Section 161

Subsection 161(1) - General

Cases

Quinco Financial Inc. v. Canada, 2018 FCA 137

interest is added as usual to a GAAR assessment

In 2009, the Minister reassessed to deny capital losses claimed by predecessors of the taxpayer for their 2004 taxation years. In a Rule 58 application, the Tax Court rejected the taxpayer’s submission that, as these were GAAR reassessments, interest did not accrue on the amount of the reassessed tax between the balance-due date for those years and the date of the reassessments almost four years later.

Webb J.A. dismissed the appeal, stating (at paras 16, 21, 28 and 30):

Although … [Bocock J] states …that “all taxpayers, who are directly subject to GAAR assessments, that is, non-third parties, are required to consider and apply GAAR”, in my view it is more accurate to state that all taxpayers who are contemplating a transaction or series of transactions that would result in a tax benefit should consider the risk that GAAR will apply to deny the tax benefit. …As with any other filing position that may result in a dispute with the Minister, if the taxpayer is ultimately unsuccessful following the resolution of all objections and appeals, then that taxpayer will be required to pay the additional tax together with interest. ...

While the Minister determines the reasonable tax consequences in relation to a GAAR reassessment, in my view, this is essentially the same role that the Minister fulfills whenever a reassessment is issued under the Act whether it is based on GAAR or any other provision. ...

As well, the requirement that the Minister in GAAR cases must establish that a tax benefit is not consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer cannot justify a finding that any liability for any increased taxes would only arise once that reassessment is issued. …

There is nothing in the Act that stipulates that the increased liability as a result of a reassessment based on GAAR only arises when the reassessment is issued.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 157 - Subsection 157(1) - Paragraph 157(1)(b) GAAR assessment for prior year was payable as at the balance-due date 166
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) taxpayers do not “apply” GAAR, but GAAR liability accrues before reassessment 260

Canada v. Zelinski, 2000 DTC 6001 (FCA)

The Court rejected the submission of the taxpayer that given that s. 158(8) deemed an assessment to be valid and binding until the time of the reassessment interest under s. 161(1) arising because of the reassessment of a taxpayer accrued only from the time of the reassessment rather than from the time the taxpayer filed his return. Sexton J.A. noted (at p. 6010) that "outstanding" was broadly defined as '''that stands over; that remains undetermined, unsettled or unpaid'" and that "simply put, taxes that a taxpayer underestimates from his or her tax return are unpaid and are therefore outstanding, regardless of the date in which the Minister reassesses ... ."

Words and Phrases
outstanding

Wargacki v. The Queen, 92 DTC 6336 (FCTD)

Joyal J. recommended that the Crown remit interest on the tax payable by the taxpayer that accrued between June 17, 1986 and the date his formal judgment was issued, given that on the first date counsel for the taxpayers had made a settlement offer that was essentially identical to the findings in the action by Joyal J.

The Queen v. Union Gas Ltd., 90 DTC 6659 (FCA)

For its 1978 taxation year ending March 31, 1978 the taxpayer remitted $8,916,000 and then in June 1978 directed Revenue Canada to apply $2,168,000 of that amount to its 1979 taxation year, which was done. However, the taxpayer showed tax payable of $7,110,095 when its filed its 1978 return, which later was increased to $7,521,000 by reassessment.

No interest was payable under s. 161(2), as the taxpayer had paid the required instalments for its 1978 taxation year, and the June 1978 agreement with Revenue Canada allocating those instalment payments to the 1979 year could not alter that fact "since a contract cannot have the effect of modifying a past event". However, interest was payable under s. 161(1) because at the time for filing the taxpayer's return for its 1978 taxation year (September 1978), the instalment payments had been applied, in part, to the 1979 taxation year.

Rath v. The Queen, 82 DTC 6175, [1982] CTC 207 (FCA)

The taxpayer’s employer deducted amounts from his salary and remitted such amounts on his behalf as payment towards his tax liability for his 1974 and 1975 years. In filing his returns for those years he deducted significant amounts for moving expenses, and received refunds for each year – but was later reassessed so that he was required to repay the refunds. The pre-1984 version of s. 161(1), provided:

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.

In applying s. 161(1),Thurlow CJ compared what the taxpayer had paid as a result of the source deductions, with his final tax liability for 1974 and 1975, with interest being found to be chargeable only on the difference between those two amounts (even though the taxpayer had received a refund for both 1974 and 1975 that he had had to subsequently repay.) Thurlow CJ stated at the conclusion of his reasons:

As there was no statutory provision imposing an obligation to pay interest for the use of the refunds until the errors were corrected by reassessments, the taxpayer…was not liable for such interest … .

Galway v. M.N.R., 74 DTC 6247, [1974] CTC 313 (FCA)

On an application for a consent judgment, the Court of Appeal lacked the jurisdiction to refer an assessment back to the Minister to reassess the taxpayer's tax and interest in a single lump sum. S.54(1) of the pre-1972 Act did not lend itself to the assessment of a fixed amount for interest before the tax had all been paid. In addition, "assuming the assessment of interest can be made at a fixed amount (which the proposed assessment does not expressly do), the result of the proposed lump sum assessment would be that the amount assessed as tax would diminish with a delay in implementing the settlement ...".

