Date: 20020222
Docket: 2000-1413-IT-G
BETWEEN:
DATACALC RESEARCH CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] This appeal is from an assessment
for the appellant's 1986 taxation year whereby the Minister
of National Revenue denied to the appellant investment tax
credits ("ITCs") in the amount of $665,607 claimed in
its return of income for the 1986 taxation year in respect of
scientific research and experimental development expenditures
("SR & ED") which it incurred in that year.
[2] The parties entered into an agreed
statement of facts as follows.
The Appellant and Respondent hereby agree for the purposes of
this appeal only to the following facts:
1. The
Appellant is a body corporate duly incorporated pursuant to the
laws of the province of British Columbia.
2. The
Appellant, at all material times, carried on a business of
scientific research with particular emphasis on the development
of a high technology rigid disk drive which involved research in
the area of computer hardware and storage devices.
3. The
Appellant was reassessed to tax with respect to its 1985 taxation
year. The Appellant's appeal therefrom was settled in
accordance with the attached Minutes of Settlement.
4. In
conducting its business during its 1986 taxation year, the
Appellant claimed scientific research and experimental
development ("SR & ED") expenditures totalling
$1,901,733.
5. On April
26, 1999 the Appellant filed a tax return for its 1986 taxation
year along with prescribed forms T661 and T2038 containing
prescribed information. On the form T661, the Appellant reported
the $1,901,733 of SR & ED expenditures incurred by it in its
1986 taxation year. On the form T2038, the Appellant claimed
investment tax credits ("ITCs") of $665,008 on the
SR & ED expenditures incurred in its 1986 taxation year, and a
refundable ITC of $665,607.
6. On June 18,
1999 the Minister of National Revenue (the "Minister")
issued a Notice of Assessment denying the Appellant's ITCs
for its 1986 taxation year on the basis that "qualified
expenditures must be identified on or before the due date for
filing the tax return for the subsequent taxation year". The
said assessment also states that the Appellant's "net
loss" for income tax purposes had been revised from $508,461
to $2,405,440 and that the difference of $1,896,979 represented
the total SR & ED expenditures for the year that were allowed
as a current year business expense instead.
7. The
Appellant, on September 15, 1999, duly filed a Notice of
Objection pursuant to subsection 165(1) of the Income Tax
Act (the "Act") to the said Notice of Assessment
and on March 9, 2000 the Minister confirmed the Notice of
Assessment by Notice of Confirmation on the basis that the
Appellant did not comply with filing deadlines specified in
subsection 127(9) of the Act.
8. The
Appellant duly appealed to this Honourable Court pursuant to
sections 169, 152(1), 1(b) and (1.2) of the Act.
[3] With respect to the settlement of
the 1985 assessment referred to in paragraph 3 of the agreed
statement of facts I have not reproduced the minutes of
settlement because neither counsel was able to tell me what the
relevance of that settlement was.
[4] There appears to be no issue that
this amount was incurred and the Minister seems to have
implicitly accepted that it was SR & ED although no audit was
performed. The sole basis of the denial of the ITCs is that the
claim was made too late. The appellant filed its 1986 return in
April 1999 along with the prescribed forms (T-661 and
T-2038).
[5] A memorandum attached to the
notice of assessment explaining the assessing action reads.
Your request for Scientific Research and Experimental
Development (SR & ED) expenditures and/or Investment Tax
Credits for September 30, 1986 has been denied as based on
current legislation, qualified expenditures must be identified on
or before the due date for filing the tax return for the
subsequent taxation year.
Net Loss for income tax purposes has been revised from
$508,461.00 to $2,405,440.00. The difference of $1,896,979.00
represents the total current SR & ED expenditures for the year
that we have allowed as a current year business expense
instead.
[6] Virtually all of the $1,901,733
claimed as SR & ED ($1,896,979) was current. $4,754 was in
respect of capital expenditures.
[7] Before I deal with the main point
of the appeal several preliminary points should be disposed of.
Counsel for both parties agree that since this is an appeal from
a determination of the amount of the refundable investment tax
credits ("RITCs") the appellant has a right to appeal
to this court from that determination. Since the matter is not in
dispute I shall not elaborate beyond noting that the point is
succinctly covered in the judgment of Rip J. in Martens
v. M.N.R., 88 DTC 1382. I am in respectful
agreement with his reasoning.
[8] Second, the respondent for the
first time in this court relies on subsection 164(1) of the
Income Tax Act. The opening words of that subsection and
paragraphs (a) and (b) read
If the return of a taxpayer's income for a taxation year
has been made within 3 years from the end of the year, the
Minister
(a) may ...
and
(b) shall
...
There follow in these two paragraphs detailed provisions
concerning the Minister's duties with respect to refunds. The
respondent contends that since the 1986 return was filed about
12 years after the end of the 1986 taxation year the
Minister has no obligation to refund any ITC.
[9] Subsection 164(1) has nothing
to do with this court's duties on an appeal from an
assessment or a determination in which it must consider the
correctness of the determination or assessment nor does it
impinge in any way upon a taxpayer's statutory right of
appeal. Where the court has referred an assessment back for
reconsideration and reassessment or varied or vacated an
assessment the Minister's obligation with respect to refunds
arises from subsection 164(4.1). The correctness of this
position can be tested if we consider the case where a taxpayer
filed a return, five years late, or filed no return, and the
Minister assessed tax. If the Crown's reasoning under
subsection 164(1) were correct it would mean that the
taxpayer could not object to or appeal from the assessment
because the Minister would have no obligation to refund any
overpayment of tax resulting from a successful objection or
appeal. When stated the proposition defeats itself.
[10] The third preliminary point — and
perhaps it is too obvious to warrant mention — is there is
no equitable doctrine of laches in the Income Tax Act. The
Act contains a plethora of time limits that must be
observed — a time to file, a time to elect, a time to
assess, a time to object, a time to appeal[1] — the list goes on and on.
