18 October 2012 External T.I. 2012-0436181E5 - Part IV Tax / Denied Dividend Refund

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a dividend-recipient corporation must pay Part IV tax on a dividend from a connected dividend-payer corporation if the dividend refund is not paid by the Minister to the dividend-payer corporation?

Position: Yes.

Reasons: The Law.

XXXXXXXXXX
2012-043618
Marc LeBlond

October 18, 2012

Dear XXXXXXXXXX:

Re: Part IV Tax and the Denial of a Dividend Refund

We are writing in response to your e-mail of January 31, 2012 in which you request our comments in respect of the application of the Part IV tax of the Income Tax Act (hereinafter the “Act”) in the situation described below, considering the recent Tax Court of Canada (hereinafter the “TCC”) decision in Tawa Developments Inc. v The Queen (hereinafter “Tawa”), 2011 DTC 1324.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.

As stated in paragraph 22 of Information Circular 70-6R5, the Income Tax Rulings Directorate only provides written confirmation of the tax consequences arising from a specific proposed transaction by way of an advance income tax ruling. You should also note that the request for a technical interpretation must be handled by Canada Revenue Agency’s (hereinafter the “CRA”) tax services office responsible for a specific taxpayer if the transaction herein described is completed. We are nevertheless prepared to provide you with the following comments, which are not binding on the CRA.

The Situation

1. Parentco owns all the shares of the capital-stock of Aco and Bco. Aco and Bco are “Connected”, as defined under subsection 186(4).

We assume that both Aco and Bco are Canadian-controlled private corporations, as defined under subsection 125(7), and have a “Taxation Year”, as defined under subsection 249(1), ending December 31.

2. In a Particular Taxation Year and as part of a reorganization to which paragraph 55(3)(a) applies, Aco redeems preferred shares of its share capital owned by Bco issuing to Bco as payment a promissory note of $ XXXXXXXXXX (hereinafter the “Aco Note”) and Bco redeems preferred shares of its share capital owned by Aco returning to it as payment the Aco Note which is cancelled (hereinafter the “Cross-Redemptions”). As a result of the Cross-Redemptions of shares, both Aco and Bco are deemed to pay and to receive a dividend of essentially $ XXXXXXXXXX, pursuant to subsection 84(3).

3. In the Particular Taxation Year, Bco earns investment income of approximately $ XXXXXXXXXX.

4. For the purpose of computing Bco’s refundable dividend tax on hand (hereinafter “RDTOH”), as defined under subsection 129(3), at the end of the Particular Taxation Year, the amount of the refundable Part 1 tax paid, under paragraph (a) of the definition of RDTOH, is $ XXXXXXXXXX.

5. As Aco and Bco are Connected to each other and the Cross-Redemptions occur in the same Taxation Year, Bco and Aco determine by successive circular calculations the amounts of their respective Part IV Tax, pursuant to paragraph 186(1)(b), and Dividend Refund, as defined in paragraph 129(1)(a), for the Particular Taxation Year, as well as, the amounts of their respective RDTOH at the end of the Particular Taxation Year.

You describe that the amounts of Aco’s and Bco’s refundable Part I tax, Dividend Refund, Part IV tax and net Part I tax owing for the Particular Taxation Year (assuming that Aco and Bco file their income return (hereinafter “T2”) for the Particular Taxation Year within the time frame specified in subsection 129(1)) are as follows:

Aco Bco
Refundable Part I Tax $ XXXXXXXXXX $ XXXXXXXXXX
Dividend Refund $ XXXXXXXXXX $ XXXXXXXXXX
Part IV Tax Payable $ XXXXXXXXXX $ XXXXXXXXXX
Net Part I Tax Owing $ XXXXXXXXXX $ XXXXXXXXXX

However, Aco misses the filing deadline specified in the preamble of subsection 129(1) for its T2 for the Particular Taxation Year to obtain a Dividend Refund for that year. Consequently, in your view, since Aco and Bco are Connected Part IV tax would not be payable by Bco on any dividend received from Aco if the Dividend Refund is not paid to Aco by the Minister because Aco late-filed its T2 for the Particular Taxation Year.

