Canada Safeway Ltd. v. R., 98 DTC 6060, [1998] 1 CTC 120 (FCA)

Létourneau J.A.:

This is an appeal from a decision by Bell J. of the Tax Court of Canada rendered on October 25, 1996 and determining a question of law under section 58 of the Tax Court of Canada Rules. The learned judge determined that a refund of the Federal Sales Tax (FST) under the Excise Tax Act! [1] should not be included in the income of the taxpayer in the year of receipt.

The learned judge came to that conclusion after analyzing the meaning of the term “reimbursement” in subparagraph (iv) of paragraph 12(1)(x) of the Income Tax Act (the Act) and ruling that a refund by the Appellant to the Respondent of Federal Sales Taxes paid by the Respondent by error is not a reimbursement within the meaning of that section. He also held that the refund reduces, for the purposes of the Act, the expense previously claimed and thus is excluded in the computation of the Respondent’s income by virtue of subparagraph 12(l)(x)(vi). For the sake of convenience, I reproduce in both languages the relevant provisions of the Act:

12.(1) Amounts to be included from business or property. - 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) payments as inducement or as reimbursement etc. - any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(i) a person who pays the amount (in this paragraph referred to as “the payor”) in the course of earning income from a business or property or in order to achieve a benefit or advantage for himself or for persons with whom he does not deal at arm’s length, or

(ii) a government, municipality or other public authority

where the amount can reasonably be considered to have been received

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

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

(iv) as a reimbursement, contribution, allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an Outlay or expense ,

to the extent that the 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), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the outlay or expense, as the case may be,

ARTICLE 12: Sommes à inclure comme revenu tiré d’une entreprise ou d’un bien.

(1) Sont à inclure dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien, au cours d’une année d’imposition, les sommes appropriées suivantes:

x) Paiements incitatifs et autres - un montant (à l’exclusion d’un montant prescrit) reçu par le contribuable dans l’année, en tirant un revenu d’une entreprise ou d’un bien,

(1) d’une personne qui paie le montant - appelé “débiteur” au présent alinéa - en tirant un revenu d’une entreprise ou d’un bien ou en vue d’obtenir un avantage pour lui-même ou pour des personnes avec qui il a un lien de dépendance, ou

(ii) d’un gouvernement, d’une municipalité ou d’un autre organisme public,

s’il est raisonnable de considérer le montant comme reçu:

(iii) à titre de paiement incitatif, sous forme de prime, subvention, prêt à remboursement conditionnel, déduction de l’impôt, indemnité ou sous toute autre forme, ou

(iv) à titre de remboursement, contribution ou indemnité ou à titre d’aide, sous forme de prime, subvention, prêt à remboursement conditionnel, déduction de l’impôt, indemnité ou sous toute autre forme, à l’égard du coût d’un bien ou à l’égard d’un débours ou d’une dépense,

dans la mesure où

(v) le montant n’est pas déjà inclus dans le calcul du revenu du contribuable ou déduit dans le calcul, pour l’application de la présente loi, d’un solde de débours, dépenses ou autres montants non déduits, pour l’année ou pour une année d’imposition antérieure,

(vi) sous réserve du paragraphe 127 (11.1), il ne réduit pas, pour l’application de la présente loi, le coût ou coût en capital du bien ou le montant du débours ou de la dépense,

I cannot help adding that section 12, like most of the provisions of that Act, is not a model of clarity.

Finally, the learned judge followed the decision of this Court in Johnson & Johnson Inc. v. R. [2] in coming to the conclusion that the sum of $2,794,438.00 in issue should not be included in the Respondent’s income for its 1994 taxation year.

It is these three conclusions of the learned judge that the Appellant attacks on appeal before us.

Before proceeding to an analysis of the learned judge’s decision and the submissions of the parties, a short summary of the facts is necessary for a better understanding of the legal issue at stake. I hasten to add that the facts are not in dispute.

Facts

The Respondent is an amalgam of a number of predecessor corporations. Between December 1, 1985 and December 31, 1989 those companies paid $2,794,438 to the Crown (“Appellant”) on account of FST under the Act. The predecessor corporations deducted the FST paid as an expense in the computation of their taxable income either in the taxation year in which the liability accrued or in the taxation year in which the amounts were paid.

