Date: 20100611
Docket: A-399-09
Citation: 2010 FCA 159
CORAM: NOËL
J.A.
DAWSON J.A.
TRUDEL
J.A.
BETWEEN:
EXIDA.COM LIMITED LIABILITY
COMPANY
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an appeal
from a decision of Woods J. of the Tax Court of Canada (the Tax Court Judge)
confirming the assessment of penalties against Exida.Com Limited Liability
Company (the appellant) for the failure to file its tax returns for its 2003,
2004 and 2005 taxation years on the due date.
[2]
At issue is whether
non-resident corporations such as the appellant can be subjected to a penalty
pursuant to subsection 162(2.1) of the Income Tax Act, R.S.C. 1985, c. 1
(5th Supp.) (the Act) for failure to file their tax returns on time for a given
taxation year, in circumstances where they have no taxes payable for that year.
The Tax Court Judge found in the affirmative. In so doing, she declined to
follow an earlier decision of her colleague Miller J. in Goar, Allison &
Associates Inc. v. The Queen, 2009 TCC 174, 2009 DTC 1125 (Goar),
who had come to the opposite conclusion.
[3]
Both Goar and
the present appeal were heard by the Tax Court pursuant to the informal
procedure with the result that neither has precedential value (section 18.28 of
the Tax Court of Canada Act, R.S.C. 1985, c. T-2).
FACTS AND STATUTORY BACKGROUND
[4]
The relevant facts in
each case are the same. The appellants carried on business in Canada in each of the taxation years in issue (2005 only in the
case of Goar), but had no taxes payable on the due date. They were late
in filing their tax return and were assessed late filing penalties in the
amount of $2,500 pursuant to subsection 162(2.1) of the Act (i.e., $25/day to a
maximum of 100 days).
[5]
Paragraph 150(1)(a)
sets out the circumstances in which a tax return must be filed:
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,
(B) carries
on business in Canada, unless the corporation’s only revenue from carrying on
business in Canada in the year consists of amounts in respect of which tax
was payable by the corporation under subsection 212(5.1),
(C) has a
taxable capital gain (otherwise than from an excluded disposition), or
(D) disposes
of a taxable Canadian property (otherwise than in an excluded disposition),
or
(ii) tax
under this Part
(A) is
payable by the corporation for the year, or
(B) would
be, but for a tax treaty, payable by the corporation for the year (otherwise
than in respect of a disposition of taxable Canadian property that is
treaty-protected property of the corporation);
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150. (1) Sous
réserve du paragraphe (1.1), une déclaration de revenu sur le formulaire
prescrit et contenant les renseignements prescrits doit être présentée au
ministre, sans avis ni mise en demeure, pour chaque année d’imposition d’un
contribuable :
a) dans le
cas d’une société, par la société, ou en son nom, dans les six mois suivant
la fin de l’année si, selon le cas :
(i) au cours
de l’année, l’un des faits suivants se vérifie :
(A) la
société réside au Canada,
(B) elle
exploite une entreprise au Canada, sauf si ses seules recettes provenant de
l’exploitation d’une entreprise au Canada au cours de l’année consistent en
sommes au titre desquelles un impôt était payable par elle en vertu du
paragraphe 212(5.1),
(C) elle a
un gain en capital imposable (sauf celui provenant d’une disposition exclue),
(D) elle
dispose d’un bien canadien imposable (autrement que par suite d’une
disposition exclue),
(ii) l’impôt
prévu par la présente partie :
(A) est
payable par la société pour l’année,
(B) serait, en
l’absence d’un traité fiscal, payable par la société pour l’année (autrement
que relativement à la disposition d’un bien canadien imposable qui est un
bien protégé par traité de la société);
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[6]
Subsection 162(2.1)
provides:
162. (2.1)
Notwithstanding subsections (1) and (2), if a non-resident corporation is
liable to a penalty under subsection (1) or (2) for failure to file a return
of income for a taxation year, the amount of the penalty is the greater
of
(a)
the amount computed under subsection (1) or (2), as the case may be, and
(b)
an amount equal to the greater of
(i) $100,
and
(ii) $25
times the number of days, not exceeding 100, from the day on which the return
was required to be filed to the day on which the return is filed.
