Section 129

Subsection 129(1) - Dividend refund to private corporation

Cases

Bonnybrook Industrial Park Development Co. Ltd. v. Canada (National Revenue), 2018 FCA 136

CRA had discretion to extend 3-year deadline

CRA's longstanding view (most recently in 2013-0499421I7) was that s. 220(3.1) does not accord it the discretion to extend the limitation in s. 129(1) prohibiting a claim for a dividend refund in a return that is filed more than three years late. Woods JA has found that this position is incorrect, stating (at paras. 40, 42):

The CRA’s view … is that the taxpayer relief provisions cannot affect a filing requirement which restricts the issuance of a dividend refund. The problem with this reasoning is that this is exactly what the taxpayer relief provisions are intended to do — enable the Minister to provide relief from strict filing requirements. ...

Subsection 220(3) of the Act provides the Minister with a broad discretion to extend the time to file a “return”.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(2.1) failure of the Minister, on application for s. 220(3) relief, to consider the request for s. 220(2.1) relief 239
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3) Minister had the discretion under s. 220(3) to extend the time for applying for a dividend refund 475

Binder Capital Corp v. Canada (National Revenue), 2017 FC 642, effectively rev'd 2018 FCA 136

Federal Court lacks jurisdiction to overturn CRA decision not to extend s. 129(1) refund-claim deadline

The first taxpayer (“BCC”) filed its 2010 income tax return in 2015. In assessing the return, CRA denied the claimed dividend refunds, late-filing penalties and interest. In its notice of objection, BCC relied on multiple extenuating circumstances for its failure to make its return within the time limit in 129(1), and requested that the Minister grant the dividend refund pursuant to s. 220(3.1). In denying this request, CRA relied on its position in 2011-0426331E5 that:

“Although subsection 220(3) of the Act provides the Minister with the discretion to extend the time for making a return of income, this discretion does not extend to the filing deadline in subsection 129(1) of the Act… Subsection 220(3) does not alter or affect whether a corporation has factually filed its return of income within the period required under the Act.”

Essentially the same issue arose, on somewhat similar facts respecting returns that were late-filed by the second taxpayer (“Bonnybrook”) under the voluntary disclosure program.

In denying the taxpayers’ applications to set aside the Minister’s adverse decisions, Campbell J stated (at paras 22 and 25):

… I find that establishing whether the Minister’s discretion applies to s. 129 is a jurisdictional question with respect to an interpretation of the ITA which is not within this Court’s authority to decide. I also find that… the Federal Court of Appeal’s decision in 1057513… supports this conclusion. ...

In my opinion, the FCA’s decision in 105 is a binding precedent. The interpretation of s. 129 is for the Tax Court to decide.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3) CRA denial of extension of 3-year deadline in s. 129(1) not subject to Federal Court review 201

1057513 Ontario Inc. v. Canada, 2015 FCA 207

dividend refund requires timely filing

During its 1997 to 2004 taxation years, the taxpayer received dividends subject to Part IV tax, and paid dividends which, if its returns had been filed within the three year period specified in s. 129(1), would have generated a dividend refund for each year. However, it did not file those returns until 2008.

In confirming the denial of the dividend refunds, Webb JA affirmed (at para. 5) the finding below "that the requirement to file tax returns within three years from the end of the taxation year in which the dividend is paid… is a condition that must be satisfied in order for the Appellant to receive the dividend refund… ."

He then stated obiter that the unclaimed refunds did not reduce the taxpayer's refundable dividend tax on hand.

See summary under s. 129(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(3) RDTOH is not reduced by unclaimed dividend refunds 114

See Also

1057513 Ontario Inc. v. The Queen, 2014 DTC 1196 [at 3743], 2014 TCC 272

failure to comply with three-year deadline extinguishes right to dividend

Bocock J found that the requirement in s. 129(1) to file a return claiming a dividend refund within three years of the year within which the dividend was paid is mandatory, not directory. Consequently, the taxpayer's failure to file returns within this three-year period meant that the Minister was under no obligation to pay a refund on that dividend.

Nanica Holdings Limited v. The Queen, 2015 DTC 1111 [at 657], 2015 TCC 85 (Informal Procedure)

“Dividend refund” an amount actually paid, not a notional amount.

The taxpayer was a Canadian controlled private company which paid taxable dividends to its shareholders in 2007 and 2008. However, it failed to file its income tax returns for those years within three years of its year end and it was denied a dividend refund under s. 129(1) of the Act. The MNR used the formula in s. 129(1) to calculate the “dividend refund” which had been denied in 2007 and 2008, and subtracted this amount from the taxpayer’s refundable dividend tax on hand (“RDTOH”) account, using this reduced amount to calculate the dividend refund which the taxpayer received in 2010 and 2011.