Where there is no time limit specified for doing an act the fact
that what might seem an inordinate delay has occurred is no
obstacle to a taxpayer's right to do it. I see no reason that
would justify the court's supplementing the overwhelming list
of time limits in the Act by introducing the somewhat
imprecise time limits embodied in the equitable doctrine of
laches.
[11] Fourth, the appellant says the Minister
has the onus of proof of showing that the expenses were not
SR & ED because he did not perform an audit and therefore did
not "assume" that they were not SR & ED. The Minister
performed no audit because the return and prescribed forms were
filed many years after the time the Minister believed they should
have been. His view was obviously that it did not matter what the
expenditures were because he believed the technical requirements
of claiming them as SR & ED and of claiming RITCs in respect of
them had not been met.
[12] If the nature of the expenditures were
in issue I would not have cast the onus on the Minister in these
circumstances. To do so would be to take the rule in M.N.R. v.
Pillsbury Holdings Ltd, [1965] 1 Ex.C.R. 676, as
discussed in Kit-Win Holdings (1973) Limited v. The Queen,
81 DTC 5030, far beyond its ratio decidendi. See
The Cadillac Fairview Corporation Limited v. The Queen,
97 DTC 405 at page 407 footnote 2.
[13] I come now to the main point of the
appeal. The respondent's position is that the appellant's
claim for RITCs fails because it is out of time. Specifically, it
fails because the prescribed form claiming the RITCs was not
filed within the time limits prescribed by the Income Tax
Act. The appellant says the time limits upon which the Crown
relies are either inapplicable or invalid. To appreciate the
force of these opposing arguments will require a review of the
legislation relating to RITCs.
[14] We start with section 37 of the
Income Tax Act which permits the deduction under specific
circumstances of SR & ED expenditures, as defined. I shall
assume for the purposes of these reasons that the expenditures
involved here were incurred in 1986 and fell within the
definition of SR & ED.
[15] Such expenditures qualify for ITCs
under section 127 and specifically under the definition of
ITC in subsection 127(9). However section 127.1 creates
an additional benefit for a qualifying corporation (essentially a
Canadian-controlled private corporation whose business income in
the preceding year did not exceed $200,000). The appellant was
such a corporation. Subsection 127.1 permitted a qualifying
corporation to include in the computation of its RITCs 40% of the
unclaimed balance of the ITCs earned in the current year.
Moreover, a qualifying corporation may be refunded any portion of
the unclaimed balance of the ITCs earned in the year of its
current SR & ED at a rate of 35%.
[16] ITC is defined in
subsection 127(9) in part as follows (I am quoting from the
Income Tax Act as it read in 1987).
"investment tax credit" of a taxpayer at the end of
a taxation year means the amount, if any, by which the aggregate
of
(a) the
aggregate of all amounts each of which is the specified
percentage of
...
(ii) a qualified
expenditure made by him in the year,
...
(e) the
aggregate of all amounts each of which is an amount required by
subsection (10.1) to be added in computing his investment tax
credit at the end of the year or at the end of any of the 7
taxation years immediately preceding or the 3 taxation years
immediately following the year.
[17] The portion of section 127.1
creating the right to RITCs that are relevant to this appeal
are:
127.1(1)
Where a taxpayer (other than a person exempt from tax under
section 149) files
(a) with his
return of income (other than a return of income filed under
subsection 70(2) or 104(23), paragraph 128(2)(e) or
subsection 150(4)) under this Part for a taxation year, or
(b) with a
prescribed form[2]
amending a return referred to in paragraph (a)
a prescribed form containing prescribed information, he shall
be deemed to have paid, on the day on which the return referred
to in paragraph (a) or the form referred to in paragraph
(b), as the case may be, is filed, an amount, on account
of his tax under this Part for the year, equal to his refundable
investment tax credit for the year.
(2) In this
section,
...
"refundable investment tax credit" for a taxation
year means,
(a) in the
case of a taxpayer that is
(i) a
qualifying corporation for the year,
(ii) an individual
other than a trust, or
(iii) a trust each
beneficiary of which is a person referred to in subparagraph (i)
or (ii),
an amount equal to 40% of the amount, if any, by which
(iv) the aggregate of all
amounts each of which is an amount included in computing his
investment tax credit at the end of the year
(A) in respect of property
acquired, or an expenditure made (other than a qualified Canadian
exploration expenditure or an expenditure in respect of which an
amount is included under subparagraph (vi) or (b)(ii) in
computing his refundable investment tax credit for the year), by
him in the year and after April 19, 1983 and before 1989,
(B) pursuant to paragraph
(b) of the definition "investment tax credit" in
subsection 127(9) in respect of a property acquired, or an
expenditure made (other than a qualified Canadian exploration
expenditure or an expenditure in respect of which an amount is
included under subparagraph (vi) or (b)(ii) in computing
his refundable investment tax credit for the year), by him in the
year and after April 19, 1983 and before 1989, or
(C) where the taxation
year commences before 1989,
(I) in respect of
his qualified Canadian exploration expenditure for the year,
or
(II) pursuant to
subparagraph (b) of the definition "investment tax
credit" in subsection 127(9) in respect of a qualified
Canadian exploration expenditure for the year,
other than an amount included under subparagraph
(b)(iii)
exceeds
(v) the aggregate
of
(A) such portion of the
aggregate of all amounts each of which is an amount deducted by
him under subsection 127(5) for the year or a preceding taxation
year (other than an amount deemed by subsection (3) to be so
deducted for the year) as may reasonably be considered to be in
respect of the aggregate determined under subparagraph (iv),
and
(B) such portion of the
aggregate of all amounts each of which is an amount required by
subsection 127(6) or (7) to be deducted in computing its
investment tax credit at the end of the year as may reasonably be
considered to be in respect of the aggregate determined under
subparagraph (iv),
plus, in the case of a qualifying corporation for the year,
other than an excluded corporation for the year, the amount, if
any, by which
(vi) the aggregate of
(A) the aggregate of all
amounts each of which is an amount required by subsection
127(10.1) to be added in computing its investment tax credit at
the end of the year in respect of an expenditure, other than an
expenditure of a capital nature, made by it after May 23, 1985
and in the year, and
(B) the aggregate of all
amounts each of which is an amount determined under paragraph
(a) of the definition "investment tax credit" in
subsection 127(9) in respect of an expenditure for which an
amount is included in clause (A)
exceeds
(vii) the aggregate of
(A) such portion of the
aggregate of all amounts each of which is an amount deducted by
it under subsection 127(5) for the year or a preceding taxation
year (other than an amount deemed by subsection (3) to be so
deducted for the year) as may reasonably be considered to be in
respect of the aggregate determined under subparagraph (vi),
and
(B) such portion of the
aggregate of all amounts each of which is an amount required by
subsection 127(6) to be deducted in computing its investment tax
credit at the end of the year as may reasonably be considered to
be in respect of the aggregate determined under subparagraph
(vi), and
(b) in the
case of any other taxpayer, the aggregate of ...
