Timing of Arrears Interest in GAAR Assessments
Quinco Financial Inc v The Queen, 2016 TCC 190
This was a Rule 58 Application under the Tax Court of Canada Rules (General Procedure). The question to be determined was whether, where the Minister relies on a GAAR assessment to deny capital losses, does arrears interest payable under subsection 161(1) of the Income Tax Act accrue in respect to any period after the taxpayer’s balance due date and before the issuance of the reassessment?
In other words, the Court was asked to determine when arrears interest would start to accrue where GAAR is used to recharacterize the transaction.
Although GAAR is different than the provisions in the Income Tax Act, it is still a part of the Act and part of the other provisions of the Act. A court must "to the extent possible, contemporaneously give effect to both the GAAR and the other provisions of the ... [Act] ... relevant to a particular transaction" (para 30) - Canada Trustco. The ITA must be interpreted as a functional, coherent whole with respect to all statutory schemes engaged by the transaction.
The TCC held that "an assessment under GAAR [...] is not an assessment divorced from the other provisions of the Act [, rather,] GAAR is entirely dependent upon a textual, contextual and purposive analysis of the object, spirit or purpose of the very provisions which allegedly confer the tax benefit" (para 31). The Minister nullifies the tax benefit through employing other non-GAAR provisions of the ITA, giving rise to tax consequences under those other provisions at the time of the transaction (para 33).
When engaging in tax planning, the taxpayer's advisors must weight the consequences of a GAAR reassessment like any other assessment (para 39). A taxpayer possibly subject to GAAR could have filed by deducting the future-impugned capital loss, but calculated tax payable by applying GAAR (para 41). If this was done, then upon a GAAR assessment interest would not accrue. All taxpayers who are directly subject to GAAR assessments are required to consider and apply GAAR (para 42). The taxpayer does not need to ask the Minister's permission to apply GAAR - STB Holdings Ltd.
Subsection 161(1) is the default provision governing interest accrual for all tax liability arising under an assessment or reassessment under the ITA. The Court concluded that on a plain reading of the arrears interest provisions, a taxpayer is liable to arrears interest beginning on the day after the balance due date on a GAAR assessment (para 45). This is because "tax payable" is fixed by an assessment or reassessment, subject to an appeal - ITA s 248(1) "tax payable". Where taxes payable exceed the taxed paid before the balance due date, on the day after the balance due date, arrears interest applies. A GAAR assessment fixes or adds to the tax payable of a taxpayer, causing (where there has not been a payment in anticipation of the denial of the tax benefit) the tax payable to exceed the taxes paid.
The Court found support for the imposition of arrears interest from the balance due date in the GAAR itself. GAAR defines "tax benefit" to include any reduction of other amounts that would be payable under the ITA. Were interest not charged until a GAAR assessment was issued, tax deferral is created during the period between the balance due date and the date of the GAAR assessment (para 53). GAAR is meant to deny tax benefits not allow them.
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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