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

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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When is a Debt a “Bad Debt”?

When is a Debt a “Bad Debt”?

Coveley v Canada, 2014 FCA 281

This was an appeal from the TCC decision 2013 TCC 417, dismissing the taxpayer’s appeal.  The only issue to be decided by the FCA was whether, in the context of a claim for Allowable Business Investment Loss (ABIL) under the ITA (paragraph 40(2)(d)), the debt owing has become a bad debt at the time the claim was made.

The leading case as to whether a debt has become bad is Rich v. Canada, 2003 FCA 38.  The taxpayer claiming that a debt has become bad must show that the determination that the debt had become bad during the taxation year was an honest and reasonable one.  This requires the consideration of a number of factors.  In Rich, the FCA stated:

[13]            I would summarize factors that I think usually should be taken into account in determining whether a debt has become bad as:

1.         the history and age of the debt;

2.         the financial position of the debtor, its revenues and expenses, whether it is earning income or incurring losses, its cash flow and its assets, liabilities and liquidity;

3.         changes in total sales as compared with prior years;

4.         the debtor’s cash, accounts receivable and other current assets at the relevant time and as compared with prior years;

5.         the debtor’s accounts payable and other current liabilities at the relevant time and as compared with prior years;

6.         the general business conditions in the country, the community of the debtor, and in the debtor’s line of business; and

7.         the past experience of the taxpayer with writing off bad debts.

This list is not exhaustive and, in different circumstances, one factor or another may be more important.

In this case there were statements made, after the year in which it was claimed that the debt had become bad, that the year was going to be a good year for the corporation, the taxpayers continued to advance money to the corporation, the corporation continued to buy equipment,  the corporation has great assets, IP, and innovative solutions, and renovations on the company’s premises were made.  These facts do not point to a corporation where a reasonable person would have lost hope that the debt would be repaid.

The FCA stated that it could not find a palpable and overriding error in the TCC decision.

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Taxpayer Reliance on Wording of Waiver

Taxpayer Reliance on Wording of Waiver

Gramiak v Canada, 2015 FCA 40

[For a paper discussing judicial approaches to interpreting waivers of limitations periods see HERE]

This was an appeal from the TCC dismissing the Appellant’s motion to strike portions of the Crown’s Reply to the Notice of Appeal and granting the Respondent’s leave to amend the reply.

A number of factual and legal issues were raised.  Among them, the Appellant argued that language of the waiver is air-tight such that no transaction other than the one specifically mentioned and no provisions other than those specifically referred to can be part of the Crown’s reply.  The Appellant also argued that subsection 152(9) cannot be relied on as the legal and factual basis of the alternate argument are different from that which underlies the reassessment.

The FCA held that the taxpayer cannot, on a motion to strike, rely on limitations introduced in the waiver based on asserted facts which the taxpayer now denies or claims to be otherwise.  The matter is best left for trial.


Subsection 152(9) permits the Minister to support an assessment using an alternative argument in circumstances where ethe taxpayer is not prejudiced by a late argument from an evidentiary perspective, and where the alternative argument would result in a reassessment being made outside the normal reassessment period:  Walsh v. Canada, 2007 FCA 222.  Where the alternative argument by the Minister rests on a legal and factual basis that is different than underlying the original reassessment, outside of the normal reassessment period, the effect would be to do away with the limitation period.

The FCA accepted that a broad view of the factual basis is appropriate where supported by language in communications between the auditor and taxpayer (or taxpayer’s representative) (para 38).   However, the FCA also states that the “determination of the factual basis for the reassessment is best left to be determined at trial based on the fullness of the evidence” (para 39).

The FCA noted that the TCC relied on a non-textual objective interpretation of the waiver to allow for a broader application.  The FCA agreed that “allowing the appellant to escape taxation on the basis of a waiver, crafted so as to include the transaction which he maintained had taken place but exclude the transaction which he later revealed after the limitation period had expired, would give rise to an absurd result” (para 41).

In this case, the CRA was induced to maintain its initial assessment position at a time where the normal reassessment period had not yet expired due to factual assertions made by the appellant’s authorized representative as well as those contained in the Notices of Objection (in which all relevant facts must be set out – subsection 165(1)).  The appellant sought to modify the wording of the waiver to limit its application, such that the court ought to be hesitant to allow a motion to strike allowing the taxpayer to benefit from facts that are different than that originally asserted.  The FCA stated:

[47]           To the extent that the appellant actively induced the Minister to remain on the wrong path and waited until the reassessment period had passed to reveal the true transaction after having ensured that the waiver had been made air-tight, he may well be precluded from resiling from his initial position and/or relying on the waiver. In this respect, the appellant’s state of mind when these representations were made is obviously crucial. Yet, the extensive affidavits sworn by the appellant and his authorized representative in support of the Motion to Strike are both silent as to when they became aware that the debentures were not acquired (Appeal Book, Vol. 1 at pp. 74 to 77 and 113 to 118). In my view, only the trial judge after having considered the evidence on point will be in position to pronounce on the behaviour of the appellant and its impact on the position which he takes on appeal.

- Sas Ansari, JD LL M PhD (exp)

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Gross Negligence Penalties – s 163(2)

Gross Negligence Penalties – s 163(2)

Strachan v Canada, 2015 FCA 60

The taxpayer was assessed gross negligence penalties pursuant to subsection 163(2) of the ITA.  She claimed fictitious business losses at the behest of an unscrupulous tax preparer.

