Takeaway: Tax Court finds that interest accrues until the actual date of loss carryback request:
Case Summary:
In this recent decision, the
Facts: The taxpayer was a Canadian bank, with a taxation year ending on
During the 2013-2014 calendar years, the CRA performed an audit of one of the taxpayer's foreign subsidiaries and reviewed income tax returns for the tax year-ends 2006 to 2010. In February of 2015, the CRA issued a proposal letter to the taxpayer in respect of the audit of the 2006 taxation year. The parties agreed to enter into a settlement agreement involving certain transfer pricing adjustments to the taxpayer's returns for the period of 2006 to 2014, which would result in an increase to the taxpayer's 2006 taxable income of roughly
In March of 2015, the taxpayer wrote back to the CRA requesting that
Shortly thereafter, the CRA issued a notice of reassessment for the taxpayer's 2006 taxation year, whereby the taxpayer's taxable income for 2006 was increased by
The taxpayer disagreed with the CRA's application and calculation of arrears interest and appealed to the Tax Court.
Issue: At issue was for the Court to decide the deemed payment date for the purpose of calculating arrears interest when a loss carryback is applied.
Tax Court Decision: On appeal, the Tax Court held - based on the specific wording of the statute - that if an amount of tax payable for a taxation year (i.e., the 2006 taxation year) is reduced because of the carryback of losses from a later year (i.e., from the 2008 taxation year), interest on any unpaid tax for the 2006 taxation year is to be calculated as if no reduction occurred until 30 days after the latest of the following dates:
- The first day immediately following the loss year =
November 1, 2008 -
The day the taxpayer's income tax return for the loss year was filed =
April 28, 2009 -
If the CRA reassessed the taxpayer's tax for the year to take into account the loss deduction as a consequence of a written request, the day on which the request was made =
March 12, 2015
Taxpayer's Argument
The taxpayer's position was that interest arrears should be calculated based on the date that the taxpayer filed its income tax return for the year the loss was filed -
CRA's Argument
The CRA's position was that interest should be calculated based on the date on which the taxpayer made its written request for the carryback loss -
Tax Court's Analysis
The trial judge disagreed with the taxpayer's argument, stating that in a self-assessing system, the onus is on the taxpayer to ensure its taxes are paid on time. Despite the fact that the balance was discovered later during an audit, the taxpayer was liable for tax owing regardless by virtue of the operation of the Act. In other words, a formal assessment issued by CRA is not necessarily determinative of a taxpayer's actual tax liability which is inherently a question of law.
The court agreed with the CRA, in that the current instance was more similar to the
In sum, the court found that the wording of paragraph 161(7)(b) was unambiguous and that
Takeaways
The end result of this case proved to be costly for the taxpayer. One could argue that this interpretation of the provision results in interest accruing on a balance that did not exist, or at the very least existed only for the period until such time as losses became available to be carried back.
Related to this point, the Tax Court noted that the Tax Act contemplates retroactive or retrospective liability following a reassessment in a self-reporting system. However, if a taxpayer does not know about a tax liability until many years later, for example after an audit, it seems unfair that they should have to pay interest for the intervening years.
It is worth noting that in the past, the CRA has acknowledged that the purpose of paragraph 161(7)(b) was to prevent situations where a taxpayer deliberately refused to pay taxes in a year, in anticipation of incurring losses in a subsequent year that could be carried back to eliminate the previous year's tax liability.
Where there were no indications of such tax avoidance, the CRA has in some circumstances be willing to accept that arrears interest should accrue only until the filing date of the taxpayer's loss year tax return, and not until the day of the request for loss carryback. It would thus appear that the CRA has not been consistent over the years in its approach to applying the provision.
Taxpayers who are being audited and may have carrybacks or carryforwards available to offset any potential "new" tax liabilities should consult immediately with a tax lawyer to determine what, if anything can be done to try and minimize this unexpected and often costly expense.
Sources
[1]
[2]
[3]
[4] Corp v. Alberta (Provincial Treasurer), 2003 ABQB 157 (CanLII)
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