Date: 20050310
Docket: A-190-04
Citation: 2005 FCA 94
CORAM: NOËL J. A.
SEXTON J.A.
EVANS J. A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
BULK TRANSFER SYSTEMS INC.
Respondent
Heard at Toronto, Ontario, on March 7, 2005.
Judgment delivered at Toronto, Ontario, March 10, 2005.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: SEXTON J.A.
EVANS J.A.
Date: 20050310
Docket: A-190-04
Citation: 2005 FCA 94
CORAM: NOËL J. A.
SEXTON J.A.
EVANS J. A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
BULK TRANSFER SYSTEMS INC.
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal from a decision of the Tax Court of Canada in which Teskey J. held that subsection 152(4.3) of the Income Tax Act, R.S.C. 1985 c.1 (5th supp.), as amended (the Act) did not empower the Minister of National Revenue (the Minister) to reduce the respondent's refundable dividend tax on hand account (RDTOH) and the corresponding refund paid to the respondent with respect to its 1991 taxation year.
Background
[2] The appeal before the Tax Court proceeded in accordance with an agreed statement of fact, the salient aspects of which are as follows.
[3] By reassessment dated August 1, 1990, (the 1987 reassessment) the Minister reassessed the respondent's 1987 taxation year ending March 31, 1987, treating the disposition of a business property in that year as giving rise to a taxable capital gain. As a result, the respondent's refundable dividend tax on hand (RDTOH) at the end of its 1987 taxation year increased by a fraction of the non-taxable portion of the capital gain. The respondent filed a notice of objection to the 1987 reassessment.
[4] During its 1991 taxation year ending March 31, 1991, and prior to the final disposition of the respondent's objection to and appeal of the 1987 reassessment, the respondent paid a $260,000 taxable dividend and applied in its return for its 1991 taxation year for a "dividend refund" (a term used under the Act to denote the fact that the refund is triggered by the payment of a taxable dividend as described below) in the amount of $65,000.
[5] The Minister subsequently made the requested $65,000 dividend refund, reflecting the dividend refund in its assessment dated December 2, 1991, (the 1991 original assessment) of the respondent's 1991 taxation year.
[6] The Minister effected the refund by applying a portion against the respondent's Part I tax liability for its 1991 taxation year ($21,008), and by delivering to the respondent a cheque for the balance ($43,992).
[7] A second reassessment was issued with respect to the respondent's 1987 taxation year on November 15, 1994. The Minister subsequently confirmed this second reassessment and the respondent appealed to the Tax Court.
[8] By Consent to Judgment dated February 2, 1996, (the Consent to Judgment) it was held that the capital gain realized by the respondent in its 1987 taxation year from the disposition of a former business property was nil as a result of the respondent's acquisition of a replacement property for its business (subsection 44(1)). Pursuant to the order of the Tax Court of Canada issued on March 1, 1996, giving effect to the Consent to Judgment, the Minister reassessed the respondent's 1987 taxation year to remove the taxable portion of the capital gain from its income.
[9] By reassessment dated February 24, 1997, (the 1991 reassessment) the Minister reassessed the respondent's 1991 taxation year by reducing the previously determined dividend refund of $65,000 to $8,420.68. In addition, the 1991 reassessment claimed arrears interest computed on the amount previously refunded and reflected a balance due of $62,907.29. The 1991 reassessment did not alter the respondent's Part I tax as originally assessed in the 1991 original assessment, that is $21,008.
[10] On May 12, 1997, the respondent filed a notice of objection to the 1991 reassessment. Some three years later (on June 23, 2000), the Minister confirmed the 1991 reassessment on the basis that it had been issued in accordance with subsection 152(4.3) of the Act. The respondent appealed to the Tax Court of Canada.
[11] The issue before the Tax Court of Canada was whether the 1991 reassessment was issued in conformity with subsection 152(4.3) of the Act, and specifically whether this provision empowered the Minister to reduce the amount of the dividend refund previously determined and made by the Minister in respect of the respondent's 1991 taxation year.
[12] The Tax Court Judge held against the Minister and the present appeal ensued.
Decision of the Tax Court Judge
[13] In a short decision, the Tax Court Judge held that a dividend refund is neither a "tax" nor "an amount deemed to have been paid or to have been an overpayment". He emphasized that, if Parliament had intended to give the Minister the power to reduce the amount of a refund, it would have included language to that effect in subsection 152(4.3).
