Citation: 2011 TCC 105
Date: 20110217
Docket: 2009-1419(IT)G
BETWEEN:
Mario Côté Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1]
Mario Côté Inc. (MCI) is
appealing from an assessment made by the Minister of National Revenue (Minister)
under section 160 of the Income Tax Act (Act), whereby the Minister
claims payment of $1,243,589.95. The assessment results from a dividend of
$6,000,000 that MCI received from 2635‑8838 Québec Inc. (2635). As shown
in the partial agreed statement of facts filed by the parties (Exhibit A‑2),
2635 apparently paid that dividend on December 6, 2005. Contrary to the usual
situation, 2635’s tax liability to the Minister has nothing to do with unpaid
tax on income earned during the relevant year; rather, it results from a refund
of $1,372,972 paid by the Minister under section 129 of the Act, that is,
a tax refund corresponding to the balance of the refundable dividend tax on
hand (RDTOH).
[2]
The parties agree that
MCI was not entitled to the refund. The Minister made the refund on the basis
of an income tax return filed by 2632-7841 Québec Inc. (2632) for the taxation
year ending on December 31, 2005, on which the sum of $1,372,972 was
entered in error as RDTOH on line 485. However, on line 784, 2632 did
not claim any dividend refund. In fact, the outside accountant who prepared the
tax return should have shown the amount in question for the purpose of
computing the cumulative eligible capital expenditures, as shown in the
amendment found in Schedule 10, “Cumulative Eligible Capital Deduction”,
produced in Exhibit A‑1, Tab 9. The dividend refund was paid to
2635 because 2632 had been liquidated and absorbed into 9145-6020 Québec Inc. (9145)
on January 1, 2005, and 9145 had been liquidated and absorbed into 2635 on
December 1, 2005.
[3]
I reproduce the agreed
statement of facts (Exhibit A‑2) below:
[Translation]
1. Mario Côté Inc. is a company that holds the
shares of numerous companies doing business in livestock and is wholly owned by
Mario Côté;
2. On January 1, 2005, 2632-7841 Québec Inc. (2632)
and 9141‑5018 Québec Inc. merged to become [were dissolved into] 9145-6020 Québec Inc. (9145);
3. 9145 was a hog business and a subsidiary of Mario
Côté inc.;
4. On December 1, 2005, 9145 and 9154-0542
Québec Inc. (9154) merged to become [were dissolved into] 2635-8838 Québec Inc. (2635);
5. 9154 was an agricultural production company and
a subsidiary of Mario Côté Inc.;
6. 2635 is a poultry company and a subsidiary of Mario
Côté Inc.;
7. The appellant is the sole shareholder of 2635.
8. On December 1, 2005, 2635 acquired all of
the shares of 9145 and 9154 by tax rollover and both 9145 and 9154 were
liquidated into 2635, resulting in a merger [the consolidation] of the three subsidiaries of the taxpayer Mario
Côté Inc., as shown in the 2005 financial statements of 2635 and Mario Côté Inc.;
9. When 2632 filed its income tax return for the
taxation year ending on December 1, 2004, it entered a refundable dividend
tax on hand (RDTOH) of $0;
10. When 2632 filed its income tax return for the
taxation year ending on December 31, 2005, it erroneously entered an RDTOH
balance of $1,372,972;
11. As a result of the merger [dissolution] on December 1, 2005, 2632’s RDTOH balance of
$1,372,972 became the opening RDTOH for 2635;
12. On December 6, 2005, 2635 paid a dividend of
$6,000,000.00 to Mario Côté Inc,. as shown on lines 200 to 270 of Schedule 3 to
the T-2 return filed by Mario Côté Inc. for 2005;
13. On July 25, 2006, 2635 filled out the
application form for financing from La Financière agricole du Québec (La
Financière);
14. The application resulted in compensation of $947,690.900
[sic] being paid to 2635;
15. On September 20, 2006, the Minister issued a
notice of assessment to 2635 and paid it a tax refund equivalent to the
RDTOH balance of $1,372,972;
16. The cheque from CRA was received by 2635 on
September 29, 2006;
17. 2635 confused that cheque from CRA with the
compensation expected from La Financière, and therefore used the amount
refunded by CRA to meet its deadlines, as if that amount had been the amount granted
by La Financière;
18. On October 16, 2006, 2632 and 2635 sent the
Minister requests to correct their income tax returns, as shown at Tab 9
of the joint book of exhibits;
19. 2635 was not entitled to the tax refund of $1,372,972;
20. 2635 has not repaid that amount to the Minister,
in spite of repeated requests.