Consistent with Presidential MSH Corporation and Tawa , V.A. Miller J. stated that "a dividend refund is an amount which is actually paid or credited" to the taxpayer (para. 4).

In allowing the appeal, V.A. Miller J. concluded (at paras. 35 & 36):

[T]he context of the “dividend refund” described in paragraph 129(1)(a) is within the system used to collect tax up front from a corporation and then to refund that tax, or part of it, when a dividend is paid out to a shareholder. … The purpose of the section 129 is to prevent tax deferral by placing the shareholder who has received the dividends in much the same tax position as if he had received the investment income himself without the intermediary corporation.

When the phrase “dividend refund” is analysed in this context, it is clear that it is not a notional amount. The system contemplates an actual repayment of tax to the corporate taxpayer… .

Other locations for this summary
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) loan made to the principal of a business corporation could not be construed as a corporate loan

Presidential MSH Corporation v. The Queen, 2015 DTC 1101 [pp. 596-610], 2015 TCC 61

RDTOH not reduced by unclaimed dividend refunds

The taxpayer paid taxable dividends in its 2005 to 2006 taxation years but missed the three-year deadline to apply for dividend refunds. Graham J found that Tawa Developments applied, so that there was no reduction in the taxpayer's RDTOH. Consequently, dividends paid by taxpayer in its 2010 to 2012 years generated dividend refunds as claimed by the taxpayer.

Thus, the taxpayer was successful in its submission that the "dividend refund" in s. 129(1)(a) was the "refund" actually paid and not, as the Minister submitted, the "amount" calculated under the s. 129(1)(a) formula, whether it was paid or not. Graham J (in the face of some submissions not made in Tawa) found that, although "dividend refund" is used inconsistently in the Act in ways that could support both "refund" and "amount" meanings, he agreed with the purposive analysis in Tawa.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions definitional term not inserted immediately after referent term 81

Ottawa Ritz Hotel Company Limited v. The Queen, 2012 DTC 1172 [at 3427], 2012 TCC 166 (Informal Procedure)

The taxpayer was ineligible for a dividend refund because it did not send the required application within three years of the taxation year in question. However, Webb J. also noted that, in accordance with Tawa Developments, there was also no reduction in the taxpayer's refundable dividend tax on hand.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(3) RDTOH not extinguished by three-year limitations period on dividend refund 49
Tax Topics - Income Tax Act - Section 162 - Subsection 162(2) 82

Administrative Policy

2017 Ruling 2016-0674681R3 - Sequential Split-Up Butterfly

capital gain deliberately triggered to generate CDA and RDTOH addition and year end change granted to isolate dividend refund
Starting structure

An investment holding company (DC1) is held directly by A and his brother B (apparently, a non-resident) and by an upper-tier holding company (DC2), whose shares are held by A and B, as well as by their mother (X).

Proposed transactions

In order to accomplish a split-up of DC1’s assets amongst A, B and X,

  1. X’s shares are redeemed by DC2, and
  2. there then is a pro rata butterflying of the assets of DC1 amongst DC2 and newly-formed holding companies for A and B (TC1 and TC2, the latter, a ULC) followed by
  3. a s. 88(2) wind-up of DC1 into TC1, TC2 and DC2.

Preliminarily to the next set of transactions,

  1. DC1 pays a s. 84(1) safe income dividend to DC2 in amount sufficient to trigger a full refund of its RDTOH balance

Next:

  1. Next there is a single-wing split-up butterfly of DC2's assets so that a pro rata portion of its two types of property is butterflied to TC1.
  2. X then steps back into the picture by subscribing for preferred shares of DC2,.
  3. DC2 continues as a ULC and amalgamates with a wholly-owned ULC subsidiary of B to which he had previously transferred a portion of his [common] shares of DC2, and
  4. B then receives his share of Amalco’s assets first by way of a s.84(1) dividend followed by a PUC distribution, and second by way of having all of his shares redeemed.

In order to create CDA to facilitate the redemption (in 1 above) of X’s preferred shares in DC2, DC1 first effects a taxable drop-down of low-ACB marketable securities to a Newco subsidiary, with the resulting CDA being pushed out to DC2 under s.84(1). In addition “redeeming the…preferred shares held by Ms. X crystalizes the additional RDTOH so that it is an asset for the purposes of the butterfly, which allows for a more equitable distribution of assets on the single-wing butterfly of DC2’s assets.”

In order that the safe income dividend in Step 4 generates a full refund of the RDTOH (having regard to a deemed dividend also being paid in Step 5 to only one of the TCs) CRA agrees to there being a taxation year end immediately after Step 4.