Alleged Errors in Decision Under Appeal
[14] In support of the appeal, the Minister relies exclusively on the words "an amount deemed to have been paid or to have been an overpayment" as they are found in subsection 152(4.3). With respect to the portion of the refund that was set off against taxes otherwise payable, the Minister argues that this in effect results in a "deemed payment" of those taxes pursuant to subsection 129(2) of the Act thereby bringing this portion of the refund within the ambit of subsection 152(4.3) (Memorandum of the appellant, paragraph 24).
[15] The Minister further argues that the refund operates as a "credit" against taxes previously paid by the corporation during prior years. The Minister argues that it would be contrary to the scheme of the Act if some credits were considered to be "deemed payments" or "deemed overpayments" within the meaning of subsection 152(4.3) while other credits, which operate in exactly the same manner, were not (Memorandum of the appellant, paragraphs 25, 26 and 27).
Statutory Provisions
[16] Subsections 152(4.3) and (4.4) are relevant to the disposition of this appeal:
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152.(4.3) Consequential assessment
(4.3) Notwithstanding subsections 152(4), 152(4.1) and 152(5), where the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or where the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax,interest or penalties payable, or redetermine an amount deemed to have been paid or to have been an overpayment, under this Part by the taxpayer in respect of the subsequent taxation
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152.(4.3) Cotisation corrélative
(4.3) Malgré les paragraphes (4), (4.1) et (5), lorsqu'une cotisation ou une décision d'appel a pour effet de modifier un solde donné applicable à un contribuable pour une année d'imposition donnée, le ministre peut ou, si le contribuable en fait la demande par écrit, doit, avant le dernier en date du jour d'expiration de la période normale de nouvelle cotisation pour une année d'imposition subséquente et de la fin du jour qui tombe un an après l'extinction ou la détermination de tous les droits d'opposition ou d'appel relatifs à l'année donnée, établir une nouvelle cotisation à l'égard de l'impôt, des intérêts ou des pénalités payables, ou déterminer de nouveau un montant réputé avoir été payé, ou payé en trop, en vertu de la présente partie par le contribuable pour l'année subséquente,
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year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
152.(4.4) Definition of "balance"
(4.4) For the purpose of subsection 152(4.3), a "balance" of a taxpayer for a taxation year is the income, taxable income, taxable income earned in Canada or any loss of the taxpayer for the year, or the tax or other amount payable by, any amount refundable to, or any amount deemed to have been paid or to have been an overpayment by, the taxpayer for the year.
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mais seulement dans la mesure où il est raisonnable de considérer que la nouvelle cotisation ou la détermination se rapporte à la modification du solde donné applicable au contribuable pour l'année donnée.
152.(4.4) Sens de solde
(4.4) Pour l'application du paragraphe (4.3), le solde applicable à un contribuable pour une année d'imposition correspond au revenu, au revenu imposable, au revenu imposable gagné au Canada ou à une perte du contribuable pour l'année, à l'impôt ou autre montant payable par lui pour l'année, à un montant qui lui est remboursable pour l'année ou à un montant réputé avoir été payé, ou payé en trop, par lui pour l'année.
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[17] It is also useful to set out subsections 129(1) and (2):
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Dividend refund to private corporation
129. (1) 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 mailing the notice of assessment for the year, refund without application therefor 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
(b) shall, with all due dispatch, make the dividend refund after mailing the notice of assessment if an application for it has been made in writing by the corporation within the period within which the Minister would be allowed under subsection 152(4) to assess tax payable under this Part by the corporation for the year if that subsection were read without reference to paragraph 152(4)(a).
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Remboursement au titre de dividendes à une société privée
129. (1) Lorsque la déclaration de revenu d'une société en vertu de la présente partie pour une année d'imposition est faite dans les trois ans suivant la fin de l'année, le ministre:
a) peut, lors de l'envoi par la poste de l'avis de cotisation pour l'année, rembourser, sans que demande en soit faite, une somme (appelée "remboursement au titre de dividendes" à la présente loi) égale au moins élevé des montants suivants:
(i) le tiers de l'ensemble des dividendes imposables que la société a versés sur des actions de son capital-actions au cours de l'année et à un moment où elle était une société privée,
(ii) son impôt en main remboursable au titre de dividendes, à la fin de l'année;
b) doit effectuer le remboursement au titre de dividendes avec diligence après avoir posté l'avis de cotisation, si la société en fait la demande par écrit au cours de la période pendant laquelle le ministre pourrait établir, aux
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(2) Instead of making a refund that might otherwise be made under subsection 129(1), the Minister may, where the corporation is liable or about to become liable to make any payment under this Act, apply the amount that would otherwise be refundable to that other liability and notify the corporation of that action.
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termes du paragraphe 152(4), une cotisation concernant l'impôt payable en vertu de la présente partie par la société pour l'année s'il n'était pas tenu compte de l'alinéa 152(4)a).
(2) Au lieu d'effectuer le remboursement qui pourrait autrement être fait en vertu du paragraphe (1), le ministre peut, lorsque la société est tenue de faire un paiement en vertu de la présente loi, ou est sur le point de l'être, imputer sur cette autre obligation la somme qui serait par ailleurs remboursable et en aviser la société.
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Analysis and Decision
[18] Subsection 160.1(1) empowers the Minister, by assessment under subsection 160.1(3), to determine that any amount, previously refunded to a taxpayer for a taxation year, was in excess of the amount to which the taxpayer was entitled as a refund under the Act. The excess is deemed to be an amount payable by the taxpayer on the day which the amount was refunded, and the taxpayer is required to pay interest at the prescribed rate from the date the excess became payable.
[19] By virtue of subsections 160.1(3) and 152(1.2), the Minister's right to make a determination under subsection 160.1(1) is subject to the same time limits as those which are applicable to assessments and reassessments under section 152 of the Act.
[20] Accordingly, the last day on which the Minister could have made a subsection 160.1(1) determination of the respondent's $65,000 dividend refund in respect of its 1991 taxation year was December 1, 1994, that is, the last day of the respondent's normal reassessment period in respect of its 1991 taxation year under subsection 152(4) and paragraph 152(3.2)(b).
[21] The only issue to be decided in this case is whether the Minister's authority in subsections 152(1) and 160.1(1) to determine a dividend refund within the normal reassessment periods contemplated in subsection 152(4) can be exercised outside of the normal reassessment period by the issuance of a consequential assessment pursuant to subsection 152(4.3).
[22] Subsection 152(4.3) is an exceptional measure which extends the normal reassessment period to allow for consequential assessments to be made one year after the adjustment in the year of origin (the particular year) is determined (Sherway Centre Limited v. The Queen, 2003 DTC 5082 (F.C.A.)). In this case, the Minister relying on this provision issued the 1991 reassessment on February 27, 1997, that is, two days before the anniversary date of the consent order.
[23] On the face of this provision, the Minister's authority is limited to reassessing "the tax, interest or penalties payable", or redetermining "an amount deemed to have been paid or to have been an overpayment".
[24] Relying exclusively on this second phrase, the Minister asks the Court to conclude that a "deemed payment" resulted from the Minister's redetermination of the refund in this case, and that the Tax Court Judge erred in holding otherwise.
[25] The first part of the Minister's argument is that, to the extent that the amount of the refund was applied to reduce taxes otherwise payable pursuant to subsection 129(2), it is a "deemed payment" of those taxes.
[26] There is no merit to this argument. Subsection 129(2) of the Act provides for what is in effect a set-off of amounts owing by the taxpayer to the Minister against dividend refunds properly payable. A set-off gives rise to an actual payment. No deemed payment can be said to arise from the operation of that provision.
[27] The second part of the Minister's argument is that the refund in this case operates the same way as a "tax credit" and ought to be treated the same way.
[28] In my respectful view, this is a mischaracterization of the purpose and operation of a taxpayer's RDTOH. The amount in this account is not a credit against taxes, nor does it operate the same way as a tax credit. Although the distinction is fundamental, it requires some elaboration, as the Minister, who is charged with the application of the Act, does not seem to recognize it.
[29] Through a gross up and tax credit mechanism, shareholders of a Canadian controlled private corporation (CCPC) are initially taxed at the full individual rate on a grossed-up amount of taxable dividends received from a CCPC. However, shareholders are entitled to a credit against the tax so computed. The amount of the credit is intended to approximate the tax previously paid by the CCPC on its investment income, reduced by the amount of the dividend refund to which the CCPC became entitled under subsection 129 upon paying the taxable dividends.
[30] The combination of the dividend refund to the CCPC, and the gross-up and tax credit to its shareholders, is intended to reduce the net effective rate of tax paid by both the CCPC and the shareholders to a level that approximates the rate that would have been paid on the investment income had the shareholders earned it directly.
