Many taxpayers believe that a credit held by the Canada Revenue Agency (CRA) or Revenu Québec will automatically be used to pay upcoming tax liabilities.
However, the Tax Court of Canada’s ruling in BMLex Avocats Inc. v. The King shows that relying on this assumption can lead to unexpected interest charges.
The Court confirmed that taxpayers must ensure their obligations are paid correctly and within statutory deadlines. Simply having excess funds in a tax account does not necessarily mean future instalments have been paid.
Quebec Law Firm Left GST/HST Credit on Its Account
BMLex Avocats Inc., a Quebec law firm, had overpaid its GST/HST instalments for a reporting period ending June 30, 2019.
The overpayment created a credit balance of approximately $15,085 with Revenu Québec. Instead of requesting a refund, the firm deliberately left the money in its account, believing it could be used to satisfy GST/HST instalments in later years.
For the reporting period ending June 30, 2023, the firm was required to make four quarterly instalment payments totalling approximately $3,837.
It did not submit those payments by the required deadlines because Revenu Québec was already holding significantly more than the amount needed.
The law firm believed the existing credit should automatically count as payment of the 2023 instalments.
Revenu Québec Charged Interest on Missed Instalments
Revenu Québec did not treat the earlier overpayment as payment of the firm’s future obligations.
It assessed approximately $185 in interest, arguing that the required GST/HST instalments had not been paid within the legally prescribed time limits.
The taxpayer appealed the assessment to the Tax Court of Canada. It argued that charging interest was inappropriate because the government already possessed enough of the firm’s money to cover the full instalment amount.
The dispute centred on whether a taxpayer can avoid instalment interest when a tax authority holds a credit exceeding the amount owed, even though the taxpayer did not provide instructions to apply it.
Tax Court Rejects Automatic Credit Application Argument
The Tax Court dismissed the appeal and upheld the interest assessment.
According to the Court, taxpayers remain responsible for paying taxes in the form, manner and timeframe required under applicable legislation. A credit balance does not automatically settle a later tax obligation merely because sufficient funds are available.
The Court referred to previous Canadian cases in which taxpayers attempted to offset tax liabilities using refunds or overpayments from different periods.
Those decisions generally established that a taxpayer cannot assume one balance will automatically be applied against another liability. Clear directions must normally be provided to the relevant tax authority.
Tax Authorities Do Not Operate Like Personal Bank Accounts
The taxpayer argued that the instalments should be considered paid because Revenu Québec already controlled enough money to satisfy them.
The Court disagreed, explaining that tax authorities cannot be treated as though they maintain a single bank account for each taxpayer.
CRA and Revenu Québec administer different reporting periods, tax programmes, balances and statutory obligations. They are not generally required to decide how a taxpayer’s available credits should be distributed.
When a taxpayer wants a refund or credit transferred to another obligation, the taxpayer must provide clear and timely instructions identifying how the funds should be applied.
Because BMLex Avocats Inc. did not direct Revenu Québec to use the credit against the specific 2023 instalments, those instalments remained unpaid when their deadlines passed.
Earlier Overpayments Were Not Advance Instalments
The firm also argued that its excess GST/HST payments from 2019 should be treated as advance payments toward instalments due in 2023.
The Court rejected this position.
It concluded that the legal obligation to pay the 2023 instalments did not exist in 2019. Therefore, the firm could not automatically satisfy an obligation several years before it arose.
Unless tax legislation specifically permits advance payment arrangements, an overpayment from an earlier reporting period cannot simply be treated as payment of an unrelated future liability.
The lack of specific transfer instructions meant that the 2019 credit remained separate from the 2023 instalment requirements.
Wider Implications for Canadian Businesses
Although the interest involved was only about $185, the ruling has broader importance for taxpayers who regularly deal with instalments, refunds and credit balances.
It may affect:
- Corporations and professional corporations
- Self-employed individuals
- Law firms and other professional practices
- Businesses making regular GST/HST instalments
- Taxpayers who routinely receive refunds or create overpayments
The decision demonstrates that tax credits, instalment obligations and refunds are not necessarily interchangeable for administrative purposes.
A business may still face interest charges even when CRA or Revenu Québec holds funds worth more than the outstanding liability.
Lessons from Earlier Tax Cases
Similar issues have appeared in other Canadian tax disputes.
In Emcon Services Inc. v. The Queen, 2008 TCC 501, a taxpayer requested that an overpayment be transferred to a later taxation year.
Although that case involved the Income Tax Act rather than GST/HST rules, it also showed that the timing and administration of a credit transfer can affect whether interest applies.
Both Emcon and BMLex demonstrate that an existing credit does not automatically eliminate exposure to interest. The result depends on the relevant legislation, the timing of the transfer and the instructions provided by the taxpayer.
Tax Tips for Managing Credits and Instalments
Businesses should avoid treating CRA or Revenu Québec credit balances as funds that will automatically be withdrawn when future obligations become due.
Taxpayers with regular overpayments or refunds should review their accounts periodically and confirm how each credit has been recorded.
Where a credit is intended to cover another liability, taxpayers should consider providing clear written instructions before the applicable payment deadline.
Businesses should also retain records of:
- Instalment payments
- Refund applications
- Credit-transfer requests
- Written instructions sent to tax authorities
- Communications with CRA or Revenu Québec
- Account statements and payment confirmations
Accurate records can help establish what instructions were provided and may reduce the risk of disputes over interest.
The ruling in BMLex Avocats Inc. v. The King confirms that holding a substantial CRA or Revenu Québec credit does not automatically satisfy future tax instalments.
Taxpayers must actively ensure that payments are properly allocated and completed before statutory deadlines. When a credit is meant to cover another obligation, clear instructions should be provided to the tax authority.
Otherwise, interest may continue accumulating even though the government already holds enough money to cover the amount owed.