Sentinel Hill No. 29 Limited Partnership et al. v. Attorney General of Canada

Sentinel Hill No. 29 Limited Partnership et al. v. Attorney General of Canada [Indexed as: Sentinel Hill No. 29 Limited Partnership v. Canada (Attorney General)]

89 O.R. (3d) 30

Court of Appeal for Ontario,

Feldman, MacFarland and Watt JJ.A.

February 22, 2008

Taxation -- Income tax -- Taxpayers mistakenly believing that fees payable under agreements with non-residents were deductible -- Taxpayers deducting amount of payments from their income tax and remitting withholding tax to Canada Revenue Agency on behalf of non-residents [page31 ]-- CRA subsequently denying that payments were deductible -- No withholding tax being owed by non-residents -- Taxpayers not having cause of action against CRA for unjust enrichment -- CRA owing money to non-residents and not to taxpayers -- Part XIII of Income Tax Act providing complete procedural code for return of non- resident withholding tax -- Application for return of withholding tax to be made to Tax Court of Canada and not to provincial Superior Court -- Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, Part XIII.

The appellants believed, on the advice of the Canada Revenue Agency ("CRA"), that certain fees payable under agreements with non-residents were deductible. They deducted the amount of the payments from their income tax and withheld and remitted to the Canada Revenue Agency on behalf of the non-residents the applicable withholding tax relative to the payments, as required by Part XIII of the Income Tax Act. CRA subsequently denied that a portion of the payments was deductible. As a result, no withholding tax was owed or payable by or on behalf of the non-residents. The appellants brought an action against CRA in unjust enrichment, seeking the return of the taxes they mistakenly remitted on behalf of the non-residents. CRA moved successfully for an order dismissing the action. The appellants appealed.

Held, the appeal should be dismissed.

Even though it was the appellants who may have suffered the deprivation, and it was CRA that had been unjustly enriched, under the Act, it was only the non-residents to whom any overpayment of withholding tax was owed. The appellants could have no cause of action against CRA. Part XIII of the Act provides a complete procedural code for the return of non- resident withholding taxes whether paid under mistake or where there is no liability under the Act. Sections 165 and 169 of the Act provide that if any application is to be made to court, it is to the Tax Court of Canada, not to the Superior Court of a province.

APPEAL from order of Lax J., [2007] O.J. No. 1377, 156 A.C.W.S. (3d) 951 (S.C.J.), dismissing an action.

Statutes referred to Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as am., ss. 165, 169, 212(1), (13.1), 215(1), 227(6), (7), and Part XIII Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21

J. Kenneth McEwan, Q.C., and David R. Davies, for appellants. James Gorham and Ifeanyi Nwachukwu, for respondent.

Endorsement by THE COURT: --

Overview

[1] The appellants are each Ontario limited partnerships formed to participate in tax sheltered investments in film and television productions with non-resident film studios. Believing that certain fees payable under the agreements with the non-resident studios [page32 ]were deductible, the appellants deducted the amount of the payments to the non- residents from their income tax, and withheld and remitted to the Canada Revenue Agency ("CRA") on behalf of the non- residents the applicable withholding tax relative to the payments, as required by Part XIII of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1.

[2] Subsequently, CRA reassessed the appellants by denying that a portion of the payments to the non-residents was deductible in the hands of the appellants. Under Part XIII, if the payment is not deductible in the hands of the resident partnership, then no withholding tax is owed or payable by or on behalf of the non-residents.

[3] The appellants brought this action against CRA in unjust enrichment, seeking the return of the taxes they mistakenly remitted on behalf of the non-residents when they believed those taxes were owing.

[4] The CRA moved under Rule 21 [of the rules of Civil Procedure, R.R.O. 1990, Reg. 194] to have the action dismissed as a matter of law and for lack of jurisdiction. The motion judge agreed. She held that there can be no action in unjust enrichment by the appellants. Although the amounts were remitted by the appellants, the remittances were made on behalf of the non-residents. Consequently, only the non-residents are owed any monies by the CRA. She also found there was a juristic reason for the original payment. On the jurisdiction issue, the motion judge held that the Act provides a complete procedural code for the recovery of any overpaid or wrongly paid withholding tax.

[5] The appellants appealed to this court on both issues.

Analysis

[6] The following sections of the Act are relevant to the issues raised:

212(1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non- resident person as, on account or in lieu of payment of, or in satisfaction of,

(a) a management or administration fee or charge;

(b) interest except

(i) interest payable by a non-resident-owned investment corporation,

(ii) interest payable on . . .

. . . . . [page33 ]

212(13.1) For the purposes of this Part, other than section 216,

(a) where a partnership pays or credits an amount to a non-resident person, the partnership shall, in respect of the portion of that amount that is deductible, or that would but for section 21 be deductible in computing the amount of the income or loss, as the case may be, referred to in paragraph 96(1)(f) or 96(1)(g) if the references therein to "a particular place" and "that particular place" were read as references to "Canada", be deemed to be a person resident in Canada;

(a.1) where a partnership pays, credits or provides to a non-resident person an amount described in subsection (5.1), the partnership is deemed in respect of the amount to be a person; . . .

215(1) When a person pays, credits or provides, or is deemed to have paid, credited or provided, an amount on which an income tax is payable under this Part, or would be so payable if this Part were read without reference to subsection 216.1(1), the person shall, notwithstanding any agreement or law to the contrary, deduct or withhold from it the amount of the tax and forthwith remit that amount to the Receiver General on behalf of the non-resident person on account of the tax and shall submit with the remittance a statement in prescribed form.

227(6) Where a person on whose behalf an amount has been paid under Part XII.5 or XIII to the Receiver General was not liable to pay tax under that Part or where the amount so paid is in excess of the amount that the person was liable to pay, the Minister shall, on written application made no later than 2 years after the end of the calendar year in which the amount was paid, pay to the person the amount so paid or such part of it as the person was not liable to pay, unless the person is or is about to become liable to make a payment to Her Majesty in right of Canada, in which case the Minister may apply the amount otherwise payable under this subsection to that liability and notify the person of that action.

227(7) Where, on application under subsection 227(6) by or on behalf of a person to the Minister in respect of an amount paid under Part XII.5 or XIII to the Receiver General, the Minister is not satisfied

(a) that the person was not liable to pay any tax under that Part, or

(b) that the amount paid was in excess of the tax that the person was liable to pay,

the Minister shall assess any amount payable under that Part by the person and send a notice of assessment to the person, and sections 150 to 163, subsections 164(1) and 164(1.4) to 164(7), sections 164.1 to 167 and Division J of Part I apply with any modifications that the circumstances require.

. . . . . [page34 ]

165(1) A taxpayer who objects to an assessment under this Part may serve on the Minister a notice of objection, in writing, setting out the reasons for the objection and all relevant facts,

(a) where the assessment is in respect of the taxpayer for a taxation year and the taxpayer is an individual (other than a trust) or a testamentary trust, on or before the later of

(i) the day that is one year after the taxpayer's filing-due date for the year, and

(ii) the day that is 90 days after the day of mailing of the notice of assessment; and

(b) in any other case, on or before the day that is 90 days after the day of mailing of the notice of assessment.

169(1) Where a taxpayer has served notice of objection to an assessment under section 165, the taxpayer may appeal to the Tax Court of Canada to have the assessment vacated or varied after either

(a) the Minister has confirmed the assessment or reassessed, or

(b) 90 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that the Minister has vacated or confirmed the assessment or reassessed,

but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed.

Issue 1: Are the appellants owed any monies by CRA?

[7] A non-resident is only liable for Part XIII withholding tax under s. 212(1) if it receives certain payments from a "person resident in Canada". A partnership is deemed to be a "person resident in Canada" under s. 212(13.1) if the payments it makes to a non-resident are deductible. In this case, the appellants initially believed the payments they made to the non-residents were deductible, having earlier obtained a ruling from CRA to that effect. After the appellants had remitted the withholding tax on those payments, CRA ruled that a portion of the payments was not deductible. Consequently, the appellants were not "persons resident in Canada" in respect of those payments and no withholding tax was owed by the non- residents.

[8] The agreement between the appellants and the non- residents contained a "gross-up" clause that required the appellants to gross up the payments it owed them by a sufficient amount so that once the tax was withheld and paid, the non-residents received the net amount they bargained for with no deduction for Canadian taxes. The effect of the gross- up clause was that the appellants effectively absorbed the non-residents' liability for Canadian withholding tax. [page35 ]

[9] Once the payments the appellants made to the non- residents were reassessed as non-deductible under the Act, the non-residents were not liable for the withholding tax that the appellants had already paid. However, the non-residents suffered no deprivation because of the gross-up clause. Rather, it is the appellants who have suffered a deprivation because they paid the tax on behalf of the non-residents out of their own pocket. The non-residents have not applied for a refund because they are not out [to] pocket any monies. It is the appellants who seek a refund from CRA.

[10] However, as the motion judge found, the gross-up clause is a private arrangement between the parties and does not affect their legal relationship with CRA, which is governed by the Act. The Act provides that the liability for tax is the non-residents', while the duty to remit is the appellants'. Consequently, even though it is the appellants who may have suffered the deprivation, and it is the CRA that has been unjustly enriched, under the Act, it is only the non-residents to whom the respondent owes any overpayment of withholding tax. The appellants can have no action against CRA. Because of this finding, there is no need to address the second part of the unjust enrichment test, absence of juristic reason.

Issue 2: Does Part XIII of the Act provide a complete procedural code?

[11] The appellants argue that because Part XIII of the Act only provides a remedy in s. 227(6) for non-residents, there is a gap in the Act in terms of a remedy for the appellants who paid the tax in accordance with the gross-up clause and are the ones who actually suffered the deprivation as a result. The appellants also point to CRA Information Circular 75-6R2 that recognizes the existence of "gross-up" clauses in agreements with non-residents and mandates how withholding tax is to be calculated on those grossed up payments.

[12] However, the fact that a remedy is provided only for non-residents is consistent with the scheme of Part XIII. As discussed above, CRA owes any overpayment only to the non- resident. Section 227(6) provides that where either the non- resident was not liable for withholding tax or an overpayment was made on the non-resident's behalf, it is the non-resident who has the remedy against CRA. Furthermore, if the non-resident disputes the remedy provided by CRA, ss. 227(7), 165 and 169 of the Act provide that an appeal lies to the Tax Court of Canada, not to the Superior Court of a province. [page36 ]

[13] It would appear that if the person resident in Canada who is obliged to withhold and remit to CRA wants the ability to claim a refund from CRA in case of an incorrect or over- payment, it must have an assignment or other legal arrangement with the non-resident that allows the resident to assert the non-resident's rights. Without such an arrangement, no one other than the non-resident is owed a remedy; therefore there is no gap in Part XIII.

[14] We agree with the motion judge that Part XIII of the Act provides a complete procedural code for the return of non- resident withholding taxes whether paid under mistake or where there was no liability for the tax. Sections 165 and 169 of the Act provide that if any application is to be made to court, it is to the Tax Court of Canada, not to the Superior Court of a province.

Result

[15] The appeal is dismissed with costs fixed in the amount of $10,000 inclusive of disbursements and GST.

Appeal dismissed.