(not applicable)
[18] The two portions of that definition
that the appellant says are of particular significance in this
appeal are clause (a)(iv)(A) and
clause (a)(vi)(A):
(iv) the aggregate of all
amounts each of which is an amount included in computing his
investment tax credit at the end of the year
(A) in respect of property
acquired, or an expenditure made (other than a qualified Canadian
exploration expenditure or an expenditure in respect of which an
amount is included under subparagraph (vi) or (b)(ii) in
computing his refundable investment tax credit for the year), by
him in the year and after April 19, 1983 and before 1989,
...
(vi) the aggregate of
(A) the aggregate of all
amounts each of which is an amount required by subsection
127(10.1) to be added in computing its investment tax credit at
the end of the year in respect of an expenditure, other than an
expenditure of a capital nature, made by it after May 23, 1985
and in the year.
[19] Subsection 127(10.1) read:
For the purposes of paragraph (e) of the definition
"investment tax credit" in subsection (9), where a
taxpayer was throughout its taxation year a Canadian-controlled
private corporation whose taxable income for the immediately
preceding taxation year together with the taxable incomes of all
corporations with which it was associated in the year for their
taxation years ending in the calendar year immediately preceding
the calendar year in which the corporation's year ended does
not exceed the aggregate of the business limits (as determined
under section 125) of the corporation and the associated
corporations for those preceding years, the amount, if any, by
which
(a) 35% of
the lesser of
(i) the
aggregate of all expenditures described in subparagraph
(e)(iv) of the definition "specified percentage"
in subsection (9) made by it in the year and that were designated
by the taxpayer in its return of income under this Part for the
year, and
(ii) the
taxpayer's expenditure limit for the year
exceeds
(b) the
aggregate of all amounts determined under paragraph (a) of
the definition "investment tax credit" in subsection
(9) in respect of an expenditure referred to in subparagraph
(a)(i)
shall be added in computing the taxpayer's investment tax
credit at the end of the taxation year.
[20] The definition of "qualified
expenditure" in subsection 127(9) read in 1987 as
follows:
"qualified expenditure" means an expenditure in respect
of scientific research and experimental development made by a
taxpayer after March 31, 1977 that qualifies as an expenditure
described in paragraph 37(1)(a) or subparagraph
37(1)(b)(i), but does not include
(a) a
prescribed expenditure, nor
(b) in the
case of a taxpayer that is a corporation, an expenditure
specified by the taxpayer for the purposes of clause
194(2)(a)(ii)(A).
[21] That definition was amended in 1994 by
S.C. 1994 C. 21 ("the 1994 amending act"),
subsection 61(1) which read.
The definition "qualified expenditure" in subsection
127(9) of the Act is amended by striking out the word
"nor" at the end of paragraph (a), by adding the
word "or" at the end of paragraph (b) and by
adding the following after paragraph (b):
(c) subject
to subsection (11.4), an expenditure in respect of which the
taxpayer does not, by the day on or before which the
taxpayer's return of income under this Part for the
taxpayer's taxation year after that in which the expenditure
was incurred is required to be filed, or would be required to be
filed if tax under this Part were payable by the taxpayer for
that following year, file with the Minister a prescribed form
containing prescribed information.
[22] The 1994 amending act was assented to
on June 15, 1994. The prescribed form referred to in the
amendment was T-661.
[23] Subsection 61(5) of the 1994
amending act read as follows.
(5) Subsections (1)
and (4) apply after February 21, 1994 to expenditures incurred at
any time except that, for an expenditure incurred by a taxpayer
in a taxation year ending before February 22, 1994, the taxpayer
may file the prescribed form referred to in paragraph (c)
of the definition "qualified expenditure" in subsection
127(9) of the Act, as enacted by subsection (1), by the later of
the day referred to in that paragraph and the day that is 90 days
after this Act is assented to.
[24] By S.C. 1996 C. 21 ("the
1996 amending act") subsection 30(10) the definition of
"qualified expenditure" was replaced.
Subsection 30(10) of the amending act read as follows.
The definition "qualified expenditure" in subsection
127(9) of the Act is replaced by the following:
"qualified expenditure" incurred by a taxpayer in a
taxation year means
(a) an amount
that is an expenditure incurred in the year by the taxpayer in
respect of scientific research and experimental development that
is an expenditure
(i) for the
first term shared-use-equipment or second term
shared-use-equipment,
(ii) described in
paragraph 37(1)(a), or
(iii) described in
subparagraph 37(1)(b)(i), or
(b) a
prescribed proxy amount of the taxpayer for the year (which, for
the purpose of paragraph (e), is deemed to be an amount
incurred in the year),
but does not include
...