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162. (2.1) Malgré
les paragraphes (1) et (2), la pénalité dont une société non-résidente est
passible pour défaut de produire une déclaration de revenu pour une année
d’imposition aux termes de ces paragraphes correspond au plus élevé des
montants suivants :
a) le montant
déterminé selon les paragraphes (1) ou (2), selon le cas;
b) le plus
élevé des montants suivants :
(i) 100 $
(ii) le
produit de 25 $ par le nombre de jours, jusqu’à concurrence de 100, depuis le
jour où la déclaration devait être produite jusqu’au jour où elle est
produite.
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[Emphasis added.]
[7]
It is also useful to
set out subsections 162(1) and 162(2) :
162. (1)
Every person who fails to file a return of income for a taxation year as and
when required by subsection 150(1) is liable to a penalty equal to the total
of
(a)
an amount equal to 5% of the person’s tax payable under this Part for
the year that was unpaid when the return was required to be filed, and
(b)
the product obtained when 1% of the person’s 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 12, from the
date on which the return was required to be filed to the date on which the
return was filed.
(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 162(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 person’s 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.
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162. (1)
Toute personne qui ne produit pas de déclaration de revenu pour une année
d’imposition selon les modalités et dans le délai prévus au paragraphe 150(1)
est passible d’une pénalité égale au total des montants suivants :
a)
5 % de l’impôt payable pour l’année en vertu de la présente partie qui
était impayé à la date où, au plus tard, la déclaration devait être produite;
b)
le produit de 1 % de cet impôt impayé par le nombre de mois entiers,
jusqu’à concurrence de 12, compris dans la période commençant à la date
où, au plus tard, la déclaration devait être produite et se terminant le jour
où la déclaration est effectivement produite.
(2) La personne qui ne produit pas de
déclaration de revenu pour une année d’imposition selon les modalités et dans
le délai prévus au paragraphe 150(1) après avoir été mise en demeure de le
faire conformément au paragraphe 150(2) et qui, avant le moment du défaut, devait
payer une pénalité en application du présent paragraphe ou du paragraphe (1)
pour défaut de production d’une déclaration de revenu pour une des trois
années d’imposition précédentes est passible d’une pénalité égale au total
des montants suivants :
a) 10 % de
l’impôt payable pour l’année en vertu de la présente partie qui était impayé
à la date où, au plus tard, la déclaration devait être produite;
b) le produit
de 2 % de cet impôt impayé par le nombre de mois entiers, jusqu’à concurrence
de 20, compris dans la période commençant à la date où, au
plus tard, la déclaration devait être produite et se terminant le jour où la
déclaration est effectivement produite.
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[Emphasis
added.]
[8]
Finally, subsection
162(7) sets out a penalty for failure to file an information return as and when
required under the Act, and also provides for a residual penalty for failing to
comply with a duty or obligation imposed under the Act where no penalty is
expressly set out for that breach :
162. (7) Every
person (other than a registered charity) or partnership who fails
(a)
to file an information return as and when required by this Act or the
regulations, or
(b)
to comply with a duty or obligation imposed by this Act or the regulations is
liable in respect of each such failure, except where another provision of
this Act (other than subsection 162(10) or 162(10.1) or 163(2.22)) sets
out a penalty for the failure, to a penalty equal to the greater of $100
and the product obtained when $25 is multiplied by the number of days, not
exceeding 100, during which the failure continues.
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162.
(7)
Toute personne (sauf un organisme de bienfaisance enregistré) ou société de
personnes qui ne remplit pas une déclaration de renseignements selon les
modalités et dans le délai prévus par la présente loi ou le Règlement de
l’impôt sur le revenu ou qui ne se conforme pas à une obligation imposée
par la présente loi ou ce règlement est passible, pour chaque défaut 00 sauf
si une autre disposition de la présente loi (sauf les paragraphes (10) et
(10.1) et 163(2.22)) prévoit une pénalité pour le défaut — d’une
pénalité égale, sans être inférieure à 100 $, au produit de la multiplication
de 25 $ par le nombre de jours, jusqu’à concurrence de 100, où le défaut
persiste.
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[Emphasis
added]
[9]
It is also useful to
reproduce the technical notes issued by the Department of Finance in October
1998 when subsection 162(2.1) was introduced (the October 1998 technical
notes):
New subsection 162(2.1)
is a special rule for the computation of penalties under subsections 162(1)
(failure to file return) and 162(2) (repeated failure to file). The rule, which
applies to all non-resident corporations, provides that a penalty under either
of those subsections is to be computed as the greater of two amounts. The first
amount is the amount determined under subsection 162(1) or 162(2). The second
amount is the greater of $100 and $25 for each day, up to 100, that the failure
to file continues. New subsection 162(2.1) thus operates to subject
non-resident corporations to the effect of the regular penalties under
subsections 162(1) and (2) in respect of a failure to file an income tax return
and, consistent with the role of that tax return as an information return for
those corporations that claim an exception from Canadian tax as a result of the
application of a tax treaty, to the alternative penalties that would apply
under subsection 162(7) of the Act if a separate information return had been
required in respect of those corporations.
