Section 164

A trust (the “Thames Trust”) received annual “fees” from a non-resident hedge fund manager (“GAM”) that it distributed to beneficiaries, including the applicant (“443 Inc”). For the 2008 to 2011 taxation years, 443 Inc filed its T2 tax returns on the basis that such distributions were income to it. It then filed amended returns requesting CRA to reassess the returns on the basis that the GAM fees had not been income from a source, so that it was entitled to refunds. CRA did not do so. The GAM fees had also been received in earlier years by a Bermuda company (“Sadrington”) owned indirectly by two non-resident trusts, one of which was tied to the principal of 443 Inc (“Ludmer”). CRA assessed Ludmer for the 1995 to 2015 taxation years on the basis that the GAM fees were income from a source and were to be included in Ludmer’s income under s. 56(2), having indicated to 443 Inc that this was an alternative assessing position to the Minister’s position that the GAM fees were taxable to the recipients (most relevantly, the Thames Trust). Ludmer had appealed these assessments to the Tax Court.

443 Inc. sought judicial review of a decision (the “Decision”) whereby the Minister appeared to make a “final” determination not to proceed with the processing of the amended tax returns of 443 Inc. Pamel J stated (at paras. 66, 71):

The trouble I have in determining whether or not the Decision is reasonable is that it is not clear what the Decision actually says. … [T]he Minister is not clear as to whether she is refusing outright to exercise her discretion to reassess 443 Inc, or whether she is simply crystalizing and making “final” her earlier proposal to postpone her decision on processing the Amended Returns until the common issue [regarding whether the GAM fees were income from a source] has been dealt with. …

As drafted, the Decision is open to two different interpretations, and as such, must be set aside as being unreasonable.

However, Pamel J stated that he would “not order that the matter be returned to the CRA for redetermination at this time.” (para. 72). He had earlier noted the statement in IT-335R2 regarding s. 56(2) that “it is normally the … CRA … practice not to assess the same income twice." In explaining why he was leaving the matter to the parties to determine whether a resolution was possible, he noted that if the Minister exercised her discretion to make a final determination that it would not reassess 443 Inc, the consequence might be that 443 Inc’s fate was sealed insofar as getting its amended returns accepted, even if the common issue was ultimately resolved on the basis that the GAM fees were non-taxable. However, he then stated (at para. 75):

If she is to exercise her discretion in that way thus setting in stone and finally determining the assessments of 443 Inc, I would expect the CRA to directly and clearly address its application of alternative assessing positions and the effect of Interpretation Bulletin IT335R2 in its letter to 443 Inc, and explain why, if that is the case, the policy is not being followed. In addition, the Minister cannot have it both ways. And with funds already in hand for the taxation years 2008 to 2011, the reasonable corollary decision would be for Minister to take a consistent position in respect of Mr. Ludmer’s appeal of his reassessments as regards the 2008 to 2011 taxation years. This cannot become an “I gotcha” situation.

The taxpayer (“984”) reported a capital gain on its 2003 sale of land on the basis that it had acquired it from its parent (Henro) on a rollover basis. In 2010, the Minister assessed Henro (to include an income account gain) and 984 (to reverse the previously reported capital gain and refund the capital gains tax plus interest, totalling $1.7M) on the basis that the 2003 drop-down had occurred on a non-rollover basis. On March 23, 2015, the Minister implemented a settlement agreement (effectively agreeing with 984’s and Henro’s initial filing position) by inter alia assessing 984 to claim back the 2010 payment, including the refund interest, plus arrears interest since 2010, in what Noël CJ found (contrary to the Tax Court below) to be in proper reliance on ss. 160.1(1), 160.1(3) and 164(3.1).

Noël CJ noted (at para. 68) that, although the 2010 assessment of 984 was a nil assessment:

Aside from the fundamental distinction drawn … in Okalta, an assessment that levies tax and a nil assessment have the same legal effect i.e. both start the limitation period when issued as the original notice, both replace a prior assessment or reassessment when issued as the last notice, and both fix the tax payable for the year.

Given that the 2010 nil assessment was an “assessment” including for the purposes of s. 164(1)(a)(iii), it followed “that the 2010 payment was a refund authorized to be made pursuant to subparagraph 164(1)(a)(iii)” (para. 73), from which it further followed “that the refund interest paid by the Minister to the respondent in 2010 can be recovered pursuant to subsection 164(3.1)” (para. 74).

Furthermore, it did not matter that the 2010 assessment was issued more than three years after the previous 2003 (re)assessment of 984, given that (para. 58):

A notification that no tax is payable may be issued at any time, because the three-year limit subsequently provided for under [s. 152(4)] does not apply to a notice that no tax is payable.

