1074022 B.C. Ltd. v Li - BCSC finds that CRA could be directed to pay an excess s. 116 remittance to the taxpayer’s secured creditors
No s. 116 certificate was obtained on a court-approved sale of a Vancouver property (arising in connection with foreclosure proceedings) by the Hong Kong owner (Mr. Li), so that the purchaser paid 25% of the purchase price (being $200,000) to CRA. Mr. Li’s tax liability was only $46,000 and he had provided CRA with an irrevocable direction to pay the excess funds (i.e., $154,000) to his lawyer (so that such funds would then be paid, in accordance with the court order, to the secured creditors of Mr. Li, including the second mortgagee (the petitioner in this case). However, CRA refused to do so on the basis that s. 164 of the ITA and s. 67 of the Financial Administration Act required a tax refund to be paid only to the taxpayer (i.e., to Mr. Li in Hong Kong, with the effect of defeating his secured creditors) and not a third party (i.e., a mortgagee).
Before determining “that Canada is obligated to pay the excess funds to Mr. Li’s lawyer in trust in accordance with the direction to pay,” Harper M stated:
In my view, Canada’s interpretation of s. 67 of the FAA and s. 164 of the ITA is overly narrow. If CRA pays the excess funds to Mr. Li’s lawyer in trust, the payment is neither an “assignment” of the excess funds to a third party, nor a payment for the benefit of anyone other than Mr. Li. The funds remain Mr. Li’s to be dealt with in accordance with the trust conditions agreed upon between him, his lawyer and the secured creditors.
Harper M went on to indicate that “Alternatively, it is acceptable that CRA pay the excess funds into court to the credit of the proceeding, or to the petitioner’s lawyer in trust, if agreed.” In this regard, she rejected the Attorney General’s argument that “it has no discretion to pay the excess funds into court, or, in fact, to do anything other than pay them to Mr. Li.”
It is suggested that this case:
may be considered to make a more general point: taxpayers should be allowed to direct where their refunds are to be paid, just as they choose the bank account into which the funds are to be deposited.
Neal Armstrong. Summaries of 1074022 B.C. Ltd. v Li, 2020 BCSC 65 under s. 116(5) and of H. Michael Dolson, "Can a Tax Refund Be Paid to a Third Party? Section 116 and Foreclosures,” Canadian Tax Focus, Vol. 10, No. 2, May 2020, p. 8 under Financial Administration Act, s. 67.