Bois Aisé De Roberval Inc. v. R., 99 DTC 380, [1999] 4 CTC 2161 (TCC)

McArthur T . C.J.:

Facts

The appellant has appealed from an assessment dated December 8, 1994, for the taxation year ending on April 18, 1993. It is contesting that assessment on the ground that the Minister of National Revenue (the “Minister”) incorrectly included an amount of $308,397.82 in its income.

The facts are not disputed by the parties. There was an agreement as to the facts introduced at the trial. The appellant specializes in the production of box spring frame components for beds. It also produces various types of lumber.

On December 30, 1986, Canada and the United States signed an Agreement respecting the export of certain softwood lumber products (hereinafter the “Agreement”). The purpose of the Agreement was to settle disputes between Canada and the United States relating to the export of certain Canadian lumber products to the United States and to avoid having the United States impose countervailing duties on Canadian exports.

The Softwood Lumber Products Export Charge Acd [1] was enacted shortly after the Agreement was signed. Section 6 of the Agreement imposed on exporters of softwood lumber products a charge of 15% of the value of the lumber.

Under the government’s interpretation of that Act and the Agreement, the appellant was compelled to pay charges of $218,397.82 for the period from January 8, 1987 to December 31, 1987. The appellant then deducted that amount from its income for the taxation year ending on October 31, 1988, as an expense. As well, it deducted $90,000 from its income for the taxation year ending on October 31, 1987, which amount was an estimate by the appellant of what it owed in export tax at that point.

An amendment was made to the Agreement on December 16, 1987, specifically to include the box spring frames exported by the appellant. The schedule to the Softwood Lumber Products Export Charge Act was also amended.

Accordingly, the Minister assessed the appellant on March 31, 1988, for additional charges of $659,905.17, representing the exports made by the appellant during the period from January 8, 1987 to December 31, 1987. On May 24, 1988, the appellant filed a notice of objection to the assessment and an application for a refund. During its fiscal year ending April 18, 1992, the appellant paid $162,500 as partial payment of the assessment of March 31, 1988.

On March 20, 1992, the Canadian International Trade Tribunal decided that the Softwood Lumber Products Export Charge Act did not cover the export of the box spring frames sold by the appellant. Consequently, it ordered that the assessment be set aside and found that the appellant had paid charges of $218,397.82 in error.

The Minister then refunded the $218,397.82 to the appellant. He also refunded the $162,500 paid by the appellant as partial payment of the assessment dated March 31, 1988. Interest totalling $131,608.44 was also refunded. The total amount, $512,506.26, was paid to the appellant in its fiscal year ending on April 18, 1993. The interest received by the appellant is included in the appellant’s income for the 1993 taxation year. The appellant is not disputing that figure.

It is, however, disputing the $218,397.82 representing the refund it received on account of charges paid in error, which the Minister included in its income for the 1993 taxation year. Of the $162,500 refunded, the Minister included $90,000 in the appellant’s income for the 1993 taxation year. The appellant is contesting that inclusion. The Minister did not include the difference of $72,500 in the appellant’s income because the appellant had not deducted it from its income as an expense. In short, the Minister included the amounts of $218,397.82 and $90,000, for a total of $308,397.82, in the appellant’s income for the 1993 taxation year.

Appellant’s position

The appellant submits that the refunds were initially export penalties and that they were not a form of benefit, grant or assistance, or of any other form of payment described in paragraph 12( 1 )(x) of the Income Tax Act [2] (hereinafter the “Act”). The appellant argues that the amounts in question were paid in order to discourage the export of Canadian lumber to the United States under the Agreement. It adds that the term “refund” found in paragraph 12( 1 )(x) of the Act should not be interpreted as referring to a refund of an export penalty.

Respondent’s position

The Minister essentially argues that the addition of the word “refund” to the English version of paragraph 12(1)(x) of the Act shows that Parliament intended to cover any form of reimbursement, regardless of the purpose or nature of the amounts for which reimbursement was made.

Issue

Did the Minister correctly include the amount of $308,397.82 in the appellant’s income for its taxation year ending on April 18, 1993?

Analysis

The issue is essentially how to interpret paragraph 12(1)(x) of the Act. which reads as follows:

12. (1) Income inclusions — There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(x) inducement, reimbursement, etc. — any particular amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property...

