Inez Holdings LTD v. Minister of National Revenue, [1983] CTC 2437, 83 DTC 365

Guy Tremblay:—This appeal was heard on April 14, 1983, at the City of Montreal, Quebec.

1. The Point at Issue

The point at issue is whether the appellant company is correct in contesting, for the taxation year 1978, interest in the amount of $2,356.19 on tax payable and penalty in the amount of $500 imposed for late filing. The ap- pellant contends that the amendment to paragraph 186(1 )(b.1) of December 6, 1979, which extends to June 30, 1980, the period during which an election to pay tax under Part IV of the Income Tax Act could be made, gives effect to the tax only from the date of the election and not from a date before the said amendment.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraphs 6(a) to (h) of the reply to notice of appeal, the respondent described the facts on which he based his assessment:

6. In assessing the Appellant for its 1978 taxation year, the Minister of National Revenue relied, inter alia, on the following assumptions of facts:

(a) On October 5, 1979, the Appellant filed its tax return for the 1978 taxation year (March 31, 1978 to December 31, 1978);

(b) According to Section 150(1 )(a) of the Income Tax Act, the Appellant was then late in filing its return for the 1978 taxation year;

(c) On November 19, 1979, the Respondent issued a Notice of assessment for the 1978 taxation year indicating that no tax was payable according to the information contained in the Appellant’s return;

(d) On June 27, 1980, the Appellant advised the Respondent that pursuant to Section 186(b.1) of the Income Tax Act, its director has elected to pay Part IV tax in respect of $100,000.00 of a dividend received by it on December 8, 1978 from Sapsgim Corporation Ltd;

(e) On July 21, 1980, the Appellant filed an amended return for its 1978 taxation year;

(f) On December 18, 1980, the Respondent issued a Notice of reassessment according to the election above mentioned and indicating that an amount of $2,356.19 was charged on account of interest on tax payable and a late filing penalty of $500.00;

(g) The interest was charged pursuant to, inter alia, Section 187(2) of the Income Tax Act:

(h) The penalty for late filing was imposed pursuant to, inter alia, Section 187(3) and 162(1 )(b) of the Income Tax Act.

3. The Facts

3.01 Pursuant to the reply to notice of appeal, the respondent admitted paragraphs 1 to 10 of the appellant’s notice of appeal. Those paragraphs read as follows:

1. Inez Holdings Ltd (“Holdings”) has a December 31st, year end.

2. During the taxation year 1978, the only income of Holdings was a stock dividend declared and received on December 8, 1978 from a Corporation “connected with” holdings.

3. During the first six (6) months of 1979, the directors of Holdings did not elect to pay the Part IV tax in respect of the taxable dividend received in December 1978.

4. During the first three (3) months of 1979, Holdings did not consequently pay the Part IV tax.

5. On June 30th, 1979, Holdings did not file a tax return in respect of the 1978 taxation year.

6. In October 1979, Holdings filed its tax return.

7. In December 1979, Article 186(1 )(b1 ) was amended in order to extend to June 30th, 1980 the period during which the election to pay the Part IV tax could be made in respect of dividends received after November 16,1978 (1979) SC 0 5, s 56.

8. This time, availing itself of the extended delay to make the Part IV election, Holdings elected in June 1980, to pay the Part IV tax in respect of the dividend received on December 8, 1978.

9. On June 27, 1980, Holdings sent to the Department of National Revenue a cheque in the amount of $19,000 concerning its 1978 tax liability (in effect, the Part IV tax).

10. On July 11, 1980, Holdings filed an amended return for its 1978 taxation year.

3.02 All the material facts having been admitted by both parties, the crux of the matter is the interpretation of the legal dispositions involved in the present case.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act, SC 1970-71-72, Chapter 63 as amended, involved in the present case are 150(1 )(a), 162(1), 186(1) as passed before the amendment of December 6, 1979, the amendment to subsection 186(1) found at subsections 56(1) and (2) of 28 Eliz Il, Chapter 5, and subsections 187(1), (2) and (3).