Finally, it also did not matter that no reassessment had been issued to bring the 2003 tax payable back from zero, as per the 2010 nil assessment, to the amount initially assessed, given that inter alia “Markevich makes it clear that an excessive refund can be assessed even if the power to issue a reassessment for the year pursuant to subsection 152(4) has expired” (para. 77).

Accordingly, the 2015 assessment for an overpayment and interest was valid.

The taxpayer had an overpayment of tax in its 1996 taxation year, and did not file its T2 return within three years of the end of 1996. Although s. 164(1) would prevent the taxpayer from obtaining its 1996 refund, the taxpayer filed a request under s. 221.2(1) to have the Minister appropriate the 1996 payments to the taxpayer's 1999 taxation year. The taxpayer's argued that the phrase "may become payable" in s. 221.2(1) should be construed so broadly as to encompass even theoretical future liabilities - therefore, because it was always possible in theory that an amount "may become payable" in respect of 1999, under s. 221.2(1) the Minister should appropriate the 1996 overpayments to offset these theoretical liabilities. (No such liabilities were actually anticipated for 1999.)

Strickland J rejected the taxpayer's argument. Parliament is presumed not to make contradictory enactments, and the broad interpretation urged by the taxpayer would confer authority on the Minister to indirectly circumvent the refund restrictions in s. 164(1) (para. 59). She noted, however, that there is a possibility the taxpayer may realize the value of the 1996 overpayment, should the Minister determine that there is an amount that is payable or may become payable.

The taxpayer had filed income tax returns reporting Part XIV tax payable, its returns were assessed as filed, and it did not file Notices of Objection. The taxpayer later bought an application for mandamus to compel the Minister to pay a refund of the tax. He argued that s. 18.5 of the Federal Court Act did not prohibit such an application on the ground that s. 164(1)(b) of the Act, in providing that the Minister shall refund any overpayment, contemplated an alternative process to filing Notices of Objection. In rejecting the submission, MacKay J. found (at p. 5128) that the Act does not provide any exception to the normal process of objecting to an assessment. Furthermore, he noted (at p. 5129) that:

"If no overpayment is claimed in the return and the Minister accepts the taxpayer's calculations of tax owed, the taxpayer is not entitled to a refund, unless there is subsequently a successful objection to, or objection, and appeal of, the Minister's assessment."

After the taxpayer was reassessed for over $200 million and appealed to the Tax Court, the Minister obtained an ex parte order under s. 225.2 (the “Jeopardy Order”) to take collection action forthwith. The taxpayer paid $12.75 million on account of his tax liability. However, the Federal Court then made a consent order that the Jeopardy Order be “set aside and vacated” (which Webb JA interpreted as signifying its annulment) and the $12.75 million was refunded to the taxpayer pursuant to s. 164(1.1), but without interest, whose absence the taxpayer now challenged.

Webb JA stated (at para 17):

If the amount was refunded under [subsection 164(1.1)], then Mr. Grenon would have been entitled to interest on such refund under subsection 164(3) of the Act. Therefore, the issue in this case is whether subsection 164(1.1) of the Act applied.

Before ordering that the taxpayer was to be paid interest on the $12.75 million pursuant to s. 164(3), Webb JA stated (at paras. 26, 33 and 34):

… [S]etting aside the Jeopardy Order in this case would mean that subsection 164(1.1) of the Act, should be read as if the Jeopardy Order had never been issued. This would mean that “no authorization has been granted under subsection 225.2(2) in respect of the amount assessed” for the purposes of this subsection. Since Mr. Grenon has appealed the reassessments to the Tax Court and has applied in writing for the refund, the other conditions of this subsection have been satisfied and interest is payable under subsection 164(3) of the Act. ...

Since any interest paid on the amount refunded to him will have to be repaid with interest if the result of Mr. Grenon’s appeal is that all or a portion of the refunded amount is still payable, there is no loss to the federal government if interest is paid on the refunded amount, absent any collection concerns. …

There is a loss to Mr. Grenon if interest is not paid on the refunded amount and he is successful in his appeal in reducing his outstanding liability to less than the refunded amount. In my view, this would support the contextual interpretation that interest should be paid to him on the refunded amount.

Layden Stevenson J. found that the correct standard of judicial review under s. 18.1 of the Federal Court Act of a decision of the Minister under s. 164(1.1) not to return security furnished by the taxpayer was a standard of reasonableness rather than a standard of patent unreasonableness. A submission of the taxpayer that a writ of seizure and sale by the Minister could be viewed as "security accepted" for purposes of s. 164(1.1) was rejected.

An individual (“Consiglio”) his wife was the sole director and shareholder of the respondent corporation, whose assets consisted of several heavily mortgaged properties plus a refund claim of approximately $1.2 million. The only property with real value was a development property with an outstanding foreclosure order against it. The Minister sought jeopardy orders under s. 164(1.2) permitting funds then in the hands of the Minister to be retained notwithstanding the refund claim, such funds having been paid by the corporation in respect of assessed taxes that had been appealed (with a hearing date not yet set).

Hughes J granted the order, stating (at paras. 10-11):

Justice Blanchard in Chabot [2010 FC 574] established that in order for a Judge to be satisfied that there are “reasonable grounds to believe” that the collection of tax would be jeopardized, the Court must assess the taxpayer’s net worth and ability to satisfy the tax debt independently of the refund at issue. Factors such as unorthodox behaviour of the taxpayer and evidence regarding potential dissipation of assets by the taxpayer may be considered.

… I am satisfied that there are reasonable grounds to believe that the funds now in the hands of the Minister would likely be jeopardized if returned to the Respondent. The only real asset is the Chute Lake property; it is heavily mortgaged and subject to a foreclosure order. … The principal of the Respondent, Consiglio, or the companies with which he is associated, has a history of non-payment of taxes and bankruptcy.

Iris Technologies Inc. (“Iris”) filed applications for the Canada emergency wage subsidy (“CEWS”). CRA took the view that Iris, contrary to its claims, had not experienced a significant decline in its qualifying revenues, and denied the claims – initially on the basis of exercising its discretion under s. 164(1.6), which provides that the Minister, before the time for filing the taxpayer’s return for the year, “may refund to the taxpayer all or any part of the [deemed CEWS] overpayment” arising under s. 125.7(2). Iris then filed a notice of application for judicial review of the decision of the Minister in which it sought inter alia an order requiring payment of its claimed CEWS amount. The Minister moved to strike the application and also sought leave to enter an affidavit of a CRA officer (with no direct involvement in the matter) that attached a notice of determination made (after the date of the application for judicial review) pursuant to s. 152(3.4), and determining that there was no overpayment under s. 125.7(2).

After finding that such evidence of the making of the notice of determination was admissible, Rennie JA concluded that the Minister’s motion should have been granted, stating (at paras. 41, 43):

Whether there is an “amount” that is “deemed” to be an overpayment [under s. 125.7(2)] is not discretionary. It is determined according to the statutory formula, and it is for the Tax Court to ensure that the formula was correctly applied. If, following the Tax Court determination there is, in fact, an overpayment which the Minister refuses to refund, the Federal Court has jurisdiction to review the refusal to refund the overpayment. Iris’ application is, in this sense, premature. The Minister has a discretion to refund, but it is contingent on the existence of an overpayment under the ITA. Whether the Minister erred in determining that there was no overpayment is to be adjudicated in the Tax Court; whether the Minister erred in refusing to refund an overpayment is for the Federal Court to decide. …

The relief sought makes clear that the essential character of the notice of application is a challenge to the correctness of the finding that no “amount” is payable by way of a refund under subsection 125.7(2) and to vacate the notice of determination. … Subsection 152(1.2) … provides for objection and appeal rights following a notice of determination, and Parliament has directed that those proceedings are to be in the Tax Court of Canada … .

Following his assessment for a $2,890,050 penalty in 2012 under s. 163.2, the Applicant paid $1,000,000 to the Minister so as to offset interest which would be borne by him if the assessment were upheld. After the assessment was vacated pursuant to a consent judgment, the Minister issued a Notice of Reassessment on December 7, 2016 showing the cancellation of the penalty and a refund of the $1M, but which did not provide for any payment of interest on the $1M. In its upper right-hand corner it stated “Tax year 2012,” in contrast to the original Notice of Assessment, which designated the tax year as “N/A.” On February 28, 2017, Crown counsel indicated that there was no statutory authority to pay interest, because the relevant provisions of the Act require a taxation year to be specified in order for interest to be paid.

In rejecting the Crown’s argument that the naming of a taxation year in the Notice of Reassessment was an error, Diner J referred to s. 152(8), indicated (at para. 86) that it applies “equally to reassessments as it does to assessments,” and then stated (at para. 87):

Therefore, on a strict reading of the text of the statute, the 2016 Reassessment is presumed to be valid and binding … .

It was not relevant that the taxation year was not listed in the original Notice of Assessment, as it had been vacated by the consent judgement.

Respecting a further Crown argument that the Reassessment was properly described as a “notice of refund” or “refund receipt”, and that it was improperly named as a Reassessment, and after noting (at para. 92) that “the jurisprudence acknowledges that administrative errors do not vitiate an assessment and subsection 152(8) exists to protect the Minister from taxpayers attempting to invalidate assessments based on technicalities,” Diner J stated (at paras. 95-96):

It is one thing for the Minister seeking to prevent a taxpayer relying on minor defects in her department’s document. But it is another for the Minister to then herself claim that the minor error undermines the validity of her own document to avoid adherence to it, when all other data points of the form are entirely accurate … .

Consequently, for the purpose of this specific case, this Court concludes that the Reassessment issued by the Respondent is a valid reassessment, even if it also included both a refund to, and a nil balance owing from, Mr. Glatt.

Diner J went on to state (at para 108):

The non-payment of interest in these circumstances runs counter to … Grenon. Here, Mr. Glatt’s $1M payment in controversy was clearly made to avoid the accrual of interest with respect to an assessment that was then vacated. This is akin to Grenon, where the taxpayer provided $12.75M to the Minister in response to a Jeopardy Order that this Court issued against him, which was then vacated by the Court.

He concluded (at para. 112):

… I find that the current jurisprudence supports a finding that interest must be paid on the Principal Amount. As the reassessment still exists despite its nil status for the purpose of venue, subsection 154(8) continues to apply, as do the other provisions of the Act that then flow from it confirming that the refund must be returned with interest at the prescribed rate, including paragraph 164(3)(e).

In response to an increase in royalty charges by the Albertan government for the rights to oil sands, the federal government issued the Syncrude Remission Order ("SRO") in 1976. Under this order, participants in the Syncrude Project were entitled to a remission of federal income tax on the amount of the Alberta royalty charges. The taxpayer's right to this amount was also affirmed in an advance tax ruling. The Minister applied the SRO as a reduction in taxes payable in each taxation year.

Gagné J rejected the taxpayer's submission (at para. 47) that "when the Minister decided to apply the SRO payments against Imperial Oil's tax liability, he acted in the statutory power granted by the ITA and that, in doing so, the remission amounts that offset Imperial Oil's tax liability for that year was paid on account of Imperial Oil's liability within the meaning of subsection 164(7) of the ITA and had the effect of creating an overpayment," stating (at para. 50) that "whichever mechanism [payment or such application] is chosen, it does not create an obligation on the Minister, when acting pursuant to the SRO, to pay refund interest under the ITA."

The overpayments on which interest runs include rights to refunds which a discounter has acquired pursuant to the Tax Rebate Discounting Act, and where Department employees negligently paid the refunds to the taxpayers rather than the discounter, interest continued to run to the time of judgment.

Prior to the enactment of s. 164(3.1), there was no basis for the Minister to collect interest in the circumstances described therein.

The taxpayer had acquired debt with a nominal adjusted cost base to it and successfully argued before the Supreme Court of Canada that subsequent payments to him of interest that had accrued before he had acquired the debt were excluded from his income pursuant to s. 20(14). The realization of a taxable capital gain pursuant to s. 40(3) was a logical and inevitable consequence of the decision of the Supreme Court that s. 20(14) applied. Accordingly, this consequence was required to be taken into account by the Minister in reassessing the taxpayer following that decision.

The issuance of a fresh reassessment by the Minister pursuant to s. 164(4.1)(d) does not have the effect of nullifying the assessment from which the appeal was taken, i.e., notwithstanding the Abrahams case, the taxpayer is not required to launch a fresh appeal from the s. 164(4.1)(d) reassessment. "Parliament's intention in enacting subsection 164(4.1) is clearly to benefit taxpayers who have succeeded in appealing assessments. It would be antithetical to that intention if the Minister's compliance with paragraph 164(4.1)(d) were to have the effect of depriving unwary taxpayers of the right to further pursue appeals in which they have been only partly successful."

In response to an increase in royalty charges by the Albertan government for the rights to oil sands, the federal government issued the Syncrude Remission Order ("SRO") in 1976. Under this order, participants in the Syncrude Project were entitled to a remission of federal income tax on the amount of the Alberta royalty charges. The taxpayer's right to this amount was also affirmed in an advance tax ruling, which indicated that for purposes of computing whether the taxpayer owed interest in respect of under-installing, the remission payments would be credited as of the balance due date for the year so as to relieve of arrears interest.

In rejecting the position of the taxpayer that the remission payments should be treated in the same manner for purposes of entitling the taxpayer to refund interest under s. 164(3), Noël CJ stated (at paras. 51, 57):

[T]he correctness or validity of an assessed tax liability is not affected by a remission and must be determined on the basis of the relevant provisions of the ITA… . The effect of a remission order is limited to forgiving a debt once it has arisen pursuant to relevant provisions of the ITA, which would include in this case paragraphs 12(1)(o) and 18(1)(m)… .

[I]t is clear that an overpayment of taxes payable cannot result without some form of payment being made beforehand, and no such payment can result from a remission order whose sole effect is to prevent the collection of what is, and remains, a validly assessed tax debt. Given that a remission order can do no more than that, no amount can be said to have been “paid on account of [IORL’s] liability” (paragraph 164(7)(b) of the ITA) by reason of the SRO