Canada Safeway Ltd. v. R., [1997] 1 CTC 2194, 97 DTC 187

Bell J.T.C.C.: - This determination is made pursuant to an application by the Appellant under section 58 of the Tax Court of Canada Rules (General Procedure) “for the determination, before hearing, of a question of law” on the basis that the determination of the question would dispose of the proceeding.

That rule provides that this Court may grant judgment in accordance with its determination.

Facts

According to Appellant’s counsel the following facts, being all that are necessary for the determination, are clearly not in dispute, namely,

1. The Appellant was an amalgam of a number of predecessor corporations. Between December 1, 1985 and December 31, 1989 those companies paid $2,794,438 in error to the Department of National Revenue (“Department”) on account of Federal Sales Tax (“FST”) under the Excise Tax Act.

2. All amounts totalling the aforesaid sum were deducted as expenses in the year in which they were paid to the Department.

3. The Appellant, in 1993, [1] received cheques from the Department representing a refund of the said $2,794,438 together with interest.

4. The Department reassessed the Appellant by including the amount of that refund in income in 1993. [2]

Question for Determination

The question, posed by counsel for both parties, for determination by the Court, was,

Is a refund of Federal Sales Tax received by a taxpayer in the taxation year 1993 in respect of FST paid and expensed in prior taxation years an amount required to be included in the income of the taxpayer for the taxation year in which the refund was received?

Appellant’s Submission

Appellant’s counsel referred to À. v. Johnson & Johnson Inc., (sub nom. Johnson & Johnson Inc. v. Canada) [1994] 1 C.T.C 244, 94 D.T.C. 6125 (F.C.A.). The taxpayer, from April 1975 to August 1981, had paid FST on products manufactured and distributed by it. It deducted that tax as an expense in computing income for each of the taxation years in question. The Tariff Board found the product not subject to FST and in January, 1982 the Minister of National Revenue (“Minister”) issued a refund cheque to the taxpayer. The Minister included the amount in the taxpayer’s income for its 1982 taxation year. The court concluded that the refund had to be brought into the computation of income for the years in which the FST had originally been deducted as an expense. Hugessen, J.A., said, at pages 249-50 (D.T.C. 6129-30),

... In effect what has happened is that what was formerly thought to have been an expenditure is now recognized to be so no longer. Accordingly, it is not the year of receipt which is relevant for the determination of profit, but the year of the expenditure which is now found to have been no expenditure at all.

I emphasize here that we are not talking of the recovery of expenses in the ordinary business sense of attempting to recoup what one has laid out by what one can get in. Rather, it is the reversal of what was thought to have been an expenditure due to the recognition, forced or voluntary, by the original payee that he should never have had the money in the first place. ... Expenditures thrown away and then recouped as damages do not lose their original character. It is otherwise with expenditures which are refunded because they were wrongly paid in the first place. ...

In short, it is my view that the refund of taxes, which have been charged as expenses in the year of payment but which should never have been paid at all, must be brought into the computation of income for the years in which they were paid and charged.

Appellant’s counsel then turned his attention to subparagraph 12(1 )(x)(iv) of the Income Tax Act (“Act”). It provides, in essence, that a taxpayer shall include in income any amount received from a government where the amount can reasonably be considered to have been received

(iv) as a reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an outlay or expense ...

He submitted that the Appellant had received a refund of tax, not a reimbursement of outlays or expenses. He argued that reimbursement connotes a payment to make a person whole such as an employer reimbursing his employee for parking expense. He then said that if a parking authority returns the fee paid by the employee that employee has received a refund, not a reimbursement. He distilled his submission to the statement that a reimbursement is a payment by A to B for monies paid by B to C whereas a refund is a return by A to B of monies paid to A by B.

Repondent's Submission

Respondent’s counsel submitted that the plain and ordinary meaning of the word “reimbursement” is “repayment”. He quoted The Oxford English Dictionary, Second Edition, Volume XIII which defines “reimbursement” as,

The act of reimbursing, repayment.

He referred to the meaning of “reimbursed” which 1s,

1. To repay or make up to one (a sum expended).

2. To repay, recompense (a person).

The examples, albeit in older English, of the use of “reimbursement”, not cited by counsel, include

By way of re-imbursement for the charges we had been at.

His scanty commission could never procure him the proper reassessment.

For this extent he promised a parliamentary reimbursement.

Counsel then quoted Black’s Law Dictionary, Sixth Edition, which defines “reimburse” to mean,

To pay back, to make restoration, to repay that expended; to indemnify, or make whole.

The definition of “reimbursement” in Black’s Law Dictionary not cited by counsel is,

With respect to a surety, the common-law right to get indemnity, or otherwise recoup, from the principal debtor the value of the surety’s performance in satisfying the principal debtor’s duty. Also refers to the right of an issuer of a letter of credit to recoup from its customer upon duly honoring the credit.

Respondent’s counsel, in support of his interpretation of “reimbursement”, referred to the Johnson case (supra) where the Federal Court of Appeal, at page 249 (D.T.C. 6129) said,

... Where, however, a business receives a payment, not as compensation for the goods or services which it provides but rather as a reimbursement for an expenditure which was not due and should never have been paid, the situation is different.

and to Husky Oil Ltd. v. R., (sub nom. Canada v. Husky Oil Ltd.), (sub nom. Husky Oil Ltd. v. Canada) [1995] C.T.C. 460, 95 D.T.C. 5244 (F.C.A.), at page 465, in which the Court said,

In fact, the only advantage that these two companies could conceivably have granted the respondent by selling it the shares of their subsidiaries is the possibility of claiming a tax reimbursement, not the right to get that reimbursement.

He then submitted that the word “reimbursement”, in common usage, includes a repayment of tax. He also said that the plain and ordinary meaning of “reimbursement” includes a repayment of tax and that this meaning is confirmed by the French version of the Act. He said that in paragraph 12(1)(x) the word “remboursement”, used throughout that version of the Act, refers to a repayment of tax.

Analysis and Conclusion Respecting Paragraph 12(1 )(x)

I shall set forth subparagraph (iii) of paragraph 12(l)(x) and restate subparagraph (iv). A taxpayer is required to include in income an amount received from the government where the amount can reasonably be considered to have been received.

(iii) as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or

(iv) as a reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an outlay or expense ...

[Emphasis added.]

Reference to subparagraph (iii), although not essential for the deter mination, is made to assist in comprehending the nature and scope of this legislation. It clearly refers to an inducement payment and then categorizes the types of payments which would be included within the meaning of the word “inducement”. Subparagraph (iv) clearly refers to reimbursement, contribution or allowance or assistance and then categorizes payments which would fall within the meaning of those words. This wording seems to invite a brief analysis of the “associated words rule” (noscitur a sociis). Driedger on the Construction Statutes, third edition, edited by Ruth Sullivan, at page 200, reads,

The associated words rule applies where two or more terms, linked by “and” or “or”, serve an analogous grammatical and logical function within a provision. This parallelism invites the reader to look for a common feature among the terms. This feature is then relied on to resolve ambiguity or limit the scope of the terms. Often the terms are restricted to a scope of their broadest common denominator. As Martin J.A. explained in R. v. Goulis,

When two or more words which are susceptible of analogous meetings are coupled together they are understood to be used in their cognate sense. They take their colour from each other, the meaning of the more general being restricted to a sense analogous to the less general.

The shared feature of “reimbursement, contribution or allowance or as assistance” is the payment or donation of monies to defray or offset an expense incurred by the recipient. In short, the word “reimbursement” is coloured by the words following it. This affords little, if any, opportunity for the reader to interpret “reimbursement” in this context as a refund by a payee to a payor of monies paid by that payor to the payee. This interpretation of the word “reimbursement” is consistent with the ordinary usage of that word which contemplates the covering of one’s expenses or, to use the word following “reimbursement”, a “contribution” to someone in respect of an outlay made by that person.

It is noted that the words following “as an inducement” in (iii), namely

whether as a grant, subsidy, forgivable loan, deduction from tax, allowance, or any other form.

also follow “as a reimbursement, contribution or allowance or as assistance” in (iv).