Subsection 186(1) before the amendment of December 1979 reads as follows:

186. (1) Every corporation (in this section referred to as the “particular corporation”) that was, at any time in a taxation year, a private corporation shall, on or before the last day of the 3rd month after the end of the year, pay a tax under this Part for the year equal to 1/3 of the amount, if any, by which the aggregate of

(a) all amounts received by the particular corporation in the year as, on account or in lieu of payment of, or in satisfaction of, taxable dividends from corporations other than payer corporations connected with it,

(i) that are deductible under subsection 112(1) from its income for the year, or

(ii) to the extent of the amounts in respect of those dividends that are deductible under paragraph 113(1)(a), (b) or (d) or subsection 113(2) from its income for the year, and

(b) all amounts each of which is an amount in respect of a taxable dividend received by the particular corporation in the year from a corporation (in this section referred to as the “payer corporation”) connected with the particular corporation, equal to that proportion of

(i) 3 times the dividend refund of the payer corporatioin for its taxation year in which it paid the dividend,

that

(ii) the amount in respect of the dividend so received by the particular corporation

is of

(iii) the aggregate of all taxable dividends paid by the payer corporation in its taxation year in which it paid the dividend and

(b.1) all amounts each of which is an amount in respect of a taxable dividend received after April 10, 1978 by the particular corporation in the year from a payer corporation connected with the particular corporation in respect of which the directors of the particular corporation (or where the directors of the corporation are not legally entitled to administer the affairs of the corporation, the person or persons legally entitled to administer its affairs) have, by resolution made within 6 months from the end of the year, elected to pay tax under this Part,

exceeds the aggregate of

(c) such part of the particular corporation’s non-capital loss for the year as it may claim, and

(d) such part of the particular corporation’s non-capital loss for a taxation year during which it was a private corporation that is any of the 5 taxation years immediately preceding and the taxation year immediately following the taxation year as the corporation may claim, not exceeding, however, the portion of that loss that

(i) is not deductible under section 111 from its income for the taxation year,

and

(ii) would be so deductible if the reference in paragraph 111(1)(a) to “income for the year” were read as a reference to “income for the year plus the amount on which the taxpayer would be required to pay tax for the year under Part IV if subsection 186(1) were read without reference to paragraph

(d) thereof”.

The amendment of December 1979 reads as follows:

56. (1) Paragraph 186(1 )(b.1 ) of the said Act is repealed and the following substituted therefor:

“(b.1) an amount not exceeding the aggregate of

(i) all amounts each of which is an amount in respect of a taxable dividend received after April 10, 1978 by the particular corporation in the year from a payer corporation connected with the particular corporation but not controlled by it, and

(ii) the lesser of

(A) all amounts each of which is an amount in respect of a taxable dividend received after April 10, 1978 by the particular corporation in the year from a payer corporation controlled by, but not associated with, the particular corporation, and

(B) all amounts each of which is a taxable dividend paid by the particular corporation in the year to an individual,

in respect of which the directors of the particular corporation (or where the directors of the particular corporation are not legally entitled to administer the affairs of the particular corporation, the person or persons legally entitled to administer its affairs) have, by resolution made within 6 months from the later of the end of the year and December 31, 1979, elected to pay tax under this Part,”

(2) This section is applicable in respect of dividends received after November 16, 1978.

The other provisions shall be quoted in the analysis, if necessary.

4.02 Cases at Law

Counsel for both parties referred the Board to the following cases:

1. George Evin v MNR, 14 Tax ABC 188; 56 DTC 1;

2. Cable Mines <& Oils Limited v MNR, 28 Tax ABC 42; 61 DTC 641;

3. Western Leaseholds Ltd v MNR, [1961] CTC 490; 61 DTC 1309.

4.03 Analysis

4.03.1 During the hearing with respect to the penalty issue, counsel for the respondent informed the Board that it was admitted that the appeal concerning the penalty had to be allowed. The Board shares this opinion and congratulates the counsel for his intellectual honesty in admitting the point during the trial.

