Date: 19980709
Docket: 97-760-IT-I
BETWEEN:
SAMSON HOLDINGS LIMITED (Formerly named 723960 Ontario Limited),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] The Appellant in its Notice of Appeal wherein it appealed assessments of income tax under Part I.3 of the Income Tax Act (the "Act") in respect of its 1990 and 1991 taxation years elected the informal procedure.
Issue
[2] The issue is whether the Appellant should be considered as having made any payments on account of its Part I.3 tax liability for its May 31, 1990 and May 31, 1991 taxation years prior to the April 30, 1993 Notice of Assessment of the two returns.
Facts
[3] (1) the Appellant's fiscal year end was May 31st in the years 1990 and 1991;
(2) the Appellant's Part I.3 returns for its 1990 and 1991 taxation years were required to be filed with the Minister of National Revenue (the "Ministe") on or before November 30th of 1990 and 1991, respectively, under section 181.6 of the Act;
(3) the Appellant's accountant mailed (hence filed pursuant to subsection 248(7) of the Act) on November 30, 1992 its May 31, 1992 Part I Return (together with its Part I.3 Return for that year) and the Part I.3 Returns for the 1990 and 1991 taxation years, without any covering letter or cheque or cheques.
[4] At the bottom of the first page of its Part I.3 return for the 1990 taxation year, the Appellant indicated "payment on filing $72,362" and similarly, on the first page of its Part I.3 return for the 1991 taxation year, the Appellant indicated "payment on filing $84,934, Balance Unpaid [ ]." The Part I return for 1992 showed a credit refund balance in excess of $500,000.
[5] For the 1990 and 1991 taxation years, the Appellant filed its Part I.3 return, each year by November 30th, the filing date, and included therein a liability for surtax in the amount of $42,750 for 1990 and $42,947 for 1991. The Appellant paid its 1990 and 1991 Part I tax (including the surtax) within the regulated time period.
[6] The Appellant's chartered accountant testified that he assumed that the Department of National Revenue (the "Department") would apply the refund owing to the Appellant for the 1992 taxation year in respect of its Part I tax to the Appellant's outstanding liability for its Part I.3 tax for the 1990 and 1991 taxation years. This negligent assumption should never have been made particularly when a very simple written authorization by the Appellant enclosed with the returns would have solved most of the problems herein.
[7] The Minister, upon receipt of the 1990 and 1991 Part I.3 tax returns mailed on November 30, 1992 with no cheque or cheques enclosed, assessed the following amounts for the 1990 and 1991 taxation years:
1990 1991
Part I.3 tax $ 72,362.00 $ 84,934.00
Section 235 penalty $ 1,989.90 $ 2,335.63
Section 162(1) penalty $ 12,301.54 $ 14,438.78
Section 181.8(1) Arrears interest $ 31,818.64 $ 20,294.43
Section 181.8(2) Instalment interest $ 6,191.87
Section 163.1 Deficient instalment penalty $ 2,321.95
Total $118,472.08 $130,516.66
[8] It should be noted that the Part I.3 tax liability eliminated the section 123.2 surtax liability pursuant to section 125.3 of the Act.
[9] The Notices of Objection, both dated July 29, 1993, filed in response to the Part I.3 Notices of Assessment specifically requested that the excessive portion of instalment payments be applied to the extent necessary to the 1991 Part I.3 tax liability and thereafter for the 1990 Part I.3 tax liability.
[10] The Department could not follow the direction in the Notice of Objection, as on April 5th, 1993, the Department had refunded to the Appellant the refund of the Part I tax in respect of the 1992 taxation year.
[11] At the insistence of the Collections unit of the Department, the Appellant directed, in a letter, that an amount be transferred from another corporation's account and be applied to the Appellant's outstanding liabilities under Part I.3 for the 1990 and 1991 taxation years. These transfers were effected on April 11, 1996 and June 6, 1996 for the 1990 taxation year and on April 11, 1996 for the 1991 taxation year.
[12] On June 21, 1991, the Appellant made an income tax instalment of $100,000 and made further instalments of the same amount in August, September and October. These payments were made using Remittance Form T9 and I assume it designated the instalment payments for the taxation year ending May 31, 1992. The one form is used by corporations for all its tax instalment payments, the money is then held as a credit for the taxpayer to offset its income tax liability however it arises.
[13] The Department on receipt of instalment payments would have no knowledge of what tax liability these payments would eventually cover. It is only on receipt of the Part I and Part I.3 tax returns and the assessments thereof could the Minister then apply the instalment payments to any liability.
[14] The 1992 Part I tax returns requested a refund for overpayment and which was sent.
Analysis
[15] Section 235 of the Act provides for a penalty for failure to file a tax return. It reads in part:
"Every corporation that fails to file a return for a taxation year as and when required ... is liable, in addition to any penalty otherwise provided, to a penalty for each such failure equal to ..."
