1057513 Ontario Inc v Her Majesty the Queen, 2014 TCC 272
Canadian Tax Haiku of the Week
File your tax returns!
When it comes to the tax act
Time stops for no one
Introduction
The principle of integration in tax law refers to the goal that no tax advantage (or disadvantage) should arise from the use of a corporation. In theory, the total tax paid by a corporation and its shareholders should be the same as if the individual had earned the income directly. The Income Tax Act[1] (the Act) is designed achieve this desired balance and parity. Part IV of the Act seeks to achieve this integration between corporations and individual shareholders with respect of corporate dividends. Corporations initially pay tax upon declaring dividends, but, subject to certain conditions,[2] the corporation is entitled to a “dividend refund” after its individual shareholders pay the necessary income taxes. The interpretation of one of those conditions is the subject of this judgement by the Tax Court of Canada (Tax Court).[3]
Facts
Under subsection 129(1) of the Act, a dividend refund is available to a private corporation provided its income tax return is made within 3 years after the initial dividend is paid to the individual shareholder(s). In this appeal, 1057513 Ontario Inc. (the Corporation) failed to file the necessary tax returns within the Act’s prescribed 3 year limitation period. The Corporation’s director and officer admitted to being unaware of this obligation and, as a result, failed to file any relevant corporate tax returns during the period in question, 1997 to 2004. Thus, the Corporation appealed to the Tax Court the Minister’s denial of its entitlement to receive the dividend refund.
Issue
The sole issue before the Tax Court was to determine whether the failure to file corporate tax returns within the 3 years described in subsection 129(1) was fatal to the Corporation’s claim for repayment of the corporate dividend tax.
Judgement
After providing a statutory interpretation of the provision the Tax Court rejected the appeal. The Tax Court held the provision was “strikingly lucid and abundantly clear.”[4] Parliament requires corporations to file its returns for the Minister to provide the dividend refund.
The Corporation submitted that the failure of the subsection to prescribe a penalty for missing the filing deadline distinguished it from other sections under the Act. This was rejected by the Tax Court.[5] Not only does the provision have a consequence, but such consequence was the subject of this appeal!
The consequence of the failure of the Corporation to comply with the specific filing deadline is simply the Minister is not required to pay the dividend refund. The Court also noted that the normal required time deadline is much less for the filing of corporate income tax returns and the levying of penalties which arise from such failure.[6] The obligation of a taxpayer to file a return of income is incontrovertible under the Act.[7]
The Tax Court noted that there are many consequences that arise from a failure to file tax returns. [8] The deadline contained in subsection 129(1) 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.”[9]
Finally, the Corporation submitted the harsh result of the Minister’s denial is “blatant and punitive double taxation yielding a windfall to the federal treasury contrary to the overall statutory regime.”[10]Once again, the Tax Court was not buying what the Appellant was selling.
Justice Bocock called filing income returns the most fundamental obligation on a tax payer assigned under the Act. Time sensitive requirements are embedded throughout the Act and were clearly intended by Parliament. [11] Failing to meet these requirements yields harsh consequences upon the taxpayer in the form of penalties, interest, alternative assessments, denial of tax refunds, and in this case, dividend refund forfeitures.
Justice Bocock noted that while this may be “unfair, unilateral and even draconian,” its central and overarching context and purpose is the requirement to file the prescribed “income tax return” for a prescribed “tax year” within a “filing deadline” established under the “Income Tax Act”.[12]
Conclusion
In the decision, Justice Bocock’s annoyance with this appeal was palpable. Not because he did not personally have sympathy for the taxpayer, but because the Act gives zero leeway for taxpayers who fail to meet statutory deadlines. Not only were the judge’s hands tied, he knew that the Appellant’s counsel ought to have known that there was no joy in this case. Some cases are worth appealing, and others not, and this was one of the latter. We see this time all the time in our practice; cases where the taxpayer would have been in a position to reduce their tax if they had just done something in a timely manner. But time and the Act wait for no-one. At the end of the day, you have to FILE YOUR RETURNS on time.
By Jonathan Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law
[1] Income Tax Act, RSC 1985, c 1 (5th Supp) [the Act].
[2] Ibid, at subsection 129(1).
[3] 1057513 Ontario Inc v Her Majesty the Queen, 2014 TCC 272 [105 Ontario].
[4] Ibid, at para 17.
[5] Ibid, at para 26.
[6] Ibid.
[7] Ibid, at para 27.
[8] Ibid, at para 28.
[9]Ibid.
[10] Ibid, at para 29.
[11] Ibid, at para 30.
[12] Ibid.