THE GOAR DECISION
[10]
In Goar,
Miller J. identified the question which he had to decide as follows (Goar,
para. 5):
The simple question is whether subsection 162(2.1) applies in a situation
where, as in this case, there was no monetary penalty under subsection 162(1).
I read the words in subsection 162(2.1) to mean exactly what they say; that is,
where the taxpayer is liable to a penalty.
[11]
According to Miller
J., the appellant was not liable to a penalty under subsection 162(1) given
that it had no taxes payable for the relevant taxation year (Goar, para.
6):
… So, what penalty is
the [a]ppellant liable to under subsection 162(1)? Nothing. Zero. No income, no
penalty. …
[12]
Giving the word
“liable” the alternative meaning suggested by the Minister of National Revenue
(the Minister), he went on to hold that the appellant was no more “at risk” of
incurring this penalty as it owed no taxes (Goar, para. 8).
[13]
In the course of his
reasons, Miller J. also considered the Minister’s alternative submission that a
non-resident corporation’s tax return filed in circumstances where no taxes are
payable should be treated as an information return and penalized as such
pursuant to paragraph 162(7)(a) when it is filed out of time.
[14]
After referring to
the October 1998 technical notes, Miller J. acknowledged that the intent may
have been to treat tax returns as information returns. However, he held that it
would take clearer words to make the penalty set out in subsection 162(7) with
respect to information returns applicable to the situation before him (Goar,
para. 11).
THE DECISION IN ISSUE
[15]
The Tax Court Judge
identified the position of the Minister as follows (Reasons, para. 41):
… a taxpayer is liable to a penalty under [subsection] 162(1) at any time
that an income tax return has not been filed on time. It is irrelevant, it is
argued, that the formula in [subsection] 162(1) may produce a penalty of nil in
the particular circumstances.
[16]
The Tax Court Judge
then conducted a contextual and purposive analysis of subsection 162(2.1). She
first noted that “[t]o a great extent, the issue turns on the proper meaning of
the word “liable” as it is used in subsection 162(2.1)” (Reasons, para. 45).
[17]
The Tax Court Judge then
referred to various definitions of the word “liable” and noted that its meaning
can be quite broad (Reasons, paras. 46 to 49). Furthermore, the word “liable”
in subsection 162(2.1) is distinct from the word “payable” in paragraph 162(2)(c).
According to the Tax Court Judge, the use of different words suggests that a
different meaning was contemplated (Reasons, paras. 50 and 51).
[18]
The Tax Court Judge went
on to consider the purpose of subsection 162(2.1). After considering the
history of the legislation and the October 1998 technical notes, she found that
the purpose was to impose a minimum penalty when a non-resident corporation
fails to file a tax return on time, regardless of whether there are unpaid
taxes (Reasons, paras. 57 and 58).
[19]
She concluded this
aspect of her reasons by saying (Reasons, para. 59):
… the phrase “liable to a penalty under subsection 162(1) or (2) for
failure to file a return of income for a taxation year” should encompass the
circumstances in these appeals. In other words, it should apply if the
non-resident corporation is potentially subject to a penalty under [subsection]
162(1) because it failed to file a tax return on time.
As
the appellant was potentially subject to a penalty under subsection 162(1), the
condition precedent for the application of subsection 162(2.1) was met.
[20]
Earlier in her
reasons, the Tax Court Judge considered the alternative submission of the
Minister who repeated the alternative argument made in Goar that, in the
event that subsection 162(2.1) was not applicable, the penalty set out in
subsection 162(7) is nevertheless applicable (Reasons, paras. 27 to 36).
[21]
While Miller J.
disposed of this argument on the basis of paragraph 162(7)(a), the Tax
Court Judge addressed it by reference to paragraph 162(7)(b) which
provides for a residual penalty for the failure to comply with an obligation
when no other penalty is set out under the Act. She held, focusing on this last
condition, that subsection 162(1) provides for such a penalty and that
accordingly paragraph 162(7)(b) has no application (Reasons, para. 32).
ANALYSIS AND DECISION
[22]
The questions raised
in this appeal give rise to issues of pure statutory construction which must be
assessed on a standard of correctness.
