Citation: 2008TCC167
Date: 20080325
Docket: 2005-1448(IT)G
BETWEEN:
CGU HOLDINGS CANADA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
Background and Issues
[1] The Appellant appeals the Minister of National
Revenue’s (the “Minister”) assessment of its 2000 taxation year which denied a
refund claimed in respect of a taxable dividend paid by it in the year. The
refund claimed pertains to an “allowable refundable tax on hand” account (the “refundable
tax account” or “allowable refundable tax”). The Appellant’s entitlement to the
refund depends on the correctness of its calculation of the refundable tax account
and its standing as a “non-resident-owned investment corporation” (an “NRO”) at
the requisite time.
[2] An NRO is a corporation all of the
shareholders of which are non-residents or one or more other NROs. An NRO is
allowed a refund from its refundable tax account when it pays a dividend. The
Appellant claimed such a refund in respect of a dividend paid by it in its 2000
taxation year. The refund was denied on the basis that the Appellant was not an
NRO and on the basis that, in any event, the amount of its refundable tax
account was nil. The Appellant relies on its determination of its allowable
refundable tax and on an election it made, pursuant to section 134.1 of the Act,
to be deemed to be an NRO at the relevant time. The Respondent asserts that the
Appellant is not eligible to make such an election.
[3] The Appellant was formed on the amalgamation of
three corporations in March 1999. Its first taxation year ended on the last day
of February 2000. One of the three predecessor corporations was an NRO.
However, since two of the predecessors were not NROs, the Appellant did not
qualify as an NRO unless section 134.1 applies.
[4] The predecessor
that was an NRO, namely, GA Scottish Corporation (Canada) Ltd. (“GA Scottish”), had a
refundable tax account and at
least one of the shareholders of one of the predecessor corporations was an unidentified
NRO. The dividend
that the Appellant asserts triggers the refund in issue was received entirely
by that unidentified NRO. The suggestion during the hearing was that but for
the amalgamation, a dividend by the NRO predecessor corporation, GA Scottish, would
have triggered a refund of its allowable refundable tax if it had been paid
before the amalgamation. In this context one might say that the issue in this
appeal is whether the amalgamation has deprived the Appellant of a refund of refundable
tax.
[5] The background facts that I have been apprised of
are not in dispute. A Statement of Agreed Facts was submitted at the hearing.
That statement is appended to these Reasons.
[6] The agreed facts can be summarized quite simply
as follows:
i)
On March 2, 1999 the
Appellant was formed on the amalgamation of three companies only one of which
(GA Scottish) was an NRO immediately before the amalgamation;
ii)
The Appellant’s first
taxation year following the amalgamation commenced at the time of the
amalgamation
and ended on February 29, 2000;
iii)
Immediately before the
amalgamation GA Scottish had an unrefunded balance in its refundable tax
account of $1,265,348.00; cumulative taxable income of $1,917,233.00; and
retained earnings of $1,641,791.00;
iv)
During its first
taxation year, the Appellant paid a taxable dividend (within the meaning of
subsection 133(8)) in the amount of $7,706,000.00 to a shareholder that was an
NRO;
v)
The Appellant made a
timely election pursuant to paragraph 134.1(1)(c) of the Act to
be deemed to be an NRO for the 2000 taxation year and applied to the Minister pursuant
to subsection 133(6) for an allowable refund from the refundable tax account;
and
vi)
The Minister denied the
refund on the basis that the Appellant did not satisfy the criteria set out in
paragraph 134.1(1)(a) for making the election and on the basis that the refundable
tax account of the amalgamated corporation (i.e. the Appellant) was nil.
The
Taxation of NROs
[7] A brief summary of how NROs are treated under the
Act will be helpful in order to put the issues in this appeal in
context. In very general terms an NRO is a Canadian corporation engaged only in
certain types of activities and all of the shares of which are beneficially
owned by non-resident persons or by other NROs. The definition of an NRO is set
out in subsection 133(8) of the Act. It is not in dispute that GA
Scottish qualified as an NRO.
