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 subsection 245(7).

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 assessment.

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.

Sylvie Guindon
PricewaterhouseCoopers LLP, Quebec City

Canadian Tax Focus
Volume 5, Number 1, February 2015
©2015, Canadian Tax Foundation