Citation:
2015TCC85
Date: 20150410
Docket: 2013-4667(IT)I
BETWEEN:
NANICA
HOLDINGS LIMITED,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
V.A. Miller J.
Overview
[1]
The Appellant is a Canadian controlled private
corporation within the meaning of subsection 125(7) of the Income Tax Act
(the “Act”). In 2007 and 2008, it paid taxable dividends to its
shareholders. However, it failed to file its income tax returns for those years
within three years of its year end and it was denied a dividend refund under
subsection 129(1) of the Act.
[2]
The Minister of National Revenue (the
“Minister”) used the formula in subsection 129(1) to calculate the “dividend
refund” which had been denied to the Appellant in the 2007 and 2008 years and
then subtracted the amount of the dividend refund from the Appellant’s
refundable dividend tax on hand (“RDTOH”) account. This reduced RDTOH amount
was used in the calculation of the dividend refund which the Appellant received
in 2010 and 2011, the years under appeal.
[3]
The issue in this appeal is whether the phrase
“dividend refund” in paragraph 129(3)(d) represents the amount which is
paid or credited to a corporation or whether it is a notional amount which
reduces a corporation’s RDTOH account at the end of the year notwithstanding
that the corporation did not receive a refund.
[4]
The brief answer to this issue is that a
dividend refund is an amount which is actually paid or credited to the
Appellant.
[5]
Prior to issuing my decision in this case, this
same issue came before this Court in the general procedure appeal of Presidential
MSH Corporation v The Queen, 2015 TCC 61. I agree with Justice Graham’s
conclusion in Presidential MSH Corporation and I adopt his conclusion in
my decision.
Facts
[6]
The parties filed a Statement of Agreed Facts
which I have attached as Appendix A to this decision. A summary of the facts is
as follows.
[7]
The Appellant’s fiscal year end is August 31. In
its 2007 taxation year, it received dividends of $76,168 from non-connected
corporations. In its 2007 and 2008 taxation years, the Appellant paid taxable
dividends to its shareholders of $73,800 and $111,000 respectively. It did not
file its income tax returns for 2007 and 2008 until December 22, 2011 and
January 6, 2012 respectively, which was more than three years after its year
end for both 2007 and 2008.
[8]
In its 2007 income tax return, the Appellant
computed its liability for Part IV tax to be $25,389. It claimed a refund
under subsection 129(1) in the amount of $24,600 in 2007 and $789 in 2008.
Those refunds were correctly disallowed by the Minister as a result of the
Appellant’s late filing of its returns and in accordance with subsection
129(1).
[9]
The Appellant received no dividends, paid no
taxable dividends and had no investment income in the 2009 year.
[10]
In 2010 and 2011, the Appellant had investment
income of $5,792 and $9,267, respectively and it paid taxable dividends in the
amount of $32,500 and $33,500 respectively. In its 2010 and 2011 returns, the
Appellant claimed dividend refunds of $1,545 and $2,471, respectively. The
dividend refunds claimed for 2010 and 2011 were allowed by notice of assessment
dated February 1, 2012.
[11]
The 2007 and 2008 years were initially assessed
by the Minister on March 26, 2012 and March 15, 2012, respectively. When
the Appellant learned that the dividend refunds for 2007 and 2008 had been
denied, it requested that its income tax returns for the 2010 and 2011 years be
amended and that it be allowed dividend refunds in the amount of $10,833 and
$11,167, respectively. The Appellant based its calculation for the revised
dividend refunds on its view that there should be no reduction to its RDTOH
account because the dividend refunds for 2007 and 2008 had been denied.
[12]
The Appellant’s request to amend its returns for
the 2010 and 2011 years was denied. However, the Appellant was granted an
extension of time to file a notice of objection to its initial assessment for
these years. The assessment was confirmed.
Appellant’s Position
[13]
The Appellant argued that the amount to be
subtracted from its RDTOH account is nil because the dividend refunds for the
2007 and 2008 years were not paid or credited to it. Counsel for the Appellant
submitted that Justice Hogan’s conclusion in Tawa Developments Inc v The
Queen, 2011 TCC 440 should be followed because it was well reasoned,
persuasive and directly on point.
[14]
In Tawa, Justice Hogan was asked to
decide whether the taxpayer was entitled to a dividend refund in its 2004
taxation year even though it had filed its 2004 income tax return more than
three years after its 2004 year end. The Minister had denied the dividend
refund claimed by Tawa and had also reduced Tawa’s RDTOH account. Justice Hogan
held that the denial of the dividend refund for Tawa’s 2004 year was correct.
However, after a thorough textual, contextual and purposive analysis, he also
concluded that the RDTOH account should not be reduced by the amount of the denied
dividend refund.
[15]
In support of his position, counsel for the
Appellant also relied on Ottawa Ritz Hotel Co v R, 2012 TCC 166. In that
decision, Justice Webb, as he then was, in obiter, agreed with Justice
Hogan’s conclusion that the RDTOH account is not reduced by the amount of a
dividend refund which is denied.
[16]
Counsel for the Appellant stated that the
definition of RDTOH given in subsection 129(3) depends on the definition of
dividend refund given in subsection 129(1). He quoted the following passage
from Bulk Transfer Systems Inc v The Queen, 2005 FCA 94 at paragraph 33:
The balance in
the RDTOH account at the end of a particular year is reduced in the following
year by the amount of dividend refunds to which the corporation has become
entitled as a result of the payment of taxable dividends to its shareholders.
[17]
Counsel further argued that there are two
conditions to the entitlement of a dividend refund in subsection 129(1). The
first condition is that the taxpayer must have paid taxable dividends; and, the
second condition is that the taxpayer must file its income tax return within
three years of its year end. In the circumstances where the taxpayer filed his
tax return beyond the three year limitation period, it is not “entitled” to a
dividend refund and consequently, its RDTOH account should not be reduced.
Stated another way, the Appellant’s argument is that since it did not receive a
dividend refund in 2007 and 2008, the amount to be deducted from its RDTOH
account is nil.
Respondent’s Position
[18]
The Respondent’s position in this appeal was
similar to that argued in Presidential MSH Corporation. Similar
arguments were also made by the Canada Revenue Agency in its opinion contained
in document 2012 – 0436181E5.
[19]
The Respondent submitted that the phrase
“dividend refund” as contained in paragraph 129(3)(d) of the definition
for RDTOH is a notional amount calculated in accordance with subsection 129(1).
It is not a reference to the amount actually refunded. Therefore, the dividend
refund is subtracted from the Appellant’s RDTOH account notwithstanding that
the amount was not actually refunded. In the Respondent’s view, the Appellant’s
“dividend refund” was $24,600 and $789 in 2007 and 2008 respectively and these
amounts were correctly deducted from the Appellant’s RDTOH account.
Analysis
[20]
In this appeal, the question concerns the amount
of the Appellant’s dividend refunds for the 2007 and 2008 taxation years. The
amount of these refunds is used in calculating the Appellant’s RDTOH available
in subsequent years – in particular, the 2010 and 2011 years which are under
appeal.
[21]
The dividend refund and the RDTOH account are
part of a complex, technical scheme involving many provisions of the Act.
The relevant provisions for our purposes are subsections 129(1) and (3) which
read:
129. (1) Where a return of a
corporation’s income under this Part for a taxation year is made within 3 years
after the end of the year, the Minister
(a) may,
on sending the notice of assessment for the year, refund without application an
amount (in this Act referred to as its “dividend refund” for the year) equal to
the lesser of[1]
(i) 1/3 of all taxable dividends paid by the
corporation on shares of its capital stock in the year and at a time when it
was a private corporation, and
(ii) its refundable dividend tax on hand at the end of the year;
and
(b) shall,
with all due dispatch, make the dividend refund after sending the notice of
assessment if an application for it has been made in writing by the corporation
within the period within which the Minister would be allowed under subsection
152(4) to assess tax payable under this Part by the corporation for the year if
that subsection were read without reference to paragraph 152(4)(a).
