Union Gas Limited v. Minister of National Revenue, [1983] CTC 2179

John B Goetz—[Orally]: This is an appeal with respect to the appellant’s 1978 taxation year. Pursuant to subsection 157(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, the appellant, Union Gas Limited (hereinafter referred to as the “company”) in its 1978 taxation year paid to the Receiver General of Canada the sum of $8,916,000 on account of its tax payable for that year.

Mr Gerald Miller, CA the Manager of Corporate Finance for the appellant, advised the Board that the appellant’s fiscal year ended March 31, 1978. He calculated that the company had overpaid the sum of $2,168,000 on account of its 1978 taxation year and on June 7, 1978 wrote Revenue Canada, Taxation asking them to apply this overpayment to its 1979 taxation year. He did this as a result of a letter from the Department of National Revenue addressed to the appellant, dated November 19, 1973 and received November 20, 1973. The said letter was filed as Exhibit A-2 and reads as follows:

Union Gas Limited

50 Keil Drive N,

Chatham, Ontario

N7L 3V9

Attention: Mr G E Miller, CA

Comptroller

J C CRAWFORD

November 19, 1973

Dear Sirs:

Re: Refund of Instalment Payments

This letter will serve to confirm our telephone conversation of November 16, 1973, and is in reply to your letter of October 29, 1973

Our Head Office advises that a refund of instalment payments cannot be made at this time. Overpayments, as defined in Section 164(7) of the Income Tax Act, may only be determined after the tax payable for the year is established, and therefore, no refund is possible until such time as the return is filed and the tax established.

Yours truly,

(signature)

Chief of Administration Services

Subsection 164(7) is merely definitive of the word “overpayment” and reads:

164. (7) In this section, “overpayment” means the aggregate of all amounts paid on account of tax minus all amounts payable under this Act or an amount so paid where no amount is so payable.

This, of course, as can be seen, is a neutral definition.

The appellant filed its 1978 taxation return on September 27, 1978, and calculated its tax payable to be $7,110,095. The Crown, in an assessment dated April 23, 1979, declared that as of May 31, 1978, there was a deficiency of $325,468.09 and charged interest thereon in the amount of $8,974.27 in accordance with subsection 161 (2) of the Income Tax Act. Subsections 161(1) and (2) read 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 pu rposes 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.

After making that initial assessment, Revenue Canada refunded the balance of the 1978 overpayment to the company in December 1979, and then by notice of reassessment dated Septembers, 1980, the Minister reassessed the federal tax payable for the 1978 taxation year as being $7,521,600.30 and also assessed interest payable by the company in the amount of $95,587.32. This was computed for the period of June 1, 1978 to September 10, 1980.

The Minister confirmed that reassessment on the grounds that “Interest has been levied in accordance with the provisions of section 156 and subsection 161(1) of the Act and section 4300 of the Income Tax Regulations”. The company contends that having duly made its instalment payments on account of its 1978 taxes, which exceeded the actual tax payable, that no interest was assessable in respect of taxes payable for its 1978 taxation year.

The appellant further contends that Revenue Canada had no jurisdiction to apply the estimated overpayment of the 1978 taxes to the 1979 taxes payable until on or after the mailing of the notice of assessment for the 1978 taxation year.

The company contends that that portion of subsection 161(2) which reads:

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, . . .

does not apply because the company had paid its taxes.

Further, the Minister purported to allocate the excess tax payments in June 1978 rather than making it effective as of the date of assessment. Moreover, if Revenue is holding the overpayment for 1978, which of course was in excess of tax finally reassessed, then no interest should have been charged at all. It should be noted that no taxes were payable by the company for the 1979 taxation year.

The respondent, on the other hand, dwelt on subsections 161(1) and (2), but I consider the question of refunds as being irrelevant to the appellant’s position. Ms Boris argued that the overpayment ceased to exist as of September 1978.

Revenue Canada can only act under section 164 of the Act and consequently the taxpayer, in fact, cannot designate the allocation of payment of tax. On May 31, 1978, two months after the end of the appellant’s fiscal year, Revenue Canada had in hand over $8,000,000 on its books and deposited somewhere. I do not think that Revenue Canada can have an overpayment in hand and charge interest after reassessment on a paper figure when, in fact, it had cash in hand.

I would like to quote from the case of Cominco Ltd v MNR, [1973] CTC 2240; 73 DTC 193, and particularly from 2242 and 195 respectively. This is a judgment of the Honourable L J Cardin, PC, QC, the present Chairman of this Board. He says at 2242 and 195 respectively:

Regardless of the accounting methods applied by the Department of National Revenue, section 54(1 ) (now section 161 (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 re-assessment 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 re-assessment?

Mr Cardin goes on to say at 2243 and 196:

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 re-assessment 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 1976 taxation year in paying, on account of taxes for that year, an amount of $9,773,617 the appellant made an over-payment which was credited to the appellant’s 1967 taxation year pursuant to section 57(2) of the Income Tax Act and on the other hand the appellant made an under-payment which gave rise to a charge for interest under section 54(1). It is my opinion that there can be but one valid tax payable as determined by assessment or re-assessment for a particular taxation year. Therefore, there cannot be an overpayment and under-payment at the same time.

I agree wholeheartedly with all other comments made by Mr Cardin in this judgment as it relates to the question before the Board.

As to the result of the reassessment, that the appellant should receive interest on its overpayment until it actually received its refund, I would refer to Otto John Rath v The Queen, [1982] CTC 207; 82 DTC 6175, in support of that contention. This is a case involving an erroneous assessment by the Department of National Revenue on moving expenses and then seeking to charge interest on its erroneous assessment. That case was heard by the Federal Court of Appeal and the judgment was rendered by Mr Justice Thurlow who takes much the same position as Mr Cardin did in the Cominco case (supra).

The Department of National Revenue cannot have it both ways, that is to say, use of the appellant’s cash overpayment and then charge interest on the liability arising from an erroneous assessment.

I therefore allow the appeal and refer the matter back to the respondent for reconsideration and reassessment.

Appeal allowed.