Arrears Interest Calculation when GAAR Applied
JK Read Engineering Ltd v The Queen, 2014 TCC 309
At issue was the calculation of arrears interest where the General Anti Avoidance Rule (GAAR) has been applied. Specifically at issue was (1) the date at which the tax liability arises when GAAR is applied, and (2) when interest beings to accrue on that liability.
The taxpayer argued that subsection 245(7) of the Income Tax Act requires that the Minister first issue a Notice of Assessment based on the GAAR before the tax consequences of abusive avoidance transactions can be determined. The tax liability, therefore, arises only on the date of the GAAR assessment.
The Minister argues that GAAR applies automatically and without the Minister’s actions, giving rise to the tax liability on the taxpayer’s balance due date.
The Court held that GAAR operates as a transaction is being carried out without the need for the Minister to Assess.
Justice Hogan reviewed the taxpayer’s and Minister’s positions.
The taxpayer argued that the SCC in Copthorne Holdings Ltd. v. The Queen, 2007 TCC 481, affirmed in 2009 FCA 163, affirmed in 2011 SCC 63, held that taxpayer’s cannot self-assess on the basis of GAAR because of subsection 245(7), and on this basis the tax liability only arises when the Minister assesses on the basis of GAAR. Hogan J disagreed with this analysis, and stated that implicit in the SCC decision s that “GAAR operate[s] as the abusive transactions [are] being carried out, and not [...] when the GAAR-based assessment [is] issued by the Minister” (para 16).
The Court considered the proper interpretation of subsection 245(7) of the ITA, which reads:
Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.
Justice Hogan noted that the decision of the SCC did not deal with the striking out of the penalty (the basis of the taxpayer’s no-self-assessment argument), and therefore could not be used to interpret the provision. This reminds us of the importance of actually looking at what issues were before a court, and what part of the decision is the ratio and what parts are obiter (see para 22-24). The SCC in R. v. Henry,  3 S.C.R. 609, rejected the idea that the obiter of the SCC majority is binding on lower courts, and stated that having obiter bind lower courts is not desirable because:
. . . the effect would be to deprive the legal system of much creative thought on the part of counsel and judges in other courts in continuing to examine the operation of legal principles in different and perhaps novel contexts, and to inhibit or skew the growth of the common law.
. . . All obiter do not have, and are not intended to have, the same weight. The weight decreases as one moves from the dispositive ratio decidendi to a wider circle of analysis which is obviously intended for guidance and which should be accepted as authoritative. . . .
Justice Hogan also referred to the decision in S.T.B. Holdings Ltd. v. The Queen, 2002 DTC 1254, where it was held that an assessment issued under subsection 245(7) does not require specific reference to GAAR and does not prevent the use of GAAR as an alternative assessing tool. The FCA, 2002 FCA 386, on appeal held, appeal to SCC dismissed, that 245(7) applies only to third party taxpayers affected by the assessment of a target taxpayer, and who are seeing an adjustment under 245(6). Justice Miller in the decision quoted from the explanatory notes accompanying the enactment of GAAR:
New subsection 245(7) of the Act provides that a person may not rely on subsection 245(2) in order to determine his income, taxable income, or taxable income earned in Canada of, tax or other amount payable by, or amount refundable to, any person under the Act as well as any other amount under the Act which is relevant for the purposes of the computation of the foregoing, except through a request for adjustment under subsection 245(6). This prevents a person from using the provisions of subsection 245(2) in order to adjust his income, or any of the above-mentioned amounts without requesting that adjustment following the procedures set out in subsection 245(6). [emphasis added]
The Court held that GAAR application for determination of the tax liability of a taxpayer does not depend on the date of the Notice of Assessment (para 41), or that in the alternative it is retrospective in effect (para 42).
As for the arrears interest on the tax liability, the court held that the interest accrues from the taxpayer’s balance-due-date if there is tax payable outstanding at that time. The FCA in The Queen v. Whent, 2000 DTC 6001 at para. 44, held that “outstanding” refers to an amount “that stands over; that remains undetermined, unsettled, or unpaid”. Also, the definition of “tax payable” in subsection 248(1) does not provide an exception for the application of GAAR. Thus arrears interest begins to accrue from the balance due date.
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