REASONS
FOR JUDGMENT
Graham J.
[1]
The Appellant paid taxable dividends in each of
its 2004, 2005 and 2006 taxation years. When the Appellant filed its tax
returns for those years, it claimed refunds under subsection 129(1) of the Income
Tax Act. The Minister of National Revenue denied those refunds on the basis
that the Appellant had not filed its tax returns within three years of their
respective year ends as required by subsection 129(1). The Appellant does
not dispute that denial.
[2]
In calculating the Appellant’s refundable
dividend tax on hand (“RDTOH”) balance at the end of its 2005, 2006 and 2007
taxation years under subsection 129(3), the Minister deducted the amount
of the subsection 129(1) refunds that the Appellant had claimed, but not
received, in its 2004, 2005 and 2006 taxation years respectively.
[3]
The Appellant paid taxable dividends in each of
its 2010, 2011 and 2012 taxation years. When the Appellant filed its tax
returns for those years, it claimed refunds under subsection 129(1). The
Minister denied a portion of those refunds on the basis that the Appellant did
not have sufficient RDTOH available. Had the Minister not deducted the amount
of subsection 129(1) refunds claimed but not received by the Appellant in its
2004, 2005 and 2006 taxation years, the Appellant would have had adequate RDTOH
available to cover the refunds claimed in its 2010, 2011 and 2012 taxation
years. The Appellant has appealed the denial of those refunds in its 2010, 2011
and 2012 taxation years.
Issue
[4]
The issue in this Appeal is whether the Minister
erred in deducting the subsection 129(1) refunds claimed but not received by the
Appellant in its 2004, 2005 and 2006 taxation years when determining its RDTOH
balance at the end of its 2005, 2006 and 2007 taxation years under subsection
129(3).
Legislation
[5]
Subsection 129(3) defines the term “refundable
dividend tax on hand”. It sets out a detailed calculation. For the purposes of
this appeal, only paragraph (d) of the calculation is relevant. That paragraph
requires the amount otherwise determined by the calculation to be reduced by “the corporation’s dividend refund for its preceding taxation
year”. Thus, the key question in this Appeal is what the term “dividend refund” means. The term “dividend refund” is defined in paragraph 129(1)(a).
[6]
Paragraph 129(1)(a) reads:
Where a return of a corporation's income under this Part for a
taxation year is made within 3 years after the end of the year, the Minister
(a) may, on sending the notice of assessment for the
year, refund without application an amount (in this Act referred to as its
“dividend refund” for the year) equal to the lesser of
(i) 1/3 of all taxable dividends paid by the corporation on shares
of its capital stock in the year and at a time when it was a private
corporation, and
(ii) its refundable dividend tax on hand at the end of the
year; …
Summary of Parties’ Positions
[7]
The Respondent takes the position that “dividend
refund” means simply the amount that is determined by the formula set out in
paragraph 129(1)(a). The Respondent reaches this conclusion by reading
the definition as beginning with the words “an amount” and ending at the end of
subparagraph (ii). The Respondent submits that a taxpayer’s “dividend refund”
can therefore be determined whether that amount is actually refunded to the
taxpayer or not. Thus, the Respondent concludes that the Minister correctly reduced
the Appellant’s RDTOH by the amounts that were calculated under paragraph 129(1)(a)
in 2004, 2005 and 2006 despite the fact that those amounts were never refunded
to the Appellant.
[8]
The Appellant takes the position that “dividend
refund” means the refund of the amount determined by the formula set out in
paragraph 129(1)(a). The Appellant reaches this conclusion by reading
the definition as beginning with the word “refund” and ending at the end of
subparagraph (ii). The Appellant asserts that a taxpayer’s “dividend refund” is
therefore either nil or indeterminable if no amount is actually refunded to the
taxpayer. Thus, the Appellant argues that the Minister erred in reducing the
Appellant’s RDTOH by the amounts that were calculated under paragraph 129(1)(a)
in 2004, 2005 and 2006 because those amounts were never refunded to the
Appellant.
Overview
[9]
This issue was analyzed in depth by Justice
Hogan in Tawa Developments Inc. v. The Queen. Justice Hogan performed a textual, contextual and purposive
analysis and concluded that subsection 129(1) refunds that are claimed but not
received do not reduce a taxpayer’s RDTOH. The Appellant submits that I should
follow Justice Hogan’s decision. The Respondent submits that Justice Hogan’s
decision was obiter and, in any event, that I should not follow it.
[10]
I agree with Justice Hogan’s overall conclusion.
However, the parties made submissions to me that do not appear to have been
before Justice Hogan. I will therefore conduct my own analysis.
Textual Analysis
[11]
The parties urged me to examine the ordinary
meaning of the word “refund”, the use of the word “refund” in the defined term
“dividend refund” and the role that the preamble to subsection 129(1) plays in
the interpretation of the defined term.
Ordinary meaning
of the word “refund”:
[12]
The Appellant submits that the ordinary meaning
of the word “refund”, refers to an amount that is returned to a taxpayer. The Appellant asserts that the defined term must therefore refer
to an amount that has been refunded.
[13]
By contrast, the Respondent submits that the
word “refund” in paragraph 129(1)(a) is a verb and that it refers
to what the Minister may do rather than to the nature of the amount that is
being defined. Therefore, the Respondent submits that the ordinary meaning of
the word “refund” should not play any role in interpreting the defined term.
[14]
In my view, both parties’ arguments beg the question.
The parties do not actually dispute what the word “refund” means. They merely
dispute whether it falls within the words that make up the defined term or not.
The Appellant wants the word “refund” to be part of the definition and
therefore places emphasis on its inclusion in the words that the Appellant
believes form the definition. The Respondent does not want the word “refund” to
be part of the definition and therefore places emphasis on its role outside of
the words that the Respondent believes form the definition. Neither of these
approaches is helpful as neither of them actually tells me which words make up the
definition, just which words each party wants to make up the definition.
Use of the word
“refund” in the defined term:
[15]
The Appellant submits that Parliament’s decision
to use the word “refund” in the defined term “dividend refund” indicates that
Parliament intended the definition to capture not just the amount determined by
the formula but rather the refund of the amount determined by the formula. The
Appellant argues that good drafting requires that the words chosen for a
defined term not give an artificial or unnatural meaning to that term.