Rulings

Including that with respect to the s. 84(1) deemed dividend in 4 above resulting in a dividend refund to DC2 of all of its RDTOH., so that each of TC1 and TC3 will be liable under s. 186(1)(b) for Part IV tax thereon. Ss. 55(2) and 55(2.1) should not apply to deem such deemed dividends to be capital gains, provided that such deemed dividends do not exceed the safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the Class A and Class B common shares of DC2 held by each of TC1 and TC3 at the safe income determination time for the series of transactions that includes the payment of the deemed dividends.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution sequential split-up butterfly with 1% tolerance, triggering of capital gains to generate CDA and RDTOH, and year end change to accommodate RDTOH division 656
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(a) sale of securities for cash proceeds that are reinvested, and tendering shares for shares of offeror 56
Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(7) CRA accommodates year end change so that dividend refund of full RDTOH balance is generated in Year 1 202

24 November 2015 CTF Roundtable Q. 1, 2015-0610691C6 - T2 Late-Filing: Impact on Div. Refund and RDTOH

unclaimed dividend refunds did not reduce the corporation’s RDTOH

Will CRA follow recent decisions (e.g., MSH) that have not required the reduction of a corporation’s RDTOH balance where it was denied a dividend refund because it failed to file its applicable income tax return within the required three-year period; and will it require a dividend recipient to pay Part IV tax if it receives a dividend from a connected dividend payer that had RDTOH at the end of a particular taxation year even if the dividend payer is denied a dividend refund because its income tax return was not filed within that period? CRA responded:

The CRA will follow these recent… decisions with respect to the computation of a corporation’s RDTOH balance. In 1057513 Ontario Inc.... the Federal Court of Appeal has also recently stated, in obiter, that unclaimed dividend refunds did not reduce the corporation’s RDTOH balance. …

As well, the CRA will consider that a dividend recipient’s Part IV tax liability with respect to a dividend received from a connected dividend payer will be determined according to the dividend refund actually received by the dividend payer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) unclaimed divided refunds do not generate s. 186(1)(b) tax to the dividend recipient 94

9 October 2015 APFF Roundtable Q. 8, 2015-0595591C6 F - Dividend Refund and Part IV Tax Payable

unclaimed divided refunds do not generate s. 186(1)(b) tax to the dividend recipient

CRA accepts MSH and has reversed 2012-0436181E5, in now considering that a dividend refund which is not claimed on a timely basis does not reduce the refundable dividend tax on hand of the payor corporation. Accordingly, the dividend recipient will not be subject to Part IV tax under s. 186(1)(b) (based on the dividend refund calculated for the payor) if the dividend refund is not received by the dividend payor.

2 February 2015 External T.I. 2013-0510751E5 F - Cooperatives and Dividend Refund

entitlement of agricultural cooperative corporations or cooperative corporations to dividend refunds

In finding that an agricultural cooperative corporation, as defined in s. 135.1(1), that is a private corporation and has an RDTOH balance may be eligible to a dividend refund pursuant to s. 129(1), CRA stated (TaxInterpretations translation):

A "share" under subsection 248(1) includes a share of the capital of an agricultural cooperative corporation and a cooperative corporation, as defined in subsections 135.1(1) and 136(2), respectively, as well as a share of the capital of a credit union. Furthermore...that an amount which is annually paid to the holders of preferred fractional interests in a cooperative as a return on the invested capital and proportionally among the holders...generally will be taxable as dividends.

In finding that a cooperative formed under the Quebec Cooperatives Act that is neither an agricultural cooperative corporation nor a cooperative corporation is eligible for a dividend refund, CRA, after having noted that such a cooperative is a legal person and a corporation, stated:

Even if a cooperative has an RDTOH balance, it will likely not obtain a dividend refund in accordance with section 129 if the fractions of its capital do not constitute shares as defined under subsection 248(1).

As a fraction of the capital of a cooperative other than an agricultural cooperative corporation, a cooperative corporation and a credit union does not constitute a share…this type of cooperative is not able to obtain a dividend refund.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Share fractions of cooperative capital not shares 119

11 March 2014 Internal T.I. 2013-0499421I7 - Application of subsection 220(2.1) to 129(1)

no discretion to extend three year deadline

An extension of time to make a return using s. 220(3) does not alter or affect whether a corporation has factually filed its return of income within the period required under the Act, so that if the corporation has not filed its return of income within three years of the end of the taxation year, it cannot obtain a dividend refund.

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

no requirement that "refund" be received

There is a cross-redemption of preferred shares held by two connected corporations (Aco and Bco) in each other, thereby giving rise to Part IV tax based on their respective dividend refunds (which, in these circumstances, are generally determined on a circular basis). However, Aco misses the return filing deadline to obtain a dividend refund for that year. Bco submits that, based on Tawa Developments, Aco accordingly has no dividend refund for the year, so that there is no Part IV tax liability to Bco.

In rejecting this interpretation, CRA stated that in Tawa the Tax Court wrongly interpreted the definition of "dividend refund" in light of "the ordinary meaning of the word 'refund' instead of the precise and unequivocal meaning of the expression Dividend Refund under paragraph 129(1)(a)," which refers to an amount which arises on the payment of a taxable dividend, irrespective of whether the corporation in fact receives the refund.