(iii) as an inducement, whether as a grant, subsidy, forgivable

loan, deduction from tax, allowance or any other form of inducement, or

(iv) as g refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of

(A) an amount included in, or deducted as,

the cost of property, or

(B) an outlay or expense,

to the extent that the particular amount

(v) was not otherwise included in computing the taxpayer’s income, or deducted in computing, for the purposes of this Act, any balance of undeducted outlays, expenses or other amounts, for the year or a preceding taxation year,

(vi) except as provided by subsection 127(11.1), (11.5) or (11.6), does not reduce, for the purpose of an assessment made or that may be made under this Act, the cost or capital cost of the property or the amount of the outlay or expense, as the case may be,

(vii) does not reduce, under subsection (2.2) or 13(7.4) or paragraph 53(2)(s), the cost or capital cost of the property or the amount of the outlay or expense, as the case may be, and

(viii) may not reasonably be considered to be a payment made in respect of the acquisition by the payer or the public authority of an interest in the taxpayer or the taxpayer’s business or property.^ [3] [Emphasis mine.]

This provision was amended by S.C. 1998, c. 19, s. 71. The amended English version now includes the word “refund” in subparagraph 12(1)(x)(iv) of the Act.

The appellant’s main argument is that the amendments to the English version of the text do not change the nature of the refund in question. The appellant is of the view that this provision makes a distinction based on the nature of the refund. However, it submits, those amendments are so minor that they do not affect the law on this point. It submits that not all reimbursements are covered by this provision. In support of its argument, it referred the Court to subparagraph 12(l)(x)(viii) of the Act, which sets out a reasonableness test. Consequently, counsel for the appellant argues that the conclusion to be drawn from that test is that Parliament did not intend to include refunds of every kind. Counsel of the view that if Parliament had intended to include all refunds, it would not have introduced this subjective test and would simply have said “all refunds of taxes” in a clear and unequivocal manner.

In addition, counsel for the appel the terms (contribution, allowance, assistance, grant, subsidy), this provision essentially covers inducements, benefit or other payments that have a positive effect. In his submission, the amount refunded in the instant case was an export penalty the purpose of which was to restrict imports. That refund is not a tax credit. The nature of the refund is not the same as that of the other sorts of payments listed in this provision. According to counsel for the appellant, the context in which the refund was made must be examined because paragraph 12( l)(x) of the Act does not cover all refunds.

The appellant also admits that the addition of the word “refund” to the English version has a significant impact on the line of cases in which the leading case is Canada Safeway Ltd. v. R. (1997), 98 D.T.C. 6060 (Fed. C.A.), a decision of the Federal Court of Appeal.

As regards the respondent, counsel for the Minister first established that paragraph 12(1)(x) of the Act has traditionally applied to two types of payments. First, there are inducements, which are generally associated with inducements paid to a tenant. Second, there are payments in the form of assistance. However, he submits that the Minister very recently added a third form of payment: “refunds”. In his submission, this category of payment encompasses refunds of charges and taxes paid in error. He argues that it was Parliament’s intention to include refunds in the taxpayer’s income, and that accordingly it was also Parliament’s intention to reverse the decisions in Johnson & Johnson Inc. v. R. (1993), 94 D.T.C. 6125, [1994] 2 F.C. 137 (Fed. C.A.) and Canada Safeway Ltd. v. R. (1997), 98 D.T.C. 6060 (Fed. C.A.).

In Johnson & Johnson Inc. v. R. supra, the taxpayer manufactured personal hygiene products, including sanitary napkins. It had paid sales taxes on those products to the federal government, although they were exempt. The Minister subsequently refunded the taxes paid by the taxpayer, and included the amount of the refund in the taxpayer’s income for the year in which the refund was made. Counsel for the respondent suggested that this judgment recognizes the inclusion of refunds, and that the only remaining question is when to include them. While Hugessen J.A. did not deny that refunds received by a taxpayer are part of that taxpayer’s income, he nonetheless found that such payments must be included in the taxpayer’s income in the year in such the taxpayer made the payments. Speaking for the Federal Court of Appeal, he wrote, at page 6129 (page 148):

In my view, the trial judge was right. Indeed I would go further and assert that even in “a very strict sense” the refund of sums paid and claimed as expenses incurred in the respondent’s business is derived from that business and must be taken into account in the computation of the income therefrom. If the refund had been received in the year in which the sales tax had been wrongly paid, there is simply no room for doubt that it must be taken into account in that year. A change in the timing does not change the “character” of the payment.

