129(1), Part IV Tax, Tax Court of Canada

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.

FACTS

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.

PARTIES’ POSITIONS

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.

ANALYSIS

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).

Text

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).

Context

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.

Purpose

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.

CONCLUSION

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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