Date: 20091119
Docket: A-217-08
Citation: 2009 FCA 341
CORAM: EVANS
J.A.
LAYDEN-STEVENSON
J.A.
TRUDEL
J.A.
BETWEEN:
CAROLE PECHET
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
TRUDEL J.A.
Background
[1]
This
is an appeal from the judgment of Valerie Campbell J. (the Judge), dated April
11, 2008, dismissing Ms. Pechet’s appeals from Notices of Reassessment dated
April 3, 2003 issued under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) (the Act) for the 1997, 1998, 1999, 2000 and 2001 taxation years. The
decision under appeal is reported as Pechet v. The Queen, 2008TCC208.
[2]
The
appeal deals with the rights and obligations under the Act of a non-resident
who receives rental payments in Canada from a Canadian
resident and how these rights and obligations interplay with those of the Canadian
resident. The provisions of the Act relevant to this appeal are found in Part
XIII entitled Tax on Income from Canada of
non-resident persons, and as they read for the years in question,
are appended to these reasons.
[3]
The
statutory scheme set out in Part XIII of the Act can be described as follows:
- Part XIII of the Act
opens with a charging provision (section 212). Relevant to this appeal is
paragraph 212(1)(d), which imposes a 25 per cent income tax on
rental income received by non-resident persons from a person resident in
Canada for the use, or a right to the use, in Canada of
property belonging to the non-resident.
- Although Part XIII
tax is levied on the non-resident person, subsection 215(1) requires the
tax payable by the non-resident to be deducted at source by the Canadian
resident and remitted forthwith to the Receiver General of Canada.
- A Canadian resident
who fails to withhold and remit is liable to pay, as Part XIII tax on
behalf of the non-resident, the whole amount not deducted or withheld
(which can be recovered later from the non-resident (subsection 215(6))).
The Canadian resident is also liable for a penalty under subsection 227(8)
and for interest under subsection 227(8.3) on the amounts not deducted or
withheld.
- While not liable
for the penalty, the non-resident person is jointly and severally liable with
the Canadian resident for any interest payable on the amounts not deducted
or withheld (subsection 227(8.1) of the Act).
- By virtue of
subsection 227(10), the Minister may at any time assess any amount payable
under subsections 8.1 or 8.3.
[4]
The
above delineation would be incomplete without also addressing the
non-resident’s obligation to report the rental income and the choice of payment
offered under Part XIII. This is where subsection 216(1) of the Act comes into
play.
[5]
Subsection
216(1) allows a non-resident, within two years after the end of the year in
which the income in question was received, to file a return and to pay regular
Part I tax on the net income from real property in Canada in lieu of
paying a 25 per cent Part XIII tax on the gross amount as required by section
212. In most cases, the difference between the Part XIII tax remitted by the Canadian
resident and the Part I tax liability originating from the section 216 return
will result in a subsequent refund to the non-resident.
[6]
In
the case at bar, the appellant elected to file a return under section 216 under
the circumstances expressed by the Judge at paragraph 2 of her reasons:
[2] […]
the Appellant was a non-resident of Canada during the relevant
taxation years. She had a 50% interest in a partnership that owned a commercial
rental property in Edmonton, Alberta. The Appellant received
her share of the rental payments paid to the partnership but no amounts were
withheld and remitted pursuant to Part XIII of the Income Tax Act (the Act).
On May 29, 2002, the Appellant filed income tax returns under subsection
216(1), for the 1997 to 2001 taxation years, which showed that no Part I tax
was owed by the Appellant in respect to any of these taxation years. By Notices
of Assessment dated April 3, 2003, the Appellant was assessed Part XIII
withholding tax and arrears interest on the Part XIII withholding tax that
would have been payable by the Appellant, absent the filing of the section 216
returns. Also on April 3, 2003, Notices of Reassessment were issued to reverse
the Part XIII withholding tax but not the arrears interest (reasons for
judgment at paragraph 2).