…
(3) In
this section, “refundable dividend tax on hand” of a corporation at
the end of a taxation year means the amount, if any, by which the total of
(a) where
the corporation was a Canadian-controlled private corporation throughout the
year, the least of
(i) the amount determined by the formula
A – B
where
A
is
26 2/3% of the corporation’s aggregate investment income for the year, and
B
is
the amount, if any, by which
(I)
the amount deducted under subsection 126(1) from
the tax for the year otherwise payable by it under this Part
exceeds
(II)
9 1/3% of its foreign investment income for the
year,
(ii) 26 2/3% of the amount, if any, by which the corporation’s
taxable income for the year exceeds the total of
(A)
the least of the amounts determined under
paragraphs 125(1)(a) to (c) in respect of the corporation for the year,
(B)
100/35 of the total of amounts deducted under
subsection 126(1) from its tax for the year otherwise payable under this Part,
and
(C)
the amount determined by multiplying the total of
amounts deducted under subsection 126(2) from its tax for the year otherwise
payable under this Part, by the relevant factor for the year, and
(iii) the
corporation’s tax for the year payable under this Part,
(b) the
total of the taxes under Part IV payable by the corporation for the year, and
(c) where
the corporation was a private corporation at the end of its preceding taxation
year, the corporation’s refundable dividend tax on hand at the end of that
preceding year
exceeds
(d) the
corporation’s dividend refund for its preceding taxation year.
[22]
In Tawa, Justice Hogan concluded that when
a corporation failed to file its tax return within three years after its year
end, the dividend refund provision in subsection 129(1) became inoperative and
the refund was unobtainable. It was his opinion that the Act provided no
definition of the phrase “dividend refund” other than the formula contained in
paragraph 129(1)(a) which stated that it is an “amount … equal to the lesser of” two amounts – 1/3 of all taxable dividends paid in a particular
taxation year and the corporation’s refundable dividend tax on hand at the end
of the particular year. Justice Hogan then looked to the ordinary definition of
the term “refund” to inform his opinion that the word “refund” implied a
repayment and the receiving of a benefit. As a result of a textual, contextual
and purposive analysis, he concluded that the phrase “dividend refund”
represents an amount which is actually refunded. I agree with his conclusion.
[23]
Both Justices Hogan and Graham have reached the
same conclusion with respect to the phrase “dividend refund” albeit by
different routes. In Presidential MSH Corporation, after a textual,
contextual and purposive analysis, Justice Graham concluded that the phrase
“dividend refund” means “a refund of an amount” which is determined by
the formula given in paragraph 129(1)(a). According to his conclusion,
if a corporation failed to file its tax return within three years after its
year end, it was not entitled to receive a “refund of an amount” and
therefore its “dividend refund” was nil.
[24]
It is widely recognized that statutory
provisions must be interpreted with regard to their text, context and purpose
harmoniously with the scheme and object of the Act as a whole: Canada
Trustco Mortgage Co v The Queen, 2005 SCC 54 at paragraph 10. However,
rather than giving the entire textual, contextual and purposive analyses here,
which were fully canvassed in the prior referenced cases, I will address only
those submissions made by the Respondent which were not discussed in Presidential
MSH Corporation.
[25]
In his submissions with respect to the textual
interpretation of subsection 129(1), counsel for the Respondent stated that
subsection 129(1) defines the phrase “dividend refund” as “an amount equal to
the lesser of two amounts”. I disagree with this interpretation.