Normally, of course, and as a general rule, both receipts and expenses are brought into the calculation of income in the year in which they are received or incurred. Where, however, a business receives a payment, not as compensation for the goods or services which it provides but rather as a reimbursement for an expenditure which was not due and should never have been paid, the situation is different. In effect what has happened is that what was formerly thought to have been an expenditure is now recognized to be so no longer. Accordingly, it is not the year of receipt which is relevant for the determination of profit, but the year of the expenditure which is now found to have been no expenditure at all.

The result of that conclusion is that paragraph 12( 1 )(x) of the Act does not apply to such amounts. The effect is that these amounts will not be included in the taxpayer’s income under paragraph 12(1)(x) of the Act, unless the taxpayer made the payments and received them back in the same year, which seems unlikely. Very often, because of the lengthy procedures involved in appealing and objecting to an assessment, when refunds are received by a taxpayer the time allowed for a reassessment would already have expired, leaving the Minister without a remedy. Although Hugessen J.A. did not really address the matter of the application of paragraph 12(1)(x) of the Act to refunds, he reached a similar conclusion.

Hugessen J.A. relied on the “matching principle”, which holds that if deductions were made from income in a taxation year, when those deductions are subsequently refunded they must be included in income for that year. However, paragraph 12( 1 )(x) of the Act operates to include an amount in a taxpayer’s income in the year in which it was received, regardless of whether a deduction was made in a previous taxation year. Thus, in a particular year, a taxpayer may pay no income tax because of the deductions from its taxable income. It therefore seems fair that the amount received be included in the year in which it was deducted in the first place. But there is also the problem of the expiry of the time allowed for reassessing. If refunds are included in a taxpayer’s income in the year in which the refunds are received, the matching principle is not being observed. On this point, I find that the failure to observe the matching principle is offset by the time limit problem. In addition, the Supreme Court of Canada ruled on the validity of the matching principle in its recent decision in Ikea Ltd. v. R., [1998] 1 S.C.R. 196 (S.C.C.). Iacobucci J. wrote, at page 217:

As this Court has held today in both of the latter cases, however, the correct approach to the determination of profit for tax purposes is for the taxpayer to adopt a method of computation which is consistent with the Act, with established rules of law, and with well-accepted business principles, and which gives an accurate picture of the taxpayer’s income for the taxation year in question. The “matching principle” is not an overriding rule of law, and there is no reason to apply it as paramount to or in lieu of the “realization principle”, which is of key importance in the present circumstances.

In a very recent judgment, the Federal Court of Appeal clearly ruled that paragraph 12( 1 )(jv) does not include refunds in a taxpayer’s income. In Canada Safeway Ltd. v. R., supra, the Federal Court of Appeal, per Létourneau J.A., considered the taxpayer’s argument that a distinction must be made between the English words “reimbursement” and “refund”. The facts were similar to those in Johnson & Johnson, supra, and what was involved was the refund of federal taxes paid by the taxpayer in error.

That judgment was handed down just before the amendments to paragraph 12(1)(x) of the Act, so the word “refund” did not appear anywhere therein. In Canada Safeway the taxpayer argued that an important distinction had to be made between a “refund” and a “reimbursement”. It was suggested that when taxes paid in error are returned, such amounts are “refunds” and not “reimbursements” within the meaning of paragraph 12(1)(x) of the Act. At pages 6062 et seq., Létourneau J.A. examined the problems that these two words appear to create:

The Meaning of Reimbursement

There is no doubt that the word “reimbursement” is a word of wide import and that in common parlance the term is broad enough to encompass the word “refund”. Both French and English dictionaries give the term a primary meaning associated with indemnification through the repayment to someone of an expense or loss incurred and a secondary or tertiary meaning of a mere repayment or refund. Conversely, the word “refund” has the primary meaning of restitution or return of a sum received or taken and a secondary meaning of reimbursement.

However, I agree with the learned Tax Court Judge that the term “reimbursement” has to be interpreted by reference to the context in which it is used and from which it can acquire greater and appropriate specification.

In the case of a refund of sums paid by error, there is, in my view, no flow of benefits between the respective parties: the money is simply returned to the payer. In addition, while the notion of reimbursement generally involves the intervention of a third party, that of refund implies the mere return of money between two parties.

It is clear in both statutes (the Excise Tax Act and the Income Tax Act) that Parliament has envisaged the return of moneys paid by error to a taxpayer as a refund and not as a reimbursement. Consequently, I am satisfied that the word “reimbursement” in subparagraph (iv) of paragraph 12(1)(x) of the Act was not meant to, and does not include, the word “refund”. This interpretation is consistent with the legislative text and promotes the legislative purpose expressed in the Parliamentary debates.