[7]
Under
Part XIII, the amount of the withholding-arrears interest at stake is $4,518.58
(Statement of Agreed Facts, appeal book, page 33 at paragraph 13).
Relevant portions of
subsection 216(1)
[8]
For
ease of reference and to allow for a better understanding of the parties’
arguments, I reproduce only the necessary portions of subsection 216(1), the
keywords being “thereupon” and “in lieu of”. It reads as follows:
|
Alternatives
re rents and timber royalties
216. (1) Where an amount has been
paid during a taxation year to a non-resident person or to a partnership of
which that person was a member
…
that person may,
…
file a return of income under
Part I
…
and the non-resident person
shall,
…
thereupon be liable, in lieu of
paying tax under this Part on that amount, to pay tax under Part I for the
year as though
...
(emphasis added)
|
Choix relatif aux loyers et redevances
forestières
216. (1)Dans le cas où une somme a
été versée au cours d’une année d’imposition à une personne non-résidente ou
à une société de personnes dont elle était un associé,
[…]
elle peut,
[…]
produire sur formulaire prescrit
une déclaration de revenu en vertu de la partie I,
[…]
la personne non-résidente est dès
lors tenue, au lieu de payer l’impôt en vertu de la présente
partie sur ce montant, de payer l’impôt en vertu de la partie I pour l’année
comme si :
[…]
(je souligne)
|
Position of the parties
[9]
The
appellant’s thesis is that:
… subsection
216(1), after the Appellant filed her Part I income tax returns, made the
Appellant liable for Part 1 income tax instead of or in place of any
Part XIII liability and, as a result, extinguished any Part XIII income tax
liability that the appellant was required to pay (appellant’s memorandum of
fact and law at paragraph 38).
[10] It follows
that if the appellant was not liable to pay tax under Part XIII by virtue of
her election under subsection 216(1), there was no obligation on the part of
the Canadian resident to withhold and remit any amount under subsection 215(1).
Consequently, neither the Canadian resident nor the appellant could be liable
for arrears interest on the withholdings. Hence, the appellant takes the
position that the Judge erred as the reassessments should have been quashed and
the appeals allowed.
[11] At the
hearing of the appellant’s appeal to this Court, the respondent took no issue
with the appellant’s proposed definition of the phrase in lieu of. The
respondent conceded that the phrase means in the stead of, instead of,
or as a substitute for.
[12] However, the
parties disagree on the effect of an election under subsection 216(1). The
appellant contends that the non-resident’s liability for Part XIII income tax
is simply eliminated or extinguished once the election has been made
(appellant’s memorandum of fact and law at paragraph 39). The respondent, on
the other hand, argues that the focus of subsection 216(1) is on the payment of
the tax thereby rejecting the appellant’s proposal that “liability under Part
XIII is, by reason of the filing of a s. 216 return, void ab initio”
(respondent’s memorandum of fact and law at paragraph 21).
[13] So, the real
issue is one of timing. At what moment is the non-resident’s liability for tax
under Part XIII substituted for liability under Part I? Is it from the date of
the filing of the return for a given taxation year (“thereupon liable to pay
tax under Part I”), as argued by the respondent and as found by the Judge? Or,
as argued by the appellant, does the election under subsection 216(1) displace
Part XIII entirely for that particular taxation year, thereby extinguishing all
obligations of the non-resident under that Part of the Act?
[14] The answers
to these questions raise a further concern regarding the role of the Canadian
resident in the scheme described above.
[15] At the
hearing, the appellant conceded that section 216 of the Act does not absolve
the Canadian resident from withholding and remitting. However, this was the
extent of the concession. Staying true to her position, the appellant hastened
to add that consequences would not always ensue for the non-resident if the Canadian
resident defaulted from his or her obligation.
[16] Indeed, there
would be no consequences when the non-resident elects to file a return under
subsection 216(1). Therefore, subsection 227(8.1) would not be engaged and the
appellant would not be responsible for withholdings interest arrears.