[16]
The Respondent submits that Parliament may
choose whatever words it wants for a defined term and that it is the definition
itself that prevails, not the defined term.
[17]
While the Appellant’s position has a certain
logical appeal as a means to choose between two competing interpretations, in
my view, the mere inclusion of the word “refund” in the defined term is not
enough for me to conclude that the meaning of the definition is clear on an
ordinary reading of the paragraph.
Role of the
preamble to subsection 129(1):
[18]
The Appellant submits that the definition in
paragraph 129(1)(a) only applies if a taxpayer meets the condition set
out in the preamble to subsection 129(1) that the taxpayer must have filed its
tax return for the year within three years of the end of its taxation year. The
Appellant submits that, if a taxpayer has failed to meet that condition, then
the definition of “dividend refund” is inoperative.
[19]
The Respondent submits that because the defined
term is described as applying for the purposes of the Act, it applies
regardless of whether the condition in the preamble is met or not.
[20]
Again, both parties’ arguments beg the question.
The Appellant starts from the premise that the word “refund” forms part of the
definition and therefore, not surprisingly, concludes that the definition is inoperative
if the preamble does not allow a refund to be paid. Similarly, the Respondent
starts from the premise that the word “refund” does not form part of the
definition and therefore, not surprisingly, concludes that the definition
operates even if the preamble does not allow a refund to be paid. Again,
neither of these approaches is helpful as neither of them actually tells me
which words make up the definition, just which words each party wants to make
up the definition.
[21]
I note that there are also other flaws in both
parties’ positions. The Appellant’s position is weak because it presumes that
Parliament could never insert a definition of broad application into a section
of narrow application. While doing so would be a less than ideal drafting
technique, there is nothing preventing Parliament from doing so. The Respondent’s
position is weak because, even if the Appellant’s interpretation were correct,
the definition could still apply for the purposes of the Act. It would
just render an amount of nil in situations where the condition in the preamble
was not satisfied.
Conclusion:
[22]
Based on the foregoing, in my view, the plain
and ordinary meaning of paragraph 129(1)(a) is ambiguous. It could
either indicate that a “dividend refund” is the refund of the amount determined
by the formula in the paragraph or that it is simply the amount determined by
the formula regardless of whether it is refunded or not. There is an arguable
position for both interpretations. While the use of the word “refund” in the
defined term “dividend refund” suggests that the better interpretation may be
the one proposed by the Appellant, its use is not enough for me to clearly
conclude that the Appellant’s interpretation is correct. As a result, I must look
to the contextual and purposive analyses.
Contextual
Analysis
[23]
Both parties submitted that the specific context
in which the defined term “dividend refund” is used in certain subsections of
the Act supports their position.
[24]
The Respondent argues that the defined term
means an “amount”. The Appellant essentially argues that it means a “refund of
the amount”. In the analysis below, I have substituted these alternative
meanings of the defined term into places in the Act where the defined term
is used in order to see which version makes grammatical and logical sense. I have
also examined places in the Act where the defined term has not been used
to see if its lack of use provides any insight into its meaning. As set out in
detail below, the results are, unfortunately, inconclusive.
Paragraph 129(1)(b):
[25]
The best place to look at the context of
paragraph 129(1)(a) is in the rest of subsection 129(1). The use of the
term “dividend refund” in paragraph 129(1)(b) strongly supports the
Appellant’s position. Subsection 129(1) reads:
Where a return of a corporation's income under this Part for a
taxation year is made within 3 years after the end of the year, the Minister
(a) may, on sending the notice of assessment
for the year, refund without application an amount (in this Act
referred to as its “dividend refund” for the year) equal to the lesser of
… and
(b) shall, with all due dispatch, make the
dividend refund after sending the notice of assessment if an application
for it has been made in writing by the corporation within the period within
which the Minister would be allowed under subsection 152(4) to assess tax
payable under this Part by the corporation for the year if that subsection were
read without reference to paragraph 152(4)(a).
[emphasis added]
[26]
Paragraph 129(1)(b) is meaningless if one
uses the Respondent’s interpretation. How can the Minister “make the [amount]”?
On the other hand, the paragraph has meaning if one uses the Appellant’s
interpretation. Clearly the Minister can “make the [refund of the amount]”.
[27]
This analysis of paragraph 129(1)(b) is
supported by a comparison to subsection 164(1). That subsection deals with
general refunds under the Act. It too has a preamble that prevents
taxpayers who have not filed their tax returns promptly from obtaining refunds
and it too permits the Minister to make a refund in one situation and requires
her to make one in another. Subsection 164(1) reads:
If the return of a taxpayer's income for a taxation year has been
made within 3 years from the end of the year, the Minister
(a) may,
…
(iii) on or after sending the notice of assessment for the year, refund
any overpayment for the year, to the extent that the overpayment was not
refunded pursuant to subparagraph (i) or (ii); and
(b) shall, with all due dispatch, make the
refund referred to in subparagraph (a)(iii) after sending the notice of
assessment if application for it is made in writing by the taxpayer within the
period within which the Minister would be allowed under subsection 152(4) to
assess tax payable under this Part by the taxpayer for the year if that
subsection were read without reference to paragraph 152(4)(a).
[emphasis added]
[28]
The wording of the subsections 129(1) and 164(1)
is very similar. The key difference is that there is no defined term that
describes a refund made under subparagraph 164(1)(a)(iii). Thus, in
paragraph 164(1)(b), when there is a need to refer back to that refund,
it is necessary to use the words “refund referred to in subparagraph (a)(iii)”.
[29]
The fact that, in the absence of a definition,
Parliament chose to use words that refer to the refund referred to in
subparagraph 164(1)(a)(iii) rather than the amount determined in
that subparagraph lends strong support to the Appellant’s position.
[30]
To look at it another way, if subsection 164(1)
had been drafted like subsection 129(1), it would have read:
If the return of a
taxpayer's income for a taxation year has been made within 3 years from the end
of the year, the Minister
(a)
may,
…
(iii) on or after
sending the notice of assessment for the year, refund any overpayment for the
year, to the extent that the overpayment was not refunded pursuant to
subparagraph (i) or (ii) (in this Act referred to as an “overpayment
refund”); and
(b)
shall, with all due dispatch, make the refund referred to in
subparagraph (a)(iii) overpayment refund after sending the notice of
assessment if application for it is made in writing by the taxpayer within the
period within which the Minister would be allowed under subsection 152(4) to
assess tax payable under this Part by the taxpayer for the year if that
subsection were read without reference to paragraph 152(4)(a).
