Category Archives: Part IV Tax

Do you need to be given a refund to have a refund?

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Do you need to be given a refund to have a refund?

Presidential MSH Corporation v The Queen, 2015 TCC 61

The only issue before the court was what the meaning of “dividend refund” in the context of the Refundable Dividend Tax On Hand (RDTOH) mechanism is.

The Court concluded that the definition was textually and contextually ambiguous, but that the definition that required actual payment of the dividend was the only one consistent with the purpose of the provision and the ITA.

NOTE:  This is one of the many definitional problems that arise within the ITA and have prompted criticism by scholars and practitioners asking that the ITA be revised.  It is this incoherence that, in part, makes tax avoidance possible for those with sufficient means to pay for the services of  smart and creative tax lawyers.


The taxpayer paid dividends in 2004, 2005, and 2006, and claimed a refund under ITA subsection 129(1).  The MNR denied the refunds on the basis that the taxpayer had not filed its tax returns within three years of the respective year ends as required by the provision.  However, despite denying the refund, the MNR deducted the amount of the refunds applied for but denied from the taxpayer’s RDTOH balance.

The taxpayer paid dividends in 2010, 2011, and 2012 and again applies for a refund under ITS subsection 129(1).  The MNR denied the refund claim on the basis that the taxpayer did not have sufficient RDTOH available.  The lack of RDTOH is solely due to the deduction of the refunds claimed but not received by the taxpayer in its earlier application.


The MNR argued that the “dividend refund” is calculated whether a refund is actually made to the taxpayer or not.  This position ignored the words with which paragraph 129(1)(a) begins.

The Taxpayer argued that “dividend refund” is determined by the formula in 129(1)(a), and can either be Nil or undeterminable if no refund is actually made to the taxpayer.


ITA subsection 129(3) defined the term “refundable dividend tax on hand”, and requires that the balance be reduced by “the corporation’s dividend refund for its preceding taxation year”.  The phrase “dividend refund” is defined in paragraph 129(1)(a).  The TCC referred to the decision in Tawa Developments Inc. v. The Queen, 2011 TCC 440, where it was said that a refund claimed but not received does not reduce the taxpayer’s RDTOH.

The TCC considered the ordinary meaning of the word “refund”. The MNR argued that the word was a verb – what the minister may do – while the taxpayer argued that the word referred to an amount returned.  The Court held that neither argument was helpful because neither assisted in determining what words actually make up the definition.   The Court also stated that the “mere inclusion of the word “refund” in the defined term is not enough […] to conclude that the meaning of the definition is clear on an ordinary reading of the paragraph” (para 17).


The TCC determined that the plain and ordinary meaning of paragraph 129(1)(a) is ambiguous, as it “could either indicate that a “dividend refund” is the refund of the amount determined by the formula in the paragraph or that it is simply the amount determined by the formula regardless of whether it is refunded or not” (para 22).


The Court reduced the positions of the parties to the defined term being “amount” as argued by the MNR and “Refund of the amount” as argued by the appellant, and substituted these terms in places where the defined term is found throughout the ITA.  The Court also examined places in the ITA where the defined term was not used to see whether this provided insight into its meaning.  However, the results were inconclusive.

The TCC found that the best place to look for the meaning of the defined term was in the rest of section 129.  The Court went through the use of, or failure to use, the defined term throughout section 129.  In some cases, the use of the term could support either interpretation while in others it supported either the MNR’s or the Appellant’s interpretation:

  • Paragraph 129(1)(b), which would be rendered meaningless if the MNR interpretation is adopted (paras 25-30).
  • Similarly, the use of the term in subsection 129(1.2) would be illogical if the MNR’s interpretation would be adopted (paras 33-34).
  • The use of the MNR’s interpretation is consistent with the way the term is used in subsection 129(2.2) (paras 42-44).
  • The use of the Appellant’s interpretation is supported by subsections 157(3) and (3.1).

The Court concluded that the use of the defined term “dividend refund” is inconsistent throughout the ITA. This inconsistent use makes a contextual interpretation uncertain, leaving the meaning to be determined on a purposive basis.


The TCC looked at the purpose of the provision and definition.

The MNR argued that the three-year limitation period was provided so as to give “finality and fiscal certainty”. The Court agreed with this, but disagreed that finality and certainty are taken to such an end that would deny a delinquent taxpayer from every claiming a refund in respect of RDTOH.  The Court argued that the MNR is in no more uncertain position where a taxpayer does not file a return as compared to where a taxpayer chooses not to pay a dividend – both are required to give certainty to the MNR.

The Court concluded that the RDTOH system is there to promote integration of the corporate and individual taxes and to punish taxpayers who file their returns late.  Both these objectives are achieved by adopting the taxpayer’s interpretation while integration is sacrificed by adopting the MNR’s interpretation.


The interpretation of “dividend refund” that requires the actual payment of the refund to the taxpayer is more consistent with the purpose of the provision and the ITA.

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Dividend Refunds for Private Corporations

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Dividend Refunds for Private Corporations

1057513 Ontario Inc v The Queen, 2014 TCC 272

This case dealt with a private corporation’s ability to obtain a dividend refund under Part IV of the Income Tax Act, subsection 129(1), and the conditions of getting the refund in order to integrate the taxation as between corporation and shareholder.

The ITA states that a dividend refund is to be made by the Minister to the Corporation where the corporation’s income tax return is made within 3 years of the dividend payment.  The Minister argues that the failure to file such a return within the time period is fatal, while the taxpayer disputes the Minister’s refusal to refund the Part IV tax.

The Court held that the requirement to file a tax return within 3 years of the payment of the dividend is mandatory.


The facts were not in dispute.  The corporations declared and paid dividends from 1997-2004. However, because of a mistake of law by the directors, the corporation did not file any tax returns until 2008 (beyond the 3 year period described in 129(1)).  When the returns were filed, the Minister assessed Part IV tax, interest, and penalties, while denying the dividend refund.


The Court looked at the text of subsection 129(1), and the decision of the TCC in Tawa Developments Inc v R, 2011 TCC 440, where it was stated:

[51] A textual analysis leads to the following conclusions. Because subsection 129(1) contains an unambiguous condition that a tax return be filed within a prescribed time, where that condition is not met subsection 129(1) does not come into play and the dividend refund cannot be determined. The condition contained in the preamble to subsection 129(1) is no different than the remaining conditions contained in that subsection, such as the condition that the corporation be a private corporation and that it has paid a dividend in the taxation year. If those conditions are not met, subsection 129(1) does not come into play either and the “dividend refund” is likewise indeterminable. The ordinary definitions of the word “refund” imply a repayment.

The Court also referred to the informal decision in  Ottawa Ritz Hotel Co. v Canada, 2012 TCC 166, and the decision in of Ottawa Air Cargo Centre Ltd v R., 2007 TCC 193 at paragraphs 36, 37 and 38 (subsequently affirmed by the Federal Court of Appeal at 2008 FCA 54),  that held that missing the 3 year time limit rendered the refund provisions inoperative.   The court concluded that there are no patent textual ambiguities present in “this ostensibly clear and unambiguous provision” (para14).  The condition precedent of filing a return within the time period is made even more clear by considering the French version of the provision (para 16).  The Court stated at paragraph 17:

[17]        Patently, there is “no slippage betwixt hand and mouth.” Parliament requires various entities to do various things in certain time-frames. The corporation must file its returns, exclusively within its power, control and knowledge whereupon the Minister makes the dividend refund. Textually, it is strikingly lucid and abundantly clear. On a pure textual basis, to suggest otherwise ignores the plain and obvious meaning of the words and requires, the very thing proposed by the Appellant, a virtual re-writing of the provision by the deletion of the time deadline: Ludmer v. MNR [2002] 1 CTC 95 (SCC) at paragraph 109.

The entire regime, in light of the context and purpose of integration, requires acknowledging the taxpayer’s obligation to file tax returns, provides closure for the Minister after a reasonable amount of time, includes generous grace periods, and is in line with a voluntary filing and assessment system (para 22).   The court noted that “from a policy perspective, upholding the filing deadline provides a generous, administrable and clear ability to claim a dividend refund for those taxpayers utilizing private holding companies and who should otherwise be cognizant of the additional requirements, complexities and formalities of those business structures when utilizing such entities: R. v Neudorf, 75 DTC 5213 (FCTD at paragraph 10).”

Next, the court asked whether the deadline was mandatory or declaratory:

[25] … Legally, where a statute declares that something ought to be done, without signalling the result upon default or omission, the Court must determine whether the provision is mandatory or merely directory: BC (Attorney General) v Canada (Attorney General), [1994] 2 SCR 41 at paragraph 41.

The court noted that the consequence of not filing a return within the time period is not receiving a refund. The court noted that this was NOT:

  • the case where the Minister has failed to do a certain act and thus has purportedly lost jurisdiction or authority: Wang v Commissioner of Inland Revenue, [1995] 1 All E.R. 367;
  • the case of a government employee failing to undertake a technical filing: Lewis v Brady, 17 OR 377 (HCJ) and Trenton (Town) v Dyer, 1895 24 SCR 474;
  •  of an ancillary procedural step or technical form: Moriyama v R., TCC 311 (TCC) affirmed in part at 2005 FCA 207.

TheCourt concluded that “The deadline is not only mandatory, but it embodies and emblazons a paramount requirement and purpose under the Act: the requirement of a taxpayer, who best knows the subject matter of its affairs to file its return of income” (para 28).

– Sas Ansari, JD LLM PhD (exp)

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