Otherwise, the appellant adds, her tax liability along with that of the Canadian
resident for Part XIII income tax “… would continue to exist ad infinitum,
pursuant to subsection 215(6) since that liability is predicated solely on
whether the [Canadian resident] complied with the section 215(1) withholding
requirements” (appellant’s memorandum of fact and law at paragraph 57).
[17] According to
the appellant, this perpetual Part XIII income tax would also result in income
tax being owed by both the Canadian resident (under Part I) and the
non-resident (under Part XIII) on the same source of income (rental payments).
Therefore, the interest under Part XIII would continue to run indefinitely.
Likewise, the Canadian resident’s debt for the arrears interest would also
continue to run indefinitely as “no amount of Part XIII tax would ever be paid
to the Receiver General either by the [Canadian resident] on the non-resident’s
behalf, [or] by the non-resident after the section 216 return is filed”
(appellant’s memorandum of fact and law at paragraph 58). So, “the most reasonable
way of interpreting [subsection] 227(8.3) would be to conclude that no Part
XIII income tax was ever payable for the purposes of section 215 after a
section 216 return is filed” (ibid. at paragraph 59).
[18] Finally, the
appellant contends that the co-existence of Part I and Part XIII liability for
tax would lead to a “double charging of arrears interest, once on the unpaid
Part XIII tax and secondly, on any Part I income tax not paid from the filing
due date” (ibid. at paragraph 61).
The decision of the Tax
Court
[19] Faced with
these arguments, the Judge looked at the inter-relationship between the
obligation of the Canadian resident under subsection 215(1) to withhold and
remit, and the right of the appellant to avail herself of an elective Part I
return under section 216 (reasons for judgment at paragraphs 6-7).
[20] To do so, she
embarked on an exercise of legislative interpretation using the unified
textual, contextual and purposive analysis described in Canada Trustco
Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601. This was the
correct approach to the issue at bar, that is, the interpretation of provisions
found under Part XIII of the Act.
[21] Under the
textual branch of her analysis, the Judge found that the words “in lieu of”
“connote the continued existence of, but substitution for, Part XIII tax”
(reasons for judgment at paragraph 11). The Judge thereby rejected the
appellant’s argument that section 216 “sets up an alternative tax regime to the
Part XIII regime” (reasons for judgment at paragraph 12). Rather, she concluded
that “subsection 216(1) provides only a limited alternative for calculating the
tax which non-residents may owe and must ultimately pay in respect to their
Part XIII tax liability” (reasons for judgment at paragraph 17).
[22] Under the
contextual approach, the Judge addressed and rejected the appellant’s
comparisons between the phrase “au lieu de” in the French version of several
provisions in the Act and the use of “in lieu of” or “instead of” in the
English version of those provisions (reasons for judgment at paragraphs 18-20).
[23] The Judge held
that the phrase “in lieu of” must be read alongside the word “thereupon”, which
“suggests that prior events would be unaffected by the subsequent filing of the
subsection 216(1) return, meaning that interest would accrue at the very least
up to the filing date” (reasons for judgment at paragraph 15).
[24] The Judge
discussed the appellant’s perpetuity argument as a contextual
consideration. Recognizing the difficulty associated with eliminating the
interest arrears and the interest accruing on those arrears once a subsection
216(1) tax return has been filed, the Judge accepted that under the scheme of
the Act “… interest on the subsection 215(1) amounts would not continue to
accrue beyond the point where the ultimate tax debt was settled” (reasons for
judgment at paragraph 22). However this would not eliminate the interest
arrears owing to this point nor would it stop interest from accruing on those
arrears.
[25]
Nonetheless,
the Judge dismissed the appellant’s arguments in these terms:
It would appear that Parliament has made a conscious
decision not to include
any provisions addressing relief measures. The
Parliamentary intent is that the
Canadian resident/payor of rents to a non-resident is to
withhold certain prescribed
amounts from those rental payments and remit them forthwith
to the Receiver
General so that the Minister has the temporary benefit of
those amounts. Since
there is no analogous provision in either the Act or
the Regulations in respect to
Canadian residents who pay amounts directly to
non-residents, this suggests that
residents must always withhold and remit subsection 215(1) amounts
(reasons for judgment at paragraph 23).