(e) subject
to subsection (11.4), an amount in respect of which the taxpayer
does not file with the Minister a prescribed form containing
prescribed information on or before the day that is 12 months
after the taxpayer's filing-due date for the particular
taxation year in which the amount would have been incurred in
this Act were read without reference to subsections (26) and
78(4) where the particular year begins after 1995.
[25] Subsection 30(26) of the 1996
amending act read
Subsections (1) to (3) and (5) to (23), subsections 127(11.4) and
(11.5) of the Act, as enacted by subsection (24), and subsections
127(13) to (25) of the Act, as enacted by subsection (25), apply
to taxation years that begin after 1995.
[26] Again, the prescribed form in
paragraph (e) of the new definition of qualified
expenditure was form T-661.
[27] Finally, S.C. 1998 C. 19
("the 1998 amending act") was enacted. It did a number
of things.
[28] First, by subsection 33(2) it
replaced paragraphs (e) to (g) of the
definition of qualified expenditure in subsection 127(9) by
paragraphs (f) and (g) which are not germane
to the present enquiry. Effectively it removed from the
definition of qualified expenditure the requirement for filing
the prescribed form (T-661) setting out the SR & ED expenditure
within one year of the taxpayer's filing-due date that had
been introduced in the 1994 amendment and continued in the 1996
amendment.
[29] Second, under the 1998 amending act the
requirement for filing the prescribed form was put into the
definition of "investment tax credit". Section 33
of the amending act read in part:
(1) The portion of
the definition "investment tax credit" in subsection
127(9) of the Act after paragraph (k) is replaced by the
following:
except that no amount shall be included in the total
determined under any of paragraphs (a) to (e.2) in
respect of an outlay, expense or expenditure that would, if this
Act were read without reference to subsections (26) and 78(4), be
made or incurred by the taxpayer in the course of earning income
in a particular taxation year, and no amount shall be added under
paragraph (b) in computing the taxpayer's investment
tax credit at the end of a particular taxation year in respect of
an outlay, expense or expenditure made or incurred by a trust or
a partnership in the course of earning income, if
(l) any
of the income is exempt income, or
(m) the taxpayer
does not file with the Minister a prescribed form containing
prescribed information in respect of the amount on or before the
day that is one year after the taxpayer's filing-due date for
the particular year.
...
(6) Subsection (1)
applies to all taxation years except that, if the taxpayer's
filing-due date for the year is before June 1996, the taxpayer
may file the prescribed form referred to in paragraph (m)
of the definition "investment tax credit" in subsection
127(9) of the Act, as enacted by subsection (1), before June
1997, and, for the purposes of this subsection and subsection
(1), the definition "filing-due date" in subsection
248(1) of the Act applies to all taxation years.
(7) Subsections (2)
and (3) apply to taxation years that begin after 1995.
[30] Subsection 33(2) of the 1998
amending act, referred to in subsection (7) was the
provision that in effect repealed paragraph (e) of
the definition of "qualified expenditure". That repeal
was effective for taxation years that begin after 1995, but the
revival of the requirement for the filing of a prescribed form in
the definition of ITC applied to all taxation years, with the
qualification that if the taxpayer's filing-due date was
before June 1996 the taxpayer was permitted to file the
prescribed form before June 1997.
[31] The definition of filing-due date was
added to section 248 in 1996. It reads
"filing-due date" for a taxation year of a taxpayer
means the day on or before which the taxpayer's return of
income under Part I for the year is required to be filed or would
be required to be filed if tax under that Part were payable by
the taxpayer for the year.
[32] Counsel for the appellant observed that
the deadline of June 1997 for filing by a taxpayer whose
filing-due date was before June 1996 was created by a statute
that was not assented to until June 18, 1998.
[33] I shall try to summarize these
provisions.
[34] In 1986 subsection 127.1 allowed a
taxpayer to claim RITCs if it filed with its return of income a
prescribed form with prescribed information (T-661). At that time
there was no time limit imposed on the taxpayer with respect to
the filing of the prescribed form. All that was required was that
the prescribed form be filed with the return of income for the
year or with a prescribed form amending a return. In computing
the RITCs under subsection 127.1 there were to be included
among other things:
(a)
Clause (a)(iv)(A). The amount included in computing
its ITCs in respect of property acquired or expenditure made
between April 19, 1983 and before 1989 (other than the
amounts included in computing RITCs under paragraph (vi)).
This amount must be a "qualified expenditure".
(b) Clause (a)(vi)(A).
Amounts included under subsection 127(10.1) (additional
ITCs). These are current SR & ED expenditures. Counsel for the
appellant argued that this provision did not require that the
expenditure be a qualified expenditure.
[35] Subsection 127(10.1) incorporates
by reference expenditures described in
subparagraph (e)(iv) of the definition of
"specified percentage" in subsection 127(9).
[36] The definition of "specified
percentage" in subsection 127(9) read in 1987 in
part
"specified percentage means"
...
(e) in
respect of a qualified expenditure
...
(iv) made by a taxpayer in
his 1985 taxation year or a subsequent taxation year, other than
a qualified expenditure in respect of which subparagraph (ii) is
applicable, in respect of scientific research and experimental
development to be carried out in
(A) the Province of
Newfoundland, Prince Edward Island, Nova Scotia or New Brunswick
or in the Gaspé Peninsula, 30%, and
(B) any other area in
Canada, 20%.
[37] I am, respectfully, unable to agree
that the definition of specified percentage and therefore the
amount includible under subsection 127(10.1) and the amount
to be included in a taxpayer's RITCs under the definition of
RITCs in clause (a)(vi)(A) of the definition do not
require that the expenditure be a qualified expenditure.
Subparagraph (e)(iv) of the definition of specified
percentage deals only with qualified expenditures. I do not think
that one can look at subparagraph (e)(iv) of the
definition of specified percentage and ignore
paragraph (e).