[8] The tax regime
prescribed in section 133 is that an NRO is taxed at the rate of 25% pursuant
to subsection 133(3). This tax is refunded when the NRO pays dividends to its
shareholders. Since the shareholders of an NRO must be either non-residents or
other NROs, the shareholders will be either subject to a 25% refundable NRO tax
(in the case of a dividend recipient that is an NRO) or a 25% withholding tax
(subject to applicable tax treaty limitations) under Part XIII of the Act
(in the case of dividends paid to other non-resident shareholders). In either
case the payment of a dividend by an NRO gives rise to a refund of the initial
25% tax paid by it.
[9] The NRO rules are
designed to permit the ultimate non-resident shareholder of an NRO to be taxed
in Canada without an extra level
of tax being imposed on the intermediary NRO. Generally speaking, the ultimate
non-resident shareholders of an NRO will then receive the same tax treatment they
would have received had they held the NRO’s property directly. The refundable
tax regime ensures this result without allowing a deferral of that tax. This integration
scheme will not be achieved if refundable tax accounts are locked-in as they
would be in the case at bar if the Respondent’s position prevails.
[10] That is, if a refund
was not permitted where an NRO has paid the 25% tax on its taxable income, a
dividend would be subject to a degree of double tax: two taxpayer tiers, each
subject to tax on the same original source of income. Whether such double tax
is acceptable is a matter of tax policy. Generally speaking, the scheme of the
NRO provisions is to avoid any double tax. This might be seen as favourable
treatment or a benefit given to NROs since this type of integration between
companies and their shareholders is by no means universally reflected by the
provisions of the Act dealing with other types of corporations. On the other hand, inter-corporate
dividends are generally received tax free pursuant to a deduction permitted
under section 112. This prevents further levels of taxation being imposed on
corporate tiers. The recipient NRO in the case at bar however would be expressly
excluded from this regime by virtue of subsection 112(1) which expressly denies
the deduction to NROs.
The
Legislation and the Position of the Parties
[11] The relevant
sections to consider are paragraph 87(2)(a) and section 134.1 which read
as follows:
87(2) Rules applicable -- Where there has been an amalgamation of two or more
corporations after 1971 the following rules apply:
(a) [deemed new corporation -- ]
taxation year -- for the purposes of this Act, the corporate entity formed
as a result of the amalgamation shall be
deemed to be a new corporation the first taxation year of which
shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation
that would otherwise have ended after the amalgamation shall be
deemed to have ended immediately before the amalgamation;
134.1
(1) NRO -- transition -- This section applies to a corporation that
(a) was a non-resident-owned investment
corporation in a taxation year;
(b) is not a non-resident-owned investment
corporation in the following taxation year (in this
section referred to as the corporation's "first non-NRO year");
and
(c) elects in writing filed with the Minister on or before the corporation's filing-due
date for its first non-NRO year to have
this section apply.
(2) Application -- A corporation to which this
section applies is deemed to be a non-resident-owned investment
corporation in its first non-NRO year for the
purposes of applying, in respect of dividends paid on shares of its capital
stock in its first non-NRO year to a non-resident person or a non-resident-owned investment
corporation, subsections 133(6)
to (9)
(other than the definition "non-resident-owned investment
corporation" in subsection 133(8))
and section 212 and
any tax treaty.
[12] The Department of
Finance Technical Notes explain the introduction of section 134.1 as follows:
March 2001 TN: New section 134.1 provides special
transitional rules to accommodate the phase out of non-resident-owned
investment corporations (NROs). The present NRO rules allow an NRO to claim a
refund of its 25% refundable tax when it pays dividends to its non-resident
shareholders (at which time the dividend withholding tax in Part XIII of the
Act applies). However, to access the pool of refundable tax for a given
taxation year, the refund mechanism requires dividends to be paid in a
subsequent taxation year. Since the amended definition “non-resident-owned
investment corporation” in subsection 133(8) calls for the phase-out of NROs
over a three-year period, a corporation that ceases to be an NRO would not be
able to claim a refund of the 25% refundable tax that it would pay in respect
of its last taxation year as an NRO. To accommodate the refund of this tax, new
paragraph 134.1(1)(c) provides an election through which a corporation that
ceases to be an NRO can elect to have its status as an NRO extended for this
specific purpose for its first non-NRO year. In order to access the refund, the
dividends paid in the first non-NRO year must be paid to a non-resident person
or another NRO.
New section 134.1 applies
to corporations that cease to be NROs because of a transaction, event or
circumstance that arises in a taxation year of the corporation that ends after
February 27, 2000. An election under the section is treated as having been made
in a timely manner if it is made on or before the electing corporation’s
filing-due date for its taxation year that ends after this amendment receives
Royal Assent.
[13] Paragraph 87(2)(a)
provides that the Appellant is a new corporation formed as a result of the
amalgamation. It does not qualify as an NRO since immediately before the amalgamation
not all of the predecessor corporations were NROs. Subsection 133(8) of the Act
provides as a post-amble following paragraph (f) of the definition of
NRO the following:
Except that no case shall a new
corporation (within the meaning assigned by section 87) formed as a result of
an amalgamation after June 18, 1971 of two or more predecessor corporations be
regarded as a non-resident-owned investment corporation unless each of the
predecessor corporations was, immediately before the amalgamation, a
non-resident-owned investment corporation;
…
[14] Accordingly, as a
result of the amalgamation, the Appellant, not being an NRO, would not be
eligible for the refund but for the application of subsection 134.1(1). The
dividend paid would accordingly be subject to the double tax complained of by
the Appellant.
[15] The Appellant
asserts that section 134.1 should be applied in a manner that will prevent that
result. To allow the refundable tax account of an NRO to be trapped and then
subject the dividend recipient NRO to an additional 25% tax is a result not
consistent with the underlying policy of the NRO regime.
[16] The Appellant’s argument
is based on the principle first applied in R. v. Black and Decker
Manufacturing Co.
that predecessor corporations continue to exist in the amalgamated corporation.
The argument is that the Appellant, as the corporation continuing from the
amalgamation, was an NRO before the amalgamation because GA Scottish, a
predecessor, was an NRO before the amalgamation. It was not an NRO after the
amalgamation. Hence, it meets the requirements of section 134.1 which provides
that in those circumstances a corporation can elect to be deemed to be an NRO
in the first year it ceased to be an NRO – namely in the 2000 year, in the case
at bar, it being the first year the Appellant is not an NRO.
[17] As well, the
Appellant notes that if the dividend paid by the Appellant to the NRO
shareholder ($7,706,000.00) was eligible to
trigger the refund there would be no slippage of tax since the NRO recipient is
subject to a 25% tax. There would simply be no two tier tax which was not
intended for NROs in the first place.
[18] On the other hand, there
seemed to be the suggestion in this case, in highlighting the retained earnings
of GA Scottish, that a full refund may not have been possible on a dividend paid
prior to the amalgamation. However, there is, in fact, no evidence that the
full dividend paid by the Appellant could not have been paid by GA Scottish.
Dividends are not limited to retained earnings. Further, it does not appear to me
that the intention of Parliament was to deny an NRO the opportunity to more
fully access a refundable tax account by using an amalgamation, at least where
all the predecessors of the amalgamated corporation were NROs. In that case the
refund would apply regardless of the financial status of a particular
predecessor and regardless of which shareholder of which predecessor
corporation received the dividend that triggered the refund. That this may be
what the Appellant sought to achieve by electing under section 134.1 in the
case at bar, even though not all its predecessors were NROs, does not strike me
as troublesome or relevant.
[19] Of relevance is the
Respondent’s concern that section 134.1, which permits a non-NRO to elect to be
an NRO, was added as part of the phasing out of the special tax regime
available for NROs. The Respondent suggests that it would be a misuse of the
election to construe it in such a way as would open the door for amalgamated
corporations to have a more favourable tax result arising from a phase out
provision than would have been available but for the phase out. Absent the
phase out provision, the refundable tax account would be effectively wiped out
on an amalgamation, such as this one, where the predecessor corporations are
not all NROs. The language of that transitional provision should be strictly
applied to ensure that result is not lost. That is, the language of that
provision should not be afforded a liberal construction on some theory of
parliamentary intent to avoid double taxation. The provision of the Act
relied on by the Appellant serves a different purpose altogether than to allow
the Appellant access to a refundable tax account that it otherwise could not
have access to.
Analysis
[20] The parties’
arguments are based on the intention of Parliament and tax policy concerns. Each
has an arguable position that could attract favour. What is required however is
a close scrutiny of the express language of the subject provisions in order to
determine the need to rely on such arguments and to provide a better context in
which to weigh those arguments should it be necessary to do so. Not
surprisingly, there are several issues that need to be resolved in coming to a
determination as to what the subject provisions say in relation to the facts of
this appeal.