[26] After
completing the contextual branch of her analysis, the Judge considered the
purpose behind the sections under examination. She found that the purpose
behind the provisions is to place on the Canadian resident the responsibility
to remit the tax due on all payments made to non-residents without taking into
account the tax position of the non-resident “in order to shift the burden of
enforcing compliance away from the Receiver General” (reasons for judgment at
paragraph 26). In her mind “retroactively” eliminating the obligation to
withhold and remit, following an election under subsection 216(1) “could
encourage non-compliance and introduce a measure of unintended risk and
uncertainty within the system” (reasons for judgment at paragraph 26).
[27] Ultimately,
she noted, “the Appellant is not being charged interest because she retained
money that rightfully belonged to the Minister but rather she is jointly and
severally liable for the interest on the subsection 215(1) amounts that the [Canadian
resident] did not withhold and remit as required by the relevant provisions in
the Act” (reasons for judgment at paragraphs 24 and 31).
Issue and Standard of
Review
[28] The issue is
whether the Judge misinterpreted the relevant provisions of the Act in the
context of Ms. Pechet’s appeals. The interpretation of the Act is a question of
law subject to appellate review on a standard of correctness.
[29] The main
question in this appeal remains what it was in the Court below: how does the
filing of a section 216 income tax return by a non-resident affect the
application of that non-resident’s Part XIII tax liability? (reasons for
judgment at paragraph 7).
Analysis
[30] I agree
generally with the Judge’s reasons and conclude as she did: the appellant’s
interpretation of the relevant provisions of the Act undermines the legislative
intent regarding the taxation of non-resident persons.
[31] In addition, I
conclude that the appellant’s theory that the non-resident should be viewed as
never having been a taxpayer under Part XIII, once an elective return has been
filed, is not supported by the overall scheme of the Act.
[32] In addition
to the Part XIII scheme that I have described above (see paragraph 3 of these
reasons), the Act provides for a second distinct scheme under which non-residents
carrying on business in Canada are taxable under Part I for their Canadian
source business income (see subsection 2(3) and sections 115 and following of
the Act). In such a case, the non-residents assess their own liability for Part
I tax, which is determined in the same manner as for Canadian residents except
that the tax is limited to Canadian source income.
[33] Under the
Part XIII scheme, Parliament not only imposes a specific tax (flat rate of 25
per cent of the gross amount), but also provides for the manner in which it is
to be collected. “Withholding is the only feasible way to tax the income of
non-residents who do not carry on business in Canada” (Krishna, Vern, The
Fundamentals of Canadian Income Tax, 9th ed. (Toronto: Thomson
Carswell, 2006) at page 1405).
[34]
Commenting
on the withholding tax, Professor Krishna writes:
The
withholding tax regime for passive income is a difficult compromise between two
conflicting policy objectives. We want to tax non-residents fairly but without
opening the door to tax evasion.
…
To resolve
the conflict between administrative feasibility and fairness towards
non-residents we permit various deviations from the general scheme for the
taxation of passive income (ibid. at pages 1405 and 1406).
[35] Among these
deviations or adjustments are the special elections that allow for the net
income taxation of rental income and other properties.
[36] Against this
background, I find that subsection 216(1) merely allows the non-resident to pay
his or her non-business Canadian source income under Part I, that is, it
permits the non-resident to claim those Part I deductions available to
residents in computing income under section 3. It does not eliminate the
responsibility of the Canadian resident to withhold and remit, as accepted by
the appellant, or the consequences associated with the failure to do so.
