Principal Issues: Whether an amount receivable in respect of refundable Regulation 105 withholdings in a year is an amount that can be included in computing an allowance in respect of investment in property in Canada for the year for the purposes of paragraph 219(1)(j) of the Act.
Position: Generally no.
Reasons: Pursuant to subsection 164(1) the Minister has no obligation to refund the withholdings until after a taxpayer's return of income has been filed
Ottawa Tax Services Office Appeals Division HEADQUARTERS Income Tax Rulings Attention: Amy Wang Directorate Shelley Lewis (613) 957-2118
2007-025762
Branch Tax Investment Allowance and Refundable Regulation 105 Withholdings
This is in response to your memorandum of October 25, 2007, wherein you inquired whether an amount receivable, in respect of withholdings under section 105 of the Income Tax Regulations (the "Regulations") that exceed a non-resident's final Part I tax liability in a year, is an amount that can be included in computing an allowance for the year in respect of investment in property in Canada, as an allowable liquid asset of the corporation at the end of the year under paragraph 808(2)(i) of the Regulations or as a debt under paragraph 808(2)(g) of the Regulations, for the purposes of paragraph 219(1)(j) of the Income Tax Act (the "Act").
We have the following understanding of the facts:
The taxpayer's T2 return for the 2005 taxation year was reassessed on September 25, 2006. In computing its branch tax the taxpayer determined $XXXXXXXXXX should be added to its allowance for investments in property in Canada. When the amount was denied the taxpayer objected, and claimed that $XXXXXXXXXX, the amount by which the amounts withheld from payments to the taxpayer under Regulation 105 exceeded its final Part I tax liability for its 2005 taxation year, was an allowable liquid asset of the corporation and thus could be added in computing the taxpayer's allowance for the year in respect of investment in property in Canada.
Our Comments
Pursuant to paragraph 219(1)(j) of the Act, in computing the amount subject to Part XIV tax, where the corporate taxpayer is carrying on business at the end of the year, the taxpayer may deduct the amount prescribed to be its allowance for the year in respect of its investment in property in Canada. Subsection 808(1) of the Regulations prescribes a corporation's allowance for a taxation year in respect of its investment in property in Canada to be the amount by which the corporation's qualified investment in property in Canada at the end of the year exceeds certain amounts determined prior to 1972. Section 808(2) of the Regulations defines a corporation's "qualified investment in property in Canada at the end of the year" to include:
(g) an amount equal to the aggregate of the cost amount to the corporation at the end of the year of each debt (...) owing to it
(i) in respect of any transaction by virtue of which an amount has been included in computing its income for the year or from a previous year from a business carried on in Canada; or
(i) an amount equal to the allowable liquid assets of the corporation at the end of the year.
In computing the corporation's allowable liquid assets of the corporation at the end of the year under paragraph 808(2)(i), subparagraph 808(3)(a)(iii) generally includes the cost amount of certain types of debt instruments or similar obligations that was not described in the corporation's inventory in respect of a business carried on in Canada.
As a result of the application of the aforementioned Regulations, in order for the amount in question to be considered either the aggregate cost amount of debt under subparagraph 808(2)(g)(i) or an allowable liquid asset under subparagraph 808(3)(a)(iii), and thus a qualified investment in property in Canada, the amount receivable in respect of Regulation 105 withholdings tax must be a debt (or similar obligation) that is outstanding at the end of the corporation's taxation year.
According to Professor C.R.B. Dunlop in Creditor - Debtor Law in Canada, 2nd Ed. 1995, there is no all-encompassing definition of "debt". While the text states that the meaning of the word "debt" is changing over time, the most commonly accepted meaning or use of the word "debt" is to describe an obligation to pay a sum certain or readily reducible to certainty. Black's Law Dictionary, 7Th Edition, takes a similar approach and defines debt broadly, as: "1. Liability on a claim; specific sum of money due by agreement or otherwise.... 2. The aggregate of all existing claims against an entity, or state.... 3. A nonmonetary thing that one person owes another,...". In Beament Estate v. M.N.R, [1970] SCR 680, the court noted that the term "debt" is not defined in the Act and thus takes its ordinary meaning which is a sum payable in respect of liquidated money demand, recoverable by action. While at the 1984 Canadian Tax Foundation Conference, Question 12, the Canada Revenue Agency stated that, "It is a question of fact whether or not a particular arrangement creates a "debt obligation" and what the effects of certain contingencies may be. Generally speaking, a debt obligation is considered to arise whenever a binding liability is created and the principal amount of the liability can be quantified."
While the ordinary meaning of the term debt is clearly broad, in order to be considered a debt of the taxpayer the taxpayer must have a right to the amount, and the debtor must have an obligation to pay the amount.
In Munich Reinsurance Company v. MNR, 91 DTC 1137, Judge Rip (as he then was) determined that an overpayment of tax by the taxpayer was considered property of the taxpayer, in doing so, he discussed when an overpayment of tax becomes an enforceable right of the taxpayer. Judge Rip wrote:
Subsection 164(1) provides a mechanism for the Minister to refund an overpayment of tax. The Minister may refund an overpayment of tax for the year when mailing the notice of assessment for the year or later, and shall make the refund subsequent to the mailing of the notice on application by taxpayer within a time period. Thus by filing a tax return within a specified period, the taxpayer acquires an enforceable right against the Minister for any amount of money he has overpaid in tax. While this right is undoubtedly property, it is important to note that the right to a refund does not arise at the time an overpayment of any tax instalment is made but it arises on the day a return is filed. As section 164 makes clear, a refund is not due and payable until a return is filed.
We agree with Rip J. that a right to a refund of tax does not arise until a return is filed. As such, the amounts that were overpaid by the taxpayer in 2005 would not be considered debt of the government of Canada (i.e. an asset of the taxpayer) at the end of its 2005 taxation year and therefore could not be a qualified investment in property in Canada at the end of the year under clause 808(2)(i) or clause 808(2)(g)1 . As a result, it is our view, that the $XXXXXXXXXX cannot be included in computing the taxpayer's allowance for the year in investments in property in Canada under paragraph 219(1)(j).
We trust that these comments will be of assistance.
Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 In addition, it should also be noted that even if the $XXXXXXXXXX qualified as debt, such debt would not fall under clause 808(2)(g)(i) because it is not in respect of a transaction by virtue of which an amount has been included in computing its income for the year or from a previous year from a business carried on in Canada.