REASONS
FOR JUDGMENT
Hogan J.
I. Overview
[1]
These appeals concern the calculation of arrears
interest in the context of the application of the general anti-avoidance rule
(the “GAAR”). The Appellants implemented a series of transactions (the
“Transactions”) resulting in capital losses used to offset capital gains realized
by J.K. Read Engineering Ltd. (“Read”) and J.M. Hutton Engineering Ltd.
(“Hutton”) earlier in their 2007 taxation year. Read and Hutton produced their
income tax returns for the 2007 taxation year on the basis that the Transactions
gave rise to a nil tax liability.
[2]
In 2011, the Appellants were reassessed by the
Minister of National Revenue (the “Minister”). The Minister found the steps
taken by the Appellants to be abusive avoidance transactions and, as a result,
applied the GAAR to disallow the capital losses claimed by Read and Hutton in
their 2007 tax returns.
[3]
The Appellants do not dispute the application of
the GAAR or the resulting tax liability. What is in dispute, however, is the
date on which the liability arose and from which interest began to accrue
thereon.
[4]
The Appellants argue that subsection 245(7) of
the Income Tax Act (the “Act”) requires the Minister to issue a
notice of assessment based on the GAAR before section 245 can be applied to redetermine
the tax consequence of abusive avoidance transactions. The essence of the
Appellants’ position is that the capital losses purportedly created as a result
of the implementation of the Transactions continue to offset the capital gains
realized by Read and Hutton up until the date that the Minister assessed the
Appellants on the basis of the GAAR (the “GAAR Assessments”). According to the
Appellants, interest began to accrue only from the date of the GAAR
Assessments, which is the moment in time GAAR tax liability is said to arise.
[5]
The Respondent does not see it quite the same
way. According to the Respondent, the GAAR applies without the intervention of
the Minister. Consequently, the Appellants had unpaid income tax as of their
respective balance-due dates, on which arrears interest began to accrue.
II. Factual Background
[6]
I heard the four appeals on the basis of the Agreed
Statements of Facts reproduced in their entirety in Appendix A hereto.
[7]
Because the Appellants acknowledge that the
GAAR applies to disallow the capital losses claimed by Hutton and Read, it is
sufficient for me to observe that the Appellants used high-low preferred shares
to create capital losses, employing a strategy similar to that used by the appellants
in three recent appeals.
In those appeals, the Federal Court of Appeal (the “FCA”) found that the GAAR
applied, describing the capital losses as artificial such that they could not
be used to offset the capital gain of each of the appellants.
III. Issues
[8]
The issue in these appeals as it emerges from the
written submissions of the parties can be framed as follows:
Under the GAAR does interest begin to accrue
on tax under Part I of the Act from the date of the assessments?
IV. Analysis
A. Does Copthorne
support the Appellants’ position?
[9]
The Appellants directed my attention to the decision
of the Tax Court of Canada (the “TCC”) in Copthorne Holdings Ltd. v.
The Queen.
In that case, predecessor corporations to the appellant, Copthorne, entered
into a series of transactions to preserve the paid-up capital (the “PUC”) of
shares that they had issued. The non-resident shareholder of Copthorne was
found to have received a deemed dividend following a recharacterization of the
transactions under the GAAR. The withholding tax under section 212 of the Act that
is generally imposed when a Canadian corporation pays a dividend to a non-resident
person was not deducted by Copthorne, resulting in its being assessed the amount
of that tax as well as a penalty for failure to deduct or withhold under
subsection 227(8) of the Act.
[10]
Campbell J. confirmed that Copthorne was liable
for its shareholder’s Part XIII tax; however, she struck out the penalty
that had been assessed.
[11]
In their written submissions, the Appellants
summarize Campbell J.’s decision in Copthorne as follows:
The Tax Court of Canada, in Copthorne
Holdings Ltd. v. H.M.Q., held that a taxpayer cannot self-assess on the
basis that the GAAR applies because of subsection 245(7). In Copthorne,
the GAAR applied to reduce the PUC available to shelter a cross-border share
repurchase from Part XIII tax. As a result, the Tax Court also found that the
taxpayer was not liable for the automatic penalty under subsection 227(8) that
typically results from failing to withhold Part XIII tax, because the taxpayer
technically was not required to withhold Part XIII tax at the time the shares
were repurchased. The Part XIII liability arose after the fact, when the
Minister assessed pursuant to the GAAR.
[Emphasis added.]