92 CPTJ - Q.10

RC may accept the assignment of any dividend refund to which a corporation may be entitled in payment of withholding tax which the corporation otherwise is required to remit, provided that it does not perceive a collection problem having regard to the possibility that no dividend refund, in fact, has been earned.

4 March 1991 T.I. (Tax Window, No. 2, p. 15, ¶1183)

S.129(1)(a) does not permit the payor corporation to apply for less than the full amount of its dividend refund.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) 38

86 C.R. - Q.31

RC does not have any statutory authority to provide interest on dividend refunds.

Articles

Anthony Strawson, Timothy P. Kirby, "Vendor Planning for Private Corporations: Select Issues", 2017 Conference Report, (Canadian Tax Foundation), 11:1-28

Potential generation of dividend refund with s. 84.1(1) dividend (p. 11:23)

[T] he 2002 technical interpretation discussed above … stated that the technical requirements for triggering a refund of RDTPH are not met when the dividend is deemed to have been paid pursuant to section 84.1…

It may be credibly argued that the only sensible result is that a deemed dividend arising under section 84.1 should give rise to the recovery of RDTOH because a dividend cannot be paid except on a class of shares, because the person receiving a dividend is a shareholder, and because the right to receive dividends is attached to a share….

The individual will own shares of Newco when the dividend arises, and therefore it could be argued that the deemed dividend under section 84.1 should be considered to be paid on these shares. …

In common parlance, a “dividend” is considered to be a distribution of corporate profits to its shareholders, and therefore it could be argued that in order for a deemed or fictitious dividend to arise, there must be deemed or fictitious shares on which the dividend is paid.

Paragraph 129(1)(a)

Administrative Policy

12 May 2017 External T.I. 2016-0649841E5 F - Dividend Refund to Private Corporation

CRA automatically pays available dividend refunds even when not claimed (or wanted)

Can a private corporation, at the time of filing its T2 return, choose to not apply for a dividend refund ("DR")? CRA responded that although it is not mandatory to apply for any available refund, CRA under s. 129(1)(a) has the discretion to refund the DR without a request therefor, so that CRA “is not obliged to accede to the request of the private corporation” to not receive the DR. CRA further stated:

Currently, the CRA policy… is to automatically make a DR where the information required for the calculation of the DR has been filed on the T2 return (including the Schedule 3/T2SCH3), even where a private corporation does not request it (for example, by entering zero on line 784 of his T2 return).

Subsection 129(1.2) - Dividends deemed not to be taxable dividends

See Also

Speer v. The Queen, 99 DTC 157 (TCC)

The reasons for judgment include a description of an arrangement entered into prior to the introduction of s. 129(1.2) for the generation of a refund of RDTOH without the payment to the owner of a dividend.

Canwest Capital Inc. v. The Queen, 97 DTC 1 (TCC)

The taxpayer, which was a prescribed qualifying corporation within the meaning of s. 186.2 was found to be not subject to s. 129(1.2) when it paid a dividend on its preferred shares to a prescribed venture capital corporation given that at that time it was not aware that the dividend would be received free of Part IV tax by the recipient and given that the corporate structure in question was created for the purpose of achieving extraordinary economic results rather than with a view to tax considerations.

Administrative Policy

2017 Ruling 2016-0628181R3 - Donation of shares to private foundation

s. 129(1.2) denies a dividend refund on the wind-up of a private company bequeathed (but not gifted) to a private foundation

The estate of B gifts her shares of a portfolio holding company (“Holdco”) with an RDTOH Balance to a private foundation, with Holdco thereafter using its liquid assets to redeem the common shares held by the private foundation. The balance of the Holdco shares were held before B’s death in a spousal trust, whose terms in the wills of B’s deceased husband (A) provided that the residue (including such shares) was to be transferred to the Foundation on B’s death.

CRA ruled that s. 129(1.2) would not deny a dividend refund to Holdco on the deemed dividend arising on the redemption of the shares that had been gifted to it. However, it also opined that any dividend or deemed dividend that is paid on the Holdco shares that had been transferred to the Foundation out of the residue of the spousal trust will be deemed by s. 129(1.2) not to be a taxable dividend for s. 129(1) purposes. The CRA summary states:

The main purpose test in subsection 129(1.2) is not met where the estate transfers the shares of the holding company to the foundation because subsections 118.1(4.1) and (5), as amended by Budget 2014 second bill, do not apply to the estate. However, we are of the view that subsection 129(1.2) would apply to the transfer of shares held by the spousal trust to the foundation. Similarly, we are of the view that subsection 129(1.2) might have applied had the surviving spouse’s death occurred after 2015 as the estate would then have been governed by the amended wording of subsections 118.1(4.1) and (5).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(13) - Paragraph 118.1(13)(c) gift of NQS in portfolio company cured when company wound-up into charity 183
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts residue paid under terms of spousal trust to charitable beneficiary was not a gift 133
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(15) gift of shares (NQS) of portfolio company retroactively deemed to be made in terminal year once company wound up into charity 98

