In the recent decision of Nottawasaga Inn. Ltd. v. R. (2014 DTC 1021), the Tax Court of Canada (“TCC”) held that it had no jurisdiction to hear an appeal from a reassessment of arrears interest where there exists a nil assessment of taxes and the sole basis for the appeal is not the calculation of the interest itself but the computation of the underlying taxable income on which the interest was calculated.
The taxpayer in Nottawasaga reported nil income for the 2007 taxation year after claiming a deduction for capital cost allowance and other expenses. The Minister of National Revenue (the “Minister”) reassessed the taxpayer to deny various expenses and also reduced the taxpayer’s capital cost allowance claim after reclassifying the taxpayer’s capital assets into different classes that had a lower rate of depreciation. The result of the reassessment was to increase the taxpayer’s taxable income from nil to $144,166 and to require payment of arrears interest of $6,027.
Faced with this reassessment, the taxpayer requested that a loss carry-back of $144,166 from the 2010 taxation year be applied against its 2007 taxation year, thereby reducing the taxable income to nil. The Minister agreed with the taxpayer’s request and issued another reassessment that showed the income inclusion of $144,166 being offset by the loss carry-back, with the result that no tax was payable for the 2007 taxation year. The reassessment, however, made no adjustment to the arrears interest of $6,027. The taxpayer appealed the arrears interest on the basis that the Minister erred in her reclassification of the taxpayer’s assets which, as a result, set the wrong tax amount on which arrears interest was calculated.
The TCC decision only deals with the jurisdictional issue of whether the taxpayer can challenge arrears interest by asserting that the underlying tax amount was incorrectly calculated where there is a nil assessment of taxes. The Minister argued that such a challenge was prohibited as it would effectively amount to a challenge of the underlying tax amount which the taxpayer has no right to appeal because no tax was payable.
As a general rule, it is true that taxpayers do not have the right to object or appeal an assessment of a nil amount. This is simply because there is nothing to appeal if there is no tax, interest or penalties payable. On the other hand, if the Minister issues an assessment to a taxpayer for interest payable, but there is otherwise no tax payable and the nil assessment of tax is not in dispute, the TCC acknowledged that taxpayers are entitled to object or appeal the assessment of interest. However, in dealing with a challenge to interest assessments, the court’s jurisdiction is generally limited to the following issue: whether the interest was properly calculated mathematically speaking or whether the interest was imposed in accordance with the Income Tax Act (Canada).
It follows that, when there is a nil assessment of taxes, a court has no jurisdiction to hear an appeal from an assessment of interest if the basis for the challenge is an error made by the Minister in computing the underlying tax amount on which the interest was calculated. This is precisely what the taxpayer was trying to do in Nottawasaga: it was not challenging the correctness of the calculation of the interest but the calculation of its taxable income. In other words, the taxpayer argued that its taxable income – not the interest – was incorrectly calculated due to the reclassification of its capital assets into different classes. This, in turn, resulted in the interest being imposed on the wrong underlying tax amount, according to the taxpayer.
The TCC rejected the taxpayer’s arguments and agreed with the Minister that it had no jurisdiction to hear the taxpayer’s appeal in this case. Instead of challenging the interest assessment, the taxpayer should have appealed the initial reassessment that increased its taxable income by $144,166 (i.e., the reclassification of its capital assets). However, the taxpayer chose not to do so and, instead, requested that a loss carry-back be applied to reduce its taxes payable to nil. It is therefore difficult to understand why the taxpayer should have been allowed to attack the reclassification for the purposes of challenging the arrears interest while the reclassification remained valid for the purposes of computing its taxable income.