Stonehouse Group Inc. v. The Minister of Finance
[Indexed as: Stonehouse Group Inc. v. Ontario (Minister of Finance)]
Ontario Reports Court of Appeal for Ontario Lauwers, Miller and Nordheimer JJ.A. January 11, 2021
153 O.R. (3d) 494 | 2021 ONCA 10
Case Summary
Statutes — Interpretation — Reassessment of corporation's federal tax resulting in reassessment of provincial tax and disallowance of loss carry back — Objection to reassessment resulting in disallowance being reversed and corporation being refunded its payment, but without refund interest — Motion judge denying corporation's claim for payment of refund interest at enhanced rate — Corporation's appeal allowed — Motion judge's interpretation of legislation would have denied any sort of refund, whether at normal or enhanced rate — Result would have been manifestly unfair — Corporations Tax Act, R.S.O. 1990, c. C.40, ss. 79(7), 82(4), 82(5).
Taxation — Income tax — Corporate income tax — Reassessment of corporation's federal tax resulting in reassessment of provincial tax and disallowance of loss carry back — Objection to reassessment resulting in disallowance being reversed and corporation being refunded its payment, but without refund interest — Motion judge denying corporation's claim for payment of refund interest at enhanced rate — Corporation's appeal allowed — Motion judge's interpretation of legislation would have denied any sort of refund, whether at normal or enhanced rate — Result would have been manifestly unfair — Corporations Tax Act, R.S.O. 1990, c. C.40, ss. 79(7), 82(4), 82(5).
As a result of reassessments by federal tax authorities, the respondent reassessed the appellant's provincial tax in July 2013. A deduction for a loss carried back under the Corporations Tax Act was disallowed, resulting in $560,000 in taxes and interest owing by the appellant for 2008. The appellant paid the amount in October 2013. The federal reassessments were ultimately reversed, resulting in the respondent reassessing the appellant to allow the full loss carry back. In October 2015, the respondent made a refund payment to the appellant without any refund interest. The calculation of the normal interest rate at the time resulted in a zero per cent rate. However, the appellant believed that it was entitled to be paid interest at an enhanced rate under s. 82(5) of the Corporations Tax Act because after the 2013 reassessment it had a surplus in its tax account, being the amount that it had paid that was subsequently shown not to be properly payable. A motion judge disagreed, concluding that s. 79(7) removed tax loss refunds from the benefit of the enhanced s. 82(5) interest rate. The appellant appealed.
Held, the appeal should be allowed.
The motion judge's interpretation was incorrect. A reading of s. 79(7) alone tended to support the respondent's position, which was that the appellant was entitled to normal interest under s. 82(4) but not to enhanced interest under s. 82(5). However, such a reading deemed the tax payable by a corporation to be the tax payable without taking into account any deduction allowed as a result of a loss carry back, resulting in no surplus in the taxpayer's account on which interest would be payable. The effect was to deny a corporation any refund interest, and not just refund interest at the enhanced rate. That result was not only manifestly unfair, it was directly contrary to the legislative context in which the interest payment provisions were adopted more than 60 years ago.
Cases Referred To
- Connaught Laboratories Ltd. v. Canada, [1994] F.C.J. No. 1681, 87 F.T.R. 39, [1995] 1 C.T.C. 216, 94 D.T.C. 6697, 51 A.C.W.S. (3d) 744 (T.D.)
- Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991, 2002 DFQ para. 10,056
- Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, [2006] S.C.J. No. 20, 2006 SCC 20, 266 D.L.R. (4th) 513, 348 N.R. 148, J.E. 2006-1100, 210 O.A.C. 342, 2006 D.T.C. 6532, 147 A.C.W.S. (3d) 914
- R. v. McIntosh (1995), 21 O.R. (3d) 797, [1995] 1 S.C.R. 686, [1995] S.C.J. No. 16, 178 N.R. 161, J.E. 95-457, 79 O.A.C. 81, 95 C.C.C. (3d) 481, 36 C.R. (4th) 171, 26 W.C.B. (2d) 201, 1995 CCAN para. 10,010
- Whitefish Lake Band of Indians v. Canada (Attorney General) (2007), 87 O.R. (3d) 321, [2007] O.J. No. 4173, 2007 ONCA 744, 287 D.L.R. (4th) 480, 161 A.C.W.S. (3d) 512, [2008] 1 C.N.L.R. 383
Statutes Referred To
- Corporations Tax Act, R.S.O. 1990, c. C.40 [as am.], ss. 79(7) [as am.], (a), (b), 82 [as am.], (4) [as am.], (5) [as am.]
- Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) [as am.]
Rules and Regulations Referred To
Authorities Referred To
- The Ontario Committee on Taxation, The Provincial Revenue System, Vol. III (Toronto: Queen's Printer, 1967)
APPEAL from an order denying a claim for tax refund interest.
Counsel: Justin Kutyan and Thang Trieu, for appellant. Arnold H. Bornstein and Jesse Epp-Fransen, for respondent.
The judgment of the court was delivered by
[1] NORDHEIMER J.A.: — Stonehouse Group Inc. appeals from the order of the motion judge who answered the following question of law in the negative [at para. 13]:
In determining a corporation's entitlement to an enhanced refund interest rate under subsection 82(5) of the Corporations Tax Act, must tax payable take a deduction from a loss carried back into account[?]
[2] The appeal proceeded pursuant to Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, based on an agreed statement of facts.
[3] The background facts can be stated briefly.
[4] On July 22, 2013, and as a result of some reassessments done by the federal tax authorities, the respondent reassessed the appellant, with respect to its 2008 taxation year, to disallow a deduction for a loss carried back under the Corporations Tax Act, R.S.O. 1990, c. C.40 (the "CTA"). This resulted in $560,000 of taxes, plus interest, owed by the appellant for the 2008 Taxation Year. On October 11, 2013, the appellant paid the $560,000 of taxes, plus interest, as it was statutorily required to do regardless of the fact that an objection was outstanding.
[5] On September 22, 2015, as a result of the reversal of the federal reassessments, the respondent reassessed the appellant for the 2008 Taxation Year to allow 100 per cent of the loss carry back. On October 4, 2015, the respondent made a refund payment to the appellant, without any refund interest. 1
[6] The appellant objects to the respondent's failure to pay refund interest on the tax overpayment of $560,000. The appellant says that interest ought to be paid calculated at the enhanced rate that is applicable when taxes have been overpaid as a result of a compelled payment while an objection is outstanding. It is the respondent's failure to pay that enhanced refund interest that is at the heart of this dispute.
[7] Two sections of the CTA are central to the question raised. One is s. 82(5) which reads:
82(5) Where, by a decision made under section 84 or 92 or by a court, it is finally determined that the tax payable under this Act by a corporation for a taxation year is less than the amount assessed under section 80 to which the objection was made or from which the appeal was taken, and as a result of the decision there is a surplus in the corporation's tax account for a taxation year or in the corporation's instalment account for a taxation year, the interest rate prescribed by the regulations for the purposes of this subsection, and not the rate prescribed for the purposes of subsection (4) or 83 (1), as the case may be, shall be used to determine the amount of interest for the purposes of those subsections, for each day that the surplus in the account is attributable to the decision.
[8] The other is s. 79(7) which reads;
79(7) For the purposes of calculating interest payable or allowed under this section or section 82 or 83 in respect of a particular taxation year, and for the purpose of determining the amount of a penalty, if any, to be assessed under subsection 76 (1) or (2) and the amount of tax payable under subsections 78 (4) and (6),
(a) the tax payable by the corporation under this Act for a taxation year shall be deemed to be the amount that would otherwise be determined if all amounts deducted by the corporation for that year under section 111 of the Income Tax Act (Canada), as it applies for the purposes of this Act, in respect of a loss for a taxation year after the particular year (in this section referred to as the "loss year") were not deducted; and
(b) the amount, if any, by which the tax payable by the corporation under this Act for the particular taxation year is reduced as a result of a deduction referred to in clause (a) shall be deemed to be an amount paid by the corporation on account of its liability under this Act for the particular year on the day that is the latest of,
(i) the first day of the taxation year after the loss year,
(ii) the day on which the corporation's return for the loss year is delivered to the Minister, or
(iii) the day on which the Minister receives a request in writing from the corporation to reassess the particular taxation year to take into account the deduction referred to in clause (a).
[9] The appellant's position is that it is entitled to interest calculated at the enhanced rate under s. 82(5) because, after the reassessment in 2013, it had a surplus in its tax account, namely, the amount of tax that it had been required to pay because of the respondent's refusal to permit the loss carry back when that tax was not, in fact, properly payable.
[10] The respondent's position is that s. 79(7) is a special provision relating to loss carry backs that, according to the respondent, takes this situation out of the effect of s. 82(5). It says that the effect of s. 79(7) is that the tax payable is deemed to be the same as it was before the deduction of the loss.
[11] The motion judge agreed with the respondent. He concluded, at para. 38:
The consequence of applying the deeming provision to s. 82(5) of the CTA is that refunds arising from one type of successful objection (tax losses) do not receive the benefit of the enhanced rate of interest prescribed by s. 82(5) of the CTA while refunds arising from other types of successful objections do receive the benefit.