[38] On the assumption that that legal
conclusion is right I shall deal with the other arguments. As
stated above there were no time limits imposed in 1987 for filing
the prescribed form. The time limit was first imposed in 1994 by
subsection 61(1) which added paragraph (c) to
the definition of qualified expenditure. However the time limit
for filing the prescribed form was extended to the later of one
year after the return was required to be filed or 90 days
after the Act received royal assent, which was
June 15, 1994.
[39] The expenditures were incurred in the
appellant's 1986 taxation year. The appellant's year-end
was September 30. Therefore the last day for filing the 1987
tax return would be March 31, 1988 and this would, according
to paragraph (c) of the definition of qualified
expenditure in the 1994 amending act, be the last day for filing
the prescribed form T-661. This was an obvious impossibility
since the 1994 amending act became law only on June 15,
1994. Therefore subsection 61(5) of the 1994 amending act
extended the time for filing the prescribed form for expenditures
incurred in a taxation year ending before February 22, 1994
to 90 days after June 15, 1994.
[40] If we stop there it will be obvious
that the prescribed form was not filed by that date. The
provision seems fairly straightforward although there may be
other arguments available, such as retrospectivity. I will
discuss these below.
[41] The new definition of qualified
expenditure in subsection 30(10) of the 1996 amending act
substantially repeats in paragraph (e) the provisions
of paragraph (c) introduced in the 1994 amending act.
Subsection (26) provides that a number of subsections,
including subsection (10), apply to taxation years that
begin after 1995. Thus the replacement in 1996 of former
paragraph (c) of the definition applies only to years
beginning after 1995 and, it would seem,
paragraph (c) of the amended definition introduced by
subsection 61(1) of the 1994 amending act, as well as the
application provision (subsection (5)) remain intact and are
unaffected by the 1996 amending act.
[42] Subsections 33(1) and (2) of the
1998 amending act removed the requirement to file a prescribed
form from the definition of qualified expenditure and put it in
the definition of investment tax credit. Subsection 33(6)
provides that subsection (1), which requires the filing of a
prescribed form (T-2038) within one year from the filing-due
date, applied to all years except that if the taxpayer's
filing-due date is before June 1996 it had until May 31,
1997 to file the form.
[43] Counsel for the appellant observes that
the 1998 amending act received royal assent on June 18,
1998, over a year after the extended date of May 31,
1997.
[44] I begin with the observation that there
is nothing incomprehensible about the statutory provisions
summarized above. Up to the effective date of the 1994 amending
act a taxpayer could claim RITCs by filing an appropriate
prescribed form (T-661) with its return of income. In 1994 for
the first time the failure to file a prescribed form (T-2038)[3] in the time
provided prevented expenditures from being "qualified
expenditures", a prerequisite to claiming the RITCs. The
time for filing the form was, however extended to 90 days
after the 1994 amending act was assented to for taxpayers such as
the appellant who incurred SR & ED expenditures in taxation
years ending before February 22, 1994.
[45] This situation for years prior to 1996
was not altered by the 1996 amending act. The introduction of the
new definition of qualified expenditure in that act applied only
to taxation years beginning after 1995.
[46] The 1998 amending act did however make
a change that affected the appellant. It moved the requirement
for filing a prescribed form to the definition of investment tax
credit and extended the time for filing the prescribed form to
May 31, 1997.
[47] We have, then, statutory language that
is reasonably comprehensible, as income tax legislation goes, and
that appears to impose an obligation, if a taxpayer wants to
claim a RITC for expenditures made in 1986, to file a prescribed
form by May 31, 1997. I have difficulty appreciating the
force of the argument that since the 1998 amending act did not
receive royal assent until 18 June 1998 it was impossible to
meet the May 31, 1997 deadline or at all events it could be
ignored.
[48] The fact that the 1998 amending act
came into force on June 18, 1998, a little over one year
after the May 31, 1997 deadline, leads to the postulation of
three alternative hypotheses, as follows:
1. The statute takes
effect in accordance with its terms.
2. The deadline of
May 31, 1997 can be extended on some basis until the coming
into force of the 1998 amending act. I know of no principle that
could justify such a judicial tinkering with Parliament's
intent as expressed in the language used. Even if I could extend
the deadline to the date of royal assent the prescribed form was
not filed until April 26, 1999.
3. The deadline of
May 31, 1997 can simply be ignored as being of no effect.
This is essentially what the appellant is arguing. In his written
argument counsel for the appellant contends that the
coming-into-force provision for the 1998 amendment is impossible
to comply with. He says in his written argument:
The coming-into-force provision for the 1998 amendment to the
definition "investment tax credit" states that
the amendment applies to all taxation years, except that if the
filing-due date is before June 1996, the taxpayer has until June
1997 to file the prescribed form.
The provision creates the anomaly in that although Parliament
intended to relieve the retroactive application of the amendment
by providing a filing grace period ending June 1997, the
statutory provisions never received Royal Assent, and the filing
requirement never became law, until June 18, 1998, almost one
year after the end of the grace period. The grace period,
therefore, never could be legally complied with. It is therefore
respectfully submitted that the coming-into-force provision, at
least insofar as it applies to taxation years ending prior to the
date of Royal Assent, is void for vagueness, because no
meaningful, realistic application can be derived from its
wording. As such, the filing requirement in paragraph (m) of the
definition "investment tax credit" cannot and
does not apply with respect to taxation years ending before
June 18, 1998, being the date of Royal Assent. (It should be
noted that subsection 127.1(1) of the Act at all times imposed a
requirement to file the form T2038 with a taxpayer's return
of income for the year — this was done by the
Appellant.)
The common law has consistently held that where the words of a
statute lead to an absurd or untenable result, the express
language must be ignored in favour of a common sense approach.
This principle was stated long ago in the leading English
decision, BonHam's Case (1610), 77 ER 638 (CP), where
Sir Edward Coke stated at 652:
[W]hen an Act of Parliament is against common right or reason,
or repugnant, or impossible to be performed, the common law will
countroul [sic] it, and adjudge such Act to be void.
It is clear from the above excerpt that one of the factors to
be considered is whether a provision is "impossible to be
performed." A statutory provision that on its face is
unambiguously worded yet is impossible to apply—as the
present provision is—comes within the void for vagueness
doctrine.
[49] If the coming into force provision of
the 1998 amendment is, as contended by the appellant, void it
leads to one of two results:
(i) there is no time limit for
the filing of the prescribed form; or
(ii) the coming into force
provision of the 1998 amending act disappears and the 1994
amendment remains intact. Subsection 61(5) of that act
extended the time for filing the prescribed form until the later
of a year after the date on which the return for the year when
the expenditure was made was to be filed and 90 days after
15 June 1994. The appellant has missed that deadline, and so
getting rid of the deadline imposed by the 1998 amendment is of
no assistance to the appellant unless it can at the same time
make the deadline created in 1994 disappear as well.
[50] The argument in favour of the reading
out of the 1994 amending act the requirement that a prescribed
form be filed by the later of one year after the date upon which
the return for the year in which the expenditures are incurred
must be filed and 90 days after June 15, 1994 is that
the requirement retroactively imposes further obligations on
taxpayers who had filed the requisite form (T-661) and could
result in creating retroactively a non-compliance with the
Act and a requirement to pay back the RITC.
[51] The appellant expresses the point very
clearly.
"Qualified Expenditure" - 1994
Amendment
The Respondent asserts that because the Appellant did not file
the prescribed form T661 within one year of the appellant's
filing-due date for the 1986 taxation year, the SR & ED
expenditures made by the Appellant do not qualify as
"qualified expenditures" as a result of the 1994
amendment to the definition of that term. The Appellant disagrees
with the Respondent's position.
The Appellant further submits that the purported effect of the
1994 amendment to the definition of "qualified
expenditure", if one accepts the Respondent's
position, would be to retroactively disentitle certain taxpayers
who had undertaken SR & ED expenditures from claiming an ITC or
RITC in respect of those expenditures. The Appellant submits that
such an interpretation is inconsistent with the scheme of the
Act, and in particular the scheme embodied in the SR & ED and
ITC provisions of the Act. The purpose of these provisions was to
encourage Canadian enterprises, and in particular start-up
enterprises, to engage in scientific research in order to ensure
that Canada remained globally competitive in new emerging
technologies. An incentive was thus given to such enterprises in
the form of a RITC. The Appellant submits that to interpret the
1994 amendments in such a manner that they would apply to
taxation years before Royal Assent would be inconsistent with the
Parliamentary intent inherent in the SR & ED program. In
particular, such an interpretation would result in all
qualified SR & ED expenditures undertaken prior to 1994 no
longer qualifying unless the taxpayers somehow complied with the
new filing requirement.
The Appellant further submits that a "reading down"
of the coming-into-force provisions for the 1994 amendment is
appropriate in circumstances where the interpretation proposed by
the Respondent would otherwise take away vested rights from
taxpayers: Gustavson Drilling [tab 12]. Prior to the 1994
amendment, a taxpayer who incurred SR & ED expenditures and who
filed a prescribed form with the taxpayer's return of the
year was entitled to an RITC. The Appellant submits that
Parliament cannot be presumed to have intended that all taxpayers
who carried on SR & ED and filed the prescribed form for their
1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992 or
1993 returns, as the case may be, would automatically and
retroactively no longer be entitled to an RITC, and thus be
liable to repay any such RITC received by them, if they had
failed to file a prescribed form within one year of the
applicable filing-due date or within 90 days of royal assent to
the 1994 amendment.
[52] This argument is somewhat reminiscent
of what my former law professor, the late and great Bora Laskin,
who subsequently became the Chief Justice of Canada, used to call
"parading the horrors" — the depiction of a
worst-case scenario to which a particular interpretation might
lead. The argument assumes that a taxpayer had filed its return
along with the required form in conformity with the existing
legislation and obtained a refund of the RITCs for say, 1986, and
that the Minister had then sought to claim back the refund
because the taxpayer had not filed a further form as subsequently
required by the 1994 amending act. The contention is that the
Minister's right to reclaim the RITCs paid to the taxpayer in
accordance with the legislation as it existed could not have been
contemplated by Parliament. No doubt that is so, but it is not
the situation with which we are dealing here. The appellant is
not a taxpayer who has filed its return and claimed and received
a RITC prior to the coming into force of the 1994 amending
act.
[53] If the somewhat extreme situation
postulated by the appellant in the argument quoted above occurred
it would have to be looked at very carefully, because it gives
rise to quite different considerations from those that prevail
here where the claim is based upon a filing that is well beyond
any statutory filing date.
[54] In any event, I do not think that the
fact that a statutory provision can in some circumstances lead to
an unjust or inconvenient or even absurd result can justify
ignoring it or not applying it to a different set of
circumstances. The principle that if a statute is susceptible of
two interpretations, one leading to an absurd result and one not,
the interpretation that avoids absurdity is to be preferred is
well known. However where the words of the statute are clear the
court must give effect to them even if they lead to an absurd,
unjust or inconvenient result. To modify the plain legislative
language so that it conforms to the judge's notion of what is
more reasonable or more fair or less absurd would be to usurp the
role of Parliament. I did not intend these reasons to be a
dissertation on the rule of statutory interpretation that permits
a court to seek to avoid absurdity, or that restricts the
court's ability to modify or tinker with plain statutory
language to achieve what the judge believes is a more desirable
result. There is ample authority on the subject and it is
collected in Craies on Statute Law, 7th Edition,
pages 86-92.
[55] I have concluded that the provisions of
the 1994, 1996 and 1998 amendments are not void for uncertainty
nor can the time limits be ignored because they might lead in
some circumstances to an unfair result.
[56] There remain then the arguments based
on unjust enrichment and retrospectivity.