[23]
The history of the
legislation leaves little doubt about what subsection 162(2.1) was intended to
do. Prior to 1998, the Act did not spell out the circumstances in which a
non-resident corporation had to file income tax returns in Canada. Subsection 150(1) simply provided that “in the case of a
corporation” a return “shall” be filed “for each taxation year”. Although no
such distinction was made, it seems clear that with respect to non-resident
corporations, the obligation to file could only extend to those that had some
connection with Canada. To construe the provision as applying
in the absence of any connection with Canada would give it a reach that could not
have been intended. To this extent, I respectfully disagree with the Tax Court
Judge when she says (Reasons, para. 15):
Prior to these amendments, all corporations were required to file income
tax returns in Canada, regardless of whether they were resident
in Canada or had any connection to Canada. …
[Emphasis
added]
[24]
Subsection 150(1) was
amended in 1998 to expressly require corporations to file a tax return when, in
a given taxation year, they reside in Canada, carry on business in Canada, have
a taxable capital gain or dispose of Canadian taxable property. The amendment
further created an obligation to file a tax return where in a given year, taxes
would be payable by a corporation “but for a tax treaty”. At the same time, the
penalty set out in subsection 162(2.1) was added.
[25]
The October 1998
technical notes which accompanied this amendment (see para. 9 above) make it
clear that where a non-resident corporation has taxes payable in a given
taxation year and fails to file its tax return on time, it will be subject to
the “regular penalties” computed as a percentage of the taxes payable under
subsection 162(1) and that in the event that the “regular penalties” are lower
than the higher of the “alternative penalties” set out in paragraph 162(2.1)(b),
the higher of the “alternative penalties” applies to the exclusion of the
“regular penalties”.
[26]
To the extent just
described, subsection 162(2.1) achieves the intended result. The difficulty
arises where, as here, the non-resident corporation has no taxes payable in the
year in issue and hence, cannot be subject to the “regular penalties” under
subsection 162(1) or (2) since these penalties are computed by reference to a
percentage of the taxes payable.
[27]
The October 1998
technical notes do not address this problem. They simply state in the last four
lines that consistent with the role of a tax return as an information return,
where no taxes are payable by reason of the application of a tax treaty, the “alternative
penalties” set out in subsection 162(2.1) apply the same way as the identical
penalties set out in subsection 162(7) would apply if the non-resident
corporation had failed to file an information return on time.
[28]
No doubt this was the
intention. As was found by the Tax Court Judge, the legislative history and
context make it clear that the intention was to impose the higher of the “regular
penalties” and the “alternative penalties” when a non-resident corporation has
taxes payable and the higher of the “alternative penalties” when it has none
(Reasons, para. 57). However, it is equally clear that those charged with
implementing this last aspect of the legislative plan failed in their task. As
noted, subsection 162(2.1) makes the application of the “alternative penalties”
conditional upon the non-resident corporation being liable to the “regular
penalties” under subsection 162(1) or (2), and no such liability can exist in
circumstances where a non-resident corporation has no taxes payable. The
question which arises in this appeal is whether this fundamental drafting error
can be cured by the purposive interpretation proposed by the Tax Court Judge.
In my respectful view, it cannot.
[29]
The Tax Court Judge
suggests that the word “liable” is capable of various meanings. She proposes a
number of analogous expressions (Reasons, paras. 45 to 48). However, whichever
one is used, a non-resident corporation which has no taxes to pay cannot be
“bound or obliged to pay”; “answerable for”; “legally subject to”, “amenable
to” or “responsible for” a penalty under subsection 162(1) or (2) since no such
penalty can be imposed.
[30]
At
the end of her analysis, the Tax Court Judge concludes that the
phrase “liable to a penalty under subsection 162(1) or (2) …” should apply if
the non-resident corporation is “potentially subject” to a penalty under
subsection 162(1) (Reasons, para. 59). Again,
a non-resident corporation which fails to file a tax return in circumstances
where it has no taxes to pay is neither subject to, nor “potentially subject”
to, a penalty under subsection 162(1) or (2) since no penalty can be imposed in
these circumstances.
[31]
On the other hand, if the Tax Court Judge is thereby
suggesting that the appellant should be considered to be liable on the basis
that it would have been liable if it had taxes to pay, she is rewriting the
provision in a manner that is not permissible.