I. Who
Can Elect?
[21] The first issue is
whether the Appellant is a person that qualifies to make the election to be
deemed to be an NRO in its first non-NRO year. The Respondent says it is not.
[22] Subsection 134.1(1)
provides that the election required to deem a non-NRO to be an NRO must be made
by “a corporation that (a) was a non-resident-owned investment corporation in a
taxation year; (b) is not a non-resident-owned investment corporation in the
following taxation year … ; and (c) elects … to have this section apply”. It
is clear from this language that the corporation that can make the election is the
corporation that lost its status from one year to the next. While the Appellant
seeks to apply the continuity theory to the effect that GA Scottish, as a
continuing entity, is that corporation, the Respondent argues the
Appellant is still not the corporation that was GA Scottish. The
corporation that had NRO status no longer exits as the same entity and
cannot be said to be the corporation that was the NRO before the
amalgamation.
[23] The Respondent’s
view is that applying the continuity theory of a predecessor continuing to
exist within the amalgamated company, in the context of the express language of
subsection 134.1(1), is trying to fit a square peg in a round hole. An
amalgamated corporation comprised of a composite of continuing corporate
personas is not the same corporation as any one of the predecessor corporations.
There is good authority for this position in Pan Ocean Oil Ltd. v. R.
and Dow Chemical Canada Inc. v. R.
[24] Indeed, the
statutory scheme of the Act does seem to adopt this premise. Paragraph
87(2)(a) provides that for the purposes of the Act, the corporation
formed on an amalgamation shall be deemed to be a new corporation. This is
incongruous with the notion that the amalgamated corporation is the same corporation
as any of its predecessors. If it were the same corporation as a predecessor, many
of the amalgamation rules would be redundant.
Of even more importance perhaps in illustrating that the Act intends a
difference between deeming an amalgamated corporation to be a “new corporation”
(as opposed to deeming it to be the “same” corporation as a predecessor
corporation) is found in subsection 87(1.2) where the merged corporation on an
amalgamation of parent and wholly owned subsidiary corporations is deemed to be
the “same” corporation as, and a continuation of, each predecessor corporation
for the purposes of certain provisions of the Act and the Income Tax
Application Rules. That provision arguably evidences Parliament’s intention
that a predecessor and an amalgamated corporation are distinct, different
corporations except for enumerated purposes, which do not include elections
under section 134.1.
[25] Regardless, the Appellant’s
argument gives no relevance to “sameness”. The Appellant’s argument relates to
the continued existence of the predecessor GA Scottish in accordance with the
principles laid down in Black and Decker. Here the Appellant argues that
paragraph 87(2)(a) does not say that predecessor corporations cease to
exit for the purposes of the Act. It says they have a year-end
immediately before the amalgamation. That the amalgamated corporation is a new
corporation does nothing to impact corporate law as set out in Black and
Decker which treats predecessor corporations as continuing. As such, the
creation of a “new” corporation on amalgamation as provided for in paragraph
87(2)(a) has limitations in respect of the consequences that flow from
that creation. Such limitations have been the subject of many cases.
[26] The first limitation
recognized by the Courts was that paragraph 87(2)(a) is simply the mechanical
approach employed to consolidate multiple year ends. It is intended as a means
of starting a new single year for the new consolidated entity and terminating
the current year of each of the predecessor corporations. For the purposes of
the Act it is necessary to determine the commencement of the taxation
year of the corporation formed on the amalgamation and the ending of taxation
years of the predecessor corporations and the deeming of a “new” corporation for
that purpose should not be taken as barring a finding that the law dealing
with the continued existence of predecessor corporations must prevail. The
Appellant cites R. v. Guaranty Properties Ltd. in support of this approach. The
Federal Court of Appeal in that case found that the Act did not negate
the general corporate law principle which recognized the continued existence of
predecessor corporations. The Act only provided for ending the taxation
years of predecessor corporations.
[27] The Appellant went on
to recognize that the subsequent decision of the Federal Court of Appeal in Pan
Ocean qualified that limitation of paragraph 87(2)(a) by finding
that it applied for purposes beyond establishing year ends but was nonetheless
limited in its application to computations of the amalgamated corporation’s
income and where necessary, as a consequence thereof, to its computation of
taxable income.