[37] Under normal
circumstances, the Canadian resident will have remitted the flat rate tax
forthwith, which means in practice, on or before the 15th day of the
month following the month the rental amount was paid or credited to the
non-resident (see Information Circular 77-16R4), unless the non-resident has
met the conditions of subsection 216(4) and filed with the Minister an
undertaking in prescribed form, which is not the case here. The withholding and
remitting duties of the Canadian resident are an on-going process independent
of the non-resident’s choice to elect his or her method of payment under
subsection 216(1) for a particular taxation year. As stated before, that choice
may take place within two years after the end of the year in which the income
in question was received.
[38] Despite that
election for any taxation year, the non-resident remains a Part XIII taxpayer.
The non-resident is the recipient of non-business Canadian source income for
which he or she is being taxed and also for which the general Part XIII scheme
has been adopted by the legislator. As there may be no business assets in Canada or none of
sufficient value to effectively enforce payment of their fiscal debt, the
withholding tax is tantamount to a prepaid tax ensuring that non-residents
governed by Part XIII will meet their tax obligations under the Act. Therefore,
I disagree with the appellant’s proposition that her election under subsection
216(1) serves as an opting-out mechanism (appellant’s memorandum of fact and
law at paragraph 34).
[39] It seems to
me that the appellant’s statutory interpretation is predicated solely on her
own personal circumstances: a non-resident who has used the voluntary
disclosure provisions of the Act to file her income tax returns under Part I
after having received rents, over the course of several years, from a Canadian
resident who had not withheld or remitted. As a non-resident, the appellant had
the benefit of these withholdings, but by virtue of her election under
subsection 216(1), wants to free herself from her joint and several liability
for the withholdings arrears because her ultimate tax liability under Part I
happens to be nil.
[40] It is in that
context that the appellant argues that unintended results flow from the Judge’s
interpretation of the provisions of Part XIII.
[41] These
unintended results that I have described earlier (at paragraphs 16-18 of these
reasons) are also listed under paragraphs 57 through 61 of the appellant’s
memorandum of facts and law: perpetuity of Part XIII income tax, perpetuity of
interest, and double interest liability. The appellant’s arguments are based
particularly on her interpretation of subsections 227(8.3) and 227(8.1), which
read:
|
Interest on amounts
not deducted or withheld
227. (8.3) A person
who fails to deduct or withhold any amount as required by subsection 135(3),
135.1(7), 153(1) or 211.8(2) or section 215 shall pay to the Receiver General
interest on the amount at the prescribed rate, computed
…
(b) in the case
of an amount required by subsection 135(3) or 135.1(7) or section 215 to be
deducted or withheld, from the day on which the amount was required to be
deducted or withheld to the day of payment of the amount to the Receiver
General; and…
…
Joint and several
liability
227. (8.1) Where a
particular person has failed to deduct or withhold an amount as required
under subsection 153(1) or section 215 in respect of an amount that has been
paid to a non-resident person, the non-resident person is jointly and
severally liable with the particular person to pay any interest payable by
the particular person pursuant to subsection 227(8.3) in respect thereof.
|
Intérêts sur les montants non déduits
ou non retenus
227. (8.3) La personne qui ne déduit
pas ou ne retient pas un montant conformément aux paragraphes 135(3),
135.1(7), 153(1) ou 211.8(2) ou à l’article 215 doit payer au receveur
général des intérêts sur ce montant calculés au taux prescrit :
…
b) s’il s’agit
d’un montant visé aux paragraphes 135(3) ou 135.1(7) ou à l’article 215, pour
la période commençant le jour où le montant aurait dû être déduit ou retenu
et se terminant le jour de son paiement au receveur général;
…
Solidarité
227. (8.1) Dans le cas où une personne
ne déduit pas ou ne retient pas un montant conformément au paragraphe 153(1)
ou à l’article 215 sur un montant payé à une personne qui ne réside pas au
Canada, ces deux personnes sont solidairement tenues au paiement des intérêts
payables par la première sur ce montant conformément au paragraphe 227(8.3).