Analysis
[12] The appeal involves a question of law and thus the proper standard of review is correctness: Housen v. Nikolaisen, 2002 SCC 33, at para. 8.
[13] It is agreed that there is no longer a special rule regarding the interpretation of taxing statutes, that is, such statutes are not to be interpreted strictly against the taxing authority as was once the case. Rather, taxing statutes are to be interpreted as any other statute would be, that is, "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament": Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, at para. 21.
[14] I begin my analysis by noting that s. 79(7) is not a model of legislative clarity. If one reads s. 79(7)(a) alone, it would tend to support the position of the respondent. Indeed, on its face, s. 79(7)(a) would deem the tax payable by a corporation to be the tax payable without taking into account any deduction allowed as a result of a loss carry back with the result that there would not be any surplus in the taxpayer's account on which interest would be payable.
[15] However, the difficulty with that interpretation is that it would operate to deny a corporation any refund interest, not just refund interest at the enhanced rate. On the respondent's interpretation, the tax payable is deemed not to take into account the deduction of the loss carry back and, thus, the tax payable is not reduced from the amount that the appellant was compelled to pay. There is, consequently, deemed to be no surplus in the appellant's tax account resulting from its payment of the $560,000 in taxes.
[16] That this becomes the result follows from the use of the word "surplus" in s. 82 of the CTA. I note that it is s. 82 that directly addresses refunds within the CTA. It provides the general right to interest on a refund in s. 82(4), which reads:
82(4) Interest at the rate prescribed by the regulations shall be calculated and allowed daily to a corporation on the surplus in the corporation's tax account for a taxation year, for each day there is a surplus in the tax account after the end of the instalment period for the taxation year.
[17] It is of no consequence how a surplus arises for the purpose of the general right to interest under s. 82(4) because that subsection only gives a right to interest at the normal rate, which is set at below market rates. It is the role of s. 82(5) to provide for the enhanced interest rate where the surplus results from a successful objection to an assessment. Thus, in order to restrict the operation of s. 82(5) to only those cases, it is necessary to refer to the reason why "the tax payable under this Act by a corporation for a taxation year is less than the amount assessed".
[18] The respondent's position is that the appellant was entitled to normal interest under s. 82(4) but not to the enhanced interest under s. 82(5). However, that is not the logical result of the interpretation of these sections that the respondent advances. Rather, as I have said, that interpretation would deny interest altogether, because s. 79(7)(a) would deem there to be no surplus in the corporation's tax account.
[19] As was observed in Placer Dome, at para. 22, "where the words of a statute give rise to more than one reasonable interpretation, the ordinary meaning of words will play a lesser role, and greater recourse to the context and purpose of the Act may be necessary". It is clear from the argument before us that the words used in these sections, especially s. 79(7), give rise to more than one reasonable interpretation.
[20] The context in which the provisions regarding refund interest are to be considered requires us to go back to the report of The Ontario Committee on Taxation, The Provincial Revenue System, Vol. III (Toronto: Queen's Printer, 1967). It was this report that led to the adoption of the legislation that provided taxpayers with the right to receive interest on overpayments of tax. 2 The report noted, in ch. 25, that under provincial revenue statutes there was "a very uneven balance between the rights of government and the rights of the taxpayer" when it came to the obligation to make payments.
[21] The Committee concluded that it was fundamentally unfair for taxpayers not to receive interest on overpayments of tax. The Committee also concluded that, where the overpayment was the result of a compelled payment arising from a dispute as between the taxpayer and the government, the taxpayer should receive interest at an enhanced rate, if the taxpayer was ultimately successful in disputing the tax. Regarding the payment of interest, the Committee recommended the following, ch. 25, at para. 21:
Where the taxpayer has overpaid, equity demands that he receive interest on the amount refunded. If the amount has been mutually agreed upon by the taxpayer and the government, the rate of interest should be somewhat below current borrowing rates. This is to avoid a situation where taxpayers might consider themselves invited to use the government as a savings deposit institution by making deliberate overpayments. On the other hand, where overpayment is not determined until after a dispute between the government and the taxpayer, it is only fair that the taxpayer receive interest on overpayment and penalties, if any, at a rate comparable to going market rates.
[22] Thus, it can be seen that the fundamental principle put forward by the Committee, and ultimately adopted by the government through amendments to the CTA, is that a taxpayer should receive interest on overpayments of tax. The only difference, in the level of interest to be paid, was between overpayments arising from mistake, voluntary overpayments, or other ordinary events, and overpayments due to a compelled payment arising from a dispute between the taxpayer and the government.
