Minister can’t have her cake and eat it too: Federal Court of Appeal declares interest payable to taxpayer

Overturning a decision of the Federal Court (“FC”), the Federal Court of Appeal (“FCA”)[1] declared that the Minister of National Revenue (“Minister”) had to pay interest on $12.75 million collected from the taxpayer James T. Grenon.  Mr. Grenon made this payment to the Receiver General after the Minister secured a jeopardy order and it was refunded to him after the jeopardy order was set aside and vacated.  When the Minister refused to pay interest on the refund, Mr. Grenon sought relief from the FC.

Although the notices of reassessment were not included with the documents filed with the FC, Mr. Grenon appears to have been reassessed by the Minister for more than $200 million and his appeal of those reassessments to the Tax Court of Canada (“TCC”) was pending.  As an individual taxpayer, he was entitled to take advantage of the Income Tax Act’s (“ITA”) automatic stay of collection proceedings by the Canada Revenue Agency (“CRA”).  Nonetheless, where the Minister is able to demonstrate to the FC that there are reasonable grounds to believe that the ability to collect may be jeopardized by that stay, the FC may authorize the Minister to take collection actions immediately.  On March 7, 2013, the FC issued such a jeopardy order against Mr. Grenon.  As a result of that order, on March 27, 2014 Mr. Grenon paid the $12.75 million to the Minister.  However, on July 15, 2014 the FC set aside and vacated the jeopardy order and on October 29, 2014 Mr. Grenon asked for his $12.75 million to be refunded, with interest pursuant to ITA ss. 164(1.1).  In March, 2015, the Minister refunded the amount, but without interest.

The FC dismissed Mr. Grenon’s application for judicial review of the Minister’s decision not to pay interest, holding that the Minister reasonably interpreted the ITA as imposing no obligation to pay interest in respect of funds seized under a jeopardy order.  This finding was based on the FC’s interpretation of ITA ss. 164(1.1).  That provision requires the Minister to refund amounts paid by a taxpayer, on application by the taxpayer, where:  a) a notice of objection has been filed without response by the Minister within 120 days; or b) the assessment has been appealed to the TCC.  However, the provision expressly does not apply where a jeopardy order has been granted in respect of the amount assessed.  The FC decided that:  “Mr. Grenon’s interpretation would negate Parliament’s intention, as expressed in the [ITA], to treat voluntary payments more generously than involuntary ones.  The former may attract interest; the latter do not.”

The FCA allowed Mr. Grenon’s appeal.  According to the FCA, the FC’s reasoning did not go far enough in considering the effect of the jeopardy order having been set aside and vacated.  The FCA concluded that this meant that it was as if the jeopardy order had never existed.  Therefore, ss. 164(1.1) should be read as if it had never been issued.  This removed the impediment to that subsection applying, which in turn resulted in interest being payable on the refunded amount in the usual course.  The FCA explained how this interpretation was consistent with the context and purpose of the ITA.  Therefore, the FCA held that the Minster’s interpretation of ss. 164(1.1), that no interest was payable to Mr. Grenon on the refunded $12.75 million, was incorrect and unreasonable and consequently declared that the Minister is obligated to pay that interest.

The policy of the ITA provides that interest should be borne by the party who had use of the money.  If a taxpayer does not pay reassessed tax while an assessment is under objection or appeal and it is ultimately determined that the reassessed tax must be paid, interest accruing on that tax must be paid by the taxpayer.  Conversely, if a taxpayer pays reassessed tax under dispute and it turns out that the reassessment is vacated and the tax is not payable, the Minister must refund the tax and pay interest.  This is sensible.  In our view, there is no principled reason why this approach should not be followed in a situation involving a refunded payment made after a jeopardy order gets set aside and vacated.  As a matter of policy, it would not be appropriate for the Minister to have use of the taxpayer’s money in these circumstances without having to pay interest.  With respect, the FCA’s decision is consonant with the scheme of the ITA and eminently fair and reasonable.