Subsection 129(1.1):
[31]
The use of the term “dividend refund” in
subsection 129(1.1) is compatible with either interpretation. The relevant
portion of subsection 129(1.1) reads:
In determining the dividend refund for a taxation year ending after 1977 of a particular corporation, no amount may be
included by virtue of subparagraph (1)(a)(i) in respect of a taxable
dividend paid to a shareholder that …
[emphasis
added]
[32]
Using the Respondent’s interpretation this
subsection would read “In determining the [amount] for a taxation year”. Using the
Appellant’s interpretation it would read “In determining the [refund of the
amount] for a taxation year”. Both of these interpretations are logical.
Subsection 129(1.2):
[33]
The use of “dividend refund” in subsection
129(1.2) supports the Appellant’s interpretation. Subsection 129(1.2) reads:
Where a dividend is paid on a share of the capital stock of a
corporation and the share (or another share for which the share was
substituted) was acquired by its holder in a transaction or as part of a series
of transactions one of the main purposes of which was to enable the
corporation to obtain a dividend refund, the dividend shall, for the
purpose of subsection 129(1), be deemed not to be a taxable dividend.
[emphasis added]
[34]
This subsection is illogical if one uses the
Respondent’s interpretation of “dividend refund”. Why would one of the main
purposes of a transaction ever be to enable a corporation to have an amount
determined? Corporations want refunds not calculations. The subsection makes
much more sense using the Appellant’s interpretation. Under that interpretation
the corporation is trying “to obtain a [refund of the amount]”.
Subsection 129(2):
[35]
The absence of use of the term “dividend refund”
in subsection 129(2) is internally inconsistent and does not support the
interpretation of either party. Subsection 129(2) reads:
Instead of making a refund that might otherwise be made under
subsection 129(1), the Minister may, where the corporation is liable or about
to become liable to make any payment under this Act, apply the amount
that would otherwise be refundable to that other liability and notify the
corporation of that action.
[36]
The Appellant’s position is that the term
“dividend refund” means “refund of the amount”. Therefore, if the Appellant’s
interpretation is correct, the subsection should read:
Instead of making a dividend
refund that might otherwise be made under subsection (1), the Minister
may, where the corporation is liable or about to become liable to make any payment
under this Act, apply the amount that would otherwise be refundable to that
other liability and notify the corporation of that action.
[37]
The fact that Parliament did not use the defined
term in this manner when it was so easy to do so argues against the Appellant’s
interpretation.
[38]
The Respondent’s position is that the term
“dividend refund” means “amount”. Therefore, if the Respondent’s interpretation
is correct, the subsection should read:
Instead of making a
refund that might otherwise be made under subsection (1), the Minister may,
where the corporation is liable or about to become liable to make any payment
under this Act, apply the amount dividend refund that would
otherwise be refundable to that other liability and notify the corporation of
that action.
[39]
The fact that Parliament did not use the defined
term in this manner when it was so easy to do so argues against the
Respondent’s interpretation.
Subsection 129(2.1):
[40]
The use and absence of use of the term “dividend
refund” in subsection 129(2.1) is neither inconsistent with nor
particularly supportive of either party’s interpretation. Subsection 129(2.1)
reads:
Where a dividend refund for a taxation year is paid to, or applied
to a liability of, a corporation, the Minister shall pay or apply interest on
the refund at the prescribed rate for the period beginning on the day
that is the later of
…
and ending on the
day on which the refund is paid or applied.
[emphasis added]
[41]
The use of the word “refund” by itself in the
middle and end of the subsection creates some ambiguity as it perversely appears
to be meant to cover both amounts that are and are not refunded. It appears
that the word is meant to refer to both amounts paid (i.e. amounts actually
refunded under subsection 129(1)) and amounts applied to liabilities (i.e.
amounts that would otherwise be refunds but are instead applied to liabilities
under subsection 129(2)). I do not think there is anything to be gained
from a more detailed review of this subsection.
Subsection 129(2.2):
[42]
The use of “dividend refund” in subsection
129(2.2) strongly supports the Respondent’s interpretation. The term is used
consistently throughout the subsection. Subsection 129(2.2) reads:
Where, at any particular time, interest has been paid to, or applied
to a liability of, a corporation under subsection 129(2.1) in respect of a
dividend refund and it is determined at a subsequent time that the dividend
refund was less than that in respect of which interest was so paid or applied,
(a) the amount by which the interest that was so paid or
applied exceeds the interest, if any, computed in respect of the amount that is
determined at the subsequent time to be the dividend refund shall be deemed to
be an amount (in this subsection referred to as the “amount payable”) that
became payable under this Part by the corporation at the particular time; …
[43]
For the Appellant’s interpretation to be
correct, in order to capture the situation described in subsection 129(2) where
amounts that would otherwise be refunded are applied to liabilities, subsection
129(2.2) would have to read:
Where, at any particular
time, interest has been paid to, or applied to a liability of, a corporation
under subsection (2.1) in respect of a dividend refund paid to, or the amount that would otherwise be refundable applied to
a liability of, a corporation, and it is determined
at a subsequent time that the dividend refund or the
amount applied was less than that in respect of
which interest was so paid or applied,
(a) the amount by which
the interest that was so paid or applied exceeds the interest, if any, computed
in respect of the amount that is determined at the subsequent time to be the
dividend refund or the amount that would otherwise be refundable shall
be deemed to be an amount (in this subsection referred to as the “amount
payable”) that became payable under this Part by the corporation at the
particular time; …
[44]
Furthermore, the French version of the Act
further undermines the Appellant’s interpretation. The English version uses the
defined term “dividend refund” twice in the preamble. By contrast, the French
version uses the defined term « remboursement au titre de dividends » on
the first occasion but switches to the phrase « le montant du remboursement » the
second time. The latter phrase means “the amount of the refund”. This is the
interpretation that the Appellant is arguing for. The fact that this phrase is
juxtaposed so closely to the defined term in the French version and the defined
term is not used in its place suggests that the defined term has a different
meaning than the phrase (i.e. the meaning supported by the Respondent).