[26]
When interpreting a provision textually, you
have to read the provision grammatically. This involves looking at the subject,
the verb and the object in the sentence under review. The Respondent’s
interpretation would have one look at only the object in the sentence. It is my
view that the Respondent’s interpretation would be correct if the section in
parenthesis read “which amount
in the Act is referred to as its dividend refund for the year”. I note that there is a limitation in the English version of
paragraph 129(1)(a) which does not appear in the French version of that
paragraph. That is, in the English version, the dividend refund is “for the
year”. This limitation does not seem to be expressed in the French version of
the Act. The English and French version of the relevant portion of the
paragraph read:
|
…the Minister:
a) may, … , refund … an amount (in this
Act referred to as its “dividend refund” for the year) equal to the lesser of
…
|
le
ministre:
a)
peut, … ,
rembourser, … , une somme (appelée «remboursement au titre de dividendes»
dans la présente loi) égale à la moins élevée des sommes suivantes
|
[27]
It is my view that the words in parenthesis do
not refer to just the object in the sentence - that is to the word “amount”.
The words in parenthesis refer to the text of the sentence which is the “Minister refunding an amount” . A textual reading of subsection 129(1) means that a corporation’s
“dividend refund” is “refund of an amount”. It is the act of refunding which
gives the words in parenthesis its meaning. If the Minister does not refund an
amount, because a corporation has not met the condition in the preamble to
subsection 129(1), then the dividend refund is nil.
[28]
In his written submissions, counsel for the
Respondent argued that to interpret the phrase “dividend refund” as requiring a
refund would ignore subsection 129(2) which permits “the application – but not
the refund – of the amount”. Subsection 129(2) is a set-off provision. It
reads:
Application to other
liability
(2) Instead of
making a refund that might otherwise be made under subsection 129(1), the
Minister may, where the corporation is liable or about to become liable to make
any payment under this Act, apply the amount that would otherwise be refundable
to that other liability and notify the corporation of that action
[29]
With respect, it is clear that subsection 129(2)
would only come into play when a corporation is entitled to receive a “refund
of an amount”. If a corporation has filed its tax return beyond the three year
limit, its dividend refund would be nil and the Minister would not apply any
amount to the corporation’s liability. It is my view that subsection 129(2)
supports the Appellant’s position.
[30]
The Respondent has also argued that the phrase
“dividend refund” in paragraph 129(3)(d) of the definition of RDTOH is a
notional amount calculated in accordance with subsection 129(1). Counsel stated
that it is not a reference to the amount actually refunded. However, this
argument does not respect the language of paragraph 129(1)(a).
[31]
I agree that the RDTOH account is a notional
account which determines the maximum amount of a dividend refund which a
corporation may receive upon the payment of taxable dividends: Bulk Transfer
Systems Inc v The Queen at paragraph 34. It is correct that the dividend
refund from the preceding year is a component in the calculation of the RDTOH.
However, it does not follow from the premise that the RDTOH account is a
notional account that the components used to calculate it are also notional.
The RDTOH account is the notional method for tracking the amount of tax a
corporation can potentially get refunded to it upon payment of sufficient
dividends. The same cannot be said for a dividend refund which is an amount
that is available for a monetary refund or credit where certain conditions are
met.
[32]
The context for the phrase “dividend refund”
must be considered in conjunction with Part IV tax. “Dividend refunds” are a
component of the overall scheme which allows a private corporation to recover a
partial refund of the tax it has paid on investment income when it pays taxable
dividends to its shareholders: Vern Krishna, The Fundamentals of Canadian
Income Tax, 9th ed. Thomson Carswell at pages 772 to 773.
[33]
The dual purpose of Part IV tax, coupled with
the dividend refund and RDTOH mechanism, is to prevent the deferral of tax by
earning income inside a corporation and to permit the integration of tax
between a corporation and the individual shareholder. The ultimate goal is to
achieve neutrality whether earning investment income inside a corporation or
earning it personally.
[34]
Part IV tax is levied according to the rules in
sections 186 through 186.2 of the Act. Paragraph 186(1)(a)
imposes a 1/3 tax on “assessable dividends” received by private corporations or
subject corporations. For the present purposes, assessable dividends are those
inter-corporate dividends which are deductible under section 112 in calculating
the private corporation’s Part I tax. Section 129 allows a private corporation
which pays a taxable dividend to a shareholder to obtain a refund of Part IV
tax so that the shareholder ultimately pays the tax on the income. The
mechanism that achieves this refund of tax is the RDTOH account which tracks
the amount of tax the corporation can potentially be refunded upon the
appropriate dividends.
[35]
In conclusion, the context of the “dividend
refund” described in paragraph 129(1)(a) is within the system used to
collect tax up front from a corporation and then to refund that tax, or part of
it, when a dividend is paid out to a shareholder. It is designed to prevent tax
deferral. The purpose of the section 129 is to prevent tax deferral by placing
the shareholder who has received the dividends in much the same tax position as
if he had received the investment income himself without the intermediary
corporation.
[36]
When the phrase “dividend refund” is analysed in
this context, it is clear that it is not a notional amount. The system
contemplates an actual repayment of tax to the corporate taxpayer, not a
notional repayment or a mere tracking of amounts.
[37]
As stated earlier, Parliament’s goal in enacting
section 129 was to integrate corporate and shareholder taxation. How is this
goal achieved with the limitation period contained in subsection 129(1)?
[38]
The Respondent argued that “integration absent any limitation” was not Parliament’s goal. In support of this position, counsel
referred to the Summary of the 1971 Tax Reform Legislation published by
the Minister of Finance which stated that the cost of the newly introduced
refundable tax on investment income and dividend income would be borne by the
federal government. However, it is not clear from the Crown’s argument which
costs are being borne by the federal government.
[39]
The best evidence that Parliament wished to
place some limit on integration is precisely the limitation period in
subsection 129(1), which makes the Minister’s obligation to pay or credit the
dividend refund contingent on the timely filing of the corporation’s income tax
return. It is clear that the integration of corporate and shareholder taxation
by way of a dividend refund is subject to the limitation period in subsection
129(1). See Tawa (supra paragraph 14), Ottawa Ritz
Hotel Company Limited (supra paragraph 15) and 1057513 Ontario v The
Queen, 2014 TCC 272.
[40]
Counsel for the Respondent argued that the
limitation period is rendered ineffective and meaningless if the denial of the
dividend refund is not coupled with a reduction in the RDTOH in subsequent
years. He stated that if the amount remains available for the calculation of a
dividend refund in future years, then the Appellant, in effect, still gets its
dividend refund despite filing its income tax returns late.
[41]
I disagree. This denies the cost of losing a
dividend refund in the current year. The effect of not receiving a dividend refund
is felt by both the corporation and the shareholder. The corporation does not
get a refund of the Part IV tax and the shareholder who receives the taxable
dividend gets a dividend tax credit which is intended to be a credit for the
underlying corporate tax only. The shareholder does not get a credit for the
Part IV tax. There is double taxation. In addition, the corporation is liable
for a late filing penalty and arrears interest. Applying the conclusion reached
by Justices Hogan and Graham, the Appellant may be able to recover some of the
underlying Part IV tax if it later pays out sufficient taxable dividends or if
it is partially reduced by business losses. This will occur only in future
years, if at all. In the meantime, the funds have left the corporation and have
been taxed twice. The penalty of late filing is clear.
[42]
It is my view that Parliament’s intent with
respect to the limitation period in subsection 129(1) is achieved without the
reduction of the RDTOH account. The purpose of the limitation period is
accomplished when the dividend refund is denied.
[43]
In conclusion, I agree with both Justices Hogan
and Graham that the phrase “dividend refund” in section 129 is the refund of an
amount. It is an amount which is actually refunded to the Appellant by the
Minister. As a result, the Appellant’s RDTOH account should not have been
reduced by the denied dividend refunds. It was entitled to dividend refunds of
$10,833 and $11,167 in 2010 and 2011 respectively.
[44]
The appeal is allowed.
Signed at Ottawa, Canada, this 10th day of April 2015.
“V.A. Miller”
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