Your Question and Your Views

Question

You ask if we agree that “…where a payer and a recipient corporation are connected, Part IV tax is not payable by the dividend recipient if the dividend refund is not paid by the Minister to the dividend-payer.”

Your Position is that a dividend-recipient corporation (of a taxable dividend from a Connected dividend-payer corporation) is not liable for Part IV tax, under paragraph 186(1)(b), in respect of the said dividend, if the Connected dividend-payer corporation did not comply with all the conditions in paragraph 129(1)(a).

In short, you believe that Your Position is supported by a textual, contextual and purposive analysis of paragraphs 186(1)(b) and 129(1)(a) as well as by the two reasons given by the TCC in Tawa to find that Tawa’s RDTOH account balance at the end of its 2005 Taxation Year is not reduced by the denied Dividend Refund for its 2004 Taxation Year, which are in your words as follows:

• First, since the taxpayer did not file a return on time, a condition in the preamble to subsection 129(1) was not met. Therefore, subsection 129(1) did not apply at all and the “dividend refund” was indeterminable.
• Second, a “dividend refund” is not a notional amount and cannot be anything other than an amount received by the payer corporation.

Our Comments

The scope of our comments is limited to your question set-out above.

General

Summary of the Tawa Decision

The facts in the Tawa case can be summarized as follows:

During its 2004 taxation year, Tawa received dividends of $ 321,414 from another corporation, which was connected with Tawa in that year, and Tawa paid taxable dividends of $ 321,414 to its shareholders who were not corporations connected to Tawa. In filing its 2004 T2, Tawa reported a Part IV tax liability of $ 107,138 arising from the receipt of the dividends from the other corporation and claimed a Dividend Refund of $ 107,138 in respect of the dividends paid to its non corporate shareholders. Tawa filed its 2004 T2 after the time frame specified in the preamble of subsection 129(1) to obtain a Dividend Refund. As a result, the Minister denied Tawa’s Dividend Refund and assessed Tawa as having an outstanding Part IV tax liability in respect of the dividends it received from the other corporation. For Tawa's 2005 Taxation Year, the Minister reduced Tawa’s RDTOH account balance by the amount of the denied Dividend Refund.

The TCC described the two issues in Tawa in paragraph 2, restated the second issue in paragraph 27 and reframed this issue in paragraph 28 as follows:

[2] The issue is whether the Minister of National Revenue (the “Minister”) erred when he denied a dividend refund under subsection 129(1) of the Income Tax Act (Canada) (the “Act”) with respect to the 2004 taxation year and reduced the Appellant's refundable dividend tax on hand (RDTOH) in the circumstances described below.

[27] I now turn to the second issue: whether the Appellant's RDTOH account should be reduced by the amount of the dividend refund that it failed to obtain. The definition of, or formula for determining, a corporation's RDTOH is contained in subsection 129(3). That provision reads as follows: …

[28] The specific issue in this appeal is whether the term "dividend refund" in paragraph 129(3)(d) represents a dividend refund that was actually paid or credited against outstanding taxes, or whether it is a notional amount that arises even where no refund was actually made.

[Emphasis Added]

On the first issue, the TCC found in favor of the Minister because Tawa missed the clear filing deadline set out in the preamble of subsection 129(1) for its 2004 T2 for the Minister to be able to issue to Tawa its Dividend Refund, at paragraph 25, as follows:

[25] The Minister's jurisdiction to issue a refund is governed by subsection 129(1), which makes it a condition that a tax return for the taxation year be filed within three years after the end of that year. The limitation of the Court's jurisdiction was affirmed by the Federal Court of Appeal in the Ottawa Air Cargo case, where the taxpayer was found to have been out of time to apply for a dividend refund. Here, the Appellant missed the required filing deadline, which made the dividend refund provision in subsection 129(1) inoperative in its case and the refund unobtainable.