[16] Obviously, there is no defence to this penalty as the Appellant admitted that the Part I.3 1990 and 1991 tax returns were not filed until November 30, 1992, when they should have been filed on or before November 30 in 1990 and 1991 respectively.
[17] Section 162 also provides for a penalty when income tax is not paid when owing, it reads in part:
(1) Every person who has failed to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of
(a) an amount equal to 5% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed, and
(b) the product obtained when 1% of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, from the date on which the return was required to be filed to the date on which the return was filed.
[18] Again, as in the section 235 penalty, the 1990 and 1991 taxation year returns for the Part I.3 tax were not made and the liability was not paid when required. The 5 % portion therefore is owing. In regards to the 1 %, it is limited to 12 months and even if a letter had been sent requesting the Part I 1992 refund be applied to the 1990 and 1991 Part I.3 liability, the penalties herein would stand.
[19] In answer to the question "When did the Appellant pay its Part I.3 tax?", I find that it was not paid until April 11th, 1996. The filing of the 1990, 1991 and 1992 tax returns in one envelope, without clear unambiguous written instructions to apply the refund claimed in the 1992 Part I return, and to use the instalment payments for the 1992 tax, so that the first instalment made in 1992 can be used for the 1991 year, is not effective. The 1992 instalment cannot be considered an instalment made for the 1991 Part I.3 liability, which was unknown at that time by the Minister.
[20] Liability for instalment payments for the 1991 taxation year is established under paragraph 181.7(1)(a) of the Act. For the 1991 taxation year, a corporation which failed to pay an instalment of Part I.3 tax payable on or before the day on which the instalment was required to be paid, was liable to pay interest. Interest is computed from the day on or before which the instalment is to be paid until the earlier of the date that payment of the instalment is made and the date the corporation must begin to pay arrears interest in accordance with subsection 181.8(1). Interest is computed on the amount the corporation failed to pay.
[21] Subsection 181.8(1) and 181.8(2) read:
(1) Where, at any time after the day on or before which a corporation is required to pay the remainder of its tax payable under this Part for a taxation year,
(a) the amount of its tax payable under this Part for the year exceeds
(b) the aggregate of all amounts each of which is the amount paid at or before that time on account of its tax payable and applied as at that time by the Minister against the corporation's liability for an amount payable under this Part for the year,
the corporation shall pay to the Receiver General interest at a prescribed rate on the excess, computed for the period during which that excess is outstanding.
(2) Where a corporation that is required by this Part to pay an instalment of tax has failed to pay all or any part thereof on or before the day on or before which the instalment was required to be paid, it shall pay to the Receiver General, in addition to the interest payable under subsection (1), interest at a prescribed rate on the amount that it failed to pay, computed from the day on or before which the amount was required to be paid to the earlier of the day of payment and the beginning of the period in respect of which the corporation is required to pay interest thereon under subsection (1).
[22] Section 181.9 makes section 163.1 applicable to Part I.3 of the Act, with such modification as the circumstances require.
[23] Under section 163.1 of the Act, a corporation must pay a penalty as a result of its failure to pay all or any part of an instalment of Part I.3 tax on or before the day on which it is required to be paid. The penalty is calculated, in part, as a percentage of the interest payable under section 161 in respect of all instalments for the year.
[24] In respect of the 1991 taxation year, instalment interest for Part I.3 was calculated pursuant to subsection 181.8(2) and not pursuant to section 161. The section 163.1 penalty is calculated as a percentage of the interest payable under subsection 181.8(2) in respect of the Part I.3 instalments. Under subsection 181.8(2), the interest payable is calculated on the amount that the corporation failed to pay.
[25] Section 163 reads:
(1) Every person who
(a) fails to report an amount required to be included in computing his income in a return filed under section 150 for a taxation year, and
(b) had failed to report an amount required to be so included in any return filed under section 150 for any of the three preceding taxation years
is liable to a penalty equal to 10% of the amount described in paragraph (a), except where he is liable for a penalty under subsection (2) in respect of that amount.
[26] Since it was acknowledged that the 1990 and 1991 Part I.3 tax returns were not filed until November 1992; and having found on the evidence before me that there were no payments of the Part I.3 income tax liabilities for taxation years 1990 and 1991 until April 11th, 1996; and the only designation of how the tax instalments paid in 1991 were to be applied to the 1992 Part I tax liability; the appeals are dismissed.
[27] It is obvious to me that the accountant was negligent in many ways, firstly he did not know that the Appellant was required to file Part I.3 returns for 1990 and 1991, and secondly by just mailing these returns together with the 1992 return without specific directions and explanations. A specific authorization and direction would have eliminated some of the herein Appellant's problems.
Signed at Ottawa, Canada, this 9th day of July, 1998.
"Gordon Teskey"
J.T.C.C.