An inducement is clearly not a refund. The above quoted words following inducement in (iii) enforce that view. The same words used in (iv) similarly enforce my view that a reimbursement as used there does not include a refund.

Accordingly, I do not accept the Respondent’s submissions. In the context of the shared feature of “reimbursement” and the words following it discussed above, I conclude that the refund by the Department to the Appellant of monies mistakenly paid by the Appellant to the Department do not constitute a “reimbursement, contribution or allowance or ... assistance”. In fact and in law the refund was exactly that ... a return to the payor of monies paid in error to the payee. On this basis, subparagraph 12(l)(x)(iv) does not apply to the Appellant’s circumstances with the result that the aforesaid sum of $2,794,438 cannot be included in its income by virtue of that provision.

Repondent's Further Submissions

With respect to whether the amount repaid by the Department to the Appellant reduces, for the purposes of the Act, the amount of the expense or outlay claimed by the Appellant, Respondent’s counsel submitted that

(a) the main purpose of the Income Tax Act (“Act”) is the taxation of income,

and

(b) the repayment does not reduce the Appellant’s outlay or expense unless it has actually “reduced the outlay or expense by the amount of the reimbursement in a return of income or has been assessed or reassessed to so reduce the outlay or expense”.

This submission is not persuasive. What obligation did the Appellant have so to do? In what return of income could it have done so other than in the year in which the Minister reassessed so to include it? Further, it was solely within the ambit of the Department to have reassessed the Appellant reducing that outlay or expense had it so chosen. If there is a legal reason for the Department’s inability so to reassess, such as the reassessment period having expired, that arises from the legislation. The Court cannot change that.

Respondent’s counsel, as an alternative to paragraph 12(l)(x) of the Act, submitted that the amount received by the Appellant in its 1994 taxation year must be included in the calculation of its profit for that year. He referred to a number of cases to support that submission, [3] no specific statements from any judgment having been presented to the Court. The factual situations in these cases are different from those of the Appellant. For example, in the Benaby case the issue was the appropriate year of assessment of a profit made on expropriation of land in 1954. Compensation was fixed by agreement and paid in 1955. The Supreme Court of Canada found that in the absence of a binding agreement or of a judgment fixing the compensation, the company had no more than a right to claim compensation and that there was, accordingly, nothing which could be taken into account as an amount receivable under section 85B(l)(b). [4] Judson J. said that for income tax purposes, accounts cannot be left open until the profits have been finally determined. He said, at page 420 (D.T.C. 5276),

... However, in many cases, compensation payable under the Expropriation Act is not determined until more than four years after the expropriation has taken place and, in many of these cases, the Minister would be precluded from amending the original assessment because of the four-year limitation for the assessment (s. 46(4)). [5]

He then said, at page 421 (D.T.C. 5277),

My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained.

and

...I do adopt the principle that there could be no amount receivable under s. 85B( 1 )(b) until the amount was fixed either by arbitration or agreement.

The ascertainment of compensation and therefore of profit in the Benaby case is a feature not present in the Appellant’s case. The amount owing to the Appellant did not have to be determined. It was paid in error to the Respondent. In the Vaughan case, relying on Benaby, compensation became receivable by court order in 1957 and was found properly assessable in that year. In the Fleur De Lys case an amount which had become receivable as a result of a tribunal’s decision rendered in 1983 was included in the taxpayer’s 1983 taxation year. Similarly, the Commonwealth and Violette decisions were based upon court awards.

Therefore, I conclude in accordance with the authority of the Johnson case (supra), that the sum of $2,794,438 should not be included in the Appellant’s income for its 1994 taxation year. The question of law posed to the Court having been so determined, the appeal is allowed with costs.

Although the facts relied on in this determination were stated by Appellant’s counsel as clearly not being in dispute, my impression at the hearing was that there may be matters requiring clarification in order for an appropriate judgment to issue. Accordingly, pursuant to section 169 of the Tax Court of Canada Rules (General Procedure) the Court directs Appellant’s counsel to prepare a draft of an appropriate judgment implementing this decision and to follow the procedures set forth in that section.

Appeal allowed.