Citation: 2009 TCC 373
Date: 20090721
Dockets: 2007-4892(IT)I
2007-4976(IT)I
BETWEEN:
EXIDA.COM LIMITED LIABILITY COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
TONOGA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] The issue in these informal procedure appeals is this.
Is a non-resident corporation that carries on business in Canada required
to pay a penalty for failure to file income tax returns on time in
circumstances where the corporation has no unpaid tax?
[2] For each taxation year at issue, the appellants were
assessed a penalty in the amount of $2,500 pursuant to subsection 162(2.1) of
the Income Tax Act.
[3] The taxation years at issue for Exida.com Limited
Liability Company are 2003, 2004 and 2005. The only relevant taxation year for
Tonoga Inc. is 2004.
[4] To my
knowledge, there is no relationship
between the two appellants. The appeals were heard together as the issue is the
same and the appellants were represented by the same agent.
[5] By way of background, the application of s. 162(2.1) in
circumstances similar to this was recently considered in another appeal that was
also heard under the informal procedure. In Goar, Allison & Associates
Inc. v. The Queen, 2009 TCC 174, 2009 DTC 1125, C. Miller J. concluded that
this penalty provision did not apply unless there was some unpaid tax at the
filing deadline. The representatives before me also appeared in Goar.
[6] Despite
the Minister’s loss in Goar, which was not appealed, counsel requests
that the conclusion be revisited in these appeals.
[7] In
addition to this issue, counsel has raised an alternative argument that was not
made in Goar. It focuses on the
penalty in subsection 162(7), which is equivalent in amount to the penalty in
s. 162(2.1).
[8] I was
informed by the representative for the appellants that the issue in these appeals is relevant to a large
number of non-resident corporations that carry on business in Canada.
Relevant legislative
scheme
[9] Section
162 contains a number of penalty provisions that generally apply if there has
been a failure to comply with informational requirements of the Act. It is useful to have regard to some of these
provisions.
[10] Subsection
162(1) of the Act is a general provision
that applies where an income tax return has not been filed on time. It provides
for a penalty based on a formula, which takes into account the amount of unpaid
tax at the time of the filing deadline. If there is no unpaid tax, there is no
penalty.
[11] Subsection 162(1)
provides:
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.
[12] Subsection
162(1) does not apply in circumstances where subsection 162(2.1) of the Act applies. The latter provision is a
more specific provision that applies to non-resident corporations.
[13] 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 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.
[Emphasis added]
[14] It is
useful to consider the history of this provision. It was enacted for taxation
years commencing after 1998 and was introduced in conjunction with changes to
the income tax return filing requirements applicable to non-resident
corporations.
[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. The penalty for failure to comply was set out in s. 162(1), with the
result that no penalty was payable unless there was an amount of unpaid tax at
the filing deadline.
[16] Commencing for
taxation years after 1998, the filing requirements in paragraph 150(1)(a)
of the Act were amended. As a consequence, non-resident corporations are
not required to file returns unless they have some connection to Canada. At the
same time, s. 162(2.1) was introduced to provide for a different penalty for
non-resident corporations.
[17] Paragraph 150(1)(a),
as it read during the relevant period, provided:
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, or
(D) disposes
of a taxable Canadian property, or
(ii) tax under
this Part is, or but for a tax treaty would be, payable by the corporation for
the year;
[18] It is also useful to mention the specific penalty that
applies for repeated late filing of returns. This provision, subsection 162(2),
increases the amount of the penalty if the taxpayer was penalized for the same
type of failure in a previous year.
[19] Subsection 162(2) provides:
162(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.
[Emphasis
added]
[20] In addition to these provisions which are specific to
the circumstances of a failure to file income tax returns on time, a more
general penalty is provided for in subsection 162(7) of the Act. It was
described by counsel as a “catch-all” provision that applies if there has been
a breach of an obligation under the Act for which no other penalty is
provided for.
[21] Subsection 162(7)
provides:
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 (10) or (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.
[Emphasis
added]
Facts
[22] None of the parties led evidence at the hearing. An
agreed statement of facts was filed in respect of each appellant, and these are
reproduced in Schedule A.
[23] The essential relevant facts are the same for both
appellants. Each is a corporation resident in the United States
that carries on business in Canada. Each was required to file an annual return of income
in Canada and such returns were late-filed for the relevant years. Neither
corporation had tax payable under the Act in Canada for any
of the relevant years.
[24] I would briefly mention that at the opening of the
hearing the representative of Tonoga Inc. informed me that he wished to provide
additional facts. In particular, the representative indicated that Tonoga Inc.
was a resident of Canada and that its income tax return for the relevant year
had been filed on time. These purported facts were either not in the agreed
statement or were contrary to it.
[25] No evidence was led to establish these purported facts,
and the representative accordingly indicated that he would proceed with
Tonoga’s appeal on the basis that the corporation was only a resident of the United States
and that the relevant income tax return was filed late. The appeal proceeded on
this basis.
