Citation: 2012TCC166
Date: 20120518
Docket: 2011-879(IT)I
BETWEEN:
OTTAWA RITZ HOTEL COMPANY LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant is a
corporation that paid a dividend in the amount of $32,000 during its fiscal
year ending March 31, 2007. The tax return for this 2007 taxation year was not
filed until June 5, 2010. The Appellant claimed a dividend refund in the amount
of $10,667 in its 2007 tax return but this dividend refund was denied. A
penalty was also assessed under subsection 162(2) of the Income Tax Act (the
“Act”).
[2]
Subsection 129(1) of
the Act provides as follows:
129. (1) 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; 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).
[3]
A dividend refund is
the lesser of two amounts – 1/3 of all taxable dividends paid in a particular
taxation year and the corporation’s refundable dividend tax on hand at the end
of such year. A dividend refund, as provided in this subsection, may be paid by
the Minister without any application for such refund being made by the taxpayer
(paragraph (a)). If the Minister does not voluntarily pay the refund,
the taxpayer may apply for this refund and then the Minister must pay the
refund (paragraph (b)). However, it is a condition for either situation
that the corporation’s return for the particular year for which it will be
claiming the refund must be filed within 3 years after the end of this year. If
the return is not filed within this three year period, neither paragraph (a)
nor paragraph (b) is applicable.
[4]
In Tawa Developments
Inc. v. The Queen, 2011 TCC 440, 2011 DTC 1324, Justice Hogan
confirmed that the failure to file the tax return within the three year period
referred to subsection 129(1) of the Act, “made the dividend refund provision in subsection
129(1) inoperative … and the refund unobtainable”. Since the Appellant did not
file its tax return for its 2007 taxation year within three years from the end
of this taxation year, the provisions of paragraphs (a) and (b)
of subsection 129(1) are not applicable and the Minister is not obligated to
pay the dividend refund amount to the Appellant.
[5]
While it was not raised
during the hearing, Justice Hogan did note in Tawa Developments Inc.,
above, that if the dividend refund amount is not paid to the corporate
taxpayer, then the refundable dividend tax on hand of that corporate taxpayer
is not reduced by the amount of such dividend refund that could have been paid
but was not paid because the tax return was not filed within the required three
year period. Therefore the refundable dividend tax on hand of the Appellant is
not reduced by the $10,667 claimed by the Appellant when it did file its tax
return for its 2007 taxation year on June 5, 2010 as such amount has not been
paid to the Appellant.
[6]
The Appellant was also
assessed a penalty under subsection 162(2) of the Act. This subsection
provides as follows:
(2) Every person
(a) who fails to file a return of income for a taxation year
as and when required by subsection 150(1),
(b) on whom a demand for a return for the year has been
served under subsection 150(2), and
(c) by whom, before the time of failure, a penalty was
payable under this subsection or subsection (1) in respect of a return of
income for any of the 3 preceding taxation years
is liable to a penalty equal to the total of
(d) an amount equal to 10% of the person's tax payable under
this Part for the year that was unpaid when the return was required to be
filed, and
(e) the product obtained when 2% of the tax payable under
this Part for the year that was unpaid when the return was required to be filed
is multiplied by the number of complete months, not exceeding 20, from the date
on which the return was required to be filed to the date on which the return
was filed.
[7]
The time period within
which a tax return for a corporate taxpayer must be filed is set out in
paragraph 150(1)(a) of the Act:
150. (1) Subject to subsection (1.1), a return of income that is in
prescribed form and that contains prescribed information shall be filed with
the Minister, without notice or demand for the return, for each taxation year
of a taxpayer,
(a) in the case of a corporation, by or on behalf of the
corporation within six months after the end of the year if
(i) at any time in the year the corporation
(A) is resident in Canada, …
[8]
There was no dispute that
the Appellant was resident in Canada. Therefore the Appellant was required to
file its tax return for its 2007 taxation year (which ended on March 31, 2007)
by the end of September 2007.
[9]
The Appellant had
failed to file its tax return for its 2007 taxation year as and when required
by subsection 150(1) of the Act. Although a copy of the demand that was
sent to the Appellant was not submitted during the hearing, a copy of the
letter from the Canada Revenue Agency dated June 12, 2008 was submitted. The first
paragraph of this letter states that:
This letter acknowledges your request for additional time to comply
with our notice to file the above-mentioned tax return.