[31] A taxpayer's liability for tax under Part I of the Act is determined by reference to a taxpayer's "taxable income". "Income" and "taxable income" are determined under Division B (Computation of Income) and Division C (Computation of Taxable Income), respectively, of Part I of the Act. Part I tax is determined under Division E (Computation of Tax): first, by the application of the applicable tax rate to taxable income to determine the amount of basic federal tax payable by the taxpayer; and secondly, by the application of tax credits, surcharges and reductions to determine the taxpayer's net federal tax payable.
[32] Section 129 appears in Division F of Part I entitled "Special Rules Applicable in Certain Circumstances". A dividend refund contemplated in subsection 129(1) is determined independently of, and has no impact on, the computation of a corporation's tax under Part 1 of the Act.
[33] The balance in the RDTOH account at the end of a particular year is reduced in the following year by the amount of dividend refunds to which a CCPC has become entitled as a result of the payment of taxable dividends to its shareholders. Where a CCPC has a balance in its RDTOH account, the Minister may make a dividend refund in an amount equal to 1/4 and (now 1/3) of all taxable dividends paid by the CCPC in the year so long as it does not surpass the balance in the CCPC's RDTOH account at the end of the year.
[34] As can be seen, a corporation's RDTOH is determined independently of, and has no impact on, the computation of a corporation's tax under Part I of the Act. It is merely a notional account which determines the maximum amount of a dividend refund which a corporation may receive upon the payment of taxable dividends.
[35] In contrast, tax credits are applied directly in the computation of a taxpayer's tax under Part I of the Act. They operate to reduce the federal tax otherwise payable. See for example personal tax credits (subsection 118(1)), pension income (subsection 118(3)), dividends from taxable Canadian corporations (section 121), tuition and educations fees (subsections 118.5(1) and 118.6(2)), medical expenses (subsection 118.2(1)), charitable donations (subsection 118.1(3), overseas employment income (subsection 122.3(1)), foreign taxes (subsection 126(1)), and investment tax credits (subsection 127(5)). The provisions permitting the application of each of these credits to the computation of tax under Part I of the Act are contained in Division E of Part I of the Act entitled "Computation of Tax".
[36] To the extent that impact on taxes payable, tax credits come within the ambit of subsection 152(4.3). However, unlike tax credits, a dividend refund is determined independently of and has no impact upon the computation of a taxpayer's tax under Part I of the Act.
[37] I should add that there is no provision of the Act which deems a dividend refund made by the Minister to a taxpayer to be an amount paid or overpaid under Part I of the Act by a taxpayer.
[38] In contrast, each of subsections 120(2) and (2.2), 122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) and 210.2(3) and (4) deems an amount determined in accordance with the subsection to have been paid on account of the taxpayer's tax payable under Part I of the Act for a year; subsection 122.61(1) deems an amount determined in accordance with that subsection to have been an overpayment on account of the taxpayer's liability under Part I of the Act for a taxation year contemplated in the subsection.
[39] In the absence of a deeming provision of this kind, a dividend refund made by the Minister in accordance with subsection 129(1) of the Act, cannot be considered to be or to result in "an amount deemed to have been paid or to have been an overpayment" by a taxpayer under Part I of the Act.
[40] Subsection 152(4.3) is an exception to the normal reassessment period which was intended to operate only to the extent thereby provided (Sherway, supra, paragraph 20). No provision is made for the redetermination of refunds although, as noted by the Tax Court Judge, it would be a simple matter to so provide, if that indeed was the intention of Parliament.
[41] In the absence of any such language, I conclude that the Tax Court Judge committed no error when he held that subsection 152(4.3) did not authorize the Minister to reduce the respondent's RDTOH refund in respect of its 1991 taxation year.
[42] I would dismiss the appeal with costs.
"Marc Noël"
J.A.
"I agree
J.E. Sexton"
J.A.
"I agree
John M. Evans"
J.A.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-190-04
STYLE OF CAUSE: HER MAJESTY THE QUEEN
Appellant
and
BULK TRANSFER SYSTEMS INC.
Respondent
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: MARCH 7, 2005
REASONS FOR
JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: SEXTON J.A.
EVANS J.A.
DATED: MARCH 10, 2005
APPEARANCES BY:
Ms. Marie-Therese Boris FOR THE APPELLANT
Mr. Ronald J. Farano
Mr. Gregory J. Farano FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C.
Deputy Attorney General of Canada FOR THE APPELLANT
Gardiner, Roberts
Toronto, Ontario FOR THE RESPONDENT
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