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Rarely does a tax law dispute reach the Supreme Court of Canada (“SCC”), but when it does, it often provides a welcome opportunity for comprehensive statutory interpretation. Last month, the SCC heard an appeal from the unanimous Federal Court of Appeal (“FCA”) decision of Bank of Nova Scotia v Canada, 2024 FCA 192, leave to appeal granted (41643) [Bank of Nova Scotia]. This appeal invites the Court to clarify the calculation of arrears interest where losses are carried back to reduce tax debt pursuant to subsection 161(7) of the Income Tax Act, RSC, 1985, c 1 [ITA]. It is hoped that the Court’s ruling will provide greater certainty to businesses familiar with loss carrybacks and routine tax audits under the ITA.
Facts
In 2015, the Bank of Nova Scotia (the “Bank”) received a notice of reassessment from the Minister of National Revenue (the “Minister”) for its 2006 taxation year. The reassessment resulted in an approximately $1 million increase in the Bank’s taxable income for that year. However, the Minister calculated the arrears interest to be approximately $8 million according to subsection 161(7) of the ITA. The Bank appealed the arrears interest on grounds that the Minister’s interpretation of subsection 161(7) is incorrect (Bank of Nova Scotia, paras 2-4).
The calculation of arrears interest is governed by subsection 161(1) of the ITA. As a general rule, the interest is calculated based on the unpaid taxes for a given taxation year (Bank of Nova Scotia, para 7). This interest period begins shortly after the end of the relevant taxation year and runs until the outstanding tax debts are paid (Bank of Nova Scotia, para 8). This provision is not, for the purpose of this appeal, controversial.
Subsection 161(7) modifies this general rule where certain deductions or exclusions, including loss carrybacks, are applied to a prior taxation year. In such cases, the provision requires that the carryback be ignored for a specified period when calculating arrears interest (Bank of Nova Scotia, para 11). In effect, although the carryback reduces the taxpayer’s ultimate tax liability, it does not reduce the interest amount. This scheme is also, for the purpose of this appeal, generally not in dispute (Bank of Nova Scotia, para 12). However, the parties disagree on the period over which the carryback must be ignored to calculate arrears interest pursuant to subsection 161(7) (Bank of Nova Scotia, para 4).
This appeal engages statutory interpretation of subparagraphs 161(7)(b)(ii) and (iv). Subparagraph (ii) states that interest is calculated until after the year the loss was filed. By contrast, subparagraph (iv) states that interest is calculated until the loss carryback is requested. For its 2014 income tax filing, the Bank requested its loss incurred in 2008 (filed in 2009) be carried back to offset its 2006 tax debt. The Bank argued that subparagraph (ii) is applicable which limits the period of arrears interest calculation to 2 years (2006 to 2008). By contrast, the Minister argued that subparagraph (iv) governs, resulting in arrears interest accrued over 8 years (from 2006 to 2014). In response, the Bank has consistently argued at all levels of court that subparagraph (iv) is only applicable where the reassessment is caused by the carryback request, which was not the case here (Bank of Nova Scotia, paras 17-18 and 21).
Judicial history
Wong J of the Tax Court of Canada (“TCC”) was not convinced by the Bank’s position. She dismissed the appeal, finding that the text of subparagraph (iv) was unambiguous in both English and French (Bank of Nova Scotia, at paras 17-19). The FCA was also left unconvinced by the Bank’s arguments. However, unlike the TCC, the FCA found that the text of subparagraph (iv) is ambiguous, and proceeded to conduct statutory interpretation to resolve the ambiguities (Bank of Nova Scotia, para 67).
Applying the modern approach to statutory interpretation, the Court considered the text, context and purpose of subparagraph (iv). The Court concluded that the context and purpose were “overwhelmingly in favour of the Crown’s position,” for example, in the Court’s view, the Bank's position was not expressly set out in the provision, which contradicts the need for certainty in the income tax regime. The FCA also found that the jurisprudence cited by the Bank was inapplicable or distinguishable, among other factors (Bank of Nova Scotia, paras 52, 58 and 66).
Analysis
The FCA decision in Bank of Nova Scotia creates uncertainty with respect to the application of subparagraph (iv) and business operations. The interveners argued at the Supreme Court that where carrybacks are applied retroactively, there is no tax debt, so calculating arrears interest on the basis of a notional but non-existent amount owing would be contrary to commercial expectation and prejudice businesses that routinely face audits. Similarly, they argued that the provision must be interpreted narrowly, since it is an exceptional provision that goes against the general assumption that arrears interest is intended to compensate the Crown for time value of money owed when a tax debt exists (Intervener Condensed Book, at paras 3-5).
The consequences of this appeal are significant. In this case, the difference between subparagraphs (ii) and (iv) amounts to roughly six additional years of accrued arrears interest, resulting in an amount that is approximately eight times higher than the increase in tax payable arising from the reassessment. The FCA agreed that such an interpretation could have a punitive effect on the taxpayer (Bank of Nova Scotia, paras 49-50). Yet, as the Bank and interveners argue, such a penalty is contrary to the principle that taxpayers are entitled to carry losses back from subsequent years to accurately measure income over time. It is argued that such an effect is absurd and should be avoided in the absence of Parliament’s explicit intention to impose a penalty (Bank of Nova Scotia Condensed Book, para 4).
Finally, aside from the outcome in Bank of Nova Scotia, the FCA did not, in my view, conduct a thorough statutory interpretation exercise. Rather, once the Court found that the text was ambiguous, it proceeded to reject the Bank’s arguments on each point, as opposed to providing a comprehensive overview of the surrounding statutory context and legislative purpose (See Bank of Nova Scotia, paras 39-66). The decision lacked an analysis of the relationship between the various elements under subsection 161(7), and did not assess the extrinsic or intrinsic aids to determine legislative purpose, which is typically expected from judgments involving statutory interpretation. By way of example, the FCA wrote that the Senate debate in 1954 “is not instructive as to Parliament’s intent in enacting subparagraph (b)(iv) 30 years later,” yet the Court did not attempt to consider what would be instructive to the legislative purpose (See Bank of Nova Scotia, at paras 54-56). The lack of guidance with respect to the statutory context and purpose underlying subparagraph (b)(iv) warrants clarification by the Supreme Court.
Conclusion
The Bank’s appeals in Bank of Nova Scotia have been dismissed both by the Tax Court of Canada and the Federal Court of Appeal. It will be interesting to see whether the Supreme Court of Canada will be the first court to agree that subparagraph 161(7)(b)(iv) of the Income Tax Act is inapplicable to the Bank. Regardless of the outcome, however, greater clarity with respect to the statutory context and purpose underlying subparagraph (b)(iv) is certainly warranted.