[57] The unjust enrichment argument is based
upon the Federal Court Trial Division's judgment in Forest
Oil Corp. v. Canada, [1997] 1 F.C. 624.
[58] The concept of unjust enrichment is not
a free-standing principle in Canadian law. It is a factor that
enters into the determination whether the equitable remedy of
declaring a constructive trust should be granted. Obviously this
court cannot make such a declaration within the jurisdiction
conferred by the Income Tax Act. Nonetheless if the
doctrine of constructive trust is part of the law of Canada this
court must take it into account like every other principle of law
that is relevant to the determination of an issue within its
jurisdiction, whether the principle of law is based on statute,
equity or the common law.
[59] I am, however, unable to see where the
doctrine of constructive trust, which may subsume the concept of
unjust enrichment, has anything to do with this case. The
appellant here is claiming a RITC, which is solely a creation of
statute. Either the taxpayer meets the requirements of the
statute or it does not. It is this court's function to decide
that question. If the requirements are met the appeal will be
allowed. If they are not I cannot parachute some doctrine of
unjust enrichment into the equation and say, in effect, "Oh
well, you don't meet the statutory conditions but it would be
unfair for the government not to give you the refund because it
would be unjustly enriched at your expense and so I will allow
the appeal so you can get your refund."
[60] Income tax appeals do not work that
way. It would make for some very interesting jurisprudence if
this court could base its decisions on whether a failure to meet
certain statutory conditions resulted in unjust enrichment of the
government or a taxpayer. Suppose the Minister failed to assess
within the normal assessing period and no misrepresentation
existed of the type that would allow opening up the
statute-barred year. If the doctrine of unjust enrichment applied
it should apply to taxpayers as well as the government, on the
basis of the sauce for the goose sauce for the gander principle,
and presumably the Minister could reassess on the theory that if
he did not the taxpayer would be unjustly enriched because the
Minister missed a limitation period.
[61] I do not think the unjust enrichment
principle applies here.
[62] Finally, I come to the question whether
the amendments in 1994, 1996 and 1998 are retroactive or
retrospective and if they are whether this affects the
appellant's right to claim RITCs.
[63] The question of the retrospective
operation of statutes was discussed by the Supreme Court of
Canada in Gustavson Drilling (1964) Ltd. v. M.N.R.,
75 DTC 5451. In that case the question was whether an
amendment in 1962 to subsection 83A (8a) of the
Income Tax Act whereby paragraphs (c) and
(d) thereof were repealed precluded the taxpayer's
deduction of drilling and exploration expenses in 1965 to 1968.
It was common ground that but for the repeal of
paragraphs (c) and (d) the expenses would have
been deductible.
[64] Dickson J. (as he then was)
speaking for the majority set out the respective arguments of the
parties at page 5454:
It will be convenient now to consider in more detail the
submissions of the appellant and of the Minister. Those of the
Minister may be shortly put, resting on the language of the Act
which, the Minister submits, is precise and unambiguous when read
in the context of the whole statute and the general intendment of
the Act. It is argued that there is no need to have recourse to
presumptions of legislative intent, for such rules of
construction are only useful in ascertaining the true meaning
where the language of the statute is not clear and plain: per
Lamont J. in Acme Village School District v.
Steele-Smith, (1933) S.C.R. 47, 51. There is much to this
submission. I do not think that the appellant can sustain its
position on a literal reading of subs. (8a), the language of
which places appellant fairly and squarely in the category of a
predecessor company. The appellant, however, seeks to avoid a
literal construction of the subsection with a three-pronged
argument, which must fairly be considered, based upon (a) the
presumption against retrospective operation of statutes; (b) the
presumption against interference with vested rights; (c) the
meaning to be given to the word "aggregate" in subs.
(8a). With regard to points (a) and (b) it would not be
sufficient for the appellant to establish that the legislation
had retrospective effect; it must also show it had an accrued
right which was adversely affected by the legislation.
[65] Both the Minister's argument and
that of the appellant in that case are essentially those advanced
here. As stated above, I find the language of the amendments
unambiguous.
[66] Dickson J. then discussed
retrospectivity:
First, retrospectivity. The general rule is that statutes are not
to be construed as having restrospective operation unless such a
construction is expressly or by necessary implication required by
the language of the Act. An amending enactment may provide that
it shall be deemed to have come into force on a date prior to its
enactment or it may provide that it is to be operative with
respect to transactions occurring prior to its enactment. In
those instances the statute operates retrospectively.
Superficially the present case may seem akin to the second
instance but I think the true view to be that the repealing
enactment in the present case, although undoubtedly affecting
past transactions, does not operate retrospectively in the sense
that it alters rights as of a past time. The section as amended
by the repeal does not purport to deal with taxation years prior
to the date of the amendment; it does not reach into the past and
declare that the law or the rights of parties as of an earlier
date shall be taken to be something other than they were as of
that earlier date. The effect, so far as appellant is concerned,
is to deny for the future a right to deduct enjoyed in the past
but the right is not affected as of a time prior to enactment of
the amending statute.
[67] At pages 5455-6 he said:
The Income Tax Act contains a series of very complicated
rules which change frequently, for the annual computation of
world income. The statute in force in the particular taxation
year must be applied to determine the taxpayer's taxable
income for that year. The effect of the repealing enactment of
1962 was merely to provide that in future years certain new rules
should apply affecting deductions from income of exploration and
development expenses. Although the effect of the repealing
enactment may appear to have been to divest the appellant of a
right to deduct which it had earlier enjoyed and in some manner
have caused a transmutation of an antecedent transaction, I do
not think that, when the matter is closely examined, such is the
true effect. In each of the years 1949 to 1960 the appellant had
a right to deduct. The Act in each of those years conferred the
right. In 1960 the appellant transferred its assets. The contract
of sale, if any, forms no part of the record. So far as the
record discloses, no mention was made of drilling and exploration
expenses at the time. After disposing of its property, it was no
longer a corporation whose principal business was that of
exploring or drilling for petroleum or natural gas nor did it
have income. It therefore, no longer had a right to deduct. No
claim was made by it in the 1961, 1962, 1963 or 1964 taxation
years. By the time the appellant resumed business it had no right
under the then legislative scheme to claim for drilling and
exploration expenses incurred in earlier years. Any claim which
it might make for exploration and drilling expenses could only be
in respect of expenses incurred following resumption of business.