[28] As well the
Appellant cites Canadian Roxy Petroleum Ltd. v. Alberta. In that case the Court applied the
continuing entity principle to find that an amalgamated corporation was grandfathered
from the application of a new provision even though it was formed after the
grandfathering deadline. Since a predecessor was grandfathered or would have
been but for the amalgamation and since it continued in the form of the
amalgamated corporation, the amalgamated corporation was thereby grandfathered.
The limitation in paragraph 87(2)(a) did not apply as it did not concern
the computation of income or taxable income of the amalgamated corporation. The
amalgamated corporation was treated as though it existed before the
amalgamation which is exactly what the Appellant seeks to have recognized in
the present appeal.
[29] Accepting this
limitation on the notion that the Appellant is a new corporation, deflates the
relevance of the Respondent’s position that the Appellant as a new corporation
cannot be the same corporation that had previously been an NRO. That is, the
fact that GA Scottish and the Appellant are not the same corporation does not
impact the analysis. Clearly there is no authority to suggest that an
amalgamated corporation is the same corporation as any one or more of its
predecessors. The principle applied in Black and Decker, does not suggest
that. At page 417 of that case the Supreme Court of Canada confirms, as a
matter of corporate law, that an amalgamation does not extinguish the existence
of a predecessor. Rather, a predecessor remains in existence. The Court likened
an amalgamation to a river formed by the confluence of two streams or a single
rope made up of intertwining rope with all the strengths and weaknesses of each
component. However, such analogy does not mean it is the same corporation. It
cannot be.
[30] Still, the
Respondent argues that where there are no identifiable intertwining ropes but
rather only an indistinguishable blending of two streams, the finding should be
that the predecessor attributes cannot be attributed to the amalgamated
corporation under the continued existence theory.
[31] It is true that in
some cases it is easy to identify characteristics of a predecessor that are
inheritable or continue to exist without distortion. A liability, as considered
in Black and Decker is the best example. However, where the amalgamation
changes the very character or persona of a predecessor and that essence or
persona is the critical thing that must survive the amalgamation to meet a
particular statutory test it seems to me the Respondent has a good argument.
However, as attractive as that argument may be, it is neither the direction
that corporate law, nor tax law, has taken.
[32] The cases relied on
by the Appellant are reflective of the state of the law. Parliament has watched
how the Courts have limited the application of paragraph 87(2)(a) and
done nothing to give it a fuller life. To say now that reading the Act
as a whole should support the Respondent’s argument that this Court on its own
initiative breathe fresh life into that section is not something I am prepared
to do even though I am of the view that the law as it has evolved has put
limitations on its application that I likely would not have imposed. I say this
as it seems to me, looking at the Act and Regulations as a whole,
that the drafters of the amalgamation provisions of the Act have assumed
that an amalgamation gives rise to a new corporation that has none of the tax impacting
attributes of a predecessor unless they are continued by an express provision
of the Act. This gives Parliament control over the circumstances that
afford an amalgamated corporation the tax treatment afforded a predecessor. Parliament,
or so it seems, wanted to have that control in order to say “no” to the very
situation before me unless it chose to expressly provide otherwise. However, even
though Parliament saw such control slipping away, it did nothing to restore it.
Perhaps that casts doubt on that theory in the first place.
[33] In any event, Parliament
must be presumed to know the law and when it drafts legislation, its impact
under the law must be presumed to be intended. On this basis it is hard to
accept the Respondent’s argument that subsection 134.1(1), which sets out who
can make the subject election, must be given a narrow scope to reflect a narrow
transitional purpose. The section on its face does not preclude the application
of the legal principles established by the cases relied on by the Appellant. Since
the election provided for in section 134.1 does not deal with the calculation
of income or taxable income, the case law is clear. GA Scottish has not ceased
to exist by virtue of the amalgamation. It can make the election in subsection
134.1(1) as the corporation that was an NRO in 1999 and not an NRO in the
following year. It did make the election and is thereby deemed to be an NRO in
the 2000 year. If that opens the door to an unintended tax benefit, Parliament needed
to narrow the application of the rule. It is not for me to correct. I am bound
by the decisions of the higher Courts. I leave it to the Court of Appeal to
recast the limitations currently set out in Pan Ocean should it
see the room and need to do so. I see no ready way to distinguish that case
from the case at bar and I am bound by that authority.
