Her Majesty the Queen v. The Great Atlantic and Pacific Tea Company Limited, [1977] CTC 538

Urie, J:—This is an appeal from the judgment of the Trial Division ordering the appellant to refund to the respondent the sum of $474,008.59. The respondent cross-appeals from the failure of the trial judge to order (a) the repayment by the appellant of the sum of $14,193.61 being interest charged by the appellant and paid by the respondent, and (b) interest on the sum awarded namely $474,008.59 and on the sum of $14,193.61 from the date or dates of payment thereof by the respondent.

The issue for determination is whether or not the respondent is entitled to an “allowable refund’’ as defined by subsection 133(8) of the Income Tax Act as amended by section 1 of SC 1970-71-72, c 63 (hereinafter called “the Act’’), for its 1972 taxation year.

The respondent, it is conceded, is a non-resident-owned investment corporation within the meaning of paragraph 133(8)(d) of the Act. It was incorporated on January 5, 1971 and its 1972 taxation year was, it is agreed, from February 28, 1971 until February 26, 1972. At the commencement of its 1972 taxation year, its retained earnings amounted to $64,919,006. Its taxable income during the 1972 taxation year amounted to $3,160,057.29 upon which the tax payable by the respondent calculated on the basis of 15% of its taxable income was $474,008.59.

During its 1972 taxation year the respondent paid taxable dividends aggregating $4,700,000 as follows:

Withholding tax at the rate of 15% was paid on those dividends.

section 133 of the amended Act provides a special tax treatment for non-resident-owned investment corporations. They are taxed at the rate of 15% on their income and 25% on their net taxable gains realized in Canada. In general terms it is further provided that when a non-resident-owned investment company distributes its income earned since the coming into force of the amended Act, by way of taxable dividends to its shareholders, the tax paid by the company on the income earned by it after the coming into force of the amended Act is to be refunded to the company. Subsection 133(6) creates the right to the refund.* [1]

The respondent’s application for a refund of the $474,008.59 tax paid on its income for the 1972 taxation year was rejected in the following terms:

You are advised that the earliest a refund of the special tax under section 133(9)(a) of the Income Tax Act can be applied for is with the 1973 Tax Return.

The learned trial judge found that the appellant erred in refusing to make the refund to the respondent and gave judgment directing the appellant to refund to the respondent the tax paid on its income, viz, $474,008.59. Early in his reasons for judgment he succinctly stated the problem in this case which, as already pointed out, he resolved in favour of the respondent. He stated [at p 434]:

The special problem presented in this case arises by reason of the particular fiscal year of the plaintiff (partly in 1971 and 1972), and what I might term the “transitional” provisions in section 133 relating to those years. Counsel for the defendant stated in argument:

. . . the plaintiff is entitled to a refund in respect of the tax . . . it has paid . . . The only issue is whether this amount is to be refunded, in respect of dividends paid in 1972, or whether the right to refund will arise, when taxable dividends are paid at a time subsequent to the end of its 1972 taxation year.”*

[* If the plaintiff has not paid, or does not pay, any dividends after the end of its 1972 taxation year, then, on the defendant’s interpretation of the section in question, the plaintiff will never receive an allowable refund in respect of the tax levied.]

The defendant’s position is, that on the correct construction of the statutory provisions, the plaintiff did not (at the material dates) have any taxable income, and its cumulative taxable income, for the purposes of the formula, is therefore nil. The plaintiff disagrees.

The term “allowable refund’’ is defined in the Act by paragraph 133(8)(a) reading as follows:

(a) “allowable refund” of a non-resident-owned investment corporation for a taxation year means the aggregate of amounts each of which is an amount in respect of a taxable dividend paid by the corporation in the year on a share of its capital stock, equal to that proportion of the dividend that

(i) the corporation’s allowable refundable tax on hand immediately before the dividend was paid

is of

(ii) the greater of the amount of the dividend so paid and the corporation’s Cumulative taxable income immediately before the dividend was paid:

From this it will be seen that there is derived the following equation for the calculation of the allowable refund:

Paragraphs 133(9)(a) and (b) provide the keys, if they can be discerned, to the meaning and calculation of “allowable refundable tax’’ and “cumulative taxable income’’. The relevant portions of those sections for the purposes of this appeal read as follows:

133. (9) . . .

(a) “allowable refundable tax on hand” . . . at any particular time means the amount . . . by which the aggregate of

(i) all amounts . . . in respect of any taxation year commencing after 1971 and ending before the particular time, equal to the tax under this Part payable by the corporation for the year, and

(ii) 15% of the amount determined under subparagraph (b)(ii) in respect of the corporation.* [2]

exceeds the aggregate of amounts each of which is

(v) an amount in respect of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971, equal to the amount in respect of the dividend determined under paragraph (8)(a); and

(b) “cumulative taxable income” . . . at any particular time means the amount . . . by which the aggregate of

(i) its taxable incomes for taxation years commencing after 1971 and ending the particular time, and

(ii) where the corporation’s 1972 taxation year commenced before 1972, the amount . . . by which its taxable income for that year . . .

exceeds the aggregate of amounts each of which is

(v) the amount of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971.

Subparagraphs (ii) in each of paragraphs (9)(a) and (9)(b) of section 133 deal with what was conveniently described as “the straddle year’’, being a taxation year which commenced before the coming into force of the amended Act on January 1, 1972. Thus, it was said, the subparagraphs are applicable to the respondent’s 1972 taxation year. The sole issue on this appeal, therefore, appears to be whether or not the taxable dividends of $4,700,000 paid by the respondent in the straddle year results in the respondent being entitled to the refund claimed by it and awarded to it by the learned trial judge.

There are three principles which, it seems to me, emerge from the complex language of paragraphs (8)(a), (9)(a) and (9)(b) of section 133 In the determination of an allowable refund for a corporation:

(1) no such refund is payable unless taxable dividends have been paid by the corporation;

(2) at least for corporations whose taxation years did not commence until after December 31, 1971, the corporation must have had taxable income before the dividends were paid; and

(3) because that is so and because by definition* [3] “taxable income” is income for a taxation year minus permitted deductions, again at least for corporations whose taxation years did not commence until after December 31, 1971, there has to have been a complete taxation year in which the corporation had taxable income upon which it was taxed before the payment of the dividends can trigger the right to a refund of tax paid on the corporation’s taxable income; that is, there is a time lag of one year before the refund of tax becomes allowable.

Neither counsel for the appellant or respondent took issue with this view of the principles applicable, as I understood their submissions. Their agreement as to those principles did not, however, extend to agreeing that in the fact situation present in this case, the respondent was entitled to claim and to have refunded to it the tax paid on its taxable income for its 1972 taxation year starting as it did, on February 28, 1971.

The appellant contended that the respondent’s 1972 taxable income could not be calculated until, at the earliest, after the close of business on February 26, 1972. Therefore, in the calculation of any allowable refund purportedly generated by the payment of the $4,700,000 in dividends in its 1972 taxation year (which payments were made before not after the taxable income for the year was capable of ascertainment) the equation earlier referred to would read as follows:

Since the numerator of the fraction is ‘‘nil’ because there was no taxable income “immediately before the dividend was paid” as required by paragraph 133(8)(a), there can be no allowable refund.

The respondent’s interpretation of the subsections in question is conveniently summarized in the reasons for judgment of the learned trial judge as follows [p 436]:

Counsel for the plaintiff turns first to cumulative taxable income and subparagraph 133(9)(b)(ii). Subparagraph (i) is not applicable to this case, but counsel stresses the taxation years there referred to must not only have commenced after the calendar year 1971 but have ended before the date of each payment of dividends. Subparagraph (ii), it is pointed out, does not State the taxation year there referred to (the straddle year) must have ended before the “particular time”. It follows then, argues the plaintiff, the company’s taxable income for 1972 is to be included in this calculation, even though it was not or could not be computed until after the date of payment of the dividends, and indeed, until after the completion of its fiscal year (February 26, 1972). The language of subparagraph (ii) is, counsel submits, clear and unambiguous; there 3 no requirement stated that the taxable income must in fact have been ascertained before the date of dividend payments; the legislators intended, in respect of those non-resident-owned investment corporations whose fiscal period overlapped both sides of January 1, 1972 and who, in the straddle year, paid, as this plaintiff did, dividends before the commencement of the new Act (not knowing what its terms might be) should be able to take advantage of the refund provision.

The plaintiff submits a similar interpretation should be put on subparagraph 133(9)(a)(ii) in respect of allowable refundable tax on hand. Counsel put it this way:

‘‘As in the case of cumulative taxable income, when one is calculating allowable refundable tax on hand at any particular time, one includes tax payable for taxation years other than the straddle year, only if those years have ended before the particular time; but one includes, in any event, the amount specified in respect of the straddle year, whether or not it has ended before the particular time.”

The trial judge gave effect to these submissions when he held [p 437]:

In respect of the straddle year provisions, however—subparagraphs 133(9)(b)(ii) and 133(9)(a)(ii)—there is no stipulation that the fiscal period must have ended before the dividend payment date. Nor is there any Stipulation (or language requiring that interpretation) that the taxable income, and therefore the amounts of tax payable, be, at that precise time, ascertained or capable of precise ascertainment. In my view those subparagraphs mean that the taxable income in the one case, and the tax in the other, are to be included in those particular calculations even though the precise amounts may not be arrived at until some time after the dividends were in fact paid.

Respondent’s argument based in the first instance on its interpretation of the “cumulative taxable income” section, viz, paragraph 133(9) (b), necessitates acceptance of the proposition that subparagraph (ii) of that paragraph can stand by itself in providing the denominator for the arithmetic equation derived from paragraph 133(8)(a) for calculating a corporation’s allowable refund for a taxation year. In my opinion, the Subparagraph cannot be so viewed for two reasons:

(1) As stated earlier, one of the principles applicable to ‘‘allowable refunds” is that they can only be claimed for a taxation year which ended before the dividends generating the right to a refund were paid. In the straddle year this would mean, in the case of the respondent, that the dividends paid in the 1972 taxation year could not apply because the taxable income for that year could not have been calculated until after February 26, 1972, a date after the dividends had been paid. Paragraph 133(8)(a) clearly supports the view that the calculation envisaged by that section could be made only in respect of the cumulative taxable income of a corporation immediately before the dividend was paid.

(2) The respondent’s argument assumes that subparagraph (ii) of paragraph 133(9)(b) is disjunctive from subparagraph (i). That this is not so is demonstrated by the presence of the conjunctive “and” at the end of subparagraph (i). As a result, it seems to me, the purpose of the subparagraph is shown. That purpose is to determine by how much the aggregate of the taxable income of the corporation from (i) years after 1971 and (ii) from a taxation year which begins during 1971 and ends after January 1, 1972 exceeds the aggregate of certain other amounts calculated under subparagraphs (iii), (iv) and (v). Its purpose is not to enable the application of the “allowable refund” provisions to a taxation year commencing at some date in 1971 and ending at some date in 1972 by itself. It is for use, in applicable cases, as part of the calculation of the cumulative taxable income of a corporation for the denominator of the arithmetic equation established by paragraph 133(8)(a) to calculate the ‘‘allowable refund” of the corporation. There was thus no necessity, in my view, for including the words “ending before the particular time” in this subparagraph as was necessary in subparagraph (i). That is, it was not necessary to specify that the taxable income be established before the particular time for the calculation under subparagraph (il) because the figure reached under it is merely part of the aggregate figure established by adding to it the calculation under subparagraph (i) which does specify the termination date, viz, a taxation year commencing after 1971 and ending before the payment of the taxable dividend.

That this reasoning is correct is borne out by the wording of subparagraph (v) of paragraph 133(9)(b). For convenience, I repeat it here:

(v) the amount of any taxable dividend paid by the corporation on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971.

The applicable amount under that subparagraph, together with the applicable amounts under subparagraphs (iii) and (iv) (in this case there would have been no additions under (iii) and (iv)) is subtracted from the aggregate of the amounts under subparagraphs (i) and (il) to ascertain the corporation’s cumulative taxable income at the particular time.

If the interpretation of the learned trial judge was correct, no such subtraction would be required because the dividends paid in the straddle year were paid prior to, not after, the commencement of the respondent’s first taxation year after 1971. They thus do not fall within the description of ‘‘taxable dividends’’ which are to be deducted from the aggregate of the two kinds of taxable income referred to in subparagraphs (i) and (ii). No wording is used in subparagraph (v) enabling the inclusion of an amount for dividends paid in the "straddle year”. In my view, clear support is thereby provided for the interpretation I have heretofore given as to the effect of the inclusion of subparagraph (ii) in paragraph 133(9)(b).

The same reasoning applies equally to the interpretation of subparagraph (ii) of paragraph (9)(a) reinforced by subparagraph (v) of that paragraph employing, as it does, the same language as subparagraph (v) of paragraph (9)(b).

In summary, if the respondent’s argument were to prevail, and as upheld by the learned trial judge, a corporation whose 1972 taxation year straddled the calendar years 1971 and 1972, could claim an allowable refund immediately after the close of its 1972 year, although the dividends had been paid prior to that date. That is, it would not have to wait a year to claim an allowable refund whereas those corporations whose 1972 taxation year was the calendar year, would have to wait until the following taxation year to do so. In my view, such a submission is illogical and ignores what the subsections appear to contemplate although, to say the least, the language used therein lacks precision and clarity.

Accordingly, I would allow the appeal with costs and confirm the Minister’s assessment. As a result of course, the cross-appeal should be dismissed with costs.

Le Dain, J (concurring):—I agree, for the reasons given by Mr Justice Urie, that the appeal should be allowed. I am unable, with respect, to attach the same significance as the learned trial judge to the omission in subparagraphs (ii) of paragraphs 133(9)(a) and (b) of any such reference to the end of the taxation year as is found in Subparagraphs (i) thereof. Subparagraphs (ii) are directed to completing the definition of what must be included in the calculation of allowable refundable tax on hand and cumulative taxable income. To the tax paid and taxable income received in respect of taxation years commencing after 1971 and ending before the payment of dividends giving rise to refund must be added, if applicable, the tax paid and taxable income received in respect of a 1972 taxation year which commenced before 1972. It was not necessary to repeat that the 1972 taxation year in such case must have ended before payment of the dividends in question; subparagraphs (ii) of paragraphs 133(9)(a) and (b) clearly refer to a taxation year that would necessarily have ended before the taxation years contemplated by subparagraphs (i) thereof. The terms of subsection 133(9) as a whole reinforce what is laid down as a general principle by subsection 133(8) in the definition of allowable refund: that the allowable refundable tax on hand must have been established before the dividends which give rise to the refund were paid. It could only be so established at the end of a taxation year. In the result, dividends paid in the course of a 1972 taxation year cannot give rise to allowable refund whether that year commenced before or after the end of 1971. As Mr Justice Urie points out, there is no reason why the respondent should be more favourably treated than a taxpayer whose 1972 taxation year commenced after 1971.

MacKay, DJ (dissenting):—I am not persuaded that the trial judge was in error in reaching the conclusion which he did in respect of the respondent’s claim to the allowable refund of $474,008.59.

In the case of a non-resident-owned investment corporation the legislative policy has been and is to relieve against taxation of both the corporation’s income and dividends paid to its non-resident shareholders.

Prior to 1970 the scheme for the taxation of non-resident-owned investment corporations was simple—it provided:

(1) that non-resident-owned investment companies be taxed at a flat rate of 15% of its taxable income for the taxation year;

(2) that dividends paid by a non-resident-owned corporation to its non-resident shareholders would not be subject to any withholding tax.

The present legislation is a more complicated scheme involving the payment by the corporation of both tax on the corporation’s income and a withholding tax on the dividends paid to the non-resident Owners and providing for a system of refunds to the corporation.

It would seem to be obvious that the purpose of Parliament under both the old and the new Act is to relieve against what may be described as double taxation in the case of foreign-owned investment corporations.

In the present case that purpose would be defeated if effect is given to the submissions of counsel for the appellant.

The position taken by the Department in this case is that the allowable refund should be claimed in respect of the respondent’s taxation year of 1973 and not that of 1972.

Paragraph 3 of the statement of defence is as follows:

3. He denies paragraph 7 of the Statement of Claim, as amended, and says that as of June 1, 1971, 29 December 1971 and 24 February, 1972, the Plaintiff’s allowable refundable tax on hand under section 133(9)(a) of the Act was nil, but admits for the purpose of this action, that immediately after the close of its 1972 taxation year, the Plaintiff’s allowable refundable tax on hand determined under section 133(9)(a) was $474,008.59.

Section 7 of the statement of claim is:

7. The Plaintiff's allowable refundable tax on hand immediately before payment of the said dividends as determined under Section 133(9)(a) of the Income Tax Act was $474,008.59.

Under section 133 the allowable refund cannot exceed the tax payable on the corporation’s income so that if the corporation’s tax on income for 1973 was, for example, $100, that is the most that could be claimed as an allowable refund and if, as is the case here, the corporation had no taxable income for the taxation year of 1973, no refund could be claimed.

I do not think Parliament could have intended this result.

In Salmon v Duncombe (1886), 11 App Cas 627 at 634, Lord Hobhouse said:

It is, however, a very serious matter to hold that when the main object of a statute is clear, it shall be reduced to a nullity by the draftsman’s unskillfulness or ignorance of law. It may be necessary for a Court of Justice to come to such a conclusion, but their Lordships hold that nothing can justify it except necessity or the absolute intractability of the language used.

and in Highway Sawmills Ltd v MNR, [1966] SCR 384 at 393; [1966] CTC 150 at 157; 66 DTC 5116 at 5120, Cartwright, J said:

The answer to the question of what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.

I think that the statements of Lord Hobhouse and Cartwright, J in these two cases are relevant in the present case.

In the Appeal Book, p 20 is the following letter dated April 27, 1972 from the Interpretation Division of the Department of National Revenue to the firm of chartered accountants who were the auditors for the respondent company:

This is in reply to your letter of April 13, 1972 in which you asked us whether a non-resident-owned investment Corporation is entitled to offset its allowable refund as calculated under paragraph 133(8)(a) of the Income Tax Act against its tax liability as determined in its return for a taxation year.

The policy of our collections division is that the full amount of the tax liability should be remitted and the Company will subsequently be issued a cheque in respect of the allowable refund. However, as has been the practice in the past in similar situations, it is expected that many Corpor- ations will desire to pay only the net amount and this practice will be accepted by the Department.

This letter was written after the close of the respondent’s 1972 taxation year and was in respect of the respondent’s tax position for that year.

Following the receipt of this letter, the respondent, setting off its allowable refund against the tax on its 1972 income, filed a tax return showing “nil” taxes payable for that year.

The Department served on the respondent an assessment notice dated December 6, 1972 as follows:

Federal Tax $474,008.59. Total refund nil. Refundable dividend tax “nil”. Balance unpaid includes interest of $13,061.09 on late or deficient installments and on balance of tax payable from due date of the balance.

With this assessment was a notice as follows:

You are advised that the earliest a refund of the special tax under section 133(9)(a) of the Income Tax Act can be applied for is with the 1973 tax return. Therefore your claim for a refund for this year has been disallowed.

Notice of objection to this assessment was filed by the respondent.

Under date of June 20, 1974 a notification by the Minister confirming the 1972 assessment was served on the respondent together with a form notifying it of its right to appeal the assessment to either the Tax Review Board or to the Federal Court—both of these documents are stated to be in reference to the respondent’s 1972 taxation year.

The present action was then commenced by a statement of claim filed on September 12, 1974—the claim, understandably in view of the notice accompanying the Minister’s confirmation of the assessment, is framed as an appeal from the 1972 assessment and as amended, claims payment of the allowable refund of $474,008.59 and the items of interest that are the subject of the cross-appeal.

The respective viewpoints as to the meaning to be given to the relevant legislation are fully set out in the reasons of Mr Justice Collier, the trial judge, and those of my brothers Urie and Le Dain and need not be restated.

I am of the view that it was open to the trial judge to reach the conclusion which he did and I would dismiss the appeal with costs.

The respondent cross-appeals in respect of the dismissal of its claims:

(1) that the defendant be ordered to pay to the plaintiff the sum of $14,193.61 being interest charged by the defendant and paid by the plaintiff:

(2) that the defendant be ordered to pay the plaintiff interest on the said amounts of $474,008.59 and $14,933.61 from the dates of payment thereof of these sums by the plaintiff.

As to the claim for repayment of the sum of $14,193.61, the trial judge said [p 438]:

The plaintiff claims repayment of the interest charged of $14,193.61 and for interest on the two sums set out above. In my opinion there is no power to grant the relief sought. The assessment by the Minister, which levied a tax of $474,008.59 and the interest, is itself not before the Court. There was not here an appeal by the taxpayer from an assessment. The relief powers of the court applicable to actions of that nature are not available in this case. I cannot therefore require the defendant to make a refund in the sum of $14,963.61.

I do not agree. The Department claimed this amount in its notice of assessment and this is an appeal from that assessment. Agreeing as I do with the trial judge’s finding that the plaintiff was entitled to the allowable refund in respect of its 1972 tax year there was no right to charge interest. I would allow the cross-appeal in respect of this item and direct that the sum of $14,193.61 be repaid to the plaintiff.

As to the claim for interest on the amounts of $474,008.59 and $14,933.61 the trial judge held that section 164, subsections (3) and

(4) did not apply. I am of the opinion that when those subsections are read together with the definition of overpayment in subsection (7) they do apply in respect of this claim and I would allow the crossappeal in respect of these items and direct payment of these items of interest.* [1]

The respondent is entitled to its costs of the cross-appeal.