21. On December 6, 2006, CRA issued a “Corporate Notice
of Reassessment” in the amount of $1,435,235.32, consisting of $1,372,971.00 in
principal and $62,264.32 in interest, as a result of a change in the net RDTOH,
in respect of 2635’s 2005 taxation year;
22. On May 26, 2008, CRA issued notice of assessment
679586 to Mario Côté Inc. for the amount of $1,243,589.95.
23. On August 28, 2007, 2635 received the
compensation from La Financière, in the amount of $714,696.52.
[4]
According to the
testimony of the in-house accountant, it was the outside accountants who
requested the correction.
[5]
No explanation was
given at the hearing for why the $1,435,235 was reduced to $1,243,589 ($1,052,348 +
interest of $191,241) in the assessment made under section 160. It might be
thought that there was partial payment of the tax liability. The assessment of
2635 that shows $1,435,235 as owing to the Minister relates to the
taxation year ending on December 16, 2005 (Exhibit A-1, Tab 2).
Submissions of the parties
(a) The respondent
[6]
Counsel for the
respondent submits that section 160 governs in this case. That section provides,
in particular, as follows:
160. (1) Tax liability re property transferred
not at arm’s length -- Where a
person has, on or after May 1, 1951, transferred property, either directly or
indirectly, by means of a trust or by any other means whatever, to:
…
(c) a person with whom
the person was not dealing at arm’s length,
…
(e) the transferee and
transferor are jointly and severally liable to pay under this Act an amount
equal to the lesser of
…
(ii) the total of all amounts
each of which is an amount that the transferor is liable to pay under this Act in
or in respect of the taxation year in which the property was transferred
or any preceding taxation year,
but nothing in this subsection shall
be deemed to limit the liability of the transferor under any other provision of
this Act.
[Emphasis added.]
160. (1) Transfert de biens entre personnes
ayant un lien de dépendance --
Lorsqu'une personne a, depuis le 1er
mai 1951, transféré des biens, directement ou indirectement, au moyen d'une fiducie ou de toute autre
façon à l'une des personnes suivantes :
…
c) une personne avec laquelle elle
avait un lien de dépendance,
…
e) le bénéficiaire et l'auteur du transfert sont
solidairement responsables du paiement en vertu de la présente loi d'un montant égal au moins élevé
des montants suivants :
…
(ii) le total des montants dont
chacun représente un montant que l'auteur du transfert doit payer en vertu de
la présente loi au cours de l'année d'imposition dans
laquelle les biens ont été transférés ou d'une année d'imposition
antérieure ou pour une de ces années;
aucune disposition du présent paragraphe n'est toutefois réputée
limiter la responsabilité de l'auteur du transfert en vertu de quelque autre
disposition de la présente loi.
[Emphasis added.]
[7]
Counsel for the
respondent submits that the assessment whereby MCI is held solidarily liable
with 2635 for the overpayment of the tax refund refers to an amount to be paid
“pour”, or, in the English version, “in respect of”, 2005. First, that
is shown in the assessment of 2635 made by the Minister on December 6, 2006
(Exhibit A‑1, Tab 2). That assessment is for the taxation year
ending on December 16, 2005. Counsel for the respondent submits that the
facts that resulted in the tax refund provided for in section 129 of the
Act occurred in 2005, that is, a dividend was paid on December 6, 2005,
and the tax return was filed by 2632 for the taxation year ending on
December 31, 2005, showing, by error, that there was an RDTOH. Counsel
submits that the overpayment of the refund is a relevant amount for the
computation of the tax applicable to the investment income earned by 2635 in
2005 and the previous years or for the computation of the tax applicable to the
investment income of 2632, which had been dissolved and then absorbed in two
stages, first into 9145 on January 1, 2005, and then into 2635 on
December 1, 2005.