See Also

Isah v. The Queen, 2018 TCC 28 (Informal Procedure)

TCC has jurisdiction to correct incorrectly computed assessment interest

After confirming the Minister’s reassessments including for gross negligence penalties, Russell J stated (at para 17):

…I note that the Appellant is unhappy that he was assessed interest in the appealed reassessments. I believe at the hearing I advised that interest relief was not a matter over which this Court has jurisdiction (unless the wrong interest rate was used or otherwise a wrong calculation of the interest was made, thereby affecting the balance of the appealed (re)assessment). Rather, it is the Minister per subsection 220(3.1) of the Act who has discretionary jurisdiction to waive or cancel interest (and penalties)... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) TCC has jurisdiction to address incorrectly computed assessment interest 149

Quinco Financial Inc v. The Queen, 2016 TCC 190, aff'd 2018 FCA 137

interest on GAAR assessment accrues from the day after the balance-due date

In 2009, the Minister reassessed the taxpayer under GAAR for its taxation year ending August 27, 2004 to deny the tax benefit from a revised capital loss. The Rule 58 question before the court was whether arrears interest accrued on the taxpayer’s resulting tax payable from the balance-due day or from the date of the GAAR reassessment.

In finding that the taxpayer's obligation for the additional tax should be treated as an obligation that arose prior to the reassessment date, Bocock J stated (at paras. 41 and 42):

… [A] taxpayer possibly subject to GAAR, could have filed by deducting the future-impugned capital loss, but applying GAAR for the purposes of calculating tax payable. …

[A]ll taxpayers, who are directly subject to GAAR assessments, that is, non-third parties, are required to consider and apply GAAR. Taxpayers who are directly or may be directly subject to the nullification of a tax benefit need not ask the Minister for permission to apply GAAR.

Furthermore (paras. 51, 53):

[S]ubsection 161(1)… imposes interest “at any time after a taxpayer’s balance-due day” where tax payable exceeds amounts paid on account of tax for the year. …

To not impose interest from the balance-due day… renders GAAR ineffective in nullifying the deferral portion of the “tax benefit”. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) taxpayers can be required to apply GAAR to themselves 135

J.K. Read Engineering Ltd. v. The Queen, 2014 DTC 1216 [at 3872], 2014 TCC 309

interest under GAAR assessments accrued from balance due dates

After finding that GAAR applied to deny capital losses of the taxpayers from the time of the abusive transactions giving rise to them rather than not being denied until the transactions' reassessment under s. 245(2), Hogan J found that it followed that interest respecting such reassessments commenced accruing from the taxpayers' balance-due dates.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Res Judicata weight of obiter depends on fulness of argument 77
Tax Topics - General Concepts - Stare Decisis weight of obiter depends on fullness of argument 77
Tax Topics - Income Tax Act - Section 245 - Subsection 245(7) GAAR applies to impose liability for abusive transactions from inception 212

Ford v. The Queen, 95 D.T.C 848 (TCC)

The taxpayer did not file a 1991 return on or before April 30, 1992 because she had no income tax payable for that year. When a subsequent court judgment retroactively gave rise to a 1991 tax liability pursuant to s. 56.1(3), she filed her 1991 return within 90 days thereafter.

Bell TCJ. found that no interest was payable because the taxpayer had used due diligence in filing on this basis, and because, if she had filed a 1991 income tax return on April 30, 1992 there would have been no requirement for the filing of a second return by her following the court's judgment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 162 - Subsection 162(1) 94

Administrative Policy

91 C.R. - Q.61

RC will credit a voluntary payment as being on account of the year subject to a waiver effective from the date of payment where RC has identified a contentious deduction which it may disallow on a reassessment to increase taxes payable for the year in question.

10 June 1991 T.I. (Tax Window, No. 4, p. 23, ¶1290)

Where RC agrees to a request to substitute one type of loss for another and there is no Part I tax either on the original assessment or the reassessment, RC will not assess interest under s. 161(1).

87 C.R. - Q.73

RC has established tolerances to provide relief where payments are received within certain time frames and where interest to the date of payment falls below certain limits.

Subsection 161(2) - Interest on instalments

Administrative Policy

93 C.R. - Q. 50

Since the introduction of the instalment reminder system in March 1992, it has been departmental policy to charge neither instalment interest nor instalment penalty in situations where instalment reminders were not sent.

86 C.R. - Q.66-69

Re change from contra method to deficiency method; and maintenance of instalment accounts.

85 C.R. - Q.32

RC will permit a transfer of instalment payments previously made to the account of the same taxpayer for a later or earlier taxation year, and a transfer of instalment payments to a (related) taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(2) 28

Subsection 161(2.2) - Contra interest

Administrative Policy

87 C.R. - Q.74

Discussion of interest offset method.