10 June 2013 STEP CRA Roundtable, 2013-0480361C6 - 2013 STEP, QUESTION 12. RDTOH and Dividend Refunds

" In response to a request for an update on its position on s. 129(1.2), CRA noted that it had issued favourable s. 129(1.2) rulings on post-mortem estate planning transactions (2004-008855, 2010-0377601R3 and 2012-0456221R3) and further stated that where the purpose test in s. 129(1.2) was met, s. 129(1.2) could technically apply to deny a dividend refund to a payer corporation even if tax was paid by the shareholder on the dividend received from the payer corporation.

29 June 2009 External T.I. 2008-0296371E5 F - Capital dividends

Three children, who own the shares of Corporation A which has a capital dividend account and refundable dividend tax on hand account but owns no assets, transfer their shares to Corporation X, which is owned by one of the children, following which Corporation A and Corporation X amalgamate, with the amalgamating corporation paying a dividend to Corporation X.

Section 129(1.2) would apply.

17 January 1997 T.I. 962932

"The provisions of subsection 129(1.2) of the Act will apply to a dividend in any situation where 'one of the main purposes' of acquiring a share and paying a dividend on that share is to enable a corporation to obtain a dividend refund. The Department has not adopted any administrative position with respect to transactions undertaken to shift refundable dividend tax on hand within a related corporate group."

23 June 1992 Memorandum 921769 (January - February 1993 Access Letter, p. 28, ¶C117-180)

It would be difficult to conclude that there has been an avoidance of Part IV tax by a recipient corporation where a related group carries out transactions so that a corporation with a balance in its refundable dividend tax on hand account generates a dividend refund on the payment of a dividend, and the recipient corporation eliminates its Part IV tax liability through the deduction of non-capital losses.

Articles

Anthony Strawson, Timothy P. Kirby, "Vendor Planning for Private Corporations: Select Issues", 2017 Conference Report, (Canadian Tax Foundation), 11:1-28

Narrow scope of abuse stated in Explanatory Notes (pp. 11:23-24)

The Department of Finance explanatory notes that accompanied the enactment of subsection 129(1.2) indicate that the perceived abuse that this section is intended to combat is the circumstance in which the corporation paying the taxable dividend receives a refund of RDTOH but the recipient is not subject to income tax at the shareholder level. This is not the case with the intentional triggering of section 84.1 because the individual shareholder pays personal tax on the deemed dividends that cause the refund of RDTOH. Thus, if the application of this provision is indeed limited to preventing the abuse identified in the explanatory notes, subsection 129(1.2) should not apply.

Subsection 129(3)

Cases

1057513 Ontario Inc. v. Canada, 2015 FCA 207

RDTOH is not reduced by unclaimed dividend refunds

Webb JA found that the taxpayer was ineligible for dividend refunds for various years because it did not file the returns claiming the dividend refunds within three years of the taxation year ends in question. Webb JA then stated (at para. 6):

[S]ince the condition…has not been satisfied, there would not be any amount that would be a dividend refund for any of the taxation years 1997 to 2004… for the purposes of paragraph 129(3)(d)… .. Therefore, the refundable dividend tax on hand account balance of the Appellant is not reduced by the dividends that were paid during the 1997 to 2004 taxation years in relation to which no amounts were refunded under subsection 129(1)… .

See summary under s. 129(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(1) dividend refund requires timely filing 127

See Also

Ottawa Ritz Hotel Company Limited v. The Queen, 2012 DTC 1172 [at 3427], 2012 TCC 166 (Informal Procedure)

RDTOH not extinguished by three-year limitations period on dividend refund

The taxpayer was ineligible for a dividend refund because it did not send the required application within three years of the taxation year in question. However, Webb J. also noted that, in accordance with Tawa Developments, there was also no reduction in the taxpayer's refundable dividend tax on hand.

Tawa Developments Inc. v. The Queen, 2011 DTC 1324 [at 1837], 2011 TCC 440

refundable dividend tax on hand not extinguished by three-year limitations period on dividend refund

The taxpayer failed to apply for its dividend refund for a taxation year within the three year time-limit, and its dividend refund that year was therefore denied. Hogan J. found that the taxpayers' RDTOH was not reduced by the amount of the unclaimed dividend refund. The ordinary meaning of "refund" is the repayment of a sum of money (paras. 33-34). The meaning of "dividend refund" likewise refers to an amount actually paid rather than the notional amount the taxpayer is entitled to apply for, because the alternative would be arbitrarily punitive (paras. 49-50).