[Emphasis Added]

On the second issue, the TCC (in an obiter dictum) disagreed with the Minister finding that the balance of Tawa’s RDTOH account at the end of its 2005 taxation year is not reduced by the denied Dividend Refund of $107,138 for its 2004 taxation year (hereinafter the “TCC’s Obiter”) firstly because Tawa did not benefit from a Dividend Refund (when the ordinary meaning of “refund” clearly suggests getting a benefit) such Dividend Refund being indeterminable (as paragraph 129(1)(a) does not come into play (is inoperative)) because the condition in the preamble to subsection 129(1) is not met and secondly, because it found that the Minister’s position is not supportable by a textual, contextual and purposive analysis of section 129, at paragraphs 51 and 52, as follows:

[51] A textual analysis leads to the following conclusions. Because subsection 129(1) contains an unambiguous condition that a tax return be filed within a prescribed time, where that condition is not met subsection 129(1) does not come into play and the dividend refund cannot be determined. The condition contained in the preamble to subsection 129(1) is no different than the remaining conditions contained in that subsection, such as the condition that the corporation be a private corporation and that it has paid a dividend in the taxation year. If those conditions are not met, subsection 129(1) does not come into play either and the “dividend refund” is likewise indeterminable. The ordinary definitions of the word “refund” imply a repayment.

[52] In my opinion, the term “refund” unambiguously evokes the receiving of a benefit. The Respondent's position that an unrefunded “refund” may represent a “deemed” or “notional refund” is not supported by a textual, contextual and purposive analysis of the provision. For these reasons, the Appellant's RDTOH balance is not reduced by the amount of $107,138.

[Emphasis Added]

The Relevant Provisions of the Act

The relevant parts of subsection 129(1) for the purpose of this letter are the following:

Where a return of a corporation's income under this Part for a taxation year is made within 3 years after the end of the year, the Minister

(a) may, on sending the notice of assessment for the year, refund without application an amount (in this Act referred to as its “dividend refund” for the year) equal to the lesser of

(i) 1/3 of all taxable dividends paid by the corporation on shares of its capital stock in the year and at a time when it was a private corporation, and

(ii) its refundable dividend tax on hand at the end of the year; and

[…]

[Emphasis Added]

We would like to point out at the outset that the word “refund” is used twice in paragraph 129(1)(a), once to convey the action verb to “refund” and a second time as part of the label “Dividend Refund” which is given to the amount that may or may not be refunded by the Minister which is defined for the purpose of the Act as the lesser of the two amounts described in subparagraphs 129(1)(a)(i) and (ii). In our opinion, as defined in paragraph 129(1)(a), a Dividend Refund represents nothing else than a notional amount.

The relevant parts of subsection 186(1) for the purpose of this letter are as follows:

Every corporation (in this section referred to as the "particular corporation") that is at any time in a taxation year a private corporation or a subject corporation shall, on or before its balance-due day for the year, pay a tax under this Part for the year equal to the amount, if any, by which the total of

[…]

(b) all amounts, each of which is an amount in respect of an assessable dividend received by the particular corporation in the year from a private corporation or a subject corporation that was a payer corporation connected with the particular corporation, equal to that proportion of the payer corporation's dividend refund (within the meaning assigned by paragraph 129(1)(a)) for its taxation year in which it paid the dividend that

[Emphasis Added]

In our opinion, the mention in paragraph 186(1)(b) of “dividend refund (within the meaning assigned by paragraph 129(1)(a))” clearly refers to a Dividend Refund that is a notional amount.

We would also like to point out that the definition of Dividend Refund in paragraph 129(1)(a) could just as well be in subsection 248(1). If that were the case, the definition of Dividend Refund in subsection 248(1) would read as follows:

248(1) Definitions. In this Act,

“dividend refund”- “dividend refund” to a corporation is an amount equal to the lesser of:

(i) 1/3 of all taxable dividends paid by the corporation on shares of its capital stock in the year and at a time when it was a private corporation, and

(ii) its refundable dividend tax on hand at the end of the year.