[26] I would also mention that some of the agreed facts and
some of the assumptions made by the Minister of National Revenue as stated in
the replies appear to be statements of law or statements of mixed fact and law.
Neither representative mentioned this at the hearing, and I do not think that anything
turns on it in these particular appeals.
Analysis
Does
subsection 162(7) apply?
[27] I will first consider the Minister’s alternative
argument. The question that is raised is this. If subsection 162(2.1) does not
apply, does the equivalent penalty in subsection 162(7) apply?
[28] The conclusion that I have reached is that subsection 162(7)
has no application in these circumstances.
[29] Subsection 162(7) applies in a wide variety of
circumstances, including where there has been a failure to comply with any
obligation imposed by the Act. It specifically excludes from its ambit
situations in which another provision of the Act “sets out” a penalty.
The question is whether the present circumstances are covered by this
exclusion.
[30] The
threshold question, therefore, is whether another provision sets out a penalty
for the appellants’ failure to file income tax returns on time.
[31] Since
this is an alternative argument, I will assume for purposes of this analysis
that s. 162(2.1) does not set out a penalty. That is not the end of the inquiry, however, as it remains to be
considered whether another provision sets out a penalty. In my view, subsection
162(1) is such a provision.
[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 s. 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 s. 162(1).
[33] If there is any doubt about this interpretation, the
doubt can be resolved by a contextual and purposive interpretation of the
relevant provisions.
[34] If the Minister’s interpretation of s. 162(7) is
correct, then any person who fails to file an income tax return on time would have
to pay a penalty under s. 162(7).
[35] As correctly pointed out by the representative for the
appellants, this interpretation appears to frustrate the clear intent of subsection
162(1) which is to impose a penalty for late-filing of an income tax return
only if there is tax unpaid at the filing deadline. If Parliament had intended
to impose a penalty regardless of whether there is unpaid tax, it is likely that
the formula in subsection 162(1) would have provided for this.
[36] For these reasons, I reject the alternative submission
of the Minister that the penalty imposed on the appellants is properly imposed
under subsection 162(7).
Does
subsection 162(2.1) apply?
[37] I now turn to the Minister’s main argument. The
question to be decided is whether the penalty provided for in subsection
162(2.1) applies if a non-resident corporation has no unpaid tax at the filing
deadline.
[38] As mentioned above, the recent Goar decision
decided this issue in the negative. C. Miller J. concluded that s. 162(2.1) is
not engaged unless there is unpaid tax.
[39] This issue turns on the proper interpretation of the
following phrase in s. 162(2.1): “[…] 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 […].”
[40] In Goar, it was concluded that a non-resident
corporation is not liable for a penalty under s. 162(1) unless there is some
unpaid tax because the formula produces a penalty of nil unless there is unpaid
tax. If there is no unpaid tax, there is no penalty.
[41] Counsel for the Minister invites me to come to a
different conclusion. He suggests that a taxpayer is liable to a penalty under
s. 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 s. 162(1) may produce a
penalty of nil in the particular circumstances.
[42] Counsel
repeated the same arguments that he had unsuccessfully made in Goar,
which are discussed in the reasons of that decision. I will not repeat them
here.
[43] With
respect to counsel, I believe that his arguments fail to fully consider the
meaning of the relevant provision from a textual, contextual and purposive
perspective.
[44] The textual, contextual and purposive approach to
statutory interpretation was recently succinctly described by Sharlow J.A.
involving an appeal under the Excise Tax Act. In North Shore
Health Region v. The Queen, 2008 FCA
2; [2008] GSTC 1, the following was stated:
[39] Subparagraph
191(3)(b)(i) must be read in its entire
context and in its grammatical and ordinary sense harmoniously with the scheme
of the statute, the object of the statute, and the intention of Parliament.
See, for example, AstraZeneca Canada Inc. v. Canada (Minister
of Health), [2006] 2 S.C.R. 560 at
paragraph 26; Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601
at paragraph 10; Driedger, Elmer A., Construction
of Statutes (2nd ed., Toronto: Butterworths, 1983) at page 87. In this case, the object of subparagraph 191(3)(b)(i),
and the intention of Parliament in enacting it, must be discerned from the
words of the statute and the relevant portions of the statutory scheme in which
they are found, as summarized above. There is no guiding jurisprudence.
[45] To a
great extent, the issue turns on the proper meaning of the word “liable” as it
is used in s. 162(2.1).
[46] It
appears that the ordinary meaning of the word is quite broad.
[47] According
to The Oxford English Dictionary, 2nd ed., the primary
meaning of “liable” is:
Bound
or obliged by law or equity, or in accordance with a rule or convention;
answerable; legally subject or amenable to.
[48] Similarly, the Federal Court of Appeal adopted a broad
meaning of “liable” in a legal context in The Queen v. National Trust
Company, 98 DTC 6409, at para. 46:
The ordinary
meaning of the word “liable” in a legal context is to denote the fact that a
person is responsible at law.
[49] Since the general meaning of the word “liable” is
broad, it is useful to consider the
relevant context in these appeals.
