7 March 1991 Income Tax Severed Letter - Clearance Certificate under Petroleum and Gas Revenue Tax Act

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

Subject: XXX Clearance Certificate under Subsection 14(9) of the Petroleum and Gas Revenue Tax Act ("PGRTA")

This is in reply to your memorandum of February 1, 1991 concerning the application of subsection 14(9) of the PGRT dealing with clearance certificate in respect of the distribution of property upon the winding-up of a partnership.

The facts as we understand them are as follows:

XXX

Relevant Law

• 7. Prior to its repeal in October 1, 1986, the relevant provision of the PGRTA read as follows:

Subsection 14(9) Certificate of Minister required

Every assignee, liquidator, administrator, executor and other like person, other than a trustee in bankruptcy, shall, before distributing any property under his control obtain a certificate from the Minister certifying that taxes, interest or penalties that have been assessed under this Part and that are chargeable against or payable out of the property have been paid or that security for the payment thereof has been accepted by the Minister. (Underlining added.)

8. a) The above wording is almost identical to that in subsection 159(2) of the ITA as it read prior to its amendment on October 29, 1985.
• b) Subsection 159(2) of the ITA as it then read provided that executors, receivers and certain other persons who control property of someone else must, before distributing such property, obtain a certificate from the Minister of National Revenue stating that there are no unpaid taxes, interest or penalties assessed under the ITA for which the controlled property might afford payment or that security has been provided therefor. Subsection 159(2) as it then read applied where any such person is administering, winding-up, controlling or otherwise dealing with a property, business or estate of another person. (In such circumstances, subsection 150(3) requires the responsible representative to file a tax return on behalf of the other person.) In addition, subsection 159(2) as it then read required the responsible representative to obtain a certificate for all amounts for which a taxpayer is or may become liable under the ITA, whether or not assessed by the Minister at the time of distribution, and for which the responsible representative is liable in his capacity as such.

Your Question

• 9. Your question is whether XXX is required by subsection 14(9) of the PGRTA to obtain a clearance certificate in respect of any property, including cash, that it distributes to the members of the Partnership on the wind-up of the Partnership.

Your views

10. You maintain that in accordance with subsection 14(9) of the PGRTA, XXX must obtain a clearance certificate before the property of the Partnership may be distributed given that:
• a) Pursuant to subsection 14(9) of the PGRTA XXX role in the wind up of the Partnership is one of liquidator or other like person who has control over the property of the Partnership to be distributed to the members of the Partnership.
• b) This is so since, as XXX has control of the Partnership property to be distributed upon the winding-up. In your view partnership property does not appear to be excluded from the ambit of subsection 14(9) of the PGRTA.
• c) The Partnership availed itself of an administrative arrangement allowed by the Department to be treated similar to a corporation for purposes of PGRT filing on behalf of the members of the Partnership. (We fail to see the relevance of this point).
• 11. You believe XXX

Taxpayer's Views

12. These are set out in letters dated June 4, 1990 and January 16, 1991 from XXX They maintain that XXX has no obligation to obtain the subject clearance certificate on the basis that each limited partner of the Partnership is responsible for his own share of any PGRT liability and that XXX is not responsible for withholding and remitting amounts on account of any such liability under the PGRTA on behalf of the members of the Partnership, other than itself. The following arguments are also raised:
• a) No provision in the PGRTA renders a general partner of a limited partnership liable for any unpaid PGRT of the limited partners thereof; reference is made to the lack of any assertion contrary or otherwise in the PGRT Information Guide in support of this contention.
• b) The administrative arrangement under which XXX for a time filed PSP returns for all partners of the Partnership should have no bearing on this matter. (We agree).
• c) The Department's insistence on requiring a clearance certificate under subsection 14(9) of the PGRTA in the situation described herein imposes an unpractical obligation upon a general partner and is inconsistent with the Department's interpretation of subsection 159(2) of the ITA in a similar fact situation.
• d) It is questionable whether the duties delegated to XXX to manage the general affairs of the partnerships should be viewed as giving XXX any real control over partnership property as required by subsection 14(9) of the PGRTA.
• e) In the absence of any statutory "charging" provision, it is not readily apparent how taxes assessed are in fact "chargeable against or payable out of [partnership] property . . ." as required by subsection 14(9) PGRTA.