Also if the definition of Dividend Refund were in subsection 248(1), paragraph 129(1)(a) would then read as follows:

129(1) Dividend refund to a private corporation

Where a return of a corporation’s income under this Part for a taxation year is made within 3 years after the end of the year, the Minister

(a) may, on sending the notice of assessment for the year, refund without application the corporation’s dividend refund for the year;

[Emphasis Added]

In our opinion, the simple transposition of the definition of Dividend Refund from paragraph 129(1)(a) to subsection 248(1), as described above, demonstrates that the definition of Dividend Refund is a notional amount and that it applies independently of the application of the preamble of subsection 129(1) to, for example in subsection 186(1), the “particular corporation” (the dividend-recipient corporation) and the “payer corporation” (the dividend-payer corporation).

CRA’s Position

CRA’s Positions on whether

(1) The RDTOH account balance of a dividend-payer corporation must be or not be reduced by a Dividend Refund, pursuant to paragraph 129(1)(d) of the definition of RDTOH, when the Minister does not pay to the dividend-payer corporation its Dividend Refund; and

(2) A dividend-recipient corporation (of a taxable dividend from a Connected dividend-payer corporation) is or not liable for Part IV tax, pursuant to paragraph 186(1)(b), when the Minister does not pay to the dividend-payer corporation its Dividend Refund amount, are described, among others, in CRA documents 2004-009861 (dated December 1, 2004) and 58226 (dated June 23, 1989), respectively. The relevant parts of both of these documents are reproduced below.

CRA document 2004-009861

The term "dividend refund" is defined by paragraph 129(1)(a) for the purposes of the Act as being the lesser of the two amounts described in subparagraphs 129(1)(a)(i) and (ii). In our view, such lesser amount would reduce the payer corporation's RDTOH pursuant to paragraph 129(3)(d) because it would still be considered to be a dividend refund whether or not it is actually received by that corporation. Moreover, if a payer corporation's RDTOH was not reduced in circumstances where the payer corporation failed to comply with the provisions of the Act with respect to filing a return of income within the three-year period prescribed by subsection 129(1), the effectiveness of this three-year limitation would be reduced.

[Emphasis Added]

CRA document 58226

We agree that the above provision [paragraph 129(1)(a)] does not impose upon the Minister the requirement to pay a dividend refund as defined under paragraph 129(1)(a) of the Act. However, it is our view that by definition, a dividend refund arises when a private corporation (as defined by paragraph 89(1)(f) of the Act) has paid a taxable dividend in a taxation year, and at the end of that year, has RDTOH. Consequently, whether or not the Minister refunds the lesser of the two amounts referred to in paragraph 129(1)(a) of the Act, the holding company [the Connected dividend-recipient corporation] referred to in your letter would, in our view, be subject to Part IV tax pursuant to paragraph 186(1)(b) of the Act on the amount of the dividend it would be deemed by paragraph 84(3)(b) of the Act to have received from the CCPC as a result of the redemption by the CCPC of its shares, as described above.

[Emphasis Added]

Answer to Your Question

We do not agree with Your Position for two reasons.

The first reason we disagree with Your Position is that to support it you rely on the TCC’s Obiter in Tawa when the issue you raise (whether or not a corporation, which receives a dividend from a Connected corporation, is liable to pay Part IV tax in respect of the said dividend when the dividend-payer corporation is entitled to a Dividend Refund but the Minister does not pay it to the dividend-payer corporation) was not considered by the TCC in Tawa and, as far as we know, in any other TCC decision or by any other Canadian court.

Secondly, we do not agree with the TCC’s Obiter in Tawa based on the following observations.

With all due respect to the TCC, we believe it erred in law in finding as reasons for not reducing the balance of Tawa’s RDTOH at the end of its 2005 taxation year by the amount of the denied Dividend Refund for its 2004 taxation year (the TCC’s Obiter) that:

(i) Tawa did not benefit from a Dividend Refund and that to have a Dividend Refund, Tawa would have had to get the benefit of a Dividend Refund based on the ordinary meaning of the word “refund” which clearly suggests getting a benefit;

(ii) In any case, Tawa could not get a Dividend Refund as defined under paragraph 129(1)(a) since this definition did not come into play as it was inoperative because Tawa did not meet the condition in the preamble to subsection 129(1); and,

(iii) CRA’s Position is not supportable by a textual, contextual and purposive analysis of section 129.

