Here’s a riddle, courtesy of the Tax Court of Canada. How can you not owe taxes while accumulating years of interest charges?
The answer to this conundrum can be found in a recent Tax Court ruling in a dispute between the Bank of Nova Scotia and the Canada Revenue Agency.
In 2013 and 2014, the CRA audited one of Scotiabank’s foreign subsidiaries for the fiscal years 2006, 2007, 2008, 2009 and 2010 ending October 31. This audit led the CRA to issue a letter of proposal in February 2015 for the 2006 tax year, which included a $ 54.9 million increase in the bank’s revenue for 2006.
Scotiabank then carried forward $ 54 million in losses from 2008, which were offset by its previous profit. However, the CRA also assessed late interest of $ 7.9 million, accrued over the years between 2006 and the reassessment date in March 2015.
The bank appealed against this interest bill, arguing that the interest should only have accrued until it filed the 2008 tax return that generated the loss it used to offset its debt. .
In her judgment, Justice Susan Wong noted that Scotiabank argued ââ¦ that Parliament did not intend that a taxpayer would be subject to interest during periods when a loss was available for carryback. , but the taxpayer does not know how to do it until the conclusion of an audit. . “
For its part, the CRA said the Income Tax Act is clear. If a carryover loss is used to offset a tax debt, the invoice is deemed to have been paid on the last of four dates, plus 30 days. In the case of Scotiabank, it was in March 2015, when the bank requested that its 2008 losses be carried back. (In fact, it should have been in April 2015, but the CRA failed to add the 30 days required by law.)
However, Scotiabank argued that the circumstances of its situation differ from the wording of the law, which states that interest is to be calculated from the day a reassessment request is made to the CRA. The CRA initiated a reassessment itself, which then led the bank to request the carry-back of its losses – the order was the reverse of the one prescribed by law.
The CRA called the bank’s position a legal fiction in which no tax was owed. Instead, the government argued that taxes are due “until the taxpayer requests compensation for losses carried back,” plus 30 days.
Justice Wong ruled in favor of the CRA, writing that the wording of the law is unambiguous and that Scotiabank’s different circumstances “do not lead to different treatment under the interest provisions.” A small victory for Scotiabank: the judge did not add the 30 days of additional interest that the CRA had omitted.
In an interview, Michael Lubetsky, partner at Davies Ward Phillips & Vineberg LLP, said the decision highlights the inequalities created by Parliament’s 1985 decision to close loopholes around the deferral provisions. (Mr. Lubetsky was not involved in the case, but as a tax lawyer, he argued and wrote on the matter.)
Prior to these 1985 changes, some businesses intentionally under-reported their income in anticipation of losses occurring in subsequent years that could offset any tax debt that arose. When they carried over the losses, the debt was extinguished and no interest was paid.
Lubetsky said what is really an anti-fraud provision should have limited application – and companies like Scotiabank should not be penalized. âMy opinion is that, since this provision has been implemented for these types of targeted circumstances, it should be interpreted accordingly. “
In response to last week’s Tax and Spend on new estimates of household carbon costs, an online reader asked if the indirect costs included an increase in the price of all goods, saying they believed all costs would eventually be passed on to consumers. Is it correct?
The short answer is no.
It all depends on how companies react to an increase in carbon pricing (or an increase in costs resulting from regulation, including the output-based pricing system.)
In some cases, companies will find ways to reduce fossil fuel consumption, either through simple reduced use or through energy efficient capital investments. Thus, these saved dollars would reduce incremental costs.
Will businesses simply go through the rest? Sectors exposed to export, in particular, are limited in their ability to pass on costs. This is partly why they receive more favorable treatment under the production-based pricing system, a type of cap-and-trade regulation.
Even companies that do not face international competition face limits in their ability to pass on costs, as price increases will deter some customers and cause them to reduce their consumption or seek alternatives.
Economists call this the price elasticity of demand. In other words, how fast does demand decrease when prices increase (or conversely, how quickly does demand increase when prices decrease)? If demand for a product is price inelastic, suppliers of that product would be able to pass on costs relatively easily. Gasoline is a good example: there are few substitution options, at least in the short term. And for many drivers, fuel mileage is largely fixed. A morning commute doesn’t get shorter if fuel prices go up.
But there are also products with elastic prices, such as soda. If the prices of pop go up, consumers will buy less, in part because there are many substitutes. Juices, milk, powdered mixes, even tap water: the list of products consumers can turn to is long. This will limit the ability of companies to pass on costs.
Finally, there is the competitive advantage effect. Firms that are relatively energy efficient will be better off and will not face the same pressures to raise prices. It is also a constraint for the less efficient companies. If they increase their costs, they could lose market share.
Have your cake zero-rated: For a fun tax chat (there’s such a thing) check out this Twitter feed on some of the quirks of the GST rules. The artificial wedding cake, for example, is taxable, since it is not intended for human consumption. However, if a decorator includes at least one layer of real cake, the entire confection is duty free – as long as that edible layer weighs at least 230 grams.
Follow me on Twitter @PatrickBrethour or ask your tax question here.
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