Subsections 157(3)
and (3.1):
[45]
Subsections 157(3) and (3.1) strongly support the
Appellant’s interpretation of “dividend refund”. Those subsections deal with
the calculation of instalment payments. The term “dividend refund” appears in
paragraphs 157(3)(b) and 157(3.1)(b). In simple terms, those
paragraphs provide for a reduction in the amount that a corporation is required
to have paid as instalment payments for the year equal to the amount of the
corporation’s dividend refund. The use of the term “dividend refund” in these
paragraphs is grammatically consistent with both the Respondent’s and the
Appellant’s interpretations. However, the Respondent’s interpretation leads to
an absurd result.
[46]
The Respondent’s interpretation would cause a
taxpayer to be granted relief from having to have made instalment payments
where the amount determined by the formula in paragraph 129(1)(a) for
the taxation year was a positive amount despite the fact that the taxpayer did not
actually receive a refund because it filed its tax return too late. Why would Parliament
want to give a taxpayer who files its tax return late relief in respect of a
refund that the taxpayer is not even entitled to receive?
[47]
Counsel for the Respondent explains the
Respondent’s position as follows. Instalment payments are made during a tax
year on account of tax that will be owed for that year. Therefore a taxpayer
has to be able to calculate its instalment payments during the year. The
Respondent argues that the Appellant’s interpretation would lead to a taxpayer
being unable to properly calculate its instalments during the year because any
refund that would become payable would not be paid until sometime after the
year end (possibly up to three years later). Thus, the Respondent argues, the
taxpayer would receive no credit for such potential refunds. By contrast, the
Respondent submits that the Respondent’s interpretation would allow a taxpayer
to calculate its instalments during the year because the deduction would be for
the amount determined by the formula, not for the amount refunded. Therefore,
the Respondent submits, the only logical conclusion is that the instalment
payments are to be reduced by the amount determined by the formula in
subsection 129(1), not the amount of any refund.
[48]
The Respondent’s argument misconstrues how
instalment payments actually work. A taxpayer’s instalment payment obligations
are not determined in advance. They are determined after the end of the year
when all of the taxpayer’s income for the year is known. A taxpayer makes
instalment payments during the year based on its best estimate of the
instalment payments that it expects it will have been required to make when its
current year ends. If, when
the taxpayer ultimately files its tax return, it turns out that the taxpayer did
not make enough instalment payments, the taxpayer is subject to interest on the
under-remittance under subsection 161(2). Thus, so long as a taxpayer
anticipates receiving a refund under subsection 129(1) at the end of the year,
the taxpayer is able to incorporate that refund into its determination of how
much it should pay in each instalment. It does not have to have actually
received the refund when it makes its instalment payments. If the taxpayer
files its return late and thus does not receive its anticipated refund then it
will pay interest on its under-remitted instalments.
[49]
In fact, that is exactly what happened in the
Appellant’s case. In determining the Appellant’s instalment payment obligations
for 2005 and 2006, the Minister did not give the Appellant any relief for the
subsection 129(1) refunds that it was not entitled to receive. The Minister therefore
assessed the Appellant instalment interest in those years. In other words, the Minister used the Appellant’s interpretation
of the Act when assessing instalment interest against the Appellant in
2005 and 2006 yet refused to use that interpretation when denying refunds under
subsection 129(1) in 2010, 2011 and 2012. I do not impute any bad faith to the
Minister in this respect. I do,
however, find it to be a striking illustration of the fact that any other
interpretation of the term “dividend refund” in section 157 is so absurd that
one would not logically follow it.
Subsection 186(1):
[50]
Subsection 186(1) deals with the calculation of
Part IV tax. The term “dividend refund” appears in paragraph 186(1)(b).
In simple terms, that paragraph requires a company that receives a dividend
from a payer corporation that is connected to it to include a certain portion
of the payer’s dividend refund for the year when calculating the recipient’s
Part IV tax. The use of the term “dividend refund” in subsection 186(1) is
grammatically consistent with both the Appellant’s and the Respondent’s
interpretations.
[51]
However, the Respondent submits that the meaning
proposed by the Appellant would give rise to an absurd result. The Respondent
argues that a taxpayer who had received a dividend during its taxation year
would be unable to calculate the amount of Part IV tax that it owed in respect
of that dividend until the payer corporation actually filed its tax return and
received a refund. The Respondent says that this would lead to an absurd result
because a taxpayer would potentially be unable to determine its Part IV tax
prior to its balance due date for the year that it received the dividend if the
payer corporation was late in filing its tax return.
[52]
I agree that that uncertainty exists. However, I
think that similar uncertainty exists even under the Respondent’s
interpretation. Even if the term “dividend refund” means the amount determined
by the formula in paragraph 129(1)(a), for a recipient to know the
amount of the dividend refund of the payer corporation, the recipient would
have to be able to determine the payer’s RDTOH for the taxation year. In order
to determine the payer’s RDTOH for a taxation year, the recipient would have to
know, among other things, the payer’s aggregate investment income for the year
and its taxable income for the year. Neither of those are amounts that the recipient
could determine before the payer’s year end. Thus, if the payer corporation had
a year end that fell after the recipient’s year end, the recipient would be
unable to determine its Part IV tax obligations on time even if the payer filed
its tax return on time.
[53]
In summary, under both the Appellant’s and the
Respondent’s interpretations, the recipient of a dividend is potentially unable
to determine the amount of its Part IV tax obligations prior to its filing due
date. I am unable to reach any conclusion based on this uncertainty.
Summary:
[54]
The use and lack of use of the defined term
“dividend refund” is inconsistent throughout the Act. Its use in three
places supports the Appellant’s interpretation, in one place supports the Respondent’s
interpretation and in two places supports both interpretations. Furthermore,
its lack of use in one place somewhat supports both interpretations but, in
another place, supports neither interpretation. This inconsistent drafting leaves
me unable to draw sufficient comfort from the contextual analysis to reach a
conclusion. The correct interpretation will therefore turn on a purposive
analysis.
Purposive
Analysis
[55]
Justice Hogan’s purposive analysis of subsection
129(1) in paragraphs 38 to 50 of Tawa is very thorough. It supports the
Appellant’s interpretation. I agree with Justice Hogan’s analysis and adopt it
as my own. There is nothing to be gained from my paraphrasing his analysis. For
ease of reference I have attached a copy of those paragraphs as Schedule “B”.
[56]
For the sake of completeness, I will briefly
address one specific argument raised by the Respondent that was not explicitly addressed
in Tawa. The Respondent submits that subsection 129(1) contains a three
year limitation period in order to provide “finality and fiscal certainty”. I agree that that is the purpose of the limitation period. If a
taxpayer has not filed its tax return within the three year deadline, then the
taxpayer is unable to get a refund for that year. The books are closed on the
year and finality and fiscal certainty are achieved.
[57]
However, the Respondent wants me to take this
quest for finality and fiscal certainty one step further and conclude that the
purpose of subsection 129(1) is to provide finality and fiscal certainty by preventing
a delinquent taxpayer from ever claiming a refund in respect of the relevant
RDTOH. The Respondent has not, however, provided me with any explanation of why
this would be the case.
[58]
The entire RDTOH system involves fiscal
uncertainty. For any taxpayer, the Minister has no way of knowing when or
whether a refund will have to be paid until after the taxpayer both declares a
dividend and files a return. There is no limit on how long a taxpayer can
string an RDTOH balance along. The Appellant’s interpretation of subsection
129(1) does not increase this level of uncertainty. The Minister still does not
know whether a refund will be payable in the future until after the taxpayer
both declares a dividend and files a return. The taxpayer’s failure to file a
return leaves the Minister in no worse fiscal position that she would have been
in if the Appellant had simply not declared a dividend at all. In fact, she is
in a better fiscal position because she has the use of the Part IV tax paid by
the taxpayer and the personal tax paid by the shareholder on the dividend
without yet having had to pay out the refund.
[59]
It is clear that Parliament designed the RDTOH
system to promote the integration of corporate and individual taxes. It is also
clear that Parliament designed subsection 129(1) to punish taxpayers who file
their returns late. The Appellant’s interpretation of subsection 129(1) allows
both of these objectives to be achieved. By contrast, the Respondent’s
interpretation requires the goal of integration to be sacrificed in order to
achieve a greater level of punishment. In the absence of a compelling reason
why Parliament would want to do that, I find that the Appellant’s interpretation
is more in keeping with the purposes of the Act.
Conclusion
[60]
Based on all of the foregoing, I find that the
term “dividend refund” in paragraph 129(1)(a) means the refund of the
amount determined by the formula set out therein. Accordingly, the Appeal is
allowed with costs and the matter referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant’s RDTOH at the
end of its 2005 taxation year was $193,746, at the end of its 2006 taxation
year was $322,103 and at the end of its 2007 taxation year was $431,336.
Recommendation
[61]
Despite my conclusion on the meaning of “dividend
refund”, a lack of clarity remains regarding subsections 129(2), (2.2) and, to
an extent, (2.1). It is my hope that Parliament will see fit to fix that
drafting rather than leaving taxpayers to guess at the meaning of those
subsections.
Signed at Ottawa,
Canada, this 20th day of March 2015.
“David E. Graham”
SCHEDULE “A”
AGREED
STATEMENT OF FACTS
1.
The Appellant is an investment holding company
which previously operated under the name “The Martin Schmerz Holding
Corporation”. It changed its name on November 18, 2011.
2.
At all material times, the Appellant was a
private corporation.
3.
At all material times, the Appellant had a March
31st fiscal year end.
2004 to 2006 Taxation Years
4.
In each of its 2004 through 2006 taxation years,
the Appellant earned investment income. The Appellant’s “aggregate investment
income” for purposes of subsection 129(1) of the Income Tax Act (Canada)
(the “Act”) was $5,780, $20,238, and $11,496 for the 2004, 2005, and 2006
taxation years, respectively.
5.
In each of its 2004 through 2006 taxation years,
the Appellant received inter-corporate dividends which were subject to tax
under Part IV of the Act. The Appellant had Part IV tax payable of $79,334,
$108,734 and $125,291 for the 2004, 2005 and 2006 taxation years, respectively.
6.
The refundable portion of Part I tax on the
“aggregate investment income” it received and the Part IV tax payable in its
2004 through 2006 taxation years were added to the Appellant’s refundable dividend
tax on hand (“RDTOH”) as defined in subsection 129(3) of the Act, at the end of
each of its 2004, 2005 and 2006 taxation years.
7.
The Appellant paid taxable dividends of
$249,000, $340,336 and $405,125 in the 2004, 2005 and 2006 taxation years,
respectively.
8.
The Appellant’s 2004 and 2005 tax returns were
filed with the Minister of National Revenue (the “Minister”) on February 17,
2010, and the Appellant’s 2006 tax return was filed with the Minister on June
11, 2009.
9.
The Appellant claimed dividend refunds of
$80,234, $113,445 and $128,358 in its 2004, 2005 and 2006 tax returns,
respectively.
10. The Minister assessed the Appellant:
(a) by a notice of assessment dated April 12, 2010, Part I tax of
$1,208, Part IV tax of $79,334, a subsection 162(1) penalty of $13,692.14 and
arrears interest of $48,043.53 for the Appellant’s 2004 taxation year;
(b) by a notice of assessment dated April 12, 2010, Part I tax of
$6,411, Part IV tax of $108,734 a subsection 162(1) penalty of $19,574.65,
instalment interest of $46.07 and arrears interest of $56,305.11 for the
Appellant’s 2005 taxation year. The Appellant made no instalment payments in
2005; and
(c) by a notice of assessment dated July 28, 2009, Part I tax of
$4,360.00, Part IV tax of $125,291, a subsection 162(1) penalty of $22,040.67,
instalment interest of $203.26 and arrears interest of $41,516.53 for the
Appellant’s 2006 taxation year. The Appellant made no instalment payments in
2006.
In the assessments, the Minister disallowed the Appellant’s claims
for dividend refunds for the 2004, 2005, and 2006 taxation years on the basis
that the Appellant’s 2004, 2005, and 2006 tax returns were not filed within 3
years after the end of the year as required by subsection 129(1) of the Act.
11. In calculating the Appellant’s RDTOH at the end of its 2005 and 2006
taxation years, the Minister deducted the amount of the dividend refund claimed
by the Appellant, but not received, for the 2004 and 2005 taxation years,
respectively.