Words and Phrases
refund

Subsection 129(4) - Definitions

Aggregate Investment Income

Administrative Policy

9 October 2015 APFF Roundtable Q. 24, 2015-0598261C6 F - Calcul du revenu de placement total - annexe 7

allocation of investment counselling fees as between interest and dividends

Dividends which are deductible in the computation of taxable income are expressly excluded from "aggregate investment income," as defined in s. 129(4). Accordingly, where a Canadian-controlled private corporation incurs investment counselling fees for a portfolio which generates both dividends from Canadian corporations and interest income, it will be necessary to determine the portion of those fees which relate to the earning of the interest income as contrasted to the dividend income. Only the interest-related portion of the fees will reduce the CCPC’s aggregate investment income.

9 May 2012 External T.I. 2012-0440781E5 - Recapture of CCA

A depreciable property of the taxpayer was rented to an associated company carrying on an active business, so that the CCA claims of the taxpayer were deducted from rental income that was deemed to be active business income under s. 129(6). However the active business was then sold, so that for subsequent years the CCA was deducted from passive rental income.

When the property is then sold, the resulting recapture of depreciation should be allocated between active business income and investment income on the same basis as the two types of income from which the CCA previously was deducted.

Canadian Investment Income

Cases

Burri v. The Queen, 85 DTC 5287, [1985] 2 CTC 42 (FCTD)

apartment rentals were not from an active business

Net rental income which a company derived from an apartment building in its 1978 and 1979 taxation years was income from property rather than income from an active business. The services which were provided to the tenants "were of a very limited nature and typical of what any owner of a modern apartment building would expect to have to provide. As such they [the services] must be seen as incidental to the making of revenue from property through the earning of rent."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 52

The Queen v. Brown Boveri Howden Inc., 83 DTC 5319, [1983] CTC 301 (FCA)

Interest earned on the investment in 30-day notes of progress payments received by a manufacturer on its long-term contracts related to money that was committed to the carrying-on of the manufacturing business, and thus was not Canadian investment income.

Morbane Developments Ltd. v. MNR, [1983] CTC 338 (FCA), briefly aff'g 81 DTC 5362, [1981] CTC 490 (FCTD)

Proceeds received for the expropriation of land inventory were active business income notwithstanding that there was a 4-year delay between a government freeze on the sale by the taxpayer company of its lands and the receipt of the proceeds.

A business, to be considered inactive, need not be in an "absolute state of suspension", and it is irrelevant that the business activities were carried on by another party on the taxpayer's behalf, rather than by the taxpayer itself.

The Queen v. Marsh & McLennan, Ltd., 83 DTC 5180, [1983] CTC 231 (FCA)

Interest earned, on the investment of funds received by an insurance broker, during the period before those funds had to be paid to the insurers, was held not to be Canadian investment income under the pre-1979 version of the definition. Per Clement, D.J.: The funds so invested may be contrasted with an investment in a long-term bond with no need to use the principal in the on-going business. Here, the funds would be required for payment to the insurers within 90 days of their investment, and the investments and the insurance broker's were interdependent. The investments thus were used in its business. Per Le Dain, J.: The funds were employed and risked in the business, as an amount equivalent to the amount so invested was committed to the carrying-on of the business in order to meet the insurance broker's obligations to the insurers, and the invested funds were thus property used or held in the course of carrying on its business. [C.R.: 129(4.1); 248(1) - "Business"]

Riviera Hotel Co. Ltd. v. The Queen, 82 DTC 6045, [1982] CTC 30 (FCTD)

The taxpayer bought and resold approximately 15 separate parcels of land over a 12-year period in addition to owning and operating a hotel. It was held that the sales of land were part of an active business carried on by the taxpayer (as the taxpayer itself had represented in its tax returns). This finding was not displaced by the fact that only 2% of the taxpayer's employees' time was required for managing the properties, given that the hotel business typically is more labour-intensive than the real-estate trading business.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 22

Supreme Theatres Ltd. v. The Queen, 81 DTC 5136, [1981] CTC 190 (FCTD)

After noting (at p. 5138 (DTC)) that "there is a presumption that, since the purpose of a corporation is to make profits from carrying out its business objects, the income received by a corporation is business income," Gibson, J found that rentals received by the taxpayer company, whose business was the operating of motion picture theatres, the lease of a Theatre to a Lion's Club and of land and drive-in theatre facilities as well, were active business income and thus excluded.

See Also

Ben Barbary Co. Ltd. v. MNR, 89 DTC 242 (TCC)

The taxpayer sold to a related company its sporting goods business, a gas bar and the underlying land in consideration of an interest-bearing promissory note, and retained other businesses including a restaurant and a convenience store. Interest received on the note was not income from an active business in light of the failure of the taxpayer to demonstrate any investment activity. Any presumption created by an objects clause in the taxpayer's articles had been rebutted. [Mogan, J. was unenthused by the presumption.]

