St-Pierre – Federal Court of Appeal effectively treats a retroactive judgment of a Superior Court as only having prospective effect for ITA purposes
A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.
Only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.
What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did in 2015 and with a fresh capital dividend then being declared and paid. When CRA found out that annulment rather than rectification had been requested, and while this annulment order was still being awaited (and the period for making a s. 15(2) assessment was about to run out), it assessed the individual under s. 15(2) on the basis that, as the dividends would be annulled, the payments to the individual instead represented advances (i.e., amounts which he was required to repay, as retaining them would have given rise to unjust enrichment).
Boivin JA found that the s. 15(2) assessment was without foundation, essentially on the basis of his not treating the judgement of the Superior Court as having retroactive effect for ITA purposes. He stated:
[I]f restitution was not possible before the date of the declaratory judgment of the Superior Court, it necessarily follows that there was no debt (in this context, an unjustified enrichment), before that date. The appellant could not at the same time be indebted to the Corporation and be legally incapable of repaying that debt to it.
Thus, the CRA assessment could not take an annulling judgment, which had not yet been given, into account. Furthermore, the “enrichment” of the individual taxpayer resulting from the Superior Court judgment was merely “theoretical” given his obligation to make restitution to the corporation, which he did.
Neal Armstrong Summary of St-Pierre v. Canada, 2018 CAF 144 under s. 15(2).