On this point, the Federal Court of Appeal held that a refund of taxes paid in error is not included in paragraph 12( 1 )(x) of the Act. That decision goes much further than the decision in Johnson & Johnson Inc., supra. Létourneau J.A. was of the opinion that amounts received as refunds are not covered by paragraph 12(1)(x) of the Act. He did not reject the decision in Johnson & Johnson, supra; he merely distinguished the nature of the amounts involved. That being said, the Minister may not include such amounts in the taxpayer’s income because they are not sums of money included in subparagraph 12( 1 )(x)(iv) of the Act.

In the Concise Oxford Dictionary of Current English, 8th edition, the word “refund” is defined to mean “pay back (money or expenses)”. On the other hand, that dictionary defines the word “reimburse” to mean “1. repay (a person who has expended money). 2. repay (a person’s expenses).” Accordingly, the only significant difference is what the Federal Court of Appeal stated it to be in Canada Safeway Ltd., supra, that is, in order for there to be a “reimbursement” there must necessarily have been outlays or expenses by the taxpayer who is subsequently reimbursed by another party. Accordingly, there are three parties involved. On the other hand, a “refund” involves only two parties: the taxpayer, who paid something and to whom that amount is now refunded by another party. Thus, a “refund” resembles the principle of restitution of prestations in civil law, which is found in article 1699 of the Civil Code of Québec. In the instant case, the amounts received by the appellant cannot be anything other than a “refund”, as the Minister returned to it all the charges and interest that it had paid in error.

Counsel for the appellant did not admit that the amounts received by the appellant were refunds. He attempted to interpret the meaning of the word “refund” by repeatedly pointing out that the word “refund” must be interpreted in the context in which it is used. He cited the principle noscitur a sociis, namely that “an expression’s meaning may be revealed by its association with others”. [4] He then addressed the definitions of the words following the word “refund”, and concluded that “refund” cannot include the return of taxes received by the appellant, because of its negative effect. He observed that the taxes paid by the appellant were in the form of a penalty, a deterrent to importing softwood lumber, while the words that follow “refund”, such as “assistance, subsidy”, have a positive effect which is that the taxpayer is being encouraged and given an incentive to undertake certain activities.

I am of the view that this argument cannot stand. Unquestionably, the words “assistance” and “subsidy” have a positive effect in that they denote a positive action on the part of the government. However, “refunds” cannot be interpreted in the same manner. I do not believe that it is appropriate to categorize the words according to their positive or negative effect. The word “refund” itself is neutral. Counsel for the appellant referred the Court to the definition of the word “remboursement” in the Grand Dictionnaire Encyclopédique Larousse, which reads as follows: [TRANSLATION] “Action of refunding, amount to be refunded.” “Rembourser” is defined as follows: [TRANSLATION] “Return to someone the amount the person paid, cause a person to recover an outlay.” Consequently, refunding someone a sum of money merely restores that person to the position he or she was in before the person paid out the money: see Ransom v. Minister of National Revenue (1967), 67 D.T.C. 5235 (Can. Ex. Ct.). In one sense, a refund may be regarded positively in that something is returned to the taxpayer. The reason why a sum was paid is of little importance.

Moreover, the language used in paragraph 12( 1 )(x) of the Act provides for two types of payments: inducements and refunds. Subparagraph 12( 1 )(x)(iii) of the Act provides for inducements. This is where there is a positive element. In subparagraph 12(l)(x)(iv) of the Act, Parliament lists amounts that that relate to refunds. The nature of this provision is thus neutral. For convenience I reproduce the relevant provision:

(iv) as g refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of

(A) an amount included in, or deducted as, the cost of property, or

(B) an outlay or expense,

This provision refers to precisely the situation in which there was an outlay or expense and a refund was subsequently made. The effect is neutral, as it merely restores the party to the situation it was in prior to any amount having been paid. As well, we see from the expression “or any other form of assistance” that Parliament did not intend to create an exhaustive list.

Lastly, Professor Côté noted the danger in the noscitur a sociis rule. At page 242 of his text, he wrote:

Concerning the rule noscitur a sociis, Mr. Justice Anglin [referring to A.G. for B.C. v. The King] wrote [at page 638]:

Without belittling the rule of construction invoked on behalf of the respondent — noscitur a sociis — care must always be taken that its application does not defeat the true intention of the legislature.

Counsel for the appellant added that the retroactive effect of a statutory provision must be narrowly construed. On this point, he quoted Professor Cote:

The general principle requires restrictive interpretation of retroactive legislation. When in doubt, the meaning which most limits a statute’s restrictive effect should be preferred: “you ought not to give a larger retrospective power to a section, even in an Act which is to some extent intended to be retrospective, than you can plainly see the legislature meant”.