Ordinary Meaning of Refund versus Statutory Definition of Dividend Refund

In our opinion, the TCC made a mistake in interpreting the expression Dividend Refund in paragraph 129(3)(d) of the definition of RDTOH by focusing on the word “refund” in the expression Dividend Refund in that paragraph and interpreting it literally according to its ordinary meaning instead of using the definition of Dividend Refund provided under paragraph 129(1)(a). Our position is based on the following observations.

The TCC acknowledges, albeit indirectly, that paragraph 129(1)(a) provides a definition of Dividend Refund in paragraph 29 of the Tawa decision, as follows:

[29] The Act provides no definition of “dividend refund” other than that contained in paragraph 129(1)(a) which states that it is an
“amount … equal to the lesser of” two figures, …

[Emphasis Added]

It is trite law that when a word or a phrase is defined in a statute that the statutory definition overrides its ordinary meaning. In this regard, as an example, in the Federal Court of Canada, Trial Division decision Arthur John Androwich v. H.M.Q., 90 DTC 6084 (upheld by the Federal Court of Appeal, 93 DTC 5275), the court stated that:

Where a term is defined in a particular statute, as "earned income" is defined in the ITA, that definition prevails over its ordinary or dictionary definition (The Interpretation Act, R.S.C. 1985 c. I-21 s. 15(1)).

We believe that finding as a reason for the TCC’s Obiter that Tawa did not benefit from the denied Dividend Refund is also flawed because it amounts to interpreting paragraph 129(3)(d) of the definition of RDTOH as if the expression Dividend Refund in that paragraph was followed by the word “made” or “refunded”.

The Supreme Court of Canada disagrees with an interpretation of a provision of a statute which requires the insertion of extra wording as it stated in Friesen v. Canada, [1995] 3 S.C.R. 103, at page 121:

It is a basic principle of statutory interpretation that the court should not accept an interpretation which requires the insertion of extra
wording where there is another acceptable interpretation which does not require any additional wording ...

[Emphasis Added]

The Interaction Between the Preamble to Subsection 129(1) and the Definition of Dividend Refund in Paragraph 129(1)(a)

We respectfully disagree with the TCC’s finding that the definition of Dividend Refund under paragraph 129(1)(a) is inoperative when the filing deadline in the preamble to subsection 129(1) is not met. In our opinion, the better view is that the definition of Dividend Refund under paragraph 129(1)(a) can apply independently of the preamble to subsection 129(1). Our position is based on the following observations.

In general, we agree with the comment made by the TCC in the Tawa decision (at paragraph 20) to the effect that if a condition in a provision is not met the provision may not be applicable to a taxpayer. However, we believe that this comment does not support the TCC’s argument to the effect that the definition of Dividend Refund in paragraph 129(1)(a) is useful only if the Dividend Refund is actually refunded to the taxpayer.

Indeed, in our opinion, a definition provided for in the Act, no matter where in the Act (may it be, for example, in a standalone section of the Act or, like in the case of the definition of Dividend Refund, inserted among other things in paragraph 129(1)(a)), is a definition which applies according to the scope provided in the provision in which it is defined. In the case of the definition of Dividend Refund, in paragraph 129(1)(a), it applies for the purpose of the Act. Hence, it applies for example for the purpose of applying and interpreting provisions of the Act which refer to Dividend Refund such as, to name a few, paragraphs 129(3)(d), 157(3)(b) and 186(1)(b).

A number of provisions in the Act (such as paragraphs 157(3)(b) and 157(3.1)(b)) apply to a taxpayer’s taxation year taking into account its Dividend Refund for that year. Therefore, when applying these provisions for a taxation year, the filing deadline in the preamble of subsection 129(1) is irrelevant as they apply before the taxpayer actually files its T2 for the year of the Dividend Refund.