4.03.2 The CCH publication “Canadian Tax Reporter”, at paragraph 24,630 explains the general basis of the amendment of paragraph 186(1 )(b.1) in December 1979 as follows:

The ability to elect to pay tax under Part IV in respect of dividends from a connected corporation which would not otherwise be subject to tax under Part IV was added applicable to dividends received after April 10, 1978. For dividends received after April 10, 1978 and before November 17, 1978 there is no limitation on the ability to elect to pay Part IV tax. However, for dividends received after November 16, 1978, the ability to elect may be limited if certain relationships exist between the payor and the recipient as to control and association.

Whereas the dividends paid by Sapsgim Corporation Limited were received after November 1978, namely on December 8, 1978, and whereas there is no dispute in fact and in law concerning the requirements in the relationship between the payer and the recipient as to control and association; it is therefore clear that the appellant is within the wording of the new enactment, and that it had until the end of June 1980 to make the election; which it did. Is it correct to refuse to pay interest charged from March 31, 1979 (“. . . the last day of the third month after the end of the year.. .” subsection 186(1) introductory paragraph) by the respondent?

Subsection 187(2) stipulates as follows concerning the computation of interest:

Where a corporation is liable to pay tax under this Part and has failed to pay all or any part thereof on the day on or before which it was required to pay the tax, it shall, on payment of the amount in default, pay interest at a prescribed rate per annum from the day on or before which it was required to make the payment to the day of payment.

In the instant case, what is the day “on which it was required to pay the tax”?

4.03.3 After receiving the dividend on December 8, 1978, the appellant company had the right and the choice to be taxed pursuant to Part IV of the Act. It had decided that Part I of the Act would then apply. It filed its income tax return in October 1979.

In December 1979, the legislator practically decided by amendment of the Act to give the opportunity to the companies meeting the requirements of the amendment, to allow another 6-month period from December 31, 1979, to make election to be taxed under Part IV.

Let us read again the following part of the amendment .. in respect of which the directors of the particular corporation (. ..) have, by resolution made within 6 months from the later of the end of the year and December 31, 1979, elected to pay tax under this Part”. First, it is clear that it is still up to the taxpayer company to decide to make the resolution to be taxed, and it is only up to a taxpayer company which has received dividends after November 16, 1978. This opportunity is not given only to those which have forgotten to make the election, but to the taxpayer companies which meet very specific new requirements considering new economic circumstances. It is really a new decision of the taxpayer to be taxed.

On this basis, therefore, the interest cannot be computed from the time that a former resolution could have been taken, but only from the resolution provided in the December 1979 amendment.

4.03.4 The appellant, however, contended that the interest must be computed only from the date of the resolution, June 28, 1980.

It is not the opinion of the Board. Despite the fact that the said resolution was taken at the end of June 1980, the interest must be computed from March 31, 1980. Indeed the introductory paragraph of section 186(1) is part of the whole provision including the December 1979 amendment. Moreover, if one reads the former paragraph 186(1 )(b.1 ) (paragraph 4.01) one can see that the wording concerning the period of election (“. . . have, by resolution made within 6 months from the end of the year, elected to pay tax under this Part”) is substantially the same as the wording of the December 1979 amendment (“. . . have, by resolution made within 6 months from the later of the end of the year and December 31, 1979 elected to pay tax under this Part”).

In the whole former provision the interest had to be computed from the last day of the third month after the end of the year.

The Board cannot see why this period of three months would not also apply because the date from which it must be computed is December 31, 1979.

4.03.5 In the three cases at law to which the Board was referred, the facts are completely different: no new enactment was involved.

5. Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed in part.