[34] Being satisfied that
the requirements of section 134.1 have been met, a further question has been
suggested; namely, in whose name does the election have to be filed. The
Appellant filed the election in its name. In Witco Chemical Co., Canada v. Oakville (Town) the Supreme Court of Canada clearly
found that a predecessor corporation’s continuance included continuance of its
identity as a juristic person with status to commence an action. That does not
mean that the election had to be filed by GA Scottish in this case. It means
that if it had been filed in that name it would not have invalidated the
election. I do not see the Respondent as having taken serious issue with this. In any event, I find that the
election was properly filed.
II. Is
the Refundable Tax Account Nil?
[35] This takes me to
consider the second issue; namely whether the refundable tax account of the
amalgamated corporation, the Appellant, is nil as asserted by the Respondent.
[36] The transfer of the
allowable refundable tax account of a predecessor corporation to an amalgamated
corporation occurs pursuant to subparagraph 87(2)(cc)(i). That
subparagraph simply adds the predecessor’s account immediately before the
amalgamation to the account of the new corporation if the new corporation is an
NRO. If the Appellant is an NRO, it will have what it asserts it has, namely,
the full amount of GA Scottish’s refundable tax account. The problem here for
the Appellant is that subsection 134.1(2) sets out that the corporation that
lost its NRO status, by virtue of the election is deemed to be an NRO for the
purposes of section 212 and subsections 133(6) to (9) excluding the definition
of NRO in subsection 133(8). No mention is made of subparagraph 87(2)(cc)(i).
[37] The Appellant argues
that the deeming provision in subsection 134.1(2) is sufficient to allow the
transfer of the refundable tax account on an amalgamation. The deeming
provision is expressly said to apply for the purposes of subsections 133(6) to
(9) in respect of dividends paid. Subsection 133(9) defines the refundable tax
account. If the Appellant is deemed to be an NRO for the purpose of applying
the definition of the subject account, then that must include acknowledging
that status in respect of related provisions that prescribe how that account is
calculated. In this sense the Appellant’s counsel refers to paragraph 87(2)(cc)
as a supporting rule. Further, by invoking the general rules relating to
allowable refunds in subsections 133(6) to (9), subsection 134.1(2) must be
taken as invoking a supporting rule that, in the case of amalgamations, itself
refers to subsection 133(9). Its supporting role in the case of amalgamation is
expressly stated in subparagraph 87(2)(cc)(i) which reads as follows:
87(2) Where there has been an
amalgamation of two or more corporations after 1971 the following rules apply:
(cc) in the case of a new
corporation that is a non-resident- owned investment corporation,
(i) for the purpose of computing its
allowable refundable tax on hand (within the meaning assigned by subsection
133(9)) at any time, where a predecessor corporation had allowable
refundable tax on hand immediately before the amalgamation, the amount thereof
shall be added to the total determined for A in the definition “allowable
refundable tax on hand” in subsection 133(9),
…
[Emphasis
added.]
[38] The Appellant argues
that deeming the amalgamated corporation to be an NRO for the purposes of
paragraph 87(2)(cc) is a logical and necessary extension of deeming the
amalgamated corporation to be an NRO for the purpose of paragraph 133(9). Such
extension is not expressly precluded by section 134.1 or by section 87. To take
these provisions as expressly precluding such a finding would be to read words
into the Act that are not there. I am cautioned not to read in words to
subparagraph 87(2)(cc)(i) or subsection 134.1(2) that would exclude
their interdependency. Section 134.1 operates in respect of dividends paid to
shareholders that are NROs for the purpose of allowing refunds to avoid double
tax and it must be allowed to operate to give effect to that purpose in the
case at bar.
[39] The Appellant’s
arguments all hinge on this last premise: section 134.1 is intended to, or
should be construed so as to, relieve double tax in all cases where it can achieve
that result without tax slippage or offence to the overall tax regime governing
NROs. Section 134.1 opens the door to an equitable resolution of an inequitable
double tax problem. I am put upon to construct the subject provisions to ensure
that opening. With a certain ironic twist, the Appellant even asks: What is the
point of allowing the deeming provision to apply (by allowing the election) and
then give no benefit to that allowance? Considering that I have concluded that
it is unlikely that Parliament intended that amalgamated corporations would be
eligible to make that election as a result of the amalgamation, it is no
surprise to me that there is no allowance in section 134.1 for the flow-through
of a predecessor’s allowable refundable tax account.