[12]
Later on in their written submissions, the
Appellants observe:
. . . It was not until the reassessment under
the GAAR was raised by the Minister that the non-resident’s requirement to pay
Part XIII tax arose. As a result, there was no withholding obligation that
existed at that time under subsection 215(1).
[13]
Finally, the Appellants’ draw the following
conclusion:
The natural extension of Copthorne, in
the context of subsection 161(1), is that:
(a) income
taxes assessed pursuant to GAAR are payable only after the Minister has issued
the assessment, and
(b) the
period during which such “taxes payable” are outstanding commences on the date
of the GAAR assessment.
[14]
With respect, I do not agree with the Appellants’
analysis of Copthorne because it fails to take into account the fact
that the Court actually found that Copthorne failed to fulfil its withholding
obligations under subsection 215(1) of the Act.
[15]
As is often the case under Part XIII, the
Minister assessed Copthorne, the dividend payer, rather than its shareholder,
the dividend recipient. Dividend payers are liable for Part XIII tax only if
they fail to deduct or withhold tax that is payable on the dividend payment. Section
215 of the Act is clear on this matter. The relevant parts of that provision
read as follows:
215(1) When a person pays, credits or provides,
or is deemed to have paid, credited or provided, an amount on which an
income tax is payable under this Part, or would be so payable if this
Act were read without reference to subparagraph 94(3)(a)(viii) and to
subsection 216.1(1), the person shall, notwithstanding any agreement or law to
the contrary, deduct or withhold from it the amount of the tax and forthwith
remit that amount to the Receiver General on behalf of the non-resident person
on account of the tax and shall submit with the remittance a statement in
prescribed form.
. . .
(6) Where a person has failed to deduct
or withhold any amount as required by this section from an amount paid
or credited or deemed to have been paid or credited to a non-resident person,
that person is liable to pay as tax under this Part on behalf of the
non-resident person the whole of the amount that should have been deducted
or withheld, and is entitled to deduct or withhold from any amount paid or
credited by that person to the non-resident person or otherwise recover from
the non-resident person any amount paid by that person as tax under this Part
on behalf thereof.
[Emphasis added.]
[16]
The Appellants’ submission that Copthorne did
not fail to withhold tax because the deemed dividend did not arise until the
GAAR assessment was issued is irreconcilable with Campbell J.’s finding that
Copthorne was liable for its non‑resident shareholder’s Part XIII tax
under section 215(6) of the Act. The GAAR had to apply beforehand to
reduce the PUC of the shares redeemed by Copthorne, otherwise the Court could
not have found that Copthorne failed to fulfil its withholding obligation under
subsection 215(1) of the Act. If Part XIII tax had not been payable
at the time of the share redemption, Copthorne would not have been liable for
such tax under subsection 215(6) of the Act. Therefore, it is implicit in the
Court’s finding in that case that the GAAR operated as the abusive avoidance
transactions were being carried out, and not, as argued by the Appellants, when
the GAAR-based assessment was issued by the Minister.
[17]
In light of the above, did the Court arrive at a
contradictory decision in Copthorne? I do not believe so. Subsection
215(6) of the Act is a charging provision that makes the payer liable for the
payee’s tax if the payer fails to deduct or withhold at the time of payment tax
that is payable by the payee. In contrast, subsection 227(8) of the Act is
a penalty provision. A due diligence defence can be mounted against the latter
but not the former. In my opinion, Campbell J. struck out the subsection 227(8)
penalty assessed against Copthorne because, in the circumstances, she found
that Copthorne had acted diligently with respect to its withholding obligations
under section 215 of the Act.
B. What is the
proper interpretation of subsection 245(7) of the Act?
[18]
As noted above, the Appellants’ position is also
based on subsection 245(7) of the Act, which reads as follows:
Notwithstanding any
other provision of this Act, the tax consequences to any person, following the
application of this section, shall only be determined through a notice of
assessment, reassessment, additional assessment or determination pursuant to
subsection 152(1.11) involving the application of this section.
[19]
The Appellants submit that this provision
precludes all taxpayers from self‑assessing tax consequences under the
GAAR.
[20]
According to the Appellants, taxpayers should
not be liable for interest before an assessment based on the GAAR is issued if
they cannot self-assess under the GAAR. While, in Copthorne, Campbell J.
appears to endorse the interpretation against self‑assessment put forward
by the appellants, I note that her decision to strike out the penalty was not appealed
by the Respondent.
In contrast, her conclusion that Copthorne was liable for the Part XIII
tax of its non-resident shareholder was affirmed on appeal by the FCA and the
Supreme Court of Canada (the “SCC”).
[21]
The Appellants’ interpretation of subsection
245(7) of the Act also conflicts with comments made in obiter in S.T.B.
Holdings Ltd. v. The Queen.
In that case, Judge Miller was called upon to decide two issues: (1) whether an
assessment issued under subsection 245(7) requires a specific reference to the
GAAR; and (2) whether subsection 245(7) precludes the use of the GAAR by the
Minister as an alternative assessing tool. He answered “no”
to both issues. Interestingly, while, for the purpose of his finding on
these issues, he was not required to rule on the matter. Judge Miller found
during the course of his analysis that subsection 245(7) of the Act applies to
a taxpayer in respect of whom a GAAR assessment is issued (referred to as the “targeted taxpayer”) and to a taxpayer affected by the
assessment of that targeted taxpayer (referred to as a “third
party taxpayer”).
On appeal to the FCA, Létourneau J. A. affirmed the trial judge’s findings, but
found that subsection 245(7) of the Act was limited to third party taxpayers
only,
namely, those taxpayers who seek an adjustment under subsection 245(6) of the
Act because they have been affected by a GAAR‑based assessment of a
targeted taxpayer. An application for leave to appeal to the SCC was dismissed.
[22]
It is well accepted that an obiter dictum
is not a binding judicial opinion. Author Michael Zander states as much in
these terms:
. . . The most carefully considered and
deliberate statement of law by all five Law Lords which is dictum cannot bind
even the lowliest judge in the land. Technically, he is free to go his own way.
. . .
[23]
This is because:
Courts are instituted to decide questions which
must be resolved to end controversies. Therefore, advisory opinions and obiter
dicta in opinions are not recognized as bases for decisions, and they are not
encouraged. The law abhors opinions written without conflict. Such opinions
do not receive the benefit of the full contest of opposing briefs, arguments,
or full consideration by the court.
[Emphasis added.]
[24]
However, Zander notes that the persuasiveness of
dicta generally strengthens as they ascend the judicial hierarchy:
. . . In practice, of course, weighty obiter
pronouncements from higher courts are likely to be followed and will certainly
be given the greatest attention, but in strictest theory they are not binding.
. . .
[25]
In 1980, the SCC, in Sellars v. The Queen, made comments that were
perceived to be supportive of the notion that obiter dicta in majority SCC
opinions can establish precedents and bind lower courts. This became known as the “Sellars principle”. For a time, this
interpretation was shared by some observers
but dismissed by others.
[26]
In 2005, the SCC in R. v. Henry clarified the “Sellars principle” and rejected its seemingly
far-reaching application. Binnie J., writing for a
unanimous Court, began by confirming that an SCC obiter cannot
effectively bind lower courts, stating that:
. . . the effect would be to deprive the legal
system of much creative thought on the part of counsel and judges in other
courts in continuing to examine the operation of legal principles in different
and perhaps novel contexts, and to inhibit or skew the growth of the common
law. This would be a consequence totally unforeseen and unintended by the Court
that decided Sellars. . . .
[27]
He then provided guidance on the weight to be
accorded to obiter dicta expressed by the SCC:
. . . All obiter do not have, and are
not intended to have, the same weight. The weight decreases as one moves from
the dispositive ratio decidendi to a wider circle of analysis which is
obviously intended for guidance and which should be accepted as authoritative.
. . .
[28]
Thus, to paraphrase, it could be said that obiter
dicta move along a continuum and diminish in weight the further they stray
from the dispositive point of a judicial opinion:
Obiter dicta
will move along a continuum. A legal pronouncement that is integral to the
result or the analysis that underlies the determination of the matter in any
particular case will be binding. Obiter that is incidental or collateral
to that analysis should not be regarded as binding, although it will obviously
remain persuasive.
[29]
In my opinion, the reasons for judgment in S.T.B.
Holdings – both in first instance and on appeal – clearly establish that obiter
dicta pronounced by the courts constitute, in the words of the SCC, a “wider circle of analysis which is obviously intended for
guidance and which should be accepted as authoritative”. For the reasons that follow,
I do not agree with the Appellants that obiter dicta are akin to “commentary, examples or exposition” that are merely persuasive. In
S.T.B. Holdings, the third party application of subsection 245(7) of the
Act was fully argued and the courts’ construction of the provision had evolved
from a comprehensive analysis.
[30]
First, it is obvious from the TCC judgment in S.T.B.
Holdings that both parties submitted arguments either for or against an
application of subsection 245(7) of the Act to taxpayers at large:
Applicant’s Argument
[7] The Applicant’s suggested
interpretation of subsection 245(7) is that, firstly, it requires that any
assessment involving the application of the GAAR must clearly indicate on the
face of the notice of assessment that GAAR is being applied;
. . .
[27] . . . learned counsel for the Applicant
most ably argued for a broader interpretation of [subsections 245(6),
(7), and (8) of the Act].
Respondent’s Position
[12] Regarding the general application of
subsection 245(7) to all taxpayers as opposed to a more limited application the
Respondent argued that this subsection was limited to a third party
application. . . .
[Emphasis added.]
[31]
Similar arguments were made before the FCA:
7 When teleological, purposive or contextual
interpretation is made of these words, counsel argues, it leads to a
series of conclusions:
. . .
(b)
subsection 245(7) covers not only third parties affected by GAAR, but also
targeted taxpayers;
.
. .
8 . . . Counsel for the respondent submits
that, on this issue, the Judge erred when he ruled that the subsection
applies both to the targeted taxpayer and third parties.
[Emphasis added.]
[32]
These submissions were given full judicial
consideration. At first instance, Judge Miller pointedly dissects subsection
245(7) of the Act using the modern rule of statutory interpretation, assisted in part by the
explanatory notes accompanying the enactment of the GAAR. With respect to those notes,
I find it worthwhile to reproduce the following excerpt therefrom as quoted by
Judge Miller:
New subsection 245(7) of the Act provides that
a person may not rely on subsection 245(2) in order to determine his income,
taxable income, or taxable income earned in Canada of, tax or other amount
payable by, or amount refundable to, any person under the Act as well as any
other amount under the Act which is relevant for the purposes of the
computation of the foregoing, except through a request for adjustment under
subsection 245(6). This prevents a person from using the provisions of
subsection 245(2) in order to adjust his income, or any of the above-mentioned
amounts without requesting that adjustment following the procedures set out
in subsection 245(6).
[Emphasis added.]
[33]
It was largely on the basis of these reasons
that the FCA found that subsection 245(7) of the Act applies to third parties,
to the exclusion of taxpayers assessed under the GAAR:
. . . The reference to the procedure set out in
subsection 245(6) for a person mentioned in subsection 245(7) certainly tends
to confirm that subsection 245(7) was intended to apply only to third parties
seeking a tax relief.
[34]
At the appeal stage, Létourneau J. A. of the
FCA, writing for a unanimous court, acknowledged the carefulness with which Judge
Miller addressed the parties’ submissions:
The Tax Court Judge made a thorough analysis of
the parties’ submissions. My summary of his decision, although longer than
usual, does not give full credit to his thoughtful examination of the issues. .
. .
[35]
After reviewing the trial judge’s reasons for
judgment, Létourneau J. A. dismissed the appeal before the FCA and affirmed the
TCC judgment, save the finding that subsection 245(7) of the Act applied to a taxpayer
assessed under the GAAR:
. . . I am in general agreement with his
interpretation of subsection 245(7), except as regards his application to the
targeted taxpayer. . . .
[36]
As can be seen from the foregoing, the
application – or non-application – of subsection 245(7) of the Act to taxpayers
assessed under the GAAR was given significant consideration in S.T.B.
Holdings. In my view, the determination of this issue by both the TCC and
the FCA was essential to the conclusions that they reached in that case. As a
result, I find that the FCA’s conclusion that subsection 245(7) of the Act is
limited to third party taxpayers is an authoritative obiter which should
be followed. It is at the very least an obiter dictum that is highly
persuasive and compelling.
[37]
Even if I was inclined to endorse the
Appellants’ view of subsection 245(7), the language of that subsection is
unhelpful to their position. The key words are “the tax
consequences to any person [according to the Appellants, Hutton or Engineering],
following the application of this section, shall only be determined
through a notice of assessment” (emphasis added).
[38]
The Oxford English Dictionary
(online)
defines the term “following” as meaning “[t]hat follows or moves after another”, “[t]hat comes after or next in order or in time; succeeding,
subsequent, ensuing”, or “[a]s a sequel to, in
succession to (an event), after”. Similarly, that term is defined in the
Merriam‑Webster English Dictionary
as signifying “being next in order or time” or “listed or shown next”.
[39]
These definitions clearly indicate that the
notice of assessment does not trigger the application of the GAAR, but is
rather subsequent to it. This view is supported by a plain interpretation of
the French version of the provision:
245(7) Malgré les autres dispositions de la
présente loi, les attributs fiscaux d’une personne, par suite de
l’application du présent article, ne peuvent être déterminés que par avis
de cotisation, de nouvelle cotisation ou de cotisation supplémentaire ou que
par avis d’un montant déterminé en application du paragraphe 152(1.11), compte
tenu du présent article.
[Emphasis added.]
[40]
The Nouveau Petit Robert considers “par suite de” to be synonymous with “à cause de” or “en
conséquence de”. In the Larousse, it is defined as meaning “en raison de”. These synonyms unequivocally
point towards a determination that an application of the GAAR must precede the
notice of assessment.
[41]
In light of both the English and French
definitions above, it cannot be said that the tax liability pursuant to the
GAAR is incurred as of the date of the notice of assessment.
[42]
If I am wrong on this point and an assessment or
reassessment is needed in order to deny tax benefits arising from abusive
avoidance transactions, it appears to me that the GAAR would still be
retrospective in its application. For example, in Copthorne, the PUC
reduction had to be considered as occurring before the share redemption in
order for there to be a deemed dividend that was subject to withholding tax.
Why then, under the Appellant’s theory, would the GAAR not be retrospective in
application with respect to the accrual of interest on tax payable in respect
of the Appellants’ 2007 taxation years? I strongly doubt that Parliament
intended taxpayers to benefit from a deferral of interest in respect of abusive
avoidance transactions.
[43]
I see nothing in the rest of section 245 of the
Act to suggest that the application of the GAAR is suspended until an
assessment is issued. On the contrary, subsection 245(2) of the Act uses mandatory
language to provide that the tax consequences of abusive avoidance transactions
shall be recast to deny tax benefits that are not reasonable in the
circumstances.
C. Consideration of the
Interest Provision
[44]
The provision governing the imposition and
accrual of interest operates in a straightforward manner regardless whether or
not the assessment is based on the GAAR. Subsection 161(1) of the Act provides
that interest accrues at the prescribed rate on the excess of the taxpayer’s
tax payable under Parts I, I.3, VI and VI.1 of the Act for a taxation year over
the total amount paid on account of that tax liability. That provision reads as
follows:
161(1) Where at any time after a taxpayer’s
balance-due day for a taxation year
(a)
the total of the taxpayer’s taxes payable under this Part and Parts I.3,
VI and VI.1 for the year
exceeds
(b)
the total of all amounts each of which is an amount paid at or before that time
on account of the taxpayer’s tax payable and applied as at that time by the
Minister against the taxpayer’s liability for an amount payable under this Part
or Part I.3, VI or VI.1 for the year,
the taxpayer shall pay to the Receiver General
interest at the prescribed rate on the excess, computed for the period during
which that excess is outstanding.
[Emphasis added.]
[45]
It is clear from the wording of this provision
that interest accrues from the taxpayer’s balance-due day, if the taxpayer has “tax payable” outstanding at that time.
[46]
In The Queen v. Whent, the FCA held that the word “outstanding” used in subsection 161(1) of the Act means
an amount “that stands over; that remains undetermined,
unsettled, or unpaid”.
[47]
The term “tax payable”
is defined in subsection 248(2) as meaning the amount of tax fixed by
assessment or reassessment, subject to variation on objection or appeal. No
exception is made in that definition for an assessment of tax based on the GAAR.
In the instant appeals, because the capital losses are denied under subsection
245(2) of the Act, Read and Hutton had outstanding “tax
payable” under Part I of the Act as of their respective balance-due days.
Similarly, because Hutton paid assessable dividends to each of the other
Appellants in their 2007 taxation years, those other Appellants had unpaid
Part IV tax payable on which interest accrued under subsection 187(2) of
the Act.
V. Conclusion
[48]
On the basis of the foregoing, I conclude that
the Transactions did not give rise to capital losses that could be used by
Hutton and Read to offset their capital gains for their 2007 taxation years.
Consequently, arrears interest was properly calculated on the Appellants’ tax
debts owing after their respective balance-due days.
[49]
For all these reasons, the appeals are dismissed.
[50]
With regard to the appeals numbered 2012‑541(IT)G,
2012‑542(IT)G and 2012‑543(IT)G, the parties agreed that there
would be no costs awarded to any party regardless of the final result.
[51]
With regard to the Read appeal, numbered
2011-3732(IT)G, the parties agreed that costs would be awarded according to the
final result. Therefore, costs are awarded to the Respondent.
Signed at Toronto, Ontario, this 21st day of October 2014.
“Robert
J. Hogan”
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