subsection 153(2) and based on source deductions being made on3/4of income or more has been abandoned. The new criteria is now set forth in subsections 156.1(1) and (2). In the case of the appellant, whose chief source of income is neither farming nor fishing, paragraph 156.1(2)(b) states that sections 155 and 156 are not applicable, meaning that no quarterly instalments are required, when “the individual's net tax owing for the particular year, or for each of the 2 preceding taxation years, does not exceed the individual's instalment threshold for that year.” According to subsection 156.1(1), “instalment threshold” for a resident of Quebec at the end of the year means $1,200.
11 It is clear that the problem associated with quarterly instalments computed by reference to the estimate of tax liability for the current year has remained. If alternative methods of computing the instalments payments and the interest liability by reference to the preceding year or the two preceding years instalment base can be seen as an answer to some problems encountered with increasing and unforeseen income, it must be recognized that it fails to address fairly the situation the appellant is facing, i.e. a steadily decreasing yearly income coupled with unforeseen sources of income such as capital gains arising in the last quarter of the year. In such a case, the previous years instalment base is not very meaningful.
12 Although different positions have been taken by the judges of the Tax Court with respect to the requirements concerning quarterly instalments and the resulting liability for interest, it is important to mention that the question has been brought up to the Federal Court of Appeal.
13 First, in the case of Corse[FN5: <p><em>Corse v. R</em>(1991), [1993] 2 C.T.C. 2017 (T.C.C.).</p>] , a case not referred to by the parties, the problem of estimating the current year tax liability for the purpose of making quarterly instalments when unforeseen income is earned or realized later in the year was brought before the Tax Court again. The taxpayer relied on the decision in Paquette (supra) in disputing the interest charged on the March 15 and June 15 quarterly instalments which he argued were not required because they preceded the sale of a rental property giving rise to a capital gain and a recapture of depreciation.
14 After a careful analysis of the requirements of subparagraph 156(1)(a)(i) concerning the estimate of the tax payable for the current year on which the taxpayer could choose to base his quarterly instalments, Judge Garon in effect decided not to follow the decision in Paquette (supra) and instead adopted a position consistent with another line of cases[FN6: <p>In this respect, see<em>Culham v. Minister of National Revenue</em>, [1985] 1 C.T.C. 2227, 85 D.T.C. 165 (T.C.C.);<em>Steer v. Minister of National Revenue</em>, [1985] 2 C.T.C. 2265, 85 D.T.C. 589 (T.C.C.);<em>Hutchins</em>(<em>supra</em>).</p>] holding that the taxpayer had to make the quarterly instalments but according to his instalment base for the preceding year which represented, in fact, a lesser amount than the estimate of the tax payable for the year. Interest assessed by the Minister on the lesser amount was thus confirmed.
15 Secondly, in Ritchie[FN7: <p><em>Ritchie v. R.</em>(IT)I (T.C.C.), Bonner J.</p>] , a case also not referred to by the parties, the issue was raised again as to whether the taxpayer was required to make quarterly instalments during his 1989 taxation year when, in November 1989, he realized a substantial capital gain that could not be foreseen. Judge Bonner, of this Court, refused to follow the decision in Hutchins (supra) and, instead, relied on the decision in Paquette (supra) in allowing the appeal on the basis that the interest assessed was not exigible.
16 On an application for judicial review, the Federal Court of Appeal simply adopted the reasoning of Judge Garon in Corse (supra), set aside the judgment and referred the matter back to the Tax Court on the basis that:
[T]he respondent, being not a person to whom subsection 153(2) applied, was required by subsection 156(1) to make instalment payments of tax on the dates mentioned in that provision and was also, as he had failed to make those payments, liable to pay interest on the amounts of the unpaid instalments in accordance with subsection 161(2).[FN8: <p><em>R. v. Ritchie</em>(1993), 93 D.T.C. 5160 (Fed. C.A.)at page 5161.</p>]
17 It is trite law to say that the decision of the Federal Court of Appeal is binding on me and that the problem referred to by the appellant cannot be alleviated by this Court. Under the provisions applicable to his 1995 taxation year, the appellant was not a person to whom subsection 156.1(2) applied. He was thus required to make quarterly instalments.
18 The requirements of subsection 156(1) for making quarterly instalments are clear and unambiguous. The alternative methods of computation are also clearly stated. The same can be said of subsection 161(2) dealing with interest on insufficient instalments and the limitation of subsection 161(4.01) stating that the taxpayer is liable for interest with respect to the lesser of the four amounts mentioned. Although the appellant realistically felt that he could only make his quarterly instalments by reference to his estimate of the tax payable for the year, he must be held liable for interest according to subsections 161(2) and 161(4.01) of the Act as those instalments proved to be insufficient.
19 As to the computation of interest, the appellant has not convinced me that the Minister has misinterpreted or misapplied any provision of the Act.
20 It would not serve any useful purpose to discuss the merit of the appellant's suggestions for improving fairness of the system because, as it is readily apparent, the remedies he is seeking are not within the powers of Revenue Canada or this Court, but lie only with Parliament.
21 The appeal is dismissed.
Email this Content