King George Hotels Ltd. v. The Queen, 81 DTC 5082, [1981] CTC 87 (FCA)

It was "stressed that whether a business is an active or inactive one is ... [a question] of fact dependent on the circumstances of each case ... . It cannot be said ... that income from 'other than an active business' necessarily means that derived from a business that 'is in an absolute state of suspension'".

Administrative Policy

19 September 1991 T.I. (Tax Window, No. 11, p. 15, ¶1509)

In any case where s. 129(4.1) does not apply, the taxable gain from disposition of a life insurance policy will constitute "income from property".

Articles

Durnford, "The Distinction Between Income from Business and Income from Property, and the Concept of Carrying on Business", 1991 Canadian Tax Journal, p. 1131.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(1) 0

Foreign Investment Income

Administrative Policy

81 C.R. - Q. 25

In determining whether or not income or loss is from property, the normal rules apply.

Income or Loss

Paragraph (b)

See Also

Rocco Gagliese Productions Inc. v. The Queen, 2018 TCC 136

royalty income from reruns was incidental business income

A company which earned royalties from the daily activities of its sole shareholder and employee in writing and producing music for TV episodes was found to be earning income from an active business and not earning income from a specified investment business.

Furthermore, the taxpayer received “some so-called residual income, i.e., income from tracks that were heard in reruns of television episodes” as income that “was incident to and pertained to the Appellant’s active business” (para. 66).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business SOCAN royalties generated by a CCPC from writing TV-episode music were not from SIB 241

Subsection 129(4.1)

Cases

The Queen v. Irving Garber Sales Canada Ltd., 92 DTC 6498 (FCTD)

The taxpayer, which was engaged in the sale of raw fur skins and of manufactured fur coats, had its holdings of certificates of deposit grow from $285,000 to $623,000 from 1978 to 1982. Although the taxpayer's other assets (mainly accounts receivable of up to $16,000) were relatively minimal, Joyal J. found that $200,000 of the certificates of deposits constituted a reasonable reserves for the exigencies of the taxpayer's business (so that the income thereon was active business income) in light inter alia of the need to demonstrate financial stability in order to participate in fur auctions and the fact that it was at risk for the full amount of each individual purchase of furs which, in some cases, were substantial.

McCutcheon Farms Ltd. v. The Queen, 91 DTC 5047 (FCTD)

An incorporated farm which held more than $200,000 in demand deposits and which derived between 16% and 20% of its gross income from the interest income thereon was held not to receive such interest as income pertaining to or incident to its business. Strayer J. stated (p. 5052):

"I cannot find a 'financial relationship of dependence of some substance' between these sums and the ongoing existing business ... The possibilities of these funds being drawn upon to sustain the business in any important way was remote and in fact did not happen during the years in question."

Ensite Ltd. v. R., 86 DTC 6521, [1986] 2 CTC 459, [1986] 2 S.C.R. 509

The taxpayer made U.S. dollar deposits with commercial banks in order to reduce its net borrowing cost under a swap arrangement respecting an investment by the taxpayer in a stamping plant in the Phillipines. The swap arrangement in turn resulted from a requirement under Phillipines law that it bring foreign currency into the Phillipines to finance the stamping plant.

The U.S. dollar deposits were held to be "property used or held by the corporation in the year in the course of carrying on a business." The deposits complied with the test that they be property that "was used to fulfil a requirement which had to be met in order to do business. Such property is then truly employed and risked in the business."

See Also

Balmoral Investments Ltd. v. The Queen, 97 DTC 802 (TCC)

Substantial interest income that the taxpayer derived from the investment of instalments from the sale of one of its hotel were property income.

Cornwall Gravel Co. Ltd. v. The Queen, 94 DTC 1709 (TCC)

The taxpayer, which was in the aggregates business, was in many cases required to secure a performance bond from a bonding company before obtaining contracts. Bonner TCJ. found that the taxpayer had failed to rebut the assumption made by the Minister that term deposits, equal in amount to the lowest level of term deposits held by the taxpayer in each year, were necessary in order to receive such performance bonds. Accordingly, the related interest income pertained to or was incident to income from its active business. In addition, Bonner TCJ. found that the rebuttable presumption that income earned by a corporation was income from an active business had application even though the taxpayer's corporate objects (if any) were not entered in evidence.

Lake Superior Investments Ltd. v. MNR, 93 DTC 898 (TCC)

Rental income from a plaza held by the taxpayer as an investment, and interest income from short-term investments in mortgages and other securities, did not give rise to income that was "incident to" or that "pertained to" the taxpayer's active business of selling building lots.