[8]
Moreover, it is
submitted that interpretation is fair, because if MCI were to succeed, the
result would be contrary to the spirit of the Act, since 2635 paid a dividend
of $6,000,000, creating an entitlement to a tax refund that, in the particular
circumstances of this case, was without basis, but enabled 2635 to avoid
repaying an amount that it obtained by reason of that dividend.
(b) Position of
the appellant
[9]
Counsel for MCI
stressed the wording of subsection 160.1(1) of the Act, according to which
the tax liability resulted, for the purposes of section 160.1, from an
overpayment of the refund to 2635 by the Minister. Subsection 160.1(1) reads
as follows:
160.1 (1) Where excess refunded -- Where at any time the Minister determines
that an amount has been refunded to
a taxpayer for a taxation year in excess of
the amount to which the taxpayer was entitled as a
refund under this Act, the following rules apply:
(a) the excess shall be deemed to be an amount that became payable
by the taxpayer on the day on
which the amount was refunded; and
(b) the taxpayer shall pay to the
Receiver General interest at the prescribed rate on the
excess (other than any portion thereof that can reasonably be considered to
arise as a consequence of the operation of section 122.5 or 122.61) from the
day it became payable to the date of payment.
160.1 (1) Remboursement en trop -- Lorsque le ministre détermine qu'un contribuable a été
remboursé pour une année d'imposition d'un montant supérieur à celui
auquel il avait droit en application de la présente loi, les règles suivantes
s'appliquent :
a) l'excédent est réputé représenter un montant qui est payable par
le contribuable à compter de
la date du remboursement;
b) le contribuable doit payer au
receveur général des intérêts sur l'excédent, sauf toute partie de l'excédent
qu'il est raisonnable de considérer comme découlant de l'application des
articles 122.5
ou 122.61,
calculés au taux prescrit, pour la
période allant du jour où cet excédent est devenu payable jusqu'à la date du
paiement.
[10]
Counsel for MCI
submits that the tax liability in issue has nothing to do with the tax
applicable to a particular taxation year, since it is the result of an amount
that was not owing being paid by the Minister to MCI because of an error in
2632’s income tax return.
[11]
Counsel for MCI
admitted that section 160 applies to a dividend payment, in view of the case
law: Algoa Trust v. Canada, [1993] T.C.J. No. 15 (QL), 1993
CarswellNat 881 (Eng.), [1993] 1 C.T.C. 2294 (Eng.), 93 DTC 405
(Eng.). Counsel also cited R. v. Simard-Beaudry,
1971 CarswellNat 239F, [1971] F.C. 396, 71 DTC 5511 (Eng.),
and Trust (CarswellNat), second paragraph of the headnote and
paragraphs 29 and 30.
Analysis
[12]
In my opinion, the
argument presented by counsel for the respondent is more persuasive than MCI’s
argument. It is consistent with the interpretation adopted by Dussault J. in Montreuil
v. R., 1994 CarswellNat 2034, at paragraph 45, [1996] 1 C.T.C.