2007 to 2009 Taxation Years
12. In its taxation year, the Appellant earned “aggregate investment
income” of $26,256 for purposes of subsection 129(1) of the Act. The Appellant
did not have any “aggregate investment income” for its 2008 or 2009 taxation
years.
13. In respect of inter-corporate dividends received, the Appellant had
Part IV tax payable of $102,231, $150,881, and $141,641 for the 2007, 2008, and
2009 taxation years, respectively.
14. The Appellant paid taxable dividends of $322,443, $362,352, and
$434,403 in the 2007, 2008, and 2009 taxation years, respectively.
15. The Appellant’s 2007, 2008 and 2009 tax returns filed with the
Minister on June 11, 2009, April 30, 2010 and May 7, 2010, respectively.
16. The Appellant claimed and received dividend refunds, computed under
paragraph 129(1)(a) of the Act, of $107,481, $120,784, and $144,801 for the
2007, 2008, and 2009 taxation years, respectively.
17. In calculating the Appellant’s RDTOH at the end of its 2007 taxation
year, the Minister deducted the amount of the dividend refund claimed by the
Appellant, but not received, for the 2006 taxation year.
2010 to 2012 Taxation Years
18. The Appellant did not earn any “aggregate investment income” in its
2010, 2011, or 2012 taxation years.
19. In its 2010 taxation year, the Appellant received, in aggregate,
$303,700 in taxable dividends from connected corporations, in respect of which
the payer corporations were entitled to dividend refunds. As a result, Part IV
tax of $101,234 would have been payable by the Appellant in that year. However,
the Part IV tax otherwise payable was reduced by the deduction of current year
non-capital losses under paragraph 186(1)(c) of the Act. After the deduction of
such losses, no net Part IV tax was payable by the Appellant in its 2010
taxation year.
20. In its 2011 taxation year, the Appellant received, in aggregate,
$323,350 in taxable dividends from connected corporations, in respect of which
the payer corporations were entitled to dividend refunds. As a result, Part IV
tax of $100,167 would have been payable by the Appellant in that year. However,
the Part IV tax otherwise payable was reduced by the deduction of current year
non-capital losses under paragraph 186(1)(c) of the Act. After the deduction of
such losses, net Part IV tax of $7,617 was payable by the Appellant in its 2011
taxation year.
21. In its 2012 taxation year, the Appellant received, in aggregate,
$291,000 in taxable dividends from connected corporations, in respect of which
the payer corporations were entitled to dividend refunds. As a result, Part IV
tax of $97,001 would have been payable by the Appellant in that year. However,
the Part IV tax otherwise payable was reduced by the deduction of non-capital
losses from previous years under paragraph 186(1)(d) of the Act. After the
deduction of such losses, no net Part IV tax was payable by the Appellant in
its 2012 taxation year.
22. The Appellant paid taxable dividends of $319,503, $358,851, and
$354,501 in its 2010, 2011, and 2012 taxation years, respectively.
23. The Appellant’s 2010, 2011, and 2012 tax returns were filed with the
Minister on October 29, 2012, October 15, 2012, and November 7, 2012,
respectively.
24. In its tax return for the 2010 taxation year, the Appellant claimed
a dividend refund of $106,501. By notice of assessment dated December 11, 2012,
the Minister assessed the Appellant allowing a dividend refund of $28,754 on
the basis that the Appellant’s RDTOH was insufficient to support the dividend
refund claimed by the Appellant.
25. In its tax return for the 2011 taxation year, the Appellant claimed
a dividend refund of $119,617. By notice of assessment dated December 11, 2012,
the Minister assessed the Appellant allowing a dividend refund of only $7,617
on the basis that the Appellant’s RDTOH was insufficient to support the
dividend refund claimed by the Appellant.
26. In its tax refund for the 2012 taxation year, the Appellant claimed
a dividend refund of $118,167. By notice of assessment dated December 11, 2012,
the Minister disallowed the dividend refund on the basis that the Appellant had
no RDTOH at the end of its 2012 taxation year.
27. If the Appellant’s RDTOH at the end of its 2005, 2006 and 2007
taxation years was not reduced by the dividend refunds claimed but not received
for its 2004, 2005 and 2006 taxation years, the Appellant would have had
sufficient RDTOH at the end of its 2010, 2011 and 2012 taxation year to support
the dividend refund claimed in each of those years.
28. The Appellant filed notices of objection to the notices of
assessment referred to in paragraphs 24, 25 and 26 (the “Assessments”), and the
Minister confirmed the Assessments by letter dated October 16, 2013.
29. On January 8, 2014, the Appellant filed a Notice of Appeal in
respect of its 2010, 2011 and 2012 taxation years.
30. A summary of the Appellant’s RDTOH as calculated by the Appellant
and the Minister is attached as Schedule A hereto.
The parties
hereto agree that this Statement of Agreed Facts does not preclude either party
from calling evidence to supplement the facts agreed to herein, it being
accepted that such evidence may not contradict the facts agreed.
