If GAAR Applies, When Does Interest Start To Accrue?
J.K. Read Engineering Ltd. v. The Queen (2014 TCC 309)
considered whether interest resulting from the application of GAAR
should be computed starting from the date on which the notice of
assessment was issued by the tax authorities, or from the taxation year
in which the relevant transactions occurred. Hogan J decided in favour
of the latter interpretation, which was that of the CRA.
In 2011, the appellants received a notice of assessment saying that
GAAR applied to a 2007 transaction, with interest on the outstanding
balance being computed from the 2007 taxation year. The CRA’s view was
that interest accrues from the date on which the tax was initially
owing—the 2007 taxation year, since at that time GAAR applied even if
the tax authorities had not intervened (that is, even if they had not
taken any action to reassess the taxpayer on the basis that GAAR
applied). The appellants believed that the interest on the balance due
should be computed only from the 2011 taxation year—that is, the year in
which the new notice of assessment was issued. The appellants based
their appeal on several arguments, including the interpretation of
Hogan J began by reviewing the decision in Copthorne Holdings Ltd. v. The Queen (2007 TCC 481),
which dealt with the application of sections 212 and 215 and subsection
227(8) and the obligation to make the necessary withholdings under part
XIII. The judge dismissed the appellant’s analysis of Copthorne on the ground that Copthorne
had indeed defaulted from his withholding obligations but that a
defence of due diligence could be established for obligations resulting
from section 215.
Subsequently, the judge proceeded with the interpretation of
subsection 245(7) in order to define its scope. He stated that the
appellants’ arguments conflicted with the obiter comments in STB Holdings Ltd. v. Canada (2002 FCA 386),
which dealt with the application of the subsection to taxpayers
affected by GAAR as third parties. The judge noted that while obiter
dicta are not binding on the courts, those made by higher courts still
deserve greater consideration.
Hogan J then analyzed the definition of “following” in the sentence
“following the application of this section” in subsection 245(7) (and
its French counterpart). He stated that it cannot be concluded that the
tax liability based on GAAR begins from the receipt of the notice of
Finally, Hogan J considered subsection 161(1) relating to accrued
interest and concluded that there is no special treatment in the
subsection for assessments based on GAAR.
PricewaterhouseCoopers LLP, Quebec City