Our Comments

• 13. The first technical issue to be answered is whether the words ". . . assignee, liquidator, administrator, executor and other like person . . ." of subsection 14(9) of the PGRTA include XXX a general partner of a limited partnership.
• 14. If we accept that the ordinary meaning of the words should be sought, we find that a "liquidator" defines the role of XXX quite accurately. According to the Concise Oxford dictionary (7th Edition) liquidate is defined as follows:

liquidate v. l.v.t. pay, clear off, (debt.) 3. wind up, ascertain liabilities and apportion assets of, (company, firm); hence liquidator n

• 15. While "liquidator" in the strict legal sense of the word as defined in Black's Law Dictionary (5th Edition) applies only to a person appointed to carry out the winding-up of a company, such strict interpretation has been rejected by the Department as well as by the courts. This is no doubt consequential on the meaning to be given to the expression "and other like person" following the specific words listed, thus requiring the taking into account of the principle of statutory interpretation referred to as "ejusdem generis". (i.e. general or class words should be restricted to the same genus as the specific words that precede them.) See paragraph 18 below for elaboration of this point.
• 16. Revenue Canada, Taxation's Interpretation Bulletin IT-363, dated March 28, 1977, discusses the requirement for a clearance certificate under subsection 159(2) of the ITA as it read prior to October 29, 1985 (which provision is identical to subsection 14(9) of the PGRTA). At paragraph 2 thereof
• 12. The term "and other like person" includes any person acting in the capacity of liquidator, whether or not a formal appointment was made. In a voluntary dissolution, there may be no formally appointed liquidator and the responsibility may have been assumed by an auditor, director, officer, or other person. Whether or not a person falls within the scope of subsection 159(2) will be determined in accordance with the facts of the particular case."

As can be seen from the Department's interpretation of subsection 159(2) of the ITA, it is the nature of the role or function being carried out that is determinative of whether the provision applies, and not whether or not the person in that role or function has been formally appointed:

• 17. In Malka et al v. The Queen, (F.C.T.D.), [[1978] C.T.C. 219] 78 DT.C. 6144, a Canadian corporation in a significant loss position was in the process of being wound up. Certain taxpayers offered to buy the company's shares and its current shareholders therefore passed a resolution and obtained a discontinuance of the winding-up. Prior to the share purchase, the taxpayers caused certain transactions to occur whereby assets and liabilities of a profitable company were transferred to the loss company. The share purchase then took place. The assets were subsequently sold to another company and the loss company was wound up, permitting the taxpayers to realize a substantial profit. On the basis that the taxpayers were liquidators of the loss company, the Minister assessed them personally for tax on the profit, relying on subsections 52(2) and (3) of the former ITA (predecessors to subsections 159(2) and (3) of the ITA).

The court held that the resolution to discontinue the winding up proceedings was nul and void, since it had been passed after much of the corporation's property had been sold and the taxpayers were in fact liquidators. As stated by Decary, J. at p. 6149.

"In my view, it would not be reasonable not to consider Charles Malka as a liquidator because he has, in fact, acted like a liquidator. In interpret S. 52(2) in such a formalistic way that it would not encompass a de facto liquidator would be contrary to the provisions of S. 52(2) even if one had no recourse to the rule of ejusdem generis. Indeed, it would give rise to blatant abuses as one would only have to distribute and then the Minister would have nobody to sue for the taxes of the company. It is precisely the de facto liquidators that are the main target of S. 52(2) and S. 52(3) as they are the ones that can be the less prone to ask for a certificate."

• 18. In the case of Parsons et al v. M.N.R., (F.C.T.D.), [[1983] C.T.C. 321] 83 DTC 5329, the court examined whether a company director could be brought within those words as they appeared in subsection 159(2) of the ITA such that he could be made personally liable for unpaid taxes of the company by virtue of his having authorized a distribution by way of dividends without first obtaining a clearance certificate.