2182 (Eng.), of the terms “pour” “l’année d’imposition” or, in
the English version, “in respect of the taxation year”, used in section 160 of
the Act:
… The tax is the principal
and the interest is the accessory. In this sense, interest that
compounds until full payment of an outstanding taxation amount for a
specified "taxation year" prior to the transfer constitutes,
whatever the year in which it is compounded, an amount that the transferor
is required to pay under the Act “in respect of” this preceding taxation
year according to the wording of subparagraph 160(1)(e)(ii) as
it applied prior to December 17, 1987, or “in or in respect
of” this preceding year according to the wording that has applied since
that date. Indeed, the Bordas dictionary defines the expression “à l'égard de”
in its usual and modern sense as meaning "envers" and "en ce qui
concerne". Moreover, the Grand Robert de la langue française
gives particularly to the word “pour” the meaning of “en ce qui concerne” and
“par rapport à”. The English expression used in
subparagraph 160(1)(e)(ii) “in respect of” has the same meaning
and in my view corroborates the interpretation to the effect that these
expressions cover all interest compounded on an outstanding tax liability
for a specified preceding taxation year at the time of the transfer or for the
taxation year during which the transfer occurred, whether these are
compounded before or after the year of the transfer. We also know that the
words “in respect of” have a very wide meaning, as recognized by the Supreme
Court of Canada in Norwegijick.
In his judgment in this case, Dickson J., who was later to become Chief
Justice, analyzed these words in the following terms:
The words “in respect of”
are, in my opinion, words of the widest possible scope. They import such
meanings as “in relation to”, “with reference to” or “in connection with”. The
phrase “in respect of” is probably the widest of any expression intended to
convey some connection between two related subject matters.*
[Emphasis
added, footnotes omitted.]
[13]
Moreover, the dividend
refund provided for in section 129 of the Act is one of the elements in the
computation of the tax applicable to investment income. It is part of the
mechanism commonly referred to as “integration mechanism”, the purpose of which
is essentially to ensure that an individual can earn investment income through
a company without being assessed higher taxes than what they would have had to
pay if the investment income had been earned directly by them. Investment
income is first taxed at the normal tax rate payable by investment companies,
and when the dividend is paid, part of the tax is refunded under
section 129, which reduces the effective tax applicable to investment
income. That tax is refundable only when a company has an RDTOH and pays a
dividend to its shareholders. That is the event that gives rise to the
reduction. Moreover, an RDTOH cannot be created unless investment income is
earned by the company.
[14]
Since the dividend was
paid on December 6, 2005, by 2635, and the Minister believed, on the basis
of the income tax return filed by one of the companies that was liquidated and
ultimately absorbed into 2635, that 2635 had an RDTOH of $l,372,972, he
refunded the amount provided for in section 129 to 2635. If 2635 (or one
of the companies that had been liquidated and then absorbed into 2635) had
earned investment income in 2005 and the previous years, it would have been granted
a reduction in the effective tax rate applicable to its investment income. We
may therefore conclude that the dividend refund resulting from payment of the
$6,000,000 dividend on December 6, 2005, is a relevant amount in the computation
of the tax applicable to the investment income earned by 2635 (or one of the
liquidated companies) in the taxation year ending on December 16, 2005, or in
previous taxation years.
[15]
The fact that this tax
was refunded on September 20, 2006, does not change the fact that it relates to
the computation of the tax applicable in respect of the 2005 and previous
taxation years. The amounts taken into account in the computation of the
refunded tax were the amount in the RDTOH account at the end of 2005 and the
amount of the dividend paid on December 6, 2005. The fact that the
Minister made an assessment requiring repayment of the overpaid tax in respect
of the taxation year ending on December 16, 2005, corresponds to those facts.
[16]
In my opinion, the
argument made by counsel for MCI based on the language of section 160.1 is
of no relevance. The purpose of that section is simply to determine the point
at which interest begins to run. It is self-evident that interest cannot run
before the date corresponding to the point at which a taxpayer had the use of
the amount in question. However, the tax liability, which arose in 2006, can be
considered to be “in respect of the taxation year” in which the
dividend was paid, that is, 2005.
[17]
In
my opinion, the tax refunded by the Minister in 2006 can be considered to be an
amount that 2635 was liable to pay in respect of the taxation year in which the
property (the $6,000,000 dividend) was transferred.
[18]
For all these reasons,
the appeal by MCI is dismissed with costs.
Signed at Ottawa, Canada, this 17th day of February 2011.
“Pierre Archambault”
Translation
certified true
on this 9th
day of May 2011.
François Brunet, Revisor
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