“Schedule
“A” [to the Agreed Statement of Facts]
|
Tax Year
|
Add: Refundable Part I Tax
|
Add: Part IV Tax Payable
|
Add: RDTOH at End of Preceding Year (Per Appellant)
|
Add: RDTOH at End of Preceding Year (Per Minister)
|
Deduct: Dividend Refund for Preceding Year (Per Appellant)
|
Deduct: Dividend Refund for Preceding Year (Per Minister)
|
RDTOH Balance End of Year (Per Appellant)
|
RDTOH Balance End of Year (Per Minister)
|
|
2004
|
$ 900.00
|
$ 79,334.00
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 80,234.00
|
$ 80,234.00
|
|
2005
|
$ 4,778.00
|
$ 108,734.00
|
$ 80,234.00
|
$ 80,234.00
|
$ -
|
$ 80,234.00
|
$ 193,746.00
|
$ 113,512.00
|
|
2006
|
$ 3,066.00
|
$ 125,291.00
|
$ 193,746.00
|
$ 113,512.00
|
$ -
|
$ 113,445.00
|
$ 322,103.00
|
$ 128,424.00
|
|
2007
|
$ 7,002.00
|
$ 102,231.00
|
$ 322,103.00
|
$ 128,424.00
|
$ -
|
$ 128,358.00
|
$ 431,336.00
|
$ 109,299.00
|
|
2008
|
$ -
|
$ 150,881.00
|
$ 431,336.00
|
$ 109,299.00
|
$ 107,481.00
|
$ 107,481.00
|
$ 474,736.00
|
$ 152,698.00
|
|
2009
|
$ -
|
$ 141,641.00
|
$ 474,736.00
|
$ 152,698.00
|
$ 120,784.00
|
$ 120,784.00
|
$ 495,593.00
|
$ 173,555.00
|
|
2010
|
$ -
|
$ -
|
$ 495,593.00
|
$ 173,555.00
|
$ 144,801.00
|
$ 144,801.00
|
$ 350,792.00
|
$ 28,754.00
|
|
2011
|
$ -
|
$ 7,617.00
|
$ 350,792.00
|
$ 28,754.00
|
$ 106,501.00
|
$ 28,754.00
|
$ 251,908.00
|
$ 7,617.00
|
|
2012
|
$ -
|
$ -
|
$ 251,908.00
|
$ 7,617.00
|
$ 119,617.00
|
$ 7,617.00
|
$ 132,291.00
|
$ -
|
SCHEDULE “B”
[38] A purposive
analysis of the provision, in the light of its legislative history, also
favours the Appellant's position. The dividend refund and RDTOH program was
first enacted in 1972 as part of the broad taxation reforms that followed the
1966 findings of the Royal Commission on Taxation (Carter Commission) and the
recommendations made in response in the 1969 White Paper. Not all of the
recommendations stemming from the Carter Commission's findings were
implemented; however, one of main legislative changes that were implemented was
a commitment to fully integrate corporate and shareholder taxation, which was a
pressing issue.27 Prior to 1972, the Act offered shareholders a
dividend tax credit for a part of the corporation's taxes, but that credit fell
well short of compensating for the tax the corporation had paid on its
pre-distribution profits. There was thus substantial double taxation. The
enactment of section 129 was part of the changes that were to help eliminate
the double taxation and to help effect integration.
[39] The 1972 tax
reform was arrived at by a very winding road. The reports of the House of
Commons and Senate Committees that, from the late 1960s to 1972, analyzed and
debated the 1966 Carter and 1969 White Paper recommendations reveal that the
recommendations faced opposition and that the final results of the reform were
significantly different from the various recommendations.
[40] The
Minister's counsel relies heavily on the White Paper's proposal to limit to two
and a half years the period of time in which dividends would have to be paid in
order to qualify a shareholder to receive dividend tax credits.28
However, the Minister's counsel appears to be unaware that this proposal, like
numerous others in the reform process, remained unimplemented.
[41] To
illustrate, in September 1970, the report of the Standing Senate Committee on
Banking, Trade and Commerce entitled Report on the White Paper Proposals for
Tax Reform noted the apparent objection to the integration program, in
particular because the program proposed a requirement that dividends be paid
within two and a half years after the end of the year of receipt of the
corporation's earnings, failing which the shareholders would lose their
dividend credit:29
[1] ... Practically every taxpayer
heard before your Committee strongly objected to the integration system, and
even the limited number who were in favour of such proposals stressed that
substantial modifications would be required in the proposed system in order to
make it acceptable.
[2] ... The proposals complicate
matters further by staledating tax credits [dividends required to be paid out
within 2 1/2 years of the receipt of corporate income] and by drawing a
distinction, artificial in the opinion of your Committee, between widely- held
corporations and closely-held corporations. Under the White Paper all
corporations would be required to maintain complicated creditable tax accounts,
detailed not only as to amount but also as to age.
[3] The main thrust of the these
proposals would introduce into Canada a system where corporations through their
boards of directors would be subject to the pressure of shareholders for
increased distribution of dividends so that creditable tax would not be
staledated. In the process corporate management and directors would not be in a
position to determine objectively the long range needs of the corporation that
they administer.30
[42] In its
January 28, 1970 proceedings, the Senate Standing Committee on Banking, Trade
and Commerce discussed the 'staledating' concept and compared it with a similar
provision in the former Income War Tax Act, which had enabled the Minister to
force the payment of dividends:
Years ago, in the old Income War Tax
Act we had the famous section 13 dealing with the ability of the Minister of
National Revenue to cause corporations to distribute dividends if they were
being unduly withheld and for no good cause.31
Apparently, that
provision was repealed because the Minister was not able to efficiently
determine which corporations required their profits for expansion and which
corporations were simply 'greedy'.32
[43] I.H. Asper,
in his book The Benson Iceberg: A critical analysis of the White Paper on tax
reform in Canada33 commented on the unworkability of the
'staledating' approach:
The problem is
augmented even more by the new and extremely important 'staledating' concept.
It provides that if the dividends (in either cash or stock) are not paid out
within two and one-half years after the year-end in which the profits have been
earned, the shareholders will not get the tax credit. These tax-paid corporate
earnings will become staledated. Dividends paid out of staledated surplus will
bear full personal income tax with no credits whatsoever. The tax results could
be quite spectacular.
The government
believes this time limit is necessary for a number of reasons. Firstly, if
there were no time limit, shareholders could accumulate tax credits or, as the
White Paper calls it, 'creditable tax,' for years and then suddenly exercise
their dividend rights and claim their tax credit all in one year. The
government believes this would create difficulties for the Revenue Department
in projecting its annual income flow. Also, it believes that if the
accumulations were allowed, people could sell their shares in companies to
shareholders in low tax brackets who, by using the accumulated tax credits,
could in effect bail out the accumulated surplus in the company and get
sufficient tax refunds from the federal government to almost pay for the shares
of the corporation.
However, the
two-and-one-half year rule is arbitrary and unfair, particularly inasmuch as
the top personal tax rates will still be at the 70% and 80% level during the
first few years of the system; and to force shareholders to take dividends in
order to avoid staledating, and to have them taxed at more than 50% is
inconsistent with the philosophy of the whole system.
[44] The
'staledating' concept discussed above is very similar to the 'staledating'
concept that the Respondent argues is embedded in subsection 129(1) and the
definition of RDTOH.
[45] The dividend
refund program was first enacted in 1972, when numerous changes to the Act were
made. The Minister's Corporate Tax Guide for the year 1972 (the 'Guide')
provides some very helpful guidance with respect to the interpretation of the
term 'dividend refund'. The Guide clearly states that the term 'dividend
refund' contained in paragraph 129(3)(d) represents 'amounts previously
refunded' and that they are 'dividend refunds made':
This publication outlines the 1972 changes in income tax legislation
as they affect corporations. Its purpose is to provide some preliminary
guidelines to assist officers of corporations and their advisers in
understanding the basic changes in taxation concepts and the new terminology.