[50] I would first compare the use of the term “liable” in
s. 162(2.1) with the use of the term “payable” in the repeated failure
provision in s. 162(2). In paragraph 162(2)(c),
the term “payable” is used to make it clear that the more onerous penalty for a
repeated failure does not apply unless there was actually a penalty owing for a
prior year.
[51] The interpretation of s. 162(2.1) suggested by the
appellants essentially equates the terms “liable” and “payable.” The use of
different terminology in the relevant subsections, however, seems to suggest
that a different meaning was contemplated.
[52] It is also useful
to have regard to the purpose of introducing a separate penalty for
non-resident corporations.
[53] As mentioned
above, subsection 162(2.1) came into force for taxation years after 1998 in
conjunction with the narrowing of the tax return filing requirements for non-resident
corporations in paragraph 150(1)(a).
[54] The intent of the
change to para. 150(1)(a) is clear. It is to restrict the circumstances
in which a non-resident corporation must file an income tax return in Canada to
circumstances where the corporation has some connection with Canada.
[55] As for the
purpose of enacting subsection 162(2.1) in conjunction with the amendment to
para. 150(1)(a), it is useful to compare the result that would follow if
the appellants’ or the respondent’s position were accepted.
[56] If the appellants’
interpretation is correct, the effect of s. 162(2.1) would be quite limited. It
would provide for a small increase in the minimum penalty imposed on
non-resident corporations that have some unpaid tax at the filing deadline. The
penalty would no longer be based entirely on the amount of unpaid tax. It would
be subject to a minimum penalty of between $100 and $2,500.
[57] If the Minister’s
interpretation is correct, the effect of subsection 162(2.1) would be to impose
a minimum penalty whenever a non-resident corporation fails to file an income
tax return on time, regardless of whether there is any unpaid tax.
[58] In my view, it is
unlikely that Parliament enacted s. 162(2.1) for the modest objective that is
inherent in the appellants’ position. It is more likely that the objective was
to put teeth into the more restrictive filing requirements for non-resident
corporations in para. 150(1)(a). Further, as noted in Goar, this
objective is reflected in the technical notes published by the Department of
Finance at the time that the legislation was introduced.
[59] For these reasons, I would conclude that 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 s. 162(1) because it failed to file a
tax return on time.
[60] Before concluding,
I would briefly mention I have taken into account a recent decision of the Federal
Court of Appeal which considered the meaning of the term “liable” in a
different context.
[61] In Perry v. The
Minister of National Revenue, 2008 FCA 260, 2008 DTC 6623, the Court had to
consider the meaning of the phrase “liable to tax” in the context of
determining residence for purposes of the Canada-United States Income Tax
Convention. In obiter, Noel J.A. appears to give a restrictive
meaning to the phrase “liable to tax,” at para. 19:
[19] As there
is no existing liability to tax under current section 94, the appellant Trust
is not a resident of Canada pursuant to Article IV(I) and therefore not a dual
resident under Article IV(4) of the Convention. It follows that no dual residency
issue arises under Article IV(4) of the Convention with respect to the current
section 94.
[62] If the word
“liable” in s. 162(2.1) were to be given the same meaning as in Perry,
it would support the appellants’ position. In my view, however, this is not the
preferred interpretation of the word as used in subsection 162(2.1) having
regard to its context and the legislative scheme.
[63] The appeals will be dismissed.
Signed at Ottawa, Canada this 21st day of July 2009.
“J. M. Woods”
SCHEDULE A
AGREED
STATEMENT OF FACTS - EXIDA
1.
Exida ("Corporation") is a resident of Pennsylvania, USA.
2.
The Corporation carried on business in Canada during the 2003, 2004 and
2005 taxation years.
3.
The Corporation had Part I tax deducted at source by clients.
4.
The Corporation was required to file a T2 income tax return by June 30,
2004, 2005 and 2006 for the 2003, 2004 and 2005 taxation years respectively.
5.
The Appellant’s fiscal year end is December 31.
6.
The returns were all filed late.
7.
There was no tax owing on the due date.
8.
The Corporation was assessed a late-filing penalty of $2,500 for each of
the 2003, 2004, and 2005 taxation years on June 28, 2007 pursuant to subsection
162(2.1) of the Income Tax Act RSC 1985 c.1 (5th Suppl.)
("Act").
AGREED
STATEMENT OF FACTS - TONOGA
1.
Tonoga ("Corporation") is a resident of Delaware, USA.
2.
The Corporation carried on business in Canada during the 2004 taxation
year.
3.
The Corporation was required to file a T2 income tax return by June 30,
2005 for the 2004 taxation year.
4.
The Appellant’s fiscal year end is December 31.
5.
That return was not filed until October 18, 2006. The return was late.
6.
There was no tax owing on the due date.
7.
The Corporation was assessed a late-filing penalty of $2,500 on
April 17, 2007 pursuant to subsection 162(2.1) of the Income Tax Act RSC
1985 c.1 (5th Suppl.) ("Act").
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