[32]
While a contextual
and purposive analysis is useful in identifying, amongst the meanings which a
word (or phrase) can have the one that best reflects Parliamentary intent, it
cannot be used to give the legislative language a meaning which it cannot bear
(see Canada (Attorney General) v. Mowat, 2009 FCA 309, at para. 99 and
the cases referred to therein). This is particularly so when regard is had to
the fact that subsection 162(2.1) is a penalty provision. The reasoning of the
Tax Court Judge results in a penalty being levied under subsection 162(2.1)
even though the stated condition precedent for its application – “if a
non-resident corporation is liable to a penalty under subsection 162(1) or (2)”
– is not met. No contextual or purposive analysis can justify such a result.
[33]
If, as I have found,
subsection 162(2.1) has no application, the question becomes whether the
appellant is nevertheless liable to the residual penalty set out in subsection
162(7) of the Act. Both the Tax Court Judge and Miller J. held that this
provision had no application, but for different reasons.
[34]
In Goar,
Miller J. only addressed the Minister’s argument that a non-resident
corporation’s tax returns when filed in circumstances where no taxes are
payable is to be treated as an information return and that as a result, the
penalty set out in paragraph 162(7)(a) is applicable when the return is
filed out of time. Miller J. rejected this argument. While acknowledging that
this may have been the intent, he said (Goar, para. 11):
… If the Government intended to treat the non-resident income tax return
as an information return subject to subsection 162(7) penalties, more direct
and unambiguous language could and should have been used.
[35]
There is no doubt
that the function of a non-resident corporation’s tax return when filed in
circumstances where no taxes are payable is that of an information return since
it can have no other function. However, the fact that it fulfils that role in these
circumstances does not alter its character as a tax return under the Act. In
this respect, paragraph 150(1)(a) is drafted on the basis that a
corporation’s tax return filed in circumstances where it has no taxes to pay
remains a tax return. In my respectful view, Miller J. correctly held that
clearer language would be required in order to make a non-resident corporation
who fails to file a tax return on time subject to the penalty set out in
paragraph 162(7)(a) with respect to information returns.
[36]
The Tax Court Judge
for her part focused her attention on paragraph 162(7)(b) which provides
for a residual penalty with respect to any failure to comply with an obligation
under the Act where no penalty is otherwise set out for that failure. She held
that subsection 162(1) provides for such a penalty thereby excluding the
application of subsection 162(7) (Reasons, para. 32):
Subsection 162(7) refers to a failure to comply with an obligation imposed
by the Act. In this case, the obligation that was not complied with was the
obligation to file income tax returns by a specified deadline. A penalty for
such circumstances is set out in [subsection] 162(1). In my view, it is not
relevant that the penalty could be nil. A penalty for the failure to file
returns on a timely basis is nevertheless set out in [subsection] 162(1).
[37]
The difficulty with
this reasoning is that non-resident corporations are not governed by subsection
162(1) but by subsection 162(2.1), which applies “notwithstanding” subsection
162(1). Furthermore, while Parliament can no doubt exclude corporations which
have no taxes to pay from the application of the penalty by framing the penalty
as a percentage of taxes payable, I do not believe that Parliament can thereby
be said to be applying a “penalty of a nil amount”. A “penalty”, by definition,
involves some form of punishment or disadvantage (see for instance The
Shorter Oxford Dictionary, Oxford Press, 1973; Canadian Oxford
Dictionary, Oxford Press, 2004; Dictionary of Canadian Law, Thomson
Carswell, 3rd Edition, 2004) with the result that a “penalty of a nil amount”
is not a penalty.
[38]
In the present case,
we have the advantage of knowing that the reason why no penalty can be imposed
on a non-resident corporation pursuant to subsection 162(2.1) when no taxes are
payable is that those charged with implementing the legislative plan failed in
their task. The result, although unintended, is that no penalty is set out for
the appellant’s failure to file its tax return on time under the Act.
[39]
It follows that the
first condition for the application of the residual penalty under paragraph
162(7)(b) is met. As otherwise, it is common ground that the appellant
failed to file its tax returns on time in breach of the obligation created by
paragraph 150(1)(a), all the elements required for the application of
the residual penalty set out in paragraph 162(7)(b) are present.
[40]
As this penalty is
identical to the ones that were levied, there is no basis for disturbing the
assessments that are the subject of the appeal.
[41]
The appeal will
accordingly be dismissed. Given my reasoning for reaching this conclusion, I
would award no costs.
“Marc
Noël”
“I
agree.
Eleanor R. Dawson J.A.”
“I
agree.
Johanne Trudel J.A.”