Quinco Financial Inc. v. The Queen, 2016 TCC 190, is a Tax Court of Canada decision concerning a Rule 58 question of mixed fact and law related to an assessment of tax and interest payable under the general anti-avoidance provision (“GAAR”). The appellant objected to the arrears interest payable that accrued between the appellant’s balance-due day for the taxation year and the issuance of the reassessment.
The Court held that the interest was payable because the GAAR is an integral part of the Income Tax Act (“Act”), one that must be anticipated and considered by taxpayers in all situations. Accordingly, a GAAR reassessment is no different from another reassessment and does not create a tax liability only its issuance.
On April 7, 2009 (“Assessment Date”), the Minister of National Revenue (“Minister”) reassessed the Appellant under the GAAR for its taxation year ending August 27, 2004 (“Taxation Year”) to deny a capital loss. This resulted in federal tax payable for the Taxation Year. Under the same reassessment, the Minister assessed arrears interest payable by the Appellant beginning on October 28, 2004 (“Balance-Due Day”).
The Appellant’s objection to the reassessment did not dispute the application of the GAAR, focusing solely on the correct commencement date for the calculation of arrears interest payable.
Law at issue
The main issue was whether arrears interest accrued starting from the Balance-Due Day or from the Assessment Date. The Appellant argued that interest only began on the Assessment Date and identified three sub-issues:
- Whether GAAR reassessments are a distinct basis for tax assessment under the Act;
- Whether taxpayers may self-assess under the GAAR; and
- Whether a specific provision for imposing interest pursuant to GAAR reassessments is necessary.
The Court rejected all three of the Appellant’s arguments.
1. The GAAR is Part of the Whole
The Appellant argued that the nature of the GAAR is to override “strict compliance and technical conformity” with the Act and that the GAAR imposes tax consequences sufficient to deny the tax benefit, but “does not permit or extend to the recharacterization of the transaction for any other tax purposes”. The GAAR reassessment itself thus created new tax consequences and a new tax liability that had not existed until the Assessment Date.
The Court rejected this argument, noting that while the “GAAR is “quite a different sort of provision”… “engrafted” upon the Act, it is nevertheless part of it, both incorporating within it and incorporated into other provisions of which GAAR seeks to prevent abuse or misuse”. A GAAR reassessment is not a novel or distinct assessment of a taxpayer, but simply the function by which the Minister nullifies tax consequences resulting from non-GAAR provisions of the Act.
The GAAR assessment does not create a new tax liability but in this case nullifies a previous Part I tax benefit in the Taxation Year. The reassessment of the Appellant utilized the GAAR, but otherwise reassessed the taxpayer in the normal course of the Act.
2. The GAAR is to be anticipated and considered by taxpayers
The Appellant argued that the GAAR may not be self-assessed because the Minister alone determines whether the provision has been abused or misused and what the reasonable circumstances lead to the denial of the tax benefit. As a result, it is only when a GAAR reassessment is received that the tax consequences could have been known to the taxpayer.
The Court held that the GAAR is to be anticipated at all times. In particular, the Court noted that “[t]ax advisors involved in such planning exercises must weigh the consequences of a GAAR reassessment like any other assessment”. Further, the Appellant could have filed using its original filing position, but still calculated its tax payable on the basis that the GAAR applied. This way, a GAAR assessment would not have caused interest to accrue. The Appellant could then still have objected to the reassessment and the Court would then determine whether the GAAR properly applied. The Court concluded that “a taxpayer is able to approach, anticipate and account for GAAR as a taxpayer is obligated to do with all other taxing sections of the Act”.
3. No Specific Provision is Required
The Appellant argued that, if Parliament had wanted arrears interest to accrue prior to the Assessment Date, then it would have enacted a specific provision. Without a specific provision imposing interest on a GAAR reassessment, the interest did not accrue. This argument was based largely on the legislative history of subsection 161(11), which was enacted to introduce interest on penalties.
The Court held that on a plain reading of the interest provisions of the Act, the Appellant is required to pay interest starting on the day after the Balance-Due Day. The GAAR reassessment changed the Appellant’s tax payable in the Taxation year. The Appellant’s analogy to the introduction of subsection 161(11) was rejected: subsection 161(11) was enacted to introduce interest on penalties, which previously did exist at all, not to change the commencement date of the calculation of said interest.
Further, if interest did not accrue until after the Assessment Date, then a tax deferral would be created between the Balance-Due Day and the Assessment Date. The GAAR definition of tax benefit includes “deferral of tax”. To not impose interest from the Balance-Due Day would effectively grant a deferral of tax despite the GAAR.
Interest on a GAAR reassessment is no different from interest on any other reassessment by the Minister.
All taxpayers are required to consider and apply GAAR to themselves and tax advisors are required to do so as well. This clearly puts to rest the argument that a taxpayer may not self-assess under the GAAR – Quinco Financial makes it explicit that taxpayers – and tax advisors – must always consider the GAAR before and during every transaction.