Taxpayers must pay interest on non-existent tax debts
Following a transfer pricing audit,
The relevant provision on the payment of interest on the Income Tax Act (ITA) is paragraph 161 (7) (b), which provides that interest accrues on a tax debt that is offset by a carry-back up to 30 days after the last of the four dates. One of these dates, set out in subparagraph 161 (7) (b) (iv), applies when a reassessment is issued following a written request for carryback, in which case interest accrues. until the date of the request.
The CRA argued that subparagraph 161 (7) (b) (iv) applies in situations like BNS, that is, when the CRA makes audit adjustments during a given tax year that the taxpayer requests to offset through loss carrybacks. Even though no additional tax can be due, the CRA charges interest on the notional amount of tax until the date the “claim” is made – which logically can only happen towards the end of the tax period. verification when adjustments are known. In support of this position, the CRA relied primarily on the case of
BNS argued that when enacting subparagraph 161 (7) (b) (iv),
In its reasons, the ICC essentially adopted the reasoning of the ARC, considering that the BNS case was “closer to that of Connaught than
In our respectful view, a careful examination of the text, context and purpose of subparagraph 161 (7) (b) (iv) strongly supports a different result than that reached by the TCC:
- Subparagraph 161 (7) (b) (iv) only applies “where, following a written request”, the CRA reassesses the taxpayer to account for a carryback losses. In cases like the BNS, the ARC does not reassess following such a request, but rather to implement the findings of an audit regarding other matters. The application of additional loss carrybacks in such a situation is incidental to the audit adjustments and therefore falls outside the clear wording of subparagraph 161 (7) (b) (iv).
- The underlying purpose of paragraph 161 (7) (b) – as the CRA itself explains – “is to cover situations where a taxpayer willfully ignores the payment of taxes, anticipating the application of tax. subsequent losses to erase the liabilities ”. In light of this underlying objective, the CRA did not apply subparagraph 161 (7) (b) (iv) in situations where tax obligations were found to be higher than expected as a result of an audit. (see CRA documents 2009-0313781I7 and 2011-0420701I7). It is not known why he chose to abandon this eminently reasonable approach.
- Prior to the enactment of subparagraph 161 (7) (b) (iv), when a taxpayer carried back losses to offset tax payable in a prior year, interest accrued from the tax year until the year of the loss. In 1985,
Parliamentamended paragraph 161 (7) (b) to add, among others, paragraph (iv). Officials of the The Finance Departmentexplained to Parliamentthat these changes were “not of a controversial nature”, but rather “aimed at resolving technical problems which had arisen in the administration and enforcement of the Income Tax Act”. Therefore, Parliamentenacted subparagraph 161 (7) (b) (iv) with the understanding that it did not depart significantly from prior law. It follows that subparagraph 161 (7) (b) (iv) must be interpreted restrictively.
- Connaught related to taxation years prior to the enactment of subparagraph 161 (7) (b) (iv). The case simply ignores the thesis that default interest can accrue on a tax debt during the period in which the debt is extinguished.
- By definition, interest is intended to compensate for the use of money, and it is unreasonable to charge interest on extinguished debts. At a minimum, if
Parliamentreally intended to achieve such a result, parliamentary proceedings would surely show a clearer record of that intention.
For all these reasons, we hope that the
Implications for taxpayers
Until and unless the
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