|
a)
Perpetuity of Part
XIII income tax (appellant’s memorandum of fact and law at paragraph 57)
[42] This argument
must fail as I agree with the Judge that the change in tax liability occurs
upon the filing of the Part I return. Thereupon, the taxpayer ceases to
be liable for tax under Part XIII. Therefore, there is no period of time when
the non-resident’s tax liability exists concurrently under both Parts on the
same source. Normally, according to the scheme, the withholdings which were
made and remitted by the Canadian resident under Part XIII will be applied, by
virtue of subsection 216(2), to the new liability of the non-resident under
Part I and will generally give rise to a refund.
b) Perpetuity of
interest (appellant’s memorandum of fact and law at paragraphs 58-60)
[43] This argument
must also fail. The Judge addressed it as follows:
… The
Appellant suggests that (…) the only way to stop interest from accruing
indefinitely is to pay the subsection 215(1) withholding amounts. According to
the Appellant, this cumbersome result in respect to subsection 227(8.3) can be
avoided if one concludes that no Part XIII tax would ever be payable for the
purposes of section 215 after a section 216 return is filed. While this is
true, expediency is not a canon of statutory interpretation. To stop interest from
accruing indefinitely, the Appellant would have to pay the subsection 215(1)
amounts on behalf of the Canadian resident, then apply these amounts to the
Appellant’s Part I tax owing, by way of subsection 216(2) and finally, obtain a
refund (also through subsection 216(2)) (reasons for judgment at paragraph 22).
[44] Once again, I
agree with her, as this is indeed how the scheme works. When withholdings are
not remitted, the Canadian resident is liable for interest on the unpaid amount
from the date they ought to have been remitted to the date of payment; the
non-resident remains jointly and severally liable for this interest, which
forms the basis of the reassessments at issue. Although technically interest on
the withholdings arrears could accrue indefinitely, there is no evidence on
record that the Minister has claimed any amount that would justify this rather
speculative argument from the appellant.
[45] The Canadian
resident who has not withheld and remitted the flat rate tax will never do so
since the monies have already passed into the non-resident’s hands. It
certainly explains why the Minister is claiming the withholdings arrears
interest up to the date of payment from the appellant.
[46] As for the
Part XIII interest, the appellant’s election under subsection 216(1) triggered
her new liability to pay tax under Part I of the Act. From that moment on, the
appellant no longer owed taxes calculated under Part XIII on the gross
income from her rental property. So, necessarily, with the new calculation of
the net income came a new principal sum under Part I. The election did not,
however, affect her continued joint and several liability for the interest
under Part XIII.
[47] In any event,
as argued by the respondent, had the Minister sought, after the appellant’s
election, payment of interest on the principal amount owed under Part
XIII before that election, the appellant could have argued that she no longer
owed tax under Part XIII and raised a Rand defence based on Rand J.’s
oft-cited definition of interest: “… interest is referable to a principal in
money or an obligation to pay money. Without that relational structure
in fact and whatever the basis of calculating or determining the amount, no
obligation to pay money or property can be deemed an obligation to pay interest”
(Reference Re: Farm Security Act 1944 (Saskatchewan) S.6, [1947]
S.C.R. 394 at page 412; Coughlan v. The Queen, [2001] 4 C.T.C. 2004 at
paragraph 14) (emphasis added).
c)
Double
interest liability (appellant’s memorandum of fact and law at paragraph 61)
[48] For the same
reasons, this last argument must also fail.
Conclusion
[49] My
examination of the relevant provisions convinces me that they form an
integrated scheme applicable to non-residents governed by Part XIII of the Act.
When interpreted in the light of the statutory schemes, these provisions all
contribute to accomplishing the intended goal of ensuring the settlement of tax
debt by non-residents. This interpretation ensures the attainment of the object
of the Act “according to its true spirit, intent and meaning” (Interpretation
Act (R.S.C., 1985, c. I-21), section 10).
[50] Therefore, I
would dismiss this appeal. As the respondent is not seeking costs, none should
be awarded.
"Johanne Trudel"
“I agree.
John M.
Evans J.A.”
“I
agree.
Carolyn Layden-Stevenson
J.A.”
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