[23] I have already noted that the interpretation advanced by the respondent would, taken literally, preclude any payment of interest due to a compelled tax overpayment arising from a loss carry back. While the respondent attempts to restrict its interpretation to only a difference in the rate of interest, normal versus enhanced, that effort cannot be logically rationalized with what the respondent asserts is the effect of s. 79(7)(a).
[24] The respondent's position also cannot be rationalized easily with the presence of s. 79(7)(b). If the respondent is correct in what it says is the effect of s. 79(7)(a), then there would appear to be little need for s. 79(7)(b), at least as it relates to loss carry backs. If the effect of s. 79(7)(a) is that the tax payable is deemed not to be reduced by the loss carry back deduction, then one wonders why it is necessary to establish a date by which the tax is deemed to have been paid. If, on the other hand, s. 79(7) is interpreted as simply a provision, in cases involving loss carry backs, that postpones the date when the deduction in the tax payable arises, and thus when interest would begin to accrue, then s. 79(7)(a) and (b) work together in a harmonious fashion. 3
[25] Yet another problem arises with respect to the respondent's position. The respondent would carve out of the government's obligation to pay interest at the enhanced rate arising from a taxpayer's successful objection, all situations where the taxpayer's success involves the application of a loss carry back. Indeed, as I have already said, the respondent's position would result in this carve out eliminating any right to interest at all. However, the respondent is unable to point to any justification offered by anyone anywhere that explains why this carve out was considered to be necessary. There is no explanatory note to the legislation. There is no report from a legislative or other advisory committee. There is no statement by the Minister in the legislature. There is no policy statement from the Ministry. There is nothing that explains why this is a desirable result in this one particular situation -- a result that appears to be directly at odds with the recommendation of The Ontario Committee on Taxation regarding the payment of interest that was otherwise adopted through amendments to the CTA.
[26] On that point, the respondent's reliance on the principle that governments have the right to legislate illogically is not a persuasive one. 4 It is also not a principle of statutory interpretation to be readily invoked.
[27] The motion judge relied on Connaught Laboratories Ltd. v. Canada, [1994] F.C.J. No. 1681, 94 D.T.C. 6697 (T.D.), as supporting his interpretation of s. 79(7). However, it does not. That decision involved a section of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), not the CTA. It was not a section dealing with the payment of interest on overpaid taxes. In addition, the concerned section mirrored the language of an earlier version of s. 79(7), not the version that is at issue in this case. Still further, the decision in Connaught addressed the liability for tax in the period from the original taxation year, not from the later date when the taxpayer sought to apply other deductions. The appellant does not seek to take its claim for interest back to that earlier period. Simply put, the decision in Connaught is not helpful here.
[28] The motion judge concluded, at para. 40:
It is not my role to second-guess the very specific and unambiguous language the Legislature has chosen to use. There is neither absurdity nor manifest error that can be pointed to as resulting.
[29] In fact, as I have already illustrated, there is a manifest error in the interpretation urged by the respondent, and adopted by the motion judge, and that is that the appellant would be disentitled to any interest payment. That result is not only manifestly unfair, it is directly contrary to the legislative context in which the interest payment provisions were adopted more than 60 years ago. And, as I have already mentioned, there is no explanation offered for why the legislature would have desired that result in this particular situation.
[30] The language in s. 79(7) is not unambiguous when read in its entire context. While it is not necessary to resort to it in this case, I would note that there remains "a residual presumption in favour of the taxpayer": Placer Dome, at para. 24. Given the history of the legislative provisions regarding the payment of interest, an interpretation which favours the underlying policy choice of fairness to the taxpayer is to be preferred.
Conclusion
[31] I would allow the appeal, set aside the order below and answer the question posed in the affirmative. The parties advised us that they had agreed on the disposition of the costs of the appeal with the result that we do not have to address that issue.
Appeal allowed.
Notes
1 For the sake of clarity, I would note that there are two interest rates used for the purpose of paying interest on refunds. One is what I will refer to as the "normal" rate of interest and the other is the "enhanced" rate of interest. Because of the current state of low interest rates, the calculation of the normal interest rate results in a 0 per cent rate.
2 At common law, absent a statutory or contractual requirement to do so, the Crown was not obligated to pay interest on money that it owed: Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, at para. 86.
3 It should be noted that the appellant is only seeking interest for the period from the time that it was compelled to pay the additional tax in 2013 and the time when the government refunded that tax. It does not seek interest going back to the 2008 taxation year.
4 R. v. McIntosh, at para. 41.
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