[40] Indeed, it is on
this basis that the Respondent takes the position that the Appellant’s
allowable refundable tax account is nil. The Respondent’s position is that
subsection 134.1(2) sets out that the corporation that lost its NRO status is
deemed to be an NRO only for the purposes of section 212 and subsections
133(6) to (9) excluding the definition of NRO in subsection 133(8). No mention
is made of subparagraph 87(2)(cc)(i) because Parliament did not envision
or intend that section 134.1 would deem a non-NRO to be an NRO for the purpose
of allowing a flow-through of a predecessor’s allowable refundable tax account
where the normal requirements for that to occur have not been met. Accordingly,
an amalgamated corporation that has lost its NRO status as a result of the
amalgamation is simply not deemed by section 134.1 to be an NRO for the
purposes of section 87. This is entirely consistent with the tax treatment of
NROs where there has been an amalgamation. As noted above, the post-amble to
the definition of NRO in subsection 133(8) provides that “in no case shall a
new corporation (within the meaning assigned by section 87) formed as a result
of an amalgamation after June 18, 1971 of two or more predecessor corporations be
regarded as a non-resident-owned investment corporation unless each of the
predecessor corporations was, immediately before the amalgamation, a non-resident-owned
investment corporation”. There
is no basis to expand the scope of the deeming provision, where to do so goes
well beyond its phasing out purpose and opens a door that Parliament clearly
had intentionally shut.
[41] I agree with the
Respondent’s position on this issue. I cannot see how the deeming provision in
subsection 134.1(2) can possibly result in GA Scottish’s allowable refundable
tax being added to the Appellant’s account on the basis that it is a supporting
rule.
[42] Turning back to the
continuance theory should assist keeping matters in perspective. The Appellant cannot
say that the continuance of GA Scottish means it survives within the Appellant
so as to make the Appellant an NRO. It is admitted that the Appellant is not an
NRO. Further, none of the continuance cases support the view that the
amalgamated company is the predecessor. The new corporation formed on the
amalgamation is manifestly not the predecessor regardless of corporate law
principles. The Appellant is not GA Scottish. It does not have that which the Act
notionally created for GA Scottish. The refundable tax account is not like
land, inventory, contractual rights or goodwill that are property transferred
under corporate law and by the Act under paragraph 87(1)(a) from
a predecessor to the amalgamated corporation. That transfer must be provided for
expressly by the legislation that notionally brought it into being. That has
not been done. The legislative scheme here is clearly not to permit such
transfer. Indeed, to the contrary, the transfer is expressly prohibited in the
circumstances of the case at bar.
[43] The trapping of
refundable tax after amalgamations, equitable or not, is quite intentional
where the predecessor corporations were not all NROs. In these circumstances
the notional account created in subsection 133(9) ceases to exist on an
amalgamation. There must, in my view, be an express provision to bring that
account back to life. Silence as to its resurrection (i.e. the absence of an
express provision in section 134.1 to preclude such resurrection) is not
sufficient. The reference in subsection 134.1(2) to particular subsections of
section 133 is not sufficient to bring life to this expired account. An express
provision would refer to the so called supporting rule directly.
[44] That the Appellant
is deemed to be an NRO without a benefit only underlines that it was not
contemplated by the subject provision to afford a benefit in these
circumstances. As reflected in the Technical Notes, section 134.1 was enacted
as part of the phase-out of the NRO regime in the Act. That phase out is
built into the definition of “NRO” in subsection 133(8) at paragraph (i) which provides as follows”:
(i) subject to section 134.1, a
corporation is not a non-resident-owned investment corporation in any taxation
year that ends after the earlier of,
(i)
the first time, if
any, after February 27, 2000 at which the corporation effects an increase in
capital, and
(ii) the corporation’s last taxation year that
begins before 2003;
[45] The election in
section 134.1 allows for an NRO, that lost its status due to this provision, to
keep its status for the first year following that loss so that its’
allowable refundable tax account, calculated without a supporting rule, can be
cleared. There is nothing in the subject provision that suggests that its’
account must be calculated as if the deeming rule in section 134.1 required the
invocation of a supporting rule.
[46] Accordingly, for
these reasons, the appeal is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 25th day of March, 2008.