The predecessor corporations applied for a refund on certain amounts of FST paid up until January 2, 1988 on the basis that such amounts were paid by mistake. The Minister of National Revenue (“Minister”) determined that the predecessor corporations were not entitled to a refund and the corporations objected to the determination. In addition, the Minister assessed the predecessor corporations for FST because of certain transactions between December 1, 1985 and December 31, 1989. The corporations objected to these assessments. The Minister considered these objections and determined that the amount of $2,794,438 had been paid by these corporations in error.

The Minister, in the Respondent’s taxation year ending January 1, 1994, repaid to the Respondent the principal amount of $2,794,438 as a refund of amounts paid in error by the predecessor corporations for the periods December 1; 1985 to December 31, 1989.

The Respondent reported the principal amount of the refund as income in its financial statements for the period ending January 1, 1994. The Respondent recorded the total amount received in respect of its claims to an FST refund as “other income” in its General Ledger for the fiscal period in which the amounts were received. The Respondent then deducted the principal amount of the refund of $2,794,438 as “other income related to prior years” in calculating its income for the purposes of the Act for its taxation year ending on January 1, 1994.

The Minister made a determination of the loss of the Respondent for its taxation year ending January 1, 1994, and included in the computation of the Respondent’s income the principal amount of the FST refund received by the Respondent in that taxation year.

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 [3] .

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.

It is apparent from the decision of Denault J. in Westcoast Energy Inc. v. Æ. [4] that the term as used in subparagraph 12(1 )(x)(iv) is limited by the context of that provision. In that case, the Court found that it does not include the compensation received by a taxpayer for the damage or loss it had suffered. The case makes it clear, contrary to what the Appellant argues, that it is not every payment or repayment that can and will qualify as a reimbursement within the terms of subparagraph 12(1 )(x)(iv).

In addition, Denault J. reviewed the Parliamentary debates surrounding the enactment of that provision, examples of reimbursement in different legal relationships as well as the situation that the provision intended to remedy:

Examples of the word reimbursement in different legal relationships were cited. First, there is a compulsory payment. This is a situation where a person has been compelled by law to pay and pays money for which another is ultimately liable. The payer can make a claim for reimbursement from the latter individual. Sec- ond, there is the example of where a person makes repairs or improvements to property which he believes to be his own. He can claim a reimbursement against the owner of the property. Third, there is the situation where a person, such as a guarantor, discharges more than his proportionate part of a debt. He can take action for reimbursement against the co-guarantors. Finally, in the law of agency, a principal is liable to reimburse his agent for reasonable expenses incurred in an emergency, even if the agent exceeded his actual authority.

Based on the above analysis, I accept these examples as an accurate reflection of what the word means and the meaning that Parliament intended to capture by enacting section 12(1)(x). The budget debates referred to similar situations, such as the landlord/tenant leasehold improvements. Moreover, as previously discussed, the amendment was designed to capture a situation such as in Consumers' Gas, wherein the taxpayer made an improvement to its property at the request of ratepayers and was later reimbursed for its expenditure. It was also the case in Consumers’ Gas that the taxpayer frequently relocated pipelines and it always sought reimbursement from the requesting party up to the maximum amount permitted by law.^ [5]

He concluded that “in all of the examples of the word reimbursement, there exists a flow of benefits between the respective parties” [6] .

Subsequently, our Court upheld the decision of Denault J. in the following terms:

We are in agreement with the interpretation the learned trial judge has placed on the term “reimbursement” in paragraph 12(1 )(x)(iv) of the Income Tax Act [7]

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.

Both the Excise Tax Act and the Income Tax Act, although not conclusive, are nonetheless instructive on the difference between refund and reimbursement. Section 68 of the Excise Tax Act, which deals with payments of moneys, made by error and gives the payer the right to apply for the return of the moneys is found in a part of that Act which bears the title: Deductions, Refunds and Drawbacks. The part contains a number of sections which refer to refunds or refunded moneys. It is not in dispute in the present case that the sums received by the Respondent were refunds of FST and, therefore, a mere return of the sums it had paid by mistake. There are some 76 references to “refund” in that Act but only two references to “reimbursement” and they are mutually exclusive. Sections 175 and 178 clearly use the word “reimbursement” in a context which involves a flow of benefits between respective parties and the intervention of a third party:

[Reimbursement of employees, partners or volunteers]

175. For the purposes of this Part, where an employee of an employer, a member of a partnership or a volunteer who gives services to a charity acquires or imports property or a service for consumption or use in relation to activities of the employer, partnership or charity (each of whom is referred to in this section as the “person”) and in respect of which the employee, member or volunteer receives, at any time, a reimbursement from the person, the person shall be deemed

(a) to have received a taxable supply of the property or service;

(b) to have so acquired the property or service for use in commercial activities of the person to the same extent as the property or service was acquired or imported by the employee, member or volunteer for consumption or use in relation to commercial activities of the person; and

(c) to have paid, at that time, tax in respect of the supply equal to the amount, if any, included in the amount reimbursed that is on account of tax paid or payable by the employee, member or volunteer in respect of the acquisition or importation of the property or service by the employee, member or volunteer. 1990, c. 45, s. 12; 1994, c. 9, s. 9.

[Expenses incurred in supply of service]

178. For the purposes of this Part, where in making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient. 1990, c. 45, s. 12.

[emphasis added]

Similarly, subparagraph 164(1 )(a)(ii) of the Income Tax Act deals with over-payments of income tax by a taxpayer. The marginal note of the section is entitled Refunds and the section is in a part also called Refunds. The obligation is put on the Minister to make the refund with all due dispatch. The subparagraph reads:

Refunds

Section 164: Refunds,

(1) If the return of a taxpayer’s income for a taxation year has been made within 3 years from the end of the year, the Minister

(a) may,

(ii) on or after mailing the notice of assessment for the year, refund without application therefor, any overpayment for the year, to the extent that the overpayment was not refunded pursuant to subparagraph (1); and

(b) shall, with all due dispatch, make the refund referred to in subparagraph (a)(ii) after mailing the notice of assessment if application therefor has been made in writing by the taxpayer within the period determined under paragraph 152(4)(b) or (c), as the case may be, within which the Minister may reassess tax payable by the taxpayer for the year.

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.

Having so found, it remains to be determined whether the amount received by the Respondent in the year 1994 has to be included in its income of that year by virtue of section 9 of the Act.

This Court was faced with a similar issue in Johnson & Johnson Inc. v. R.8 [8] involving a refund of FST and a determination of the year in which such refund ought to be included as income.

Hugessen J.A. wrote at p. 6129 for a unanimous Court:

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? [9] 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.

I emphasize here that we are not talking of the recovery of expenses in the ordinary business sense of attempting to recoup what one has laid out by what one can get in. Rather, it is the reversal of what was thought to have been an expenditure due to the recognition, forced or voluntary, by the original payee that he should never have had the money in the first place.

The Appellant has given us no valid reasons to depart from the soundness of that decision. Indeed, the Appellant’s position, which is based on a strict adherence to an annual accounting system could lead to inequities for a taxpayer (although there is no evidence in the present instance that this is the case) who would have to include, in a given year, all the sums refunded while they could otherwise have been divided over a number of years. This potential for such inequity has been recognized in other jurisdictions [10] and the United States Courts have developed the tax benefit rule to allay such inequity [11]

However, as our colleague Hugessen J.A. pointed out in the Johnson case, there is no need to judicially create an equivalent to the tax benefit rule as the Minister is allowed, within certain limits under the Act, to reopen the accounts of prior years and to reassess them. This is a legislative departure from the strictness and inflexibilities of the annual accounting system and it provides, in my view, an appropriate and balanced means of correcting bona fide errors without creating injustice to the parties involved.

The Appellant complained that it is put in an unfair position because the taxpayer has two years to claim a refund of the FST and the litigation which generally ensues will bring the Minister outside the time-limit given to reassess a taxpayer. While this argument may appear attractive at first sight, it ignores the fact that the Minister, in spite of some possible awkwardness, on occasion can seek from the taxpayer a waiver of the limitation period and, in case of refusal, proceed to reassess on the basis of the amount in dispute. What the present instance reveals is not of a lack of adequate means available to the Minister to properly collect the taxes due by a taxpayer in case of a refund of taxes, but rather a lack of coordination at the time between the FST section and the Income Tax section within the Revenue Department.

For these reasons, the appeal should be dismissed with costs.

Appeal dismissed.