Moreover, paragraph 186(1)(b) provides that a particular dividend-recipient corporation that receives a taxable dividend in a taxation year from a payer corporation connected to it must pay a Part IV tax equal to the payer corporation’s Dividend Refund “within the meaning assigned by paragraph 129(1)(a)”. In our opinion, paragraph 186(1)(b) clearly refers to the dividend-payer corporation’s Dividend Refund (that is a notional amount) as defined in paragraph 129(1)(a) irrespective of whether or not the Dividend Refund is refunded to the payer corporation as this position ensures that the particular dividend-recipient corporation can comply with its obligation to pay its Part IV tax before its balance-due-day for the year it received the dividend. It would be absurd for paragraph 186(1)(b) to require the particular dividend-recipient corporation to wait to pay its Part IV tax until the Dividend Refund is actually refunded to the payer corporation because the particular corporation could end up paying its Part IV tax late through no fault of its own as the payer corporation has three years to file its T2 for its taxation year for which it has a Dividend Refund.

In the Federal Court of Appeal decision H.M.Q. v. Cascades Inc. (hereinafter “Cascades”), 2009 DTC 5139, Justice Nadon (Blais and Pelletier, JJ.A. concurring) concluded that the TCC judge misinterpreted paragraph 40(3.5)(c) by not applying it because the conditions in its opening phrase had not been met, as follows:

[27] On the basis of the phrase “where subsections 40(3.3) and 40(3.4) apply” in paragraph 40(3.5)(c), Justice Lamarre concluded that the three conditions of subsection 40(3.3) had to be met before paragraph 40(3.5)(c) could apply. With respect, I am of the opinion that the judge misinterpreted the text of paragraph 40(3.5)(c). In my view, that paragraph does not require that the three conditions of subsection 40(3.3) be met before the presumption within may apply. If Parliament had intended to give paragraph 40(3.5)(c) the meaning the judge attributes to it, the paragraph could have been written as follows, with a comma, in particular: “where subsections 40(3.3) and 40(3.4) apply, and where there is a disposition by a transferor of a share …”.

[Emphasis Added]

In our opinion, by analogy to the reasoning in Cascades, it could be argued that it is a mistake to interpret the filing deadline in the preamble of subsection 129(1) as having to be met for the definition of Dividend Refund in paragraph 129(1)(a) to apply and that the correct interpretation is that the definition of Dividend Refund in paragraph 129(1)(a) applies independently of the preamble of subsection 129(1).

The Textual, Contextual and Purposive Interpretation of Subsection 129(1) and of Paragraph 129(3)(d) of the definition of RDTOH

We respectfully disagree with the TCC’s view that a textual, contextual and purposive analysis of section 129 does not support CRA’s Position that the balance of a corporation’s RDTOH is reduced by the notional amount that is the lesser of the two amounts under subparagraphs 129(1)(a)(i) and (ii) (in the Act, the amount referred to as the Dividend Refund) regardless of whether or not the corporation filed its T2 for the Taxation Year of the Dividend Refund on time and/or benefited from the Dividend Refund. Our conclusion is based on the following observations.

The Supreme Court of Canada said, in paragraph 10 of the decision Canada Trustco Mortgage Co. v. Canada, 2005 DTC 5523, (which the TCC cited in the Tawa decision at paragraphs 31 and 32), that: “When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process.”

As mentioned above, we believe that in its textual, contextual and purposive analysis of paragraph 129(3)(d) of the definition of RDTOH the TCC wrongly used to interpret Dividend Refund the ordinary meaning of the word “refund” instead of the precise and unequivocal meaning of the expression Dividend Refund under paragraph 129(1)(a).

In our opinion, a textual and contextual analysis of subsection 129(1) and of paragraph 129(3)(d) of the definition of RDTOH clearly supports CRA’s Position when giving a dominant role to the precise and unequivocal statutory definition of Dividend Refund under paragraph 129(1)(a) and given that the definition of Dividend Refund can operate independently from the preamble of subsection 129(1), for the purpose of the Act.

It is also our view that a purposive analysis of subsection 129(1) and of the reduction of the RDTOH account under paragraph 129(3)(d) of the definition of RDTOH also supports CRA’s Position.

In our opinion, there are two purposes for subsection 129(1) and for paragraph 129(3)(d) of the definition of RDTOH.