It may seem unfortunate that an amendment which was intended to
liberalize the legislation by removing a barrier to the
inheritance of drilling and exploration expenses should have the
effect of denying a predecessor company such as the appellant
from enjoying a right which it would have enjoyed in the absence
of the repeal but the legislation as amended is unambiguous and
clear. After the repeal of paras. (c) and (d) of
subs. (8a) in 1962 and for the purpose of paying income tax in
the years following 1962, the appellant company is a predecessor
company within the meaning of subs. (8a) and precluded from
deducting the drilling and exploration expenses incurred by it
prior to November 10, 1960.
Second, interference with vested rights. The rule is that a
statute should not be given a construction that would impair
existing rights as regards person or property unless the language
in which it is couched requires such a construction: Spooner
Oils Ltd. v. Turner Valley Gas Conservation Board, (1933)
S.C.R. 629, 638. The presumption that vested rights are not
affected unless the intention of the legislature is clear applies
whether the legislation is retrospective or prospective in
operation. A prospective enactment may be bad if it affects
vested rights and does not do so in unambiguous terms. This
presumption, however, only applies where the legislation is in
some way ambiguous and reasonably susceptible of two
constructions. It is perfectly obvious that most statutes in some
way or other interfere with or encroach upon antecedent rights,
and taxing statutes are no exception. The only rights which a
taxpayer in any taxation year can be said to enjoy with respect
to claims for exemption are those which the Income Tax Act
of that year give him. The burden of the argument on behalf of
appellant is that appellant has a continuing and vested right to
deduct exploration and drilling expenses incurred by it, yet it
must be patent that the Income Tax Acts of 1960 and
earlier years conferred no rights in respect of the 1965 and
later taxation years. One may fall into error by looking upon
drilling and exploration expenses as if they were a bank account
from which one can make withdrawals indefinitely or at least
until the balance is exhausted. No one has a vested right to
continuance of the law as it stood in the past; in tax law it is
imperative that legislation conform to changing social needs and
governmental policy. A taxpayer may plan his financial affairs in
reliance on the tax laws remaining the same; he takes the risk
that the legislation may be changed.
The mere right existing in the members of the community or any
class of them at the date of the repeal of a statute to take
advantage of the repealed statute is not a right accrued:
Abbot v. Minister of Lands, (1895) A.C. 425, 431;
Western Leaseholds Ltd. v. Minister of National Revenue,
[61 DTC 1309] (1961) C.T.C. 490 (Exch.); Director of Public
Works v. Ho Po Sang, (1961) 2 All E.R. 721 (P.C.).
Section 35 of the Interpretation Act, R.S.C. 1970, c. I-23
is cited in support of the appellant. It reads:
35. Where an enactment is
repealed in whole or in part, the repeal does not
.....
(b) affect
the previous operation of the enactment so repealed or anything
duly done or suffered thereunder;
(c) affect
any right, privilege, obligation or liability acquired, accrued,
accruing or incurred under the enactment so repealed.
I agree with Mr. Justice Thurlow of the Federal Court of
Appeal that it cannot be said that the repeal of paras.
(c) and (d) affected their previous operation or
anything done or suffered by appellant thereunder since paras.
(c) and (d) never had any operation upon or
application to anything done or suffered by appellant. I am also
in agreement with Mr. Justice Thurlow that it cannot be said that
any right acquired by appellant under paras. (c) or
(d) was affected by their repeal, since no right was ever
acquired by appellant under either of them. This section is
merely the statutory embodiment of the common law presumption in
respect of vested rights as it applies to the repeal of
legislative enactments and in my opinion the section does nothing
to advance appellant's case. Appellant must still establish a
right or privilege acquired or accrued under the enactment prior
to repeal, and this it cannot do.
[68] I have quoted extensively from the
decision of the Supreme Court of Canada because it sets out the
constraints that are placed on the court's ability to limit
the effect of retrospective legislation.
[69] In light of these principles can it be
said that the amendments are retrospective and if so, what is the
effect of that retrospectivity?
[70] The amendments in 1994, 1996 and 1998
do, it is true, put a limitation if not on the right to claim
RITCs for years that precede the amendments at all events on the
manner in which they can be claimed. To that extent they differ
from those involved in the Gustavson case, which affected
the deductibility of expenses incurred after their enactment. I
do not, however, see how they took away any vested and accrued
right of the appellant. The appellant's right to claim RITCs
for earlier years was preserved but new filing requirements to
the exercise of that right were imposed prospectively. What the
appellant had, prior to the enactment of the first set of
amendments in 1994, was an expectation that it could file its
return of income for 1986 and claim the RITCs for that year after
the Act required that the return be filed. I do not regard
that as an accrued right of which the amendments deprived the
appellant. Even if it were the amendments are unambiguous in what
they intend to do. As Dickson J. said in the passage quoted
above, the presumption that vested rights are not affected unless
the intention of the legislature is clear applies whether the
legislation is retrospective or prospective.
[71] Moreover even if in some way it could
be said that the right to file returns and claim RITCs is one
that could be exercised for an indefinite period of time the
limitation that Parliament placed on that right is prospective
even though it affects a claim based on expenditures incurred in
a prior taxation year.
[72] My conclusion is that the amendments
are not retrospective and even if they are the intended effect of
the legislation is clear and unambiguous.
[73] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 22nd day of February 2002.
A.C.J.
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