DISTRIBUTIONS
OF EARNINGS OF PRIVATE CORPORATIONS
[2.073] The new
rules for the taxation of the income of private corporations earned after 1971
are designed to achieve two basic objectives, which are
(1) that income earned by a private corporation is not subject to
tax at the corporate level at rates substantially lower than rates imposed on
income earned directly by individuals, and
(2) that, in general, the total tax payable by a private corporation
and its individual shareholders after income is distributed is no greater than
the tax that would have been payable if the shareholders had personally
received the income. This objective pertains to investment income, and to
income from active business which is subject to the small business deduction.
…
Refundable Dividend Tax
[2.079] When a private
corporation pays taxable dividends it will be eligible for a refund of certain
corporate taxes previously paid. As mentioned in paragraph 2.063 the Part
IV tax paid is refundable. The total amount available for refund (refundable
dividend tax) however, is not restricted to only Part IV tax. The refundable
dividend tax on hand is composed of the aggregate of
(a) all of the Part IV tax paid in respect
of dividends received, and
(b) a maximum of 25 percentage points of the Part I tax paid in
respect of other investment income, both Canadian and foreign
less
(c) amounts previously refunded.
[2.080] The
amounts in (a) and (b) determined in respect of a particular taxation year are,
in effect, placed in a refundable dividend tax account and the account is reduced
by any dividend refunds made.34
[Bold and
underscore emphasis added.]
[46] Sections
2.079 and 2.080 of the French version of the Guide are worded in part as
follows:
DISTRIBUTIONS
DES GAINS DES CORPORATIONS PRIVÉES
[...]
Impôt
remboursable au titre de dividendes
[2.079] [...]
L'impôt en main, remboursable au titre de dividendes, se compose de la totalité
a) de l'ensemble de l'impôt de la Partie IV payé pour les dividendes
reçus, et
b) d'un maximum de 25 points de pourcentage de l'impôt de la Partie
I payé pour les autres revenus de placements, tant canadiens qu'étrangers
moins:
c) les montants précédemment remboursés.
[2.080] Les
montants indiqués aux alinéas a) et b) déterminés pour une année d'imposition
donnée sont, en effet, placés dans un compte d'impôt remboursable au titre de
dividendes d'où sont déduits tous les remboursements de dividendes effectués.
[Bold and
underscore emphasis added.]
[47] The Guide
was endorsed by the Department of National Revenue's Interpretation Bulletin
IT-61, which was published in the Canada Gazette on September 16, 1972:
5. The new rules
relating to the taxation of corporations and the taxation of distributions of
corporate earnings to their shareholders are set out at length in the
'Corporate Tax Guide' issued by the Department of National Revenue. ...
... Where
there is a need for explanation of the tax treatment of corporations generally
… reference should be made to the Corporate Tax Guide.
Published under
the authority of the Deputy Minister of National Revenue for Taxation.35
[Bold and underscore emphasis added.]
[48] The RDTOH
formula has changed since 1972, but not fundamentally. Some of the rates and
figures have been amended; there was likewise a period during which the formula
called for the historical aggregates of the component figures. Now, the formula
involves figures from two years (the current year's income and taxes, and the
previous year's RDTOH and dividend refund), but because the formula involves
only addition and subtraction and because the balance gets carried over each
year, it essentially represents the same amount as an aggregate historical
balance would. Therefore, the Minister's original 1972 instructions on the
operation of section 129 are still very helpful.
[49] According to
the Respondent's position, the term 'dividend refund' refers to a notional
amount because Parliament intended that amounts credited to a taxpayer's RDTOH
account become staledated three years after the end of the taxation year in
which they are earned. The purpose is to avoid a large build-up of potential
dividend refunds that can be triggered at any time at the sole discretion of
taxpayers. I note, however, that the Respondent's interpretation, in most
cases, does not achieve this result. According to the Respondent, the notional
amount of the 'dividend refund' is the lesser of the amounts set out in
subparagraphs 129(1) (a)(i) and (ii) respectively, namely, the taxable dividend
and the RDTOH balance at the end of the year. A corporation could avoid the
staledating of its account by deferring the payment of taxable dividends to its
shareholders. For example, had the Appellant, in the instant case, paid a
taxable dividend of $321,414 for the first time in its 2008 taxation year
(which is more than three years beyond the 2004 taxation year when Part IV tax
was credited to its RDTOH account), it would be entitled to a dividend refund
provided it filed its tax return within three years after its 2008 taxation
year.
[50] Under the
Respondent's interpretation, a corporate taxpayer would suffer a reduction of
its RDTOH balance only if it paid a taxable dividend in a year and filed a tax
return more than three years after the end of that year, which is a punitive
result compared to the treatment given to taxpayers that defer dividend
payments.
27 Howard J. Kellough and Peter E. McQuillan, Taxation of Private
Corporations and Their Shareholders, 3rd ed. (Toronto: Canadian Tax Foundation,
1999) at 2:3.
28 Respondent's Written Submissions; also trial transcript.
29 The staledating concept is described nicely by I.H. Asper in The
Benson Iceberg: A critical analysis of the White Paper on tax reform in Canada
(Toronto: Clarke, Irwin & Company Limited, 1970) at pp. 30-134.
30 Standing Senate Committee on Banking, Trade and Commerce, Report on
the White Paper Proposals for Tax Reform, September 1970 (Ottawa: Queen's
Printer for Canada, 1970) at pp. 30, 31.
31 Proceedings of the Senate Standing Committee on Banking, Trade and
Commerce, January 28, 1970 at S:22.
32 Ibid.
33 Footnote
29, above, at pp. 30-31.
34 National Revenue, Taxation, Corporate Tax Guide (undated; addresses
the 1972 changes in income tax legislation).
35 Department of National Revenue Taxation, Interpretation Bulletin
IT-61, 'Income Tax Act - Corporations that were Personal Corporations under the
Income Tax Act prior to 1972', August 16, 1972, published in the Canada
Gazette, September 16, 1972, at pp. 2658-2663.
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