One of these purposes (mentioned by the TCC in Tawa) is to play a role in achieving the integration of individual and corporate taxation.

The other purpose is to induce compliance with the Act under the threat of the imposition of a penalty, i.e. that a dividend payer files its T2 return for a taxation year of a Dividend Refund within the given time frame in the preamble of subsection 129(1) otherwise the Minister does not refund the Dividend Refund and the RDTOH account is reduced by the amount of the un-refunded Dividend Refund. In effect, the crown may confiscate a Dividend Refund.

The punitive nature of subsection 129(1) and paragraph 129(3)(d) of the definition of RDTOH is similar to that of subsection 164(1). In the TCC decision Chalifoux v. MNR, 91 DTC 946, Judge Couture characterized the application of subsection 164(1) as a legal confiscation of the taxpayer’s property by the crown, at page 947, as follows:

The application of this section as it was applied by the respondent in the instant case may be assimilated to a sort of confiscation of the appellant's property. Though authorized by the legislation, it relieved nonetheless the appellant of what legally belongs to her, and does so on the sole ground that a relatively short period had elapsed at the time she filed her tax returns claiming a refund of an "overpayment" within the meaning of subsection 164(7), amounts to which she was legally entitled but for section 164.

The punitive purpose of subsection 129(1) and of paragraph 129(3)(d) of the definition of RDTOH of inducing compliance with the Act is apparent when considering the words in and the operation of the preamble of subsection 129(1) and of paragraph 129(3)(d) of the definition of RDTOH.

The preamble of subsection 129(1) informs a dividend payer that the Minister does not have the authority to refund to it its Dividend Refund if its T2 for its Taxation Year of the Dividend Refund is not filed within three years after that Taxation Year. Furthermore, when a dividend payer’s T2 for a Taxation year of a Dividend Refund is late filed, the amount of the denied Dividend Refund effectively becomes crown property by paragraph 129(3)(d) of the definition of RDTOH operating to permanently reduce the dividend payer’s RDTOH by the amount of the denied Dividend Refund.

We believe that this view of the purpose of subsection 129(1) and paragraph 129(3)(d) of the definition of RDTOH is also supported by analogy to the handling of a refund request of income taxes provided under subsection 164(1) which also sets a time frame (similar to the one in the preamble of subsection 129(1)) within which the Minister can refund, among others, a taxpayer’s tax “Overpayment”, as defined under subsection 164(7), and beyond which the tax Overpayment generally becomes crown property.

Subsection 164(1.5) provides further support for RDTOH becoming permanent crown property when the T2 filing deadline in the preamble of subsection 129(1) is not met in that the Act also does not authorize the Minister to refund a tax Overpayment to a corporation beyond the time frame provided for in subsection 164(1) but does so to an individual or testamentary trust, pursuant to subsection 164(1.5).

In our opinion and based on the above observations, a textual, contextual and purposive analysis of subsection 129(1) and paragraph 129(3)(d) supports CRA’s Position that a private corporation that has paid a taxable dividend must reduce its RDTOH account pursuant to paragraph 129(3)(d) by the lesser of the amounts under subparagraph 129(1)(a)(i) and (ii) because this amount is considered a Dividend Refund whether or not the corporation actually received it.

Conclusion

The Rulings Directorate does not agree with your view that, in a situation where a dividend-payer corporation and a dividend-recipient corporation are Connected, Part IV tax is not payable by the dividend-recipient corporation if the Minister does not pay the dividend-payer corporation’s Dividend Refund.

In our view, in the situation described above, the dividend-recipient corporation, Bco, would be liable to pay an approximate amount of Part I tax of $ XXXXXXXXXX (related to its taxable investment income of $ XXXXXXXXXX) and of Part IV tax of $ XXXXXXXXXX for the Particular Taxation Year, and, would be entitled to a Dividend Refund of $ XXXXXXXXXX for that year. Furthermore, at the end of the Particular Taxation Year, Bco would have a balance of RDTOH of $ XXXXXXXXXX.

We trust that our comments will be of assistance.

Yours truly,

Maurice Bisson, CPA, CGA
Manager
Reorganizations Section IV
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch