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Guindon: SCC Hearing Scheduled for December 5, 2014

The highly-anticipated appeal to the Supreme Court of Canada in Guindon v The Queen has been scheduled for hearing on December 5, 2014, and the parties have now filed their factums in the appeal.

For our prior posts on this decision, refer to our summary of the Tax Court decision (2012 TCC 287), our guest blogger’s summary of the Federal Court of Appeal decision (2013 FCA 153), and our summary of the Supreme Court leave application (Docket No. 35519).

The Appellant’s (Ms. Guindon’s) Factum is available here, and the Respondent’s (Crown’s) Factum is here.

The appeal concerns the “third party” penalties under section 163.2 of the Income Tax Act.  In short, the Tax Court found that the penalty imposed under section 163.2 is a criminal penalty, not a civil one, and therefore subject to the protection of (inter alia) section 11 of the Charter of Rights and Freedoms.

The Federal Court of Appeal reversed on the basis that Ms. Guindon did not provide notice of a constitutional question, and thus the Tax Court lacked jurisdiction to make an order on the nature of section 163.2.  In any event, the Federal Court of Appeal also stated that the penalty under section 163.2 was not criminal in nature, and hence, was not subject to Charter protections.

Taxpayer’s Arguments

On appeal to the Supreme Court, the Ms. Guindon has framed her appeal as follows: based on the Supreme Court’s decisions in Wigglesworth and Martineau, section 163.2 is an offence provision that attracts the protection of (inter alia) section 11 of the Charter on the basis that section 163.2 is (1) an offence provision “by nature” and (2) an offence provision by virtue of its true “penal consequences”.

In addition, if section 163.2 is an offence provision, then Ms. Guindon argues that her section 11 Charter rights were breached in a manner that cannot be justified under section 1 of the Charter (applying the Oakes test).

Finally, Ms. Guindon asserts that a notice of constitutional question did not need to be filed in this case, since she was not seeking a declaration that section 163.2 was unconstitutional, but was rather merely asserting her Charter rights (and in the alternative, if notice of constitutional question was needed, Ms. Guindon argues that no prejudice resulted to the Crown and the Supreme Court can simply replace the lower court’s decision with its own).

Crown’s Arguments

The Crown, not surprisingly, has focused its primary argument on the fact that no notice of constitutional question was made by the taxpayer.  Accordingly, the Crown argues that the Supreme Court should dismiss the appeal on that basis alone and need not consider the substantive issues.

Alternatively, the Crown argues that section 163.2 is not an offence provision “by nature”, as its objects are purely administrative, the purpose of the penalty is to deter non-compliance under the Income Tax Act, and the process by which to challenge the penalty (i.e., the objection and appeal process under the Act) is not criminal in nature.

Moreover, the Crown asserts that section 163.2 does not impose true “penal consequences”, since (i) prosecution could have resulted in harsher sanctions (including prison time), and (ii) the magnitude of the penalty must be assessed in the context of the malady it intends to remedy (notwithstanding the lack of a penalty “ceiling”).  If the Supreme Court finds that section 163.2 infringes section 11 of the Charter, then the Minister will not seek to uphold it under section 1 of the Charter.

Potential Implications

Regardless of the Supreme Court’s finding on the issue regarding the notice of constitutional question, it would be surprising if the Supreme Court did not consider the substantive issue – it would be puzzling for the Court to grant leave and consider only the preliminary question. Accordingly, even if Ms. Guindon’s appeal fails on technical grounds, we expect the Court to offer much-needed guidance on the nature of section 163.2.

If the Court determines that section 163.2 infringes section 11 of the Charter (regardless of its finding on the “notice” issue), we can expect the Department of Finance may consider amendments to 163.2 (and the parallel provision under the Excise Tax Act) in a manner that takes into account the Supreme Court’s reasons.

The Court’s decision will also have implications for the Excise Tax Act (the “ETA”).  Section 285.1 of the ETA imposes a similar planner/preparer penalty for GST/HST purposes. At the CPA Commodity Tax Symposium in Ottawa (held on September 29 and 30, 2014), the CRA announced that it had recently issued the first penalty under section 285.1 of the ETA.

And for both the ITA and ETA, we expect there may be other potential penalty reassessments issued – or not – depending on the result of the Guindon case.

For these reasons, we eagerly await the hearing on December 5, 2014 and the Court’s subsequent decision.

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Guindon: SCC Hearing Scheduled for December 5, 2014

Foreign Charities and the Changing Landscape of CRA Charity Audits

There has been a flurry of recent scrutiny and activity in the areas of foreign and domestic charities – few foreign charities remain on the list of qualified donees since the changes to the definition of “qualified donee” in the Income Tax Act, and the CRA’s Charities Directorate appears to have taken a keen interest in the political activities of certain domestic charities.

Donors and charities would be prudent to monitor these developments and obtain professional advice where necessary.

Foreign Charities

Before 2013, a “qualified donee” under the Income Tax Act automatically included those foreign charities to which the Canadian government had made a gift in previous years (within a certain timeframe). However, that changed when the definition of qualified donee was amended to include only those foreign organizations that have applied to the CRA for registration, which would be granted if the foreign charity received a gift from the Canadian government and the CRA was satisfied that the foreign charity is carrying on relief activities in response to a disaster, providing urgent humanitarian aid, or carrying on activities in the national interest of Canada.

The CRA website lists only one foreign charity that has been registered – The Bill, Hillary and Chelsea Clinton Foundation. The CRA website also lists those organizations that had received gifts from the Canadian government before the changes to the definition of qualified donee.

Political Activities and CRA Charity Audits

The foreign charity changes occurred around the same time the CRA Charities Directorate increased its “political activities compliance efforts”. In general, charities are restricted from engaging in or supporting political activities unless those activities are wholly subordinate to their other charitable purposes. The CRA’s administrative position is that a charity must devote less than 10% of its total resources in a year to political activities.

The CRA focus on charities and political activities sparked many media articles raising the issue of whether the CRA’s auditing practices were themselves inherently politically-motivated (see articles here, herehere and here).

Cathy Hawara, the Director General of the CRA’s Charities Directorate, has denied accusations that these charity audits were politically motivated (see Ms. Hawara’s speech to the CBA Charity Law Symposium on May 23, 3014). The CRA also publicly stated that recent audits of charities were intended to focus on all types of charities and not only those with certain political inclinations. Further, the CRA has recently published a Charities Program Update which (among other things) aims to increase the transparency of its audits in the charitable sector and provide guidance as to how audits for charities involved in political activities are conducted. However, at the same time, the CRA has publicly stated that it will not divulge the guidelines for political activity audits of charities.

The controversy surrounding the CRA’s audit selection process persists. On September 15, 2014 a letter signed by 400 academics was released, demanding that the CRA halt its audit of the Canadian Centre for Policy Alternatives (“CCPA”). This letter was sent in response to the release of a CRA document obtained by the CCPA pursuant to an access to information request wherein the CRA states the reason for audit as follows: “A review of the Organization’s website… suggests that the Organization may be carrying out prohibited partisan political activities, and that much of its research/educational materials may be biased/one-sided.”

In their letter, the academics counter that “critical policy analysis does not equate with political activism, nor is it ‘biased’ or ‘one-sided’.” They argue that there is legitimate concern that charities are now self-censoring to avoid aggravating auditors and this audit activity will stifle sound, effective, and legitimate research.

On October 20, 2014, the Broadbent Institute released a report that adds further momentum to the speculative argument that the CRA is less interested in compliance and more interested in politically-motivated retribution against government critics (see also here).

The report highlights 10 “right-leaning” charities that have apparently escaped CRA audit, despite making public statements that may indicate that such charities are carrying out political activities without reporting them. The report concludes by suggesting that an impartial inquiry into the CRA’s audits of charitable organizations is the only way to come to a clear conclusion on this controversial matter.

The message is clear. The CRA is increasing scrutiny on political activities in the charitable sector. Charities should take active steps to ensure that they are compliant with applicable legislation.

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Foreign Charities and the Changing Landscape of CRA Charity Audits

Federal NFP Corporations Act: What’s Next?

Companies incorporated under the Canada Corporations Act (Part II) were required to be continued under the new Canada Not-For-Profit Corporations Act on or before October 17, 2014.

Industry Canada has published a Q&A on the next steps for those entities that have not yet continued under the new Act.

A company that has not yet completed its continuance may do so after the deadline, provided that Corporations Canada has not dissolved the company.

Corporations Canada will be sending a “Pending Dissolution Notice” to a company that has failed to continue to inform the company that it has 120 days to transition. Companies that do not complete the transition before the end of the 120-day notice period will be assumed to be inactive and will be dissolved.

Registered charities that are required to be continued under the new Act should consider the steps required to advise the Canada Revenue Agency of the continuance and any changes to the charity’s constating documents.

Any company that intends to be continued under the new Act should consult a professional advisor about completing the continuance as soon as possible.

Federal NFP Corporations Act: What’s Next?

Tax Court: Mini Storage Not a “Small Business”

The small business deduction (“SBD”) is a tax-preference provided to certain privately-held Canadian corporations, and only in respect of certain types of income. More specifically, the SBD provides for a reduction of the rate of federal income tax on the first $500,000 of active business income earned in Canada by a “Canadian-controlled private corporation”, in accordance with the rules established in the Income Tax Act (Canada) (the “Act”). The provinces generally offer a similar rate reduction, although the threshold below which the rate applies may vary.

The definition of “active business carried on by a corporation” in subsection 125(7) of the Act excludes a business that is a “specified investment business” (“SIB”). In general, this prevents a corporation from accessing the SBD where the principal purpose of the corporation’s business is to derive income from property, subject to limited exceptions.

In 0742443 B.C. Ltd. v. The Queen (2014 TCC 301), the Tax Court considered whether the taxpayer’s business of providing mini-storage and associated services was a SIB.

The Crown’s position was that the taxpayer clearly earned income from property – the storage units were rented out for a fee based on an established schedule, and the presence of some ancillary services did not change this principal purpose. The taxpayer disagreed, arguing that it was providing numerous services akin to those provided by a hotel, which is generally understood to be a services business and not a SIB.

The taxpayer’s counsel argued that the Crown’s assumptions were fundamentally misguided. Further, the rules in the Act permitting (and denying) the SBD were ambiguous, and such ambiguity should be given a liberal interpretation in favour of the taxpayer (i.e., the legislation should be read with the assumption that the intention of Parliament was to enable taxpayers to access the deduction wherever possible).

In a thorough analysis, the Tax Court disagreed with the arguments put forth by the taxpayer. The Court held that the income was clearly rent. The entire pricing structure of the taxpayer’s business was from monthly rental income based on the size of a storage unit rented. While the taxpayer was commendable in his efforts to give clients a positive experience, this did not change the nature of the business. In the words of the Court: “a few services to a few customers does not change the inherent nature of income from property”. The Court also concluded that there is no ambiguity in the relevant legislation.

In addition, the Court rejected the taxpayer’s assertion that it should succeed in the appeal because it had been treated unfairly by the Crown, specifically in respect of the Respondent’s “bad and misleading pleadings”. The Court noted that pleadings are often imperfect but that does not necessarily prejudice the other side or impede that side’s ability to understand the case that needs to be met. There were some concerns regarding the pleading of the assumptions in the Crown’s Reply, but the issue was clear, the parties knew what the case was about, evidence was properly led, and the Court was able to determine the correctness of the assessment.

The Tax Court dismissed the taxpayer’s appeal.

Tax Court: Mini Storage Not a “Small Business”

B.C. Supreme Court Rescinds Land Transfers

In Re 0741508 BC Ltd and 0768723 BC Ltd  (2014 BCSC 1791), the British Columbia Supreme Court (“BCSC”) considered whether rescission should be granted in respect of two real estate transactions in which the applicant corporations had transferred several parcels of land to a partnership.

The transactions were undertaken as part of a proposed commercial development of the land. The parties intended – in accordance with industry practice – that there would be no net GST/HST payable on the land transfers (i.e., the GST/HST payable would be offset by an input tax credit).

However, the partnership was not registered for GST/HST purposes under the Excise Tax Act (“ETA”) and accordingly the input tax credit was not available. The CRA audited members of the corporate group and reassessed nearly $6 million in GST/HST and penalties.

The parties brought an application to the BCSC for rescission of the transfers (i.e., to effectively put the property back in the hands of the selling corporations).

The application was opposed only by the CRA, which argued that rescission should not be available as the mistake in question was not related to the purpose of the transaction but only its consequences. In Gibbon v Mitchell ([1990] 1 W.L.R. 1304 (Ch.), a U.K. court held that rescission would be granted for a mistake where “the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it”. Similar reasoning was followed by the Ontario court in 771225 Ontario Inc. v Bramco Holdings Co Ltd. ([1994] 17 O.R. (3d) 571 (Gen. Div.)), which held that an assessed land transfer tax “was a consequence of the transaction, rather than its purpose, and therefore the case did not fall within the strict confines of the rule for granting relief.”

In considering whether to exercise its discretion to order equitable rescission, the BCSC cited McMaster University v Wilchar Construction Ltd. ([1971] 3 O.R. 801 (H.C.)):

In equity, to admit of correction, mistake need not relate to the essential substance of the contract, and provided that there is mistake as to the promise or as to some material term of the contract, if the Court finds that there has been honest, even though inadvertent, mistake, it will afford relief in any case where it considers that it would be unfair, unjust or unconscionable not to correct it.

In the present case, the BCSC noted that, in Re: Pallen Trust (2014 BCSC 305) the court had rejected Gibbon and instead relied on the test adopted in the U.K. Supreme Court decision in Pitt v Commissioners for Her Majesty’s Revenue and Customs ([2013] UKSC 26) to determine whether to rescind a voluntary transaction.

Equitable rescission, under Pallen, would be available where there was a “causative mistake of sufficient gravity” as to the “legal character or nature of the transaction, or as to some matter of fact or law which is basic to the transaction” such that it would be unconscionable, unjust or unfair not to correct the mistake.

The BCSC noted that, in the transactions at hand, the intention of the parties had always been that the partnership would be registered under the ETA so that no net GST/HST would be payable. This was distinguishable from Bramco, where there had never been a specific intention to minimize the applicable tax.

The BCSC reiterated the principle set out in McMaster and Pallen that “if there has been an honest, even though inadvertent mistake, equity will afford relief in any case that the court considers that it would be unfair, unjust, or unconscionable not to correct it” and held that it would be unfair and unjust for either Canada and/or the Province to gain over $6 million plus accruing interest solely because of a mistake in not registering under the ETA.

The BCSC granted the rescission and held that there was “no adequate legal remedy available, the petitioners are not seeking to carry out retroactive tax planning, and there is no prejudice to third parties.”

The Court did not explicitly consider whether the mistake met the threshold of being of sufficient gravity as to the legal character, nature of the transaction, or as to some matter of fact or law which is basic to the transaction.  Presumably, the punitive and negative results of the transaction were sufficiently grave – that is, the mistake about the fact as to whether ETA registration had been completed was sufficiently grave – that the Court found rescission should be granted.

Pallen has been appealed to the B.C. Court of Appeal.  It will be interesting to see if the present case is appealed as well.  Either way, the equitable doctrine of rescission continues to develop in the context of unintended tax consequences.

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B.C. Supreme Court Rescinds Land Transfers

Beware of Tax Phishing Scams

We have recently become aware (again) of fake emails purporting to emanate from the CRA and informing the recipient that he/she has received an Interac email money transfer (i.e., a surprise refund).

Generally, the text of these emails is as follows:

Dear TaxPayer,

Canada Revenue Agency has sent you an INTERAC e-Transfer
 (previously INTERAC Email Money Transfer).

Amount: $827.71 (CAD)
Sender’s Message: A message was not provided
Expiry Date: 10 October 2014

Action Required:
To deposit your money, click here: [fake URL here]

2014 Canada Revenue Agency (CRA) Online Support

These are scam emails and the recipients should never open any attachments or links that may accompany or be embedded in the emails.

The CRA has previously warned about these types of phishing scams:

The Canada Revenue Agency (CRA) warns all taxpayers to beware of telephone calls or emails that claim to be from the CRA but are not. These are phishing and other fraudulent scams that could result in identity and financial theft.

People should be especially aware of phishing scams asking for information such as credit card, bank account, and passport numbers. The CRA would never ask for this type information. Some of these scams ask for this personal information directly, and others refer the taxpayer to a Web site resembling the CRA’s, where the person is asked to verify their identity by entering personal information. Taxpayers should not click on links included in these emails. Email scams may also contain embedded malicious software that can harm your computer and put your personal information at risk.

Examples of recent telephone scams involve threatening or coercive language to scare individuals into pre-paying fictitious debt to the CRA. These calls should be ignored and reported to the RCMP (see contact information below).

Examples of recent email scams include notifications to taxpayers that they are entitled to a refund of a specific amount, or informing taxpayers that their tax assessment has been verified and they are eligible to receive a tax refund. These emails often have CRA logos or internet links that appear official. Some contain obvious grammar or spelling mistakes.

These types of communication are not from the CRA.

More information is available the CRA’s Security webpage.

Recipients of these scam emails should report the email to info@antifraudcentre.ca or contact the Royal Canadian Mounted Police.

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Beware of Tax Phishing Scams

Whose Mistake? Ontario Sup. Ct. Rectifies Trust Deed

Most tax rectification cases address situations in which a professional advisor has made a mistake in the planning and execution of a transaction with the result that an unintended tax consequence follows (i.e., payment of a capital dividend at a time when the company did not have a sufficient balance in its capital dividend account).

These are the relatively simple cases. However, in certain situations, the taxpayer and the CRA may take a different view on the interpretation and effect of a document, which could lead to an unintended tax result. Does the doctrine of rectification operate in these situations?

This was the situation considered by the Ontario Superior Court of Justice in Kaleidescape Canada Inc. et al. v. Computershare Trust Company of Canada et al. (2014 ONSC 4983), in which the Court was asked to determine whether the parties intended that a company remain a Canadian-controlled private company (“CCPC”) for the purposes of obtaining certain scientific research and development tax credits under the Income Tax Act (Canada) (the “Act”).

The Court granted the rectification, and Kaleidescape is a helpful case for those situations in which the “mistake” in a transaction arises as a result of competing interpretations of a parties’ document(s).

Facts

Kaleidescape Canada Inc. (“K-Can”) was a research and development company in Waterloo, Ontario. Under the Act, a CCPC is a Canadian corporation that is not controlled by a public company or a non-resident (or a combination of such persons). K-Can was structured as a “deadlock” corporation so that it would not be controlled by a non-resident and therefore would qualify as a CCPC.

From 2006 to 2008, K-Can’s shareholdings were restructured. In 2008, K-Can shares were owned by Kaleidescape Inc. (“K-US”), a Delaware company with head offices in California, and Kaleidescape Canada Employment Trust (the “Trust”). Computershare Trust Company of Canada (“Computershare”) became the sole corporate trustee. A Restated and Amended Trust Deed was entered into with K-Can as the settlor and Computershare as the sole trustee.

K-US and Computershare held equal voting rights. Additionally, a unanimous shareholders agreement relieved K-Can’s directors of their powers and conferred those powers on the shareholders. There was no provision to resolve a deadlock, and neither the shareholders nor directors had the right to make unilateral decisions.

K-Can received notices from the CRA advising that, in its view, K-Can was not a CCPC for the tax years ending December 31, 2008 and December 31, 2009. As a result, K-Can’s federal SR&ED and Ontario ITCs were denied. The CRA’s position was that the combined effect of the provisions of the Restated and Amended Trust Deed was to give a non-resident authority to direct Computershare how to vote its shares of K-Can, such that a non-resident controlled K-Can and the definition of CCPC was not met.

In response to the CRA’s reassessments, K-Can and Computershare entered into a “Deed of Rectification”, which revised the wording of Restated and Amended Trust Deed to protect K-Can’s CCPC status.

At the rectification application hearing, the Applicants argued that their common and continuing intention at all times was to structure and operate the company in a manner that would establish and preserve its CCPC status. The Respondent argued that the Applicants could not prove common intention, did not admit that a mistake had been made, and could not show the precise form of a corrected document that would express their prior intention.

Decision

In its analysis, the Court cited only two non-tax cases dealing with rectification (Performance Industries Ltd. v. Sylvan Lake Golf and Tennis Club Ltd. (2002 SCC 19) and Shafron v. KRG Insurance Brokers (Western) Inc. (2009 SCC 6)). (For tax rectification cases see Juliar v. Canada (A.G.) ([2000] O.J. No 3706), 771225 Ontario Inc. et al. v. Bramco Holdings Co. Ltd. et al. ([1995] O.J. No 157), McPeake v. Canada (A.G.) (2012 BCSC 132)Graymar Equipment (2008) Inc. v. Canada (A.G.) (2014 ABQB 15), and Re: Pallen Trust (2014 BSCS 305)).

Turning the facts of the current case, in several short paragraphs the Court stated that, on the entire record and history of the Applicants, the intention throughout was to ensure that K-Can – as an R&D body, with no other functions than research and development – qualified for CCPC status and the relevant research tax credits.

The Court held that wording chosen in the Restated and Amended Trust Deed was chosen by mistake and did not give K-US de jure control over K-Can. In respect of the proposed correction, the Deed of Rectification corrected the mistake in the original wording. The Court stated that Deed made it clear that the decision-making body was the board of directors and that the trustee was only to accept a direction in written form.

The Court granted the rectification sought by the Applicants.

 

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Whose Mistake? Ontario Sup. Ct. Rectifies Trust Deed

Finance Releases Annual Financial Report for 2013-14

The Department of Finance has released the “Annual Financial Report of the Government of Canada Fiscal Year 2013–2014″. Highlights include:

  • The Government posted a budgetary deficit of $5.2 billion for the fiscal year ended March 31, 2014, down from a budgetary deficit of $18.4 billion in 2012–13.
  • Revenues increased by $15.0 billion, or 5.9 per cent, from 2012–13, reflecting increases across all revenue streams. Program expenses increased by $2.4 billion, or 1.0 per cent, as increases in major transfers to persons and other levels of government were offset in part by a decrease in direct program expenses. Public debt charges were down $0.7 billion, or 2.3 per cent.
  • Direct program expenses, which include other transfer payments, the operating expenses of government departments and agencies, and the expenses of consolidated Crown corporations, have now decreased for four years in a row. This is the first time this has occurred since 1961–62, the earliest year for which records are available. This decline reflects effective control of government spending.
  • The federal debt (the difference between total liabilities and total assets) stood at $611.9 billion at March 31, 2014. The federal debt-to-GDP (gross domestic product) ratio was 32.5 per cent, down from 33.5 per cent a year earlier.
  • As reported by the Organisation for Economic Co-operation and Development (OECD), Canada’s total government net debt-to-GDP ratio, which includes the net debt of the federal, provincial/territorial and local governments, as well as the net assets held in the Canada Pension Plan and Québec Pension Plan, stood at 40.4 per cent in 2013. This is the lowest level among Group of Seven (G-7) countries, which the OECD expects will record an average net debt of 84.3 per cent of GDP for the same year.
  • For the 16th consecutive year, the Government has received an unmodified audit opinion from the Auditor General of Canada on the consolidated financial statements.

For additional articles on the financial report see here and here, and see Ralph Goodale’s commentary and Finance Minister Joe Oliver’s response.

Finance Releases Annual Financial Report for 2013-14

1057513 Ontario Inc.: The Clear Meaning of Subsection 129(1)

At the heart of tax integration in Canada is the refundable tax and dividend refund mechanism in subsection 129(1) of the Income Tax Act (the “Act”).

Generally, to avoid undue deferral of tax on investment income earned through a “Canadian-controlled private corporation”, such corporations must pay refundable tax on investment income (either under Part I or Part IV of the Act), which effectively brings the corporate tax rate on such income to the same rate had the income been earned directly by the Canadian shareholder.

In order to ensure that such income once distributed to an individual shareholder is not subject to double taxation, the Act provides that taxable dividends paid by a private corporation entitle the corporation to a refund of the lesser of 1/3rd of the taxable dividends paid and the balance of the corporation’s “refundable dividend tax on hand” (“RDTOH”) account. Importantly, the Act imposes a strict deadline for obtaining the refund: the return for the year in which the refund is claimed must be filed within three years of the end of the year in which the dividend is paid.

Despite this seemingly clear-cut limitation period, a number of taxpayers over the years have turned to the courts to seek what amounts to a judicial extension of the filing deadline. 1057513 Ontario Inc. v. The Queen (2014 TCC 272) is the latest in a line of recent decisions considering whether the three-year refund limitation period is absolute.

In 1057513, the taxpayer declared and paid dividends to its shareholder in the 1997-2004 tax years. The taxpayer’s director and officer was unaware that a personal holding corporation had an obligation to file a tax return in the years in question. Upon the filing of the tax returns in 2008, the CRA assessed Part IV dividend tax (and interest and penalties) and denied the dividend refund claim.

On appeal, the taxpayer made three arguments: (i) the language in subsection 129(1) was ambiguous (or “at least not unambiguous”), (ii) a textual, contextual and purposive (“TCP”) analysis of the provision reveals latent ambiguities which should allow for a late refund, and (iii) the filing deadline is directory, not mandatory, meaning that not filing the return on time is not fatal to the refund claim.

Not surprisingly, the Tax Court dismissed the appeal. Relying on Tawa Developments Inc. v. The Queen (2011 TCC 440) and other relevant decisions, the Tax Court determined that there was nothing textually unambiguous about the requirement to file a return within three years, finding the statutory language to be “strikingly lucid and abundantly clear”.

Under the TCP argument, the taxpayer argued that the Court should read out the deadline because it was “antipodal” to the integration principal. The Court disagreed, and concluded that the rule was necessary in the context and for the purpose of achieving an effective self-assessing system. Finally, the Court was not swayed by the taxpayer’s argument that a filing deadline without a penalty is directory and not mandatory. The Court noted that while there may be no penalty per se, there was certainly a consequence of the failure to file – that being the inability to access the dividend refund.

It seems clear from the jurisprudence to date that the three-year filing deadline for obtaining a dividend refund under subsection 129(1) is absolute. Taxpayers and their advisors are encouraged to file returns as soon as possible to avoid the potential punitive double-taxation.

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1057513 Ontario Inc.: The Clear Meaning of Subsection 129(1)

Devon: TCC considers large corporation rules

In Devon Canada Corporation v. The Queen the issue is whether the taxpayer (“Devon”) may deduct $20,884,041 paid to cancel issued stock options. After the close of pleadings, the Crown brought a procedural motion relating to the large corporations rules. The Tax Court allowed the motion in part, and struck certain portions of Devon’s Notices of Appeal (2014 TCC 255) (the main tax issue has not yet been heard by the Tax Court).

The content of objections and appeals for large corporations is subject to specific rules in the Income Tax Act (Canada). Under subsection 165(1.11), a large corporation’s Notice of Objection must describe each issue, the specific the relief sought for each issue, and facts and reasons in support of its position. Further, under subsection 169(2.1), the large corporation may appeal to the Tax Court only with respect to the issues and relief sought in the Notice of Objection. The Federal Court of Appeal recently considered these rules in Bakorp Management Ltd. v. The Queen (2014 FCA 104) (see our post on Bakorp here).

In the present case, the Tax Court highlighted some of the themes that have emerged from the case law on this issue:

  1. a taxpayer is not required to describe each issue exactly but is required to describe it reasonably (Potash Corporation of Saskatchewan Inc. v. The Queen, 2003 FCA 471);
  2. the determination of what degree of specificity is required for an issue to have been described reasonably is to be made on a case by case basis (Potash);
  3. a taxpayer may add new facts or reasons on appeal but not new issues (British Columbia Transit v. The Queen, 2006 TCC 437);
  4. if the proposed additional argument would result in the large corporation seeking greater relief than was previously sought, the courts are more likely to consider the argument to be a new issue rather than a reason (Potash; Telus Communications (Edmonton) Inc. v. The Queen, 2005 FCA 159);
  5. if the proposed additional argument would result in the large corporation seeking the same relief that was previously sought, the courts are more likely to consider the argument to be the same issue (British Columbia Transit; Canadian Imperial Bank of Commerce v. The Queen, 2013 TCC 170); and
  6. if the proposed additional argument would result in the large corporation seeking completely different relief than was previously sought, the courts are more likely to consider the argument to be a new issue rather than a reason (Bakorp Management Ltd. v. The Queen, 2014 FCA 104).

Devon raised three arguments in its Notices of Appeal for the deductibility of the payments to cancel stock options. These were summarized by the Tax Court as follows:

(a) Devon’s primary argument is that the payments are deductible as current expenses under subsection 9(1);

(b) In the alternative, Devon argues that the payments are eligible capital expenditures that, once added to cumulative eligible capital, would result in deductions pursuant to paragraph 20(1)(b). It further argues that, due to the fact that there were acquisitions of control of both of the predecessor companies during the taxation periods in which the payments were made, subsection 111(5.2) applies to cause significant additional deductions of cumulative eligible capital; and

(c) In the further alternative, Devon claims that the payments are financing expenses deductible under paragraph 20(1)(e).

The Crown argued that Devon, a large corporation in the years at issue, only referred to section 9 in its Notice of Objection. The other provisions – namely paragraph 20(1)(b) and subsection 111(5.2) and paragraph 20(1)(e) – were mentioned in a supplementary memorandum filed by Devon during the objection process. As such, references to provisions other than section 9 should be struck from Devon’s Notice of Appeal.

The Tax Court held that no mechanism in the Act would permit the supplemental memorandum filed by Devon to amend the original Notice of Objection. However, the Tax Court struck out references to paragraph 20(1)(b) and subsection 111(5.2) but not paragraph 20(1)(e).

The Tax Court held that paragraph 20(1)(e) did not raise a new issue and was merely an alternative reason argued by the taxpayer in favor of deducting the payments to cancel the issued stock options. However, paragraph 20(1)(b) and subsection 111(5.2) raised new issues that were not otherwise raised in the Notice of Objection and would have entitled Devon to a deduction for amounts in its cumulative eligible capital that were unrelated to the payments to cancel the stock options.

Although the taxpayer did not describe the relief sought with respect to paragraph 20(1)(e) in the Notice of Objection and only specified allowing the deduction in full, the Tax Court agreed that if a full deduction is pleaded under subsection 169(2.1) then a partial deduction of the same nature should not necessarily have to be separately pleaded under the large corporation rules.

Both the taxpayer and the Crown have appealed this procedural decision to the Federal Court of Appeal (Court File No. A-389-14).

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Devon: TCC considers large corporation rules