[10]
The tax return referred
to above in the letter was the tax return for the Appellant for the period
ending March 31, 2007. Therefore it is more likely than not that the demand to
file the tax return for its taxation year ending March 31, 2007 had been served
on the Appellant. In this letter the Canada Revenue Agency stated that unless
the tax return was filed by August 31, 2008 further compliance action may be
initiated.
[11]
A penalty was payable
under subsection 162(1) of the Act by the Appellant in respect of its
tax return for its 2006 taxation year. Therefore all of the conditions for the
imposition of the penalty under subsection 162(2) of the Act (as set out
in paragraphs (a), (b) and (c) of this subsection) have
been satisfied.
[12]
Then Associate Chief
Justice Bowman in Kadrie v. The Queen, 2001 DTC 967 confirmed that a due diligence defence was
available for a taxpayer who had been assessed a penalty under subsection
162(1) of the Act. It does not seem to me that there is any reason why such
a defence should not also be available to a person who has been assessed a
penalty under subsection 162(2) of the Act. The Appellant will, however,
need to establish that the requirements of the due diligence defence have been
satisfied.
[13]
Justice Létourneau, on behalf of
the Federal Court of Appeal,
in Les Résidences Majeau Inc. v. The
Queen, 2010 FCA 28, stated as follows:
7 As far as
the penalty is concerned, we are satisfied that the judge did not make any
mistake in upholding it. To avoid this penalty, the appellant had to establish
that it was duly diligent.
8 According to
Corporation de l'école polytechnique v. Canada, 2004 FCA 127, a
defendant may rely on a defence of due diligence if either of the following can
be established: that the defendant made a reasonable mistake of fact, or that
the defendant took reasonable precautions to avoid the event leading to
imposition of the penalty.
9 A reasonable
mistake of fact requires a twofold test: subjective and objective. The
subjective test is met if the defendant establishes that he or she was mistaken
as to a factual situation which, if it had existed, would have made his or her
act or omission innocent. In addition, for this aspect of the defence to be
effective, the mistake must be reasonable, i.e. a mistake a reasonable person
in the same circumstances would have made. This is the objective test.
10 As already
stated, the second aspect of the defence requires that all reasonable
precautions or measures be taken to avoid the event leading to imposition of
the penalty.
[14]
Although the penalty in
issue is not identified in this decision of the Federal Court of Appeal, it
appears from the decision of Justice Tardif which was appealed to
the Federal Court of Appeal that the penalty in issue is the penalty that was, prior
to April 1, 2007, imposed under section 280 of the Excise Tax Act. The
imposition of this penalty was also subject to the due diligence defence (see Pillar
Oilfield Projects Ltd. v. The Queen, [1993] G.S.T.C. 49).
[15]
In this case it is the
failure to file the tax return for 2007 (following a demand to file this
return) which followed a failure to file the tax return for the 2006 taxation
year as and when required that has resulted in the imposition of the penalty
under subsection 162(2) of the Act. There is no reasonable mistake of
fact in this case.
[16]
The due diligence
defence may also be established if the Appellant took all reasonable
precautions to avoid the failure to file its tax return.
[17]
Edgar Mitchell was the
President of the Appellant. His wife passed away suddenly on December 29, 2008
at the age of 49. Jack Bowerman, C.A. CMA, was the accountant for the
Appellant. His mother passed away in the spring of 2009. He also had surgery on
his left hand in the fall of 2009 and was unable to work for 2 months.
[18]
While the sudden
passing of his wife was a traumatic event for the President of the Appellant,
it happened over one year after the tax return for 2007 was required to be
filed as provided in subsection 150(1) of the Act. The events that
affected the accountant took place one and a half to two years after the 2007
tax return for the Appellant was required to be filed.
[19]
The Appellant has
failed to establish that it took all reasonable precautions to avoid the
failure to file its corporate tax return for 2007 by the end of September 2007
(when it was required to be filed under subsection 150(1) of the Act).
No explanation was provided for the failure to file its tax return for its 2006
taxation year as and when that return was due.
[20]
As a result the
Appellant’s appeal is dismissed, without costs.
Signed at Halifax, Nova Scotia,
this 18th day of May 2012.
“Wyman W. Webb”
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