Subsection 161(4.1) - Limitation — corporations

See Also

I.G. (ROCKIES) Corp. v. The Queen, 2005 DTC 289, 2005 TCC 51 (Informal Procedure)

For the purpose of computing interest on late and deficient instalment payments, the taxpayer was entitled to utilize the instalment method in s. 157(1)(a)(iii) (so that its first two monthly instalment payments were relatively small), notwithstanding that this method resulted in larger overall required instalment payments for the year than the method described in s. 157(1)(a)(i). Teskey J. stated (at p. 292) that "if Parliament intended in subsection 157(1) to require a corporation to use only the method that would result in the least total amount of tax being paid, it would have included clear statutory language to that effect in the body of subsection 157(1) itself".

Subsection 161(7) - Effect of carryback of loss, etc.

Cases

Connaught Laboratories Limited v. The Queen, 94 DTC 6697 (FCTD)

When the taxpayer was reassessed for its 1981 taxation year on the basis that it had realized a taxable capital gain, it choose to eliminate the resulting taxable income by carrying back a net capital loss for its 1982 taxation year, rather than utilizing undeclared scientific researched expenditures or investment tax credits for its 1981 taxation year. In finding that this choice by the taxpayer resulted in interest payable because of s. 161(7), Reed J. stated (p. 6699):

"I interpret the term 'tax payable', upon which interest is to be paid, pursuant to that subsection, as referring to the tax payable on the basis of the particular way the taxpayer chooses to compute its taxable income, when there is an option available, in this regard. I do not interpret that subsection as referring to the tax which might have been payable had another option been chosen."

See Also

Zandi v. The Queen, 2012 DTC 1246 [at 3707], 2012 TCC 259 (Informal Procedure)

The taxpayer filed his 2007 and 2008 returns on 29 July 2009. He had $289,707,38 of taxable capital gains for 2007, which was reduced to $198,153.78 through the carry-forward of a net capital loss of $73,331.18 from 2000, and $133,637.29 of "net capital losses" in 2008. His 2008 return included a T1A form requesting a carryback of the 2008 net capital losses to 2007. He sent a T1A form by fax to CRA on 14 January 2010 requesting the same carryback. The Minister reduced the taxpayer's tax payable for 2007 on the basis that the the 2008 carry-back amounts were deemed to have been paid on 13 February 2010, 30 days after the faxing of the T1A. (Further carryback requests, apparently of non-capital losses made pursuant to a notice of objection were not in issue.)

Favreau J. found that, pursuant to s. 161(7)(b)(iii), the carry-back amounts should be deemed to have been paid on 28 August 2009, 30 days after the first claiming of the net capital loss carryback in the 2008 return. The taxpayer's appeal was granted to reduce his interest payable accordingly.

Administrative Policy

29 March 2011 External T.I. 2009-0351721E5 - Interest/ Penalty on Taxpayer-Requested Adjustment

Where a taxpayer which is a member of an associated group requests a reduction to nil in in the small business limit allocated to it under s. 125(3), and then carries back subsequently-incurred non-capital losses to reduce the resulting tax payable to zero, interest is payable on tax that would have been payable but for the loss carry-back from the date of the original allocati0n until 30 days after the request is made.

93 C.R. - Q. 49

Where three years subsequent to the claiming of a capital gains exemption, it is determined that the capital gain should actually have been characterized as income, no arrears interest will be charged if the taxpayer requests that non-capital losses from previous years be applied against the income, whereas such arrears will arise if the individual instead requests the application of non-capital losses from a subsequent year.

88 C.R. - F.Q.9

Interest may be payable on a reassessment of a taxation year even if the resulting taxable income then is reduced by the carryback of a subsequent year's losses.

86 C.R. - Q.70

Interest on unpaid taxes arises where a taxable capital gain of year 2 originally is offset by a non-capital loss of year 1, then that non-capital loss is regenerated by carrying back an allowable capital loss of year 3.

Paragraph 161(7)(b)

Administrative Policy

21 March 2018 External T.I. 2017-0736291E5 - Interest calculation - loss substitutions

interest not assessed on loss substitutions

Aco first applied a $1,000 non-capital loss from Year 1 to offset a $1,000 taxable capital gain realized in Year 2. However, it then realized a $1,000 allowable capital loss in Year 3 and filed an amended Year 2 return to deduct that net capital loss under s. 111(1)(b), thereby restoring its $1,000 non-capital loss from Year 1. Does CRA still apply its policy in 9504905 of not assessing interest where there is a substitution of losses?

After summarizing s. 161(7)(b), CRA stated:

Accordingly, where a loss carry forward has been applied to a taxation year to reduce tax payable to nil, and is later substituted with a loss carry back, the calculation of interest under paragraph 161(7)(b) would result in a calculation of interest from the balance due date of the taxation year to which the loss is applied until 30 days after the latest of the dates noted above.

Nevertheless, it remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore, for a situation like the one outlined in the example above, the CRA would not assess interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(b) net capital loss carried back from Year 3 replaces non-capital loss carryforward from Year 1 without interest cost 129