Regina News Ltd. and Mid-Western News Agency Ltd. v. MNR, 93 DTC 358 (TCC)

In upholding the contention of the taxpayer ("Mid-Western") that income from surplus cash invested in short-term deposits gave rise to Canadian investment income, Christie A.C.J. accepted evidence that "a financial relationship of dependence did not exist between the funds to generate the interest in dispute and the active business carried on by Mid-Western".

Alamar Farms Ltd. v. The Queen, 93 DTC 121 (TCC)

Royalty income that a family farm corporation derived from producing oil wells situate on the farm land was found to be income from property used or held principally for the purpose of gaining or producing income from the corporation's farm business (s.129(4.1)(c)). Kempo J. accepted an analogy "to a taxpayer leasing out building space owned by it that was then surplus to its own business needs" (p. 123).

Great Eastern Life Assurance Co. Ltd. v. Director General of Inland Revenue (Malaysia), [1986] BTC 372 (PC)

The phrase "incidental gross income" meant "merely income arising as an ordinary incident of the business" rather than "income of a particular subordinate or casual character".

Words and Phrases
incidental gross income

Administrative Policy

19 August 1994 External T.I. 5-941599 -

Recapture of depreciation on the disposition of a building the rental income from which was active business income, will also be active business income.

4 February 1994 External T.I. 5-932536 -

Where a corporation whose principal business is farming owns certain rights to take petroleum from a well located on the farm land and leases such rights to an arm's length third party in consideration for a royalty, the royalty income will not be considered to be incidental to or to pertain to the corporation's farming business, nor will the rights be considered to be held or used principally for the purpose of gaining or producing income from the farming business.

Subsection 129(6) - Investment income from associated corporation deemed to be active business income

Cases

Norco Development Ltd. v. The Queen, 85 DTC 5213, [1985] 1 CTC 130 (FCTD)

s. 129(6) applied to interest paid by active business partnership to related partner

The taxpayer was an equal partner with two associated corporations in a partnership (Noort Developments) which was engaged in an active business. Noort Developments paid deductible interest to an associated corporation (Noort Bros. Construction Ltd.), which treated such interest as Canadian investment income, on the basis that "subsection 129(6) applies only to amounts paid or payable to a corporation by another corporation so that it cannot possibly apply to the interest payments received by Noort Bros. Construction Ltd. from the partnership, Noort Devlopments (p. 5216)."

In finding that s. 129(6) so applied (so that the taxpayer was not entitled to the small business deduction as the active business income of the group was correspondingly increased), McNair J stated (at pp. 5217-8):

...the partnership, Noort Developments, is not a legal entity. Section 96 of the Act provides rules for the computation of partnership income. The partnership is envisaged as a separate person solely for the purpose of measuring the flow of income to the individual partners, which is then taxed in their hands.. It is the partners and not the firm itself which are the alleged subject of taxation.

Administrative Policy

29 November 2016 CTF Roundtable Q. 15, 2016-0669731C6 - The New SBD provisions

sharing of business limit where no specified income

In contrast to a problem in the July 29, 2016 draft legislation, under recently enacted s. 129(10), where an Opco earns all its income as active business income from arm’s length third parties and pays rents to an associated “Rentco,” an appropriate sharing of the $500,000 business limit between Opco and Rentco is permitted.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(10) sharing of business limit with Rentalco 166

10 May 2013 External T.I. 2012-0449651E5 F - SENC - revenu d'entreprise exploitée activement

Norco followed

CRA followed Norco in finding that rents paid by an operating corporation to a limited partnershp having related corporations as its partners was deemed under s. 129(6) to be active business income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share assets used by an LP in its active business are used by its partner in an active business 181

10 May 2013 External T.I. 2012-0442791E5 F - SENC - Revenu d'entreprise exploitée activement

Norco applied to rent paid by Opco to partnership between Opco's Holdco and Holdco's shareholder's brother

Mr. A holds all the shares of a Canadian holding company ("Holdco") which holds all the shares of Opco. Holdco also holds 50% of the units of a Quebec partnership (SENC), with the other 50% held by the brother of Mr. A. SENC rents real property to Opco for use in Opco's Canadian active-business operations.

In finding that such rents are deemed to be active business income to Holdco to the extent of its 50% share of SENC, CRA discussed Norco Development, and then stated (TaxInterpretations translation):

Although in civil law a partnership is not a distinct juridical person, paragraph 96(1)(c) requires that the partnership calculate its income as if it were. According to paragraph 96(1)(f) ... the income earned by a partnership maintains its character in the hands of the partners. ...

...[T]he reasoning ... in Norco ... can be applied to the present facts. Otherwise, the interposition of the SENC between Holdco and Opco could lead to rents which were deductible to Opco in respect of its active business becoming income from property to Holdco.

21 October 1994 External T.I. 5-942150 -

Where s. 129(6) applies to deem rental income received by a corporation to be active business income, any recapture on the sale of the building that produced the rental income constitutes active business income.