Yang v. The Queen

Yang v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-04-15 Neutral citation 2004 TCC 268 File numbers 2003-1488(IT)I Judges and Taxing Officers François M. Angers Subjects Income Tax Act Decision Content Docket: 2003-1488(IT)I BETWEEN: CHIU-CHENG YANG, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on February 26, 2004, at Vancouver, British Columbia Before: The Honourable Justice François Angers Appearances: For the Appellant: Hector Wong Counsel for the Respondent: Raj Grewal ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 15th day of April 2004. "François Angers" Angers, J. Citation: 2004TCC268 Date: 20040415 Docket: 2003-1488(IT)I BETWEEN: CHIU-CHENG YANG, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Angers, J. [1] The taxation years in issue in these appeals are 1996 and 1997. The Appellant was assessed arrears interest and late filing penalties in respect of unpaid taxes for both taxation years. In so reassessing the Appellant, the Minister of National Revenue (the Minister) relied on the provisions of subsections 161(1), 161(7), 162(1) and 162(11) of the Income Tax Act (the Act). [2] The Appellant arrived in Canada as an immigrant in 1989. He carried on a real estate development business through two wholly owned corporations: Gen Hwa Enterprises Ltd. and Shun Gen Developments Ltd. It is in the course of an audit of these two corporations that certain facts were discovered, which ultimately led to an audit of the Appellant's personal income tax for both taxation years. It was in fact discovered that rental income from both corporations was deposited into the appellant's personal bank account and that the appellant also had unreported income from two houses he personally owned. The Appellant was assessed under subsection 15(1) of the Act for both taxation years. [3] The Appellant did not file income tax returns for both taxation years on appeal nor for 1998, 1999 and 2000. The auditor met with the Appellant's representative on October 4, 2001, and was informed that the Appellant had incurred non-capital losses from the 1998 Allowable Business Investment Loss (ABIL). A written request was made on February 20, 2002, to apply the said non-capital loss as a carryback to 1996 and 1997 and as a carry forward to 1999 to offset taxable income to nil. Since the Appellant's representative did not have the T-1 forms to complete the Appellant's income tax returns for 1996 to 2000, it was agreed that the auditor would prepare the five outstanding years in issue. The assessment is dated June 3, 2002, and the filing date is March 6, 2002. [4] The unreported rental income and shareholder appropriations for the 1996 and 1997 taxation years are $82,170 and $123,176 respectively. On October 15, 2002, the Minister reassessed both 1996 and 1997 taxation years to allow non-capital losses of $82,170 and $123,176 for each taxation year respectively to be carried back from the 1998 taxation year. The carryback date used was September 27, 2002. The Appellant was also assessed interest on arrears and late filing penalties. [5] The Appellant filed Notices of Objection on October 28, 2002, for both taxation years. On February 26, 2003, the Minister reassessed the Appellant's 1996 and 1997 taxation years to adjust the balance of arrears interest on taxes and late filing penalties by using March 8, 2002, to halt the accumulation of late filing penalties and interest for those years instead of the September 27, 2002, date initially used. [6] The Appellant does not contest the re-assessment based on the unreported income for both taxation years. His appeals concern the late filing penalties and the interest calculated on the unpaid taxes that were assessed for both taxation years. The Appellant is asking this Court either to reduce the interest and late filing penalties or to waive both completely. The Appellant's representative submits that there was no need to file income tax returns for both taxation years since there was no income to declare initially and later, even though there was income, the taxes owed became nil by applying the carryback losses. As such, no late filing penalties and interest should be assessed against the Appellant. He submits that the Minister should have made the audit sooner and suggested that the date on which to end the accumulation of interest and late penalties should be the date the Appellant submitted his carryback losses, namely on October 4, 2001. He submits that the Appellant should be treated fairly. Interest [7] Subsection 161(1) of the Act provides for the payment of interest by a taxpayer after the taxpayer's balance-due day for a taxation year on the excess: Where at any time after a taxpayer's balance-due day for a taxation year (a) the total of the taxpayer's taxes payable under this Part and Parts I.3, VI and VI.1 for the year exceeds (b) the total of all amounts each of which is an amount paid at or before that time on account of the taxpayer's tax payable and applied as at that time by the Minister against the taxpayer's liability for an amount payable under this Part or Part I.3, VI or VI.1 for the year, the taxpayer shall pay to the Receiver General interest at the prescribed rate on the excess, computed for the period during which that excess is outstanding. [8] In this fact situation, the excess is actually the total amount of taxes payable by the Appellant for both taxation years on appeal since no taxes were actually paid before the balance-due day. The interest was therefore calculated from the balance-due day which is April 30 of the following taxation year for each year (see definition of balance-due day in subsection 248(1)). The Appellant's representative submits that the use of the carryback losses resulted in no taxes being payable but subsection 161(7) of the Act provides that carryback deductions used to reduce income tax of a preceding taxation year will not affect the calculation of interest until the day that is 30 days after the latest of four possible days. Subsection 161(7) reads as follows: For the purpose of computing interest under subsection (1) or (2) on tax or a part of an instalment of tax for a taxation year, and for the purpose of section 163.1, (a) the tax payable under this Part and Parts I.3, VI and VI.1 by the taxpayer for the year is deemed to be the amount that it would be if the consequences of the deduction or exclusion of the following amounts were not taken into consideration: (i) any amount deducted under section 119 in respect of a disposition in a subsequent taxation year, (ii) any amount deducted under section 41 in respect of the taxpayer's listed-personal-property loss for a subsequent taxation year, (iii) any amount