"J.E. Hershfield"
APPENDIX A
Court File No.: 2005-1448(IT)G
TAX COURT OF CANADA
BETWEEN:
CGU HOLDINGS CANADA LTD.,
Appellant,
-and-
HER MAJESTY THE QUEEN,
Respondent.
STATEMENT OF AGREED FACTS
The parties to this proceeding admit the
authenticity of the documents referred to herein, true copies of which are
contained in the attached “Joint Book of Documents”.
The parties to this proceeding admit, for the
purposes of this proceeding only, the truth of the following facts:
A. Background
1. On March 2, 1999, the Appellant corporation was
formed on the amalgamation of the following predecessor corporations (the “Amalgamation”)
under section 185 of the Canada Business Corporations
Act (the “CBCA”):
(i)
GA
Scottish Corporation (Canada) Ltd. (“GA Scottish”);
(ii)
Commercial
Union of Canada Holdings Ltd; and
(iii)
General
Accident Holdings (Canada)
Limited.
A copy of the Amalgamation Agreement and the
Certificate of Amalgamation are contained in the Joint Book of Documents at
Tabs 1 and 2.
2. The taxation years of the Appellant’s
predecessor corporations were deemed to have ended immediately before
the Amalgamation.
3. The Appellant’s first taxation year following
the Amalgamation was deemed to have commenced at the time of the
Amalgamation and ended on February 29, 2000 (the “2000 taxation year”).
A copy of the Appellant’s income tax return for the
2000 taxation year is contained in the Joint Book of Documents at Tab 3.
B. GA Scottish’s “Allowable Refundable Tax on Hand”
4. Immediately
before the Amalgamation:
(i)
GA Scottish was a
“non-resident-owned investment corporation” (an “NRO”) within the meaning of
subsection 133(8) of the Income Tax Act (Canada)
(the “Act”); and
(ii)
Commercial Union of
Canada Holdings Ltd. and General Accident Holdings (Canada)
Limited were not NROs within the meaning of subsection 133(8) of the Act.
5. The Appellant did not qualify as an NRO under
subsection 133(8) of the Act following the Amalgamation because not
all of its predecessor corporations were NROs immediately before the
Amalgamation, as required by the postamble to the definition
“non-resident-owned investment corporation” in subsection 133(8) of the
Act, as it read on March 2, 1999 (now paragraph (g) of the definition
“non-resident-owned investment corporation” in subsection 133(8) of the
Act.)
6. Immediately before the Amalgamation, GA
Scottish had (i) an unrefunded balance of $1,265,348 of “allowable
refundable tax on hand” (within the meaning of subsection 133(9) of the
Act) (the “Refundable Tax”), (ii) “cumulative taxable income” (within
the meaning of subsection 133(9) of the Act) of $1,917,233, and (iii) retained
earnings of $1,641,791. The Refundable Tax represents the 25% NRO tax
that GA Scottish had paid in respect of income earned prior to the
Amalgamation.
C. The Section 134.1 Election and Application for
an “Allowable Refund”
7. During its first taxation year following the
Amalgamation, the Appellant paid a “taxable dividend” (within the meaning of
subsection 133(8) of the Act) in the amount of $7,706,000 to a
shareholder that was an NRO. The amount of the dividend was sufficient to
generate a complete refund of the Refundable Tax, provided the Appellant
was otherwise eligible under the Act to recover the Refundable Tax. The
shareholder of the Appellant was required by the Act to pay a 25%
refundable tax in respect of its receipt of the dividend.
See Schedule 26
to the Appellant’s income tax return for its 2000
Taxation year at
Tab 3 of the Joint Book of Documents.
8. The Appellant made a timely election pursuant
to paragraph 134.1(1)(c) of the Act to be deemed to be an NRO for the 2000
taxation year and applied to the Minister of National Revenue (the “Minister)
pursuant to subsection 133(6) of the Act for an “allowable refund” of
the Refundable Tax.
D. The Minister’s Assessment
9.
The Minister assessed
the Appellant in respect of the 2000 taxation year to deny a refund of the
Refundable Tax on the basis that the Appellant did not satisfy the criteria in
paragraph 134.1(1)(a) for making the election. In addition, the Minister has
taken the position that even if the Appellant was entitled to make the
election, the “allowable refund” resulting from the dividend paid by the
Appellant in the 2000 taxation year could not exceed nil.
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