Given these comments, if a provision is to be narrowly construed, that provision must meet certain requirement. We must first determine what Parliament intended, and we must then find that the provision is ambiguous and that there is some doubt as to its retroactive effect. In the instant case, in my view, subparagraph 12( 1 )(x)(iv) of the Act is by no means ambiguous. The effect of the addition of the word “refund” is precisely to remedy the ambiguity that existed previously, and that had generated lengthy debate. Because of the conclusions reached in Johnson & Johnson Inc., supra, and Canada Safeway Ltd., supra, Parliament added the word “refund” to put an end to that debate as to whether a refund of taxes paid in error constituted a “reimbursement” within the meaning of subparagraph 12(l)(x)(iv) of the Act. It is now clear that such amounts are covered by this provision.

I do not believe that the burden created by the retroactive effect of the provision is excessive. Counsel for the respondent put forward the “principle of symmetry”. In his view, it is entirely proper to include such amounts in the appellant’s income since the appellant had at that time deducted expenses from its income. The effect of that was to reduce the appellant’s income, and it accordingly had less taxable income for that taxation year.

The parties also tried to demonstrate that Parliament intended to include repayments of taxes paid in error. It is well settled as the [TRANSLATION] “official theory of the interpretation of legislation” [5] that the primary purpose is to determine the legislator’s intention.

Counsel for the respondent reviewed the technical notes and the ways and means motion regarding Bill C-28, which received royal assent on June 18, 1998. The technical notes dated December 1997 provide for amendments to paragraph 12( 1 )(x) of the Act.

The English version of those notes reads as follows:

Paragraph 12(1)(x) provides that certain inducements, reimbursements, contributions, allowances and assistance received by a taxpayer in the course of earning income from a business or property will be included in income to the extent that they have not otherwise reduced the cost of a property or the amount of an outlay or expense. This amendment adds a reference to amounts refunded as well as the condition that the amount received will only be included in income to the extent that it has not resulted in an assessment that reflected a reduction in the cost of a property or the amount of an outlay or expense. This amendment applies to amounts received after 1990. [Emphasis mine.]

Thus it appears from the technical notes that the Minister intended to amend the English version of subparagraph 12( 1 )(x)(iv) of the Act to include “refunds”, which the Federal Court of Appeal had held not to be included in that provision. The reason why the French version of the Act was not changed is simply that there is no other French equivalent for the word “refund”.

It follows that the addition of that word remedied a problem in subparagraph 12( 1 )(x)(iv) of the Act. Subsection 71(7) of the Income Tax Amendments Act, 1997^ [6] provides that the amendments to paragraph 12(1 )(x)(iv) apply to amounts received by the taxpayer after 1990; they are therefore applicable in the instant case.

Under the “principle of symmetry” put forward by counsel for the respondent, the appellant had deducted from its income as expenses amounts that it had paid as taxes, and so it is perfectly normal for those amounts to be included in its income when they are refunded. I agree. As I said earlier, the effect of a refund is to restore the person to the position that person was in before the amounts in question were paid.

In conclusion, the amounts received by the appellant are “refunds” within the meaning of subparagraph 12(1)(x)(iv) of the Act. Subsection 12(1) of the Act provides:

12. (1) Income inclusions — There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable....

The appellant must include those amounts in its income in the taxation year in which they were received. In the instant case, those amounts are to be included in the 1993 taxation year.

Moreover, the main effect of the addition of the word “refund” is to reverse the decisions in Johnson & Johnson Inc., supra, and Canada Safeway Ltd., supra. On this point, tax expert David Sherman made the following observation with respect to the technical notes of December 1997:

This will effectively reverse Johnson & Johnson, [1994] 1 C.T.C. 244 (F.C.A.) and Canada Safeway, [1998] I C.T.C. 120 (F.C.A.) — ed. [7]

I accept that interpretation for the purpose of these reasons. The effect of the addition of the word “refund” to paragraph 12(l)(x)(iv) of the Act is to include the refund of the amounts in the instant case in the appellant’s income for the 1993 taxation year. I am of the opinion that this appeal must be dismissed. The Minister correctly included the amount of $3 08,3 97.82 in the appellant’s income in the 1993 taxation year.

The appeal from the assessment made under the Income Tax Act for the 1993 taxation year is dismissed, with costs.

Appeal dismissed.

D.M.