The TCC denied the taxpayer’s appeal – 2013 TCC 380 –  and the FCA dismissed the appeal.

Gross negligence penalties under subsection 163(2) are imposed where a taxpayer knowingly, or under circumstances amounting to gross negligence, makes a false statement in a return.  Willful blindness to relevant facts in circumstances where the taxpayer becomes aware of the need for some inquiry, but where the taxpayer declines to make the inquiry because the taxpayer does not wish to know the truth, insufficient knowledge: Canada (Attorney General) v. Villeneuve, 2004 FCA 20;  Panini v. Canada, 2006 FCA 224.

- Sas Ansari, JD LLM PhD (exp)

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Currency Hedging – Gains Capital or Income?

Currency Hedging – Gains Capital or Income?

George Weston Limited v The Queen, 2015 TCC 42

At issue was whether the gains realised from the dissolution of a currency hedge were on account of capital or income.  The Court identified the defining characteristics of a “hedge”, and stated that the nature of hedge gains or losses is linked to the nature of the underlying item the risk of which is being hedged.


The Appellants is a holding company parent of a number of operating subsidiaries, many of which are in the USA.  In order to protect itself against fluctuations of the US dollar in relation to the Canadian dollar (the currency in which it had to reports its financial statements in), the Appellant entered into currency swaps.  When the Canadian dollar rose in relation to the US, reaching parity, the swaps were terminated resulting in a gain of about 317 Million.

The Appellant took the position that this gain was on account of capital and only half included in income. The respondent took the position that the gain was on account of income and, therefore, fully included.


The Court determined that it was appropriate to admit expert evidence of a risk management person because (i) hedge is not defined in the ITA and in the context of this case it was appropriate to consider the commercial context of hedging, as “well-accepted principles of commercial trading are acceptable as guidance”: Symes v. Canada, [1993] 4 S.C.R. 695, and (ii) expert testimony on industry practice and on accounting principles related thereto are relevant:  Echo Bay Mines Ltd. v. Canada,  [1992] 3 F.C. 707.   Where a statutory definition is absent, the Courts should be careful to disregard the valuable guidance offered by well-established business principles: Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147.

The Court moved on to define “hedge” and noted that the ITA does note provide a definition (other than in the context of weak currency debts in subsection 20.3(1), which provides indirect guidance). In subsection  20.3(1),  hedge is a derivative that is entered into primarily to reduce risk, where the derivative is properly designated as a hedge.  In Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, the SCC characterized hedging as referring to a transaction that offsets financial risk, and a transaction is a hedge where  the party to it genuinely has assets or liabilities exposed to market fluctuations, and not in an amount in excess of risk exposure (which indicated speculation).

Here the Court held that the swaps were entered into over a period and that this period  was close to the transaction dates that gave rise to the need to hedge against financial risk.  The court did not find a problem with a parent holding company entering into the swaps on behalf of its subsidiaries.

The Court distinguished Tip Top Tailors Ltd. v. Minister of National Revenue, [1957] S.C.R. 703 and Atlantic Sugar Refineries Ltd. v. Minister of National Revenue, [1949] S.C.R. 706, as both those cases involved earnings from derivatives linked to commodities used in the business of the taxpayer.  Here, the swaps were not the purchase or sale of commodities; rather they serve to stabilize the value of foreign currency assets exposed to currency risk on the company’s balance sheet (para 77).   The character of the hedge gain or loss depends on the characterization of the underlying item to which the hedge relates – the risk being hedged  (para 80).

It appears that the Court accepts a transaction to be a hedge where: (i) the transaction is recorded as a hedge in its financial statements for accounting and tax purposes; (ii) the transaction was not speculation ; and (iii) the amount of the hedge matches as closely as possible the amount of the financial risk being hedged against (Para 96).  Further, the character of the hedge gains or losses depend on the character of the underlying item being hedged – if the risk being hedged is capital in nature, the gain or loss from the hedging transaction will also be capital in nature (absent a secondary intention) (para 97).  The Court concluded, at paragraph 98:

[98]        In sum, the present case involves a situation that has not previously been brought before the courts, at least that I am aware of. The appellant made a commercial and business decision, after careful consideration, to enter into the swaps in order to protect its consolidated group equity. It knew better than anyone else the consequences of having its net investment assets exposed to the risk of currency fluctuations. The swaps are commercial derivatives designed expressly to circumvent that kind of risk. As stated by Ms. Frost, the swaps were not speculative transactions. They were designed for hedging in the financial market. Now when the risk vanished, there was no need to keep the swaps. Here, GWL was satisfied that the swaps were no longer necessary when the risk exposure of the net investment assets was reduced significantly. They therefore decided to unwind the swaps. I have concluded that the swaps were entered into to protect a capital investment, and therefore they were linked to a capital asset. Absent unacceptable risk with regard to those capital assets, the swaps had to be terminated since the reason for their existence no longer applied, and the gain or loss from unwinding the swaps should, in my view, be treated as being on capital account. The swaps were not linked in any manner to any business income per se.

The Court rejected the Crown’s alternative argument that the gain was from an adventure or concern in the nature of trade, by referring to the factors that determine whether an adventure is an adventure or concern in the nature of trade in Belcourt Properties Inc. v. The Queen, 2014 TCC 208, and  Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259.  Having rejected the existence of an initial and/or secondary intention to enter into a profit making scheme, the transaction failed to meet this test.

- Sas Ansari, JD LLM PhD (exp)

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Income Tax (Federal & Provincial) – HST/GST – International Tax