Noting that the word "director" did not appear in the provision (just as "partner" does not), Cattanach, J. asked whether it could be included in the expression "and other like person" under the doctrine of ejusdem generis by examining the meaning of the words "assignee", "liquidator", "administrator" and "executor" which precede the expression. Based on the facts he did not find sufficient parallel with the duties, rights and obligations of a company director to answer in the affirmative. On the facts as well, he set aside the Department's interpretation in paragraph 2 of Interpretation Bulletin IT-368 (paragraph 17 above) on the grounds that the corporation at issue had not been placed in liquidation nor gone into voluntary liquidation.

It can be argued that had the facts indicated circumstances of a liquidation or winding-up it would then have been difficult to exclude the director from Cattanach's own definition of liquidator at p. 5337, narrow and legalistic as it was:

"A liquidator is a person appointed to carry out the winding up of a company whose duty is to get in and realize the property of the company, to pay its debts and to distribute the surplus (if any) among the shareholders."

As can be seen, if "company" and "shareholders" are replaced by "partnership" and "partners", the foregoing describes the role of herein.

• 19. Taxation Operations Manual, Tom 13 (159) 1.18(1)(A)(a), dated June 1986, is unequivocal as to the Department's administrative policy in regards to clearance certificates to be obtained by liquidators of corporations and partnerships when it states:

"Clearance Certificate for Distribution Purposes (TX21) will be issued to executors and administrators of Estates and Trusts before the final transfer of assets to beneficiaries; and by liquidators of corporations and partnerships prior to transferring assets to shareholders/partners."

20. a) Rulings has previously expressed the opinion that subsections 159(2) and (3) of the ITA clearly apply on the winding-up of a corporation, whether before or after the 1985 amendments to those provisions (Ref. Opinion # 5-7778, dated November 1, 1985 by C. Savage).
• b) From the foregoing it is clear that the Department and the courts are in agreement that any person assuming duties qua liquidator can be subject to the provisions of subsection 159(2) of the ITA and by inference, subsection 14(9) of the PGRTA. In our opinion, the requirement in the amended subsection 159(2) that the liquidator et al be dealing with a property of another person does not preclude its application to a partner (corporation or individual) dealing with the property of other partners (corporation or individual) qua liquidator vis-a-vis the winding up a partnership. As noted earlier this view is reflected in the Departmental administrative instruction (TOM) requiring a TX21 clearance certificate for liquidators of partnerships as well as corporations.
• c) In summary, we are of the opinion that XXX is not precluded from the application by the wording at any time of subsections 14(9) of the PGRTA and 159(2) of the ITA simply on the basis that it is merely a general partner of a limited partnerships.

Whether Partnership Property Under His Control

• 21. XXX question XXX control of the property to be distributed on the wind-up, claiming that ultimate control rests with the limited partners.
• 22. The control over property contemplated by subsection 14(9) of the PGRTA and 159(2) of the ITA is that derived qua liquidator/responsible representative and not qua a shareholder or partner as the case may be. In other words, if the facts support the finding of a "liquidator/responsible representative" role - whether authorized or assumed - then in our opinion it must follow that the necessary control has been gained over the property earmarked for distribution.

Given the presumption that any active role of a limited partner in a limited partnership is generally one restricted to the contribution of capital, it follows that XXX is in fact the liquidator/responsible representative on the wind-up of the Partnership.

Liability for Unpaid Taxes

• 23. XXX correctly points out that any liability for taxes under the PGRTA rests initially with the individual partners of a partnership. However, the effect of subsection 14(10) of the PGRTA (and current subsection 159(3) of the ITA) is to render a liquidator or other like person liable for the payment of that liability of another person (such as a partner, for instance) in situations where he distributes property under his control in a wind-up situation without first obtaining a clearance certificate.
• 24. The liability of the so-called "responsible representative" was widened by the October 29, 1985 amendment of subsection 159(2) by including therein taxes for whose payment he is or can reasonably be expected to become liable in his capacity.

Conclusion(s)/Confirmation

• 25. Based on our review as above, we are of the opinion that XXX is required by subsection 14(9) of the PGRTA and we can add by subsection 159(2) of the ITA as well) to obtain a clearance certificate in respect of property, including cash, that it plans to distribute to members of the Partnership as part of the wind-up of the Partnership.
• 26. We have sought the views of officials of the Departments of Justice and Finance who concur in our opinion on this matter.