Subsection 164(3) of the Income Tax Act (Canada) requires the Minister to pay interest on an amount that is refunded, repaid or applied to another liability.
The interest is payable at the prescribed rate, which is 2% above the applicable base rate for the quarter. For the second quarter of 2008, the base rate is 4%, and so the overpayment rate is 6%. The interest is calculated from the latest of the following dates:
- If the taxpayer is an individual, the day that is 30 days after the individual’s balance-due day for the year.
- If the taxpayer is a corporation, the day that is 120 days after the end of the year.
- If the taxpayer is (i) a corporation, the day that is 30 days after the day on which its return of income for the year was filed under section 150, unless the return was filed on or before the corporation’s filing-due date for the year, and
(ii) an individual, the day that is 30 days after the day on which the individual’s return of income for the year was filed under section 150. - In the case of a refund of an overpayment, the day on which the overpayment arose.
- In the case of a repayment of an amount in controversy, the day on which an overpayment equal to the amount of the repayment would have arisen if the total of all amounts payable on account of the taxpayer’s liability under this Part for the year were the amount by which (i) the lesser of the total of all amounts paid on account of the taxpayer’s liability under this Part for the year and the total of all amounts assessed by the Minister as payable under this Part by the taxpayer for the year
exceeds (ii) the amount repaid.
Is a taxpayer required (or permitted) to accrue refund interest? The answer appears to be “no”. The CRA, in a technical interpretation that is more than 20 years-old, stated the following:
In particular, you ask whether paragraph 12(1)(c) or subsection 12(3) of the Act is applicable to such interest received by a corporate taxpayer and in what taxation year the corporation is required to include the interest in income. As indicated in paragraph 14 of Interpretation Bulletin 396R, such interest is taxable under paragraph 12(l)(c) of the Act. With respect to your concerns about subsection 12(3) of the Act, it is our view that this subsection would never apply because in order for there to be a requirement to accrue, the existence of a debt obligation must first be established. In our view, the date that the existence of the debt obligation is established would be the same date that the relevant interest becomes an amount receivable and thus taxable under paragraph 12(1)(c) of the Act.
As indicated in paragraph 4 of IT-396R, the date that interest becomes receivable is the date on which the taxpayer has a clear legal right to receive the interest. Pursuant to subsection 164(3) of the Act, the Minister does not have an obligation with respect to the interest until the overpayment or amount in dispute is refunded or repaid. Thus, the taxpayer has no clear right to receive the interest until that time. Normally, the subsection 164(3) interest will be paid at the time that the relevant amount is refunded or repaid to the taxpayer. Thus, for the purposes of paragraph 12(1)(c) of the Act, both the date that the interest becomes an amount receivable and the date it is received are usually one and the same. However, if for some reason the interest is paid subsequent to the time that the relevant amount is refunded or repaid to the taxpayer, the Department’s administrative practice is to not require the taxpayer to include the interest in income prior to the taxation year in which it is received.
