Moore
January 2023 Newsletter

Instalment penalty and interest imposed due to sale late in the year.

In the recent Gagnon case, Mr. and Mrs. Gagnon paid quarterly income tax instalments during 2019 based on the income they expected to have that year (the First Method in the article above). They chose not to pay the higher amounts that the CRA suggested they pay under the Third Method, because they thought they knew how much tax they would owe for 2019.

Unexpectedly, on December 15, 2019, the Gagnons paid themselves a $600,000 dividend from their holding company. This had not been planned, but due to “budget chatter” rumours they were worried that the tax rate on dividends would be increased in the upcoming federal budget.

As a result, their incomes were much higher for the year than they had expected. In late November, once they knew how much dividend would be paid, they paid more than enough additional instalments to cover their obligations for all of 2019.

The CRA assessed instalment interest, because the Gagnons’ instalments paid in March, June and September were inadequate. They both appealed to the Tax Court of Canada, arguing that they could not possibly have known in March, June, and September that this large dividend would come in December. They claimed the rumours of a pending increase in tax on dividend “created an unforeseen urgency, necessity and desirability to declare the dividend”.

The Tax Court judge dismissed their appeal. The Gagnons had chosen to pay instalments based on their forecast of their 2019 tax, and in doing so they took the risk of being wrong. If they had paid instalments based on their 2018 tax, or based on the amounts that the CRA suggested (combination of 2017 and 2018 amounts), no interest would have applied. But since they chose not to do so, they were out of luck.

Last modified on January 12, 2023 12:00 am