excluded from the taxpayer's income for the year by virtue of section 49 in respect of the exercise of an option in a subsequent taxation year, (iv) any amount deducted under section 118.1 in respect of a gift made in a subsequent taxation year or under section 111 in respect of a loss for a subsequent taxation year, (iv.1) any amount deducted under subsection 126(2) in respect of an unused foreign tax credit (within the meaning assigned by subsection 126(7)), or under subsection 126(2.21) or (2.22) in respect of foreign taxes paid, for a subsequent taxation year, (iv.2) any amount deducted in computing the taxpayer's income for the year by virtue of an election in a subsequent taxation year under paragraph 164(6)(c) or (d) by the taxpayer's legal representative, . . . (b) the amount by which the tax payable under this Part and Parts I.3, VI and VI.1 by the taxpayer for the year is reduced as a consequence of the deduction or exclusion of amounts described in paragraph (a) is deemed to have been paid on account of the taxpayer's tax payable under this Part for the year on the day that is the latest of (i) the first day immediately following that subsequent taxation year, (ii) the day on which the taxpayer's or the taxpayer's legal representative's return of income for that subsequent taxation year was filed, (iii) where an amended return of the taxpayer's income for the year or a prescribed form amending the taxpayer's return of income for the year was filed in accordance with subsection 49(4) or 152(6) or paragraph 164(6)(e), the day on which the amended return or prescribed form was filed, and (iv) where, as a consequence of a request in writing, the Minister reassessed the taxpayer's tax for the year to take into account the deduction or exclusion, the day on which the request was made. [9] The Federal Court of Appeal in Connaught Laboratories Ltd. v. Canada, [1994] F.C.J. No. 1681, ruled that there was no ambiguity in the wording of subsection 161(7) nor did it find its interpretation to be offensive to the purpose or objectives of the Act. The Appellant's 1996 and 1997 tax returns were filed on March 5, 2002, which is the latest day applicable under the subsection. The Minister therefore used the proper date to reduce the amount of taxes payable and on which interest was to be calculated. The wording of subsection 161(7) makes it quite clear that the Minister correctly assessed the interest payable on the tax that would have been payable but for the carryback loss up to the date the returns were filed. Late Filing Penalties [10] Subsection 162(1) of the Act reads as follows: Every person who fails 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. [11] The other relevant subsection is 162(11). It reads: For the purpose of computing a penalty under subsection (1) or (2) in respect of a person's return of income for a taxation year, the person's tax payable under this Part for the year shall be determined before taking into consideration the specified future tax consequences for the year. [12] Specified future tax consequence is defined in subsection 248(1) and means the consequence of the deduction or exclusion of an amount referred to in paragraph 161(7)(a) referred to above. [13] This Court has dealt with this issue before. The leading decision on late filing penalties is Leach Bros Stores Ltd. v. M.N.R., [1985] 1 C.T.C. 2067. At paragraph 5, Associate Chief Judge Christie of the Tax Court of Canada as he then was stated the steps to take in levying a penalty under subsection 162(1) of the Act. That paragraph reads as follows: Whatever the date may be when a penalty is levied pursuant to subsection 162(1), these three steps must be taken. First, the time when the return was required to be filed is determined. Second, the amount of tax that was unpaid at that time is calculated. Third, the amount of the penalty is settled upon by adding 5% of the amount arrived at in the second step and the product obtained when 1% of the tax that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, between the date on which the return was required to be filed and the date on which it was filed. I can find no place in this legislative scheme for taking into account non-capital losses which arose after the time when the return was required to be filed. [14] The issue was further dealt with by this Court in Reemark Chelsea Terraces Project Ltd. v. R., 93 D.T.C. 469, and in Jonathan Cloud v. Canada, 95 D.T.C. 547. This latter decision is somewhat similar in that, by virtue of subsection 15(2) of the Act, the Minister included an amount in the taxpayer's income for the 1985 taxation year. The taxpayer had not filed his 1985 tax return until November 26, 1986. The taxpayer argued that as a result of a non-capital loss from a subsequent year being applied to his 1985 taxation year, the interest and penalty should be reduced. The Court held that the amount included in his income under subsection 15(2) had to be included in the taxpayer's income at the time the taxpayer's return was required to be filed, namely on April 30, 1986. The same reasoning applies to the present case in that the income assessed under subsection 15(1) had to be included in the appellant's income at the time the appellant's tax return was required to be filed, namely on April 30, 1997, and on April 30, 1998. Under subsection 162(21), the penalty is to be computed on the appellant's tax payable for the year before taking into consideration the carry-back losses. There is no ambiguity in these subsections. Fairness [15] It has been said numerous times that this Court is not a Court of equity. It is within the discretion of the Minister under subsection 220(3.1) to waive or to cancel all or any portion of any penalty or interest payable under the Act. In Floyd Estate v. M.N.R., 93 D.T.C. 5499, the Court stated: At the outset, I should point out that it is not for the Court to decide whether the interest otherwise payable by the taxpayer ought to be waived or cancelled. It is within the discretion of the Minister. [16] This Court has no jurisdiction in this case to cancel or to waive both the penalty and the interest. For the foregoing reasons, the appeals are dismissed. Signed at Ottawa, Canada, this 15th day of April 2004. "François Angers" Angers, J. CITATION: 2004TCC268 COURT FILE NO.: 2003-1488(IT)I STYLE OF CAUSE: Chiu-Cheng Yang and Her Majesty the Queen PLACE OF HEARING: Vancouver, British Columbia DATE OF HEARING: February 26, 2004 REASONS FOR JUDGMENT BY: The Hon. Justice François Angers DATE OF JUDGMENT: April 15, 2004 APPEARANCES: For the Appellant: Hector Wong Counsel for the Respondent: Raj Grewal COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada