984274 Alberta – Tax Court of Canada finds that CRA had no statutory authority under the Act to recover $1.7M that it had paid to a taxpayer in error

The taxpayer (“984”) reported a capital gain on its 2003 sale of land on the basis that it had acquired it from its parent (Henro) on a rollover basis. In 2010, the Minister assessed the Henro (to include an income account gain) and 984 (to reverse the previously reported capital gain and refund the capital gains tax plus interest, totalling $1.7M) on the basis that the 2003 drop-down had occurred on a non-rollover basis – but its assessment of 984 was found to be void as being statute-barred. In a 2015 settlement agreement of the Minister with Henro and 984, it was agreed that the 2010 reassessments of both 984 and Henro would be reversed. However, the resulting 2015 reassessment of 984 could not be justified as valid based on s. 169(3) because the 2010 assessment was itself invalid – hence, 984 was not an appealing “taxpayer” referred to in s. 169(3) (as it was not engaged in a valid appeal procedure).

This meant that the only basis for justifying the 2015 assessment of 984 was that, pursuant to s. 160.1(1), the 2010 refund represented an amount that had been “refunded to a taxpayer … in excess of the amount to which the taxpayer was entitled as a refund under this Act.”

Preliminarily to considering this issue, Smith J determined that there had been no “overpayment” by 984 for the purpose of s. 164(1) because the 2010 assessment purporting to refund the capital gains tax was void, so that there was no reduction in the capital gains tax amount, and there therefore had been no overpayment thereof. Accordingly, there had been no refund pursuant to s. 164(1) of an overpayment.

Turning now to s. 160.1(1), Smith J found “that in order to reassess a taxpayer pursuant to subsection 160.1(1) and (3), the amount refunded must be pursuant to a provision of the Act” – and, as noted, the refund had not occurred pursuant to s. 164 and had not occurred pursuant to any other provision of the Act. Hence, the 2015 assessment of 984 also could not be justified under s. 160.1(1).

He went on to find, in the alternative, that if he were incorrect that the payment was required to be made pursuant to a specific provision of the Act in order to qualify as a refund for s. 160.1(1) purposes, the 2010 payment was not a “refund” in the ordinary sense of the word, stating that this term referenced “the return of an overpayment.” Accordingly, “either way subsection 160.1(1) would not apply.”

The appeal was allowed.

Neal Armstrong. Summaries of 984274 Alberta Inc. v. The Queen, 2019 TCC 85 under s. 160.1(1), s. 164(1), s. 169(3), s. 152(4)(a)(ii) and s. 152(8).