Stonehouse Group Inc. v. The Minister of Finance

Court File No.: CV-18-593474 Date: 2019-08-20 Superior Court of Justice – Ontario

Re: Stonehouse Group Inc., Appellant And: The Minister of Finance, Respondent

Before: S.F. Dunphy J.

Counsel: Thang Trieu, for the Appellant Arnold H. Bornstein and Jesse Epp-Fransen, for the Respondent

Heard at Toronto: June 28, 2019

Reasons for Decision

[1] In 2010, the Appellant claimed and received a tax refund in respect of its 2008 taxation year as a result of carrying back certain losses. In 2013, the Minister thought better of the matter and re-assessed the appellants return, demanding and receiving a return of the refund paid plus interest. The appellant contested this re-assessment successfully and, in 2015, was once again paid the refund to which it was entitled but without the enhanced interest rate applicable to other refunds paid to a taxpayer following a successful appeal. The dispute before me concerns the entitlement of the appellant to payment of that enhanced rate of interest.

[2] The appellant pleads that the governing statute ought to be interpreted in such a manner as to achieve a greater degree of parity between the taxpayer who was deprived of a refund to which it was entitled for five years and the state who enjoyed the benefit of funds it legitimately owed for that same period of time. The respondent takes the position that the statutory provisions are clear and that there is no entitlement to the enhanced rate of interest as claimed on these facts.

[3] This matter came before me as a motion pursuant to Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, on an agreed statement of facts to resolve a matter of statutory interpretation. Neither side took the position that this was not an appropriate case for Rule 21 or that a full evidentiary hearing on the merit was required to decide the matter. Having reviewed the agreed facts and the law as argued by both sides, I concur. The issue raised is a narrow point of statutory interpretation the outcome of which substantially disposes of this entire case. The parties have even agreed between themselves as to the costs consequences that ought to follow whatever disposition on this question I might make.

[4] For the reasons that follow, I have answered the agreed question put to me by the parties in the negative and thus find in favour of the respondent Crown.

Background facts

[5] The background facts are set forth in a simple Agreed Statement of Facts the principal elements of which may be summarized as follows.

[6] Stonehouse Group Inc. is an Ontario corporation subject to the Corporations Tax Act, R.S.O. 1990, c. 40 (or "CTA") as well as the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (or "ITA"). As such, it is required to file tax returns pursuant to both statutes.

[7] For the 2008 taxation year, Stonehouse reported a capital gain and paid the appropriate tax arising from that. For the 2010 taxation year, Stonehouse reported a non-capital loss (referred to as an "NCL") and claimed the right to carry $4 million of this amount back to its 2008 taxation year to offset the gain declared. The relevant return was filed on June 25, 2010 for the taxation year ended January 2, 2010.

[8] Ontario initially allowed the NCL and the application to carry it back to the 2008 taxation year with a Notice of Reassessment dated November 24, 2010. A resulting refund of $560,000 was allowed, which amount was paid on December 19, 2010. Canada did not immediately follow suit. Instead, on July 3, 2013, the Federal Minister re-assessed Stonehouse's return for 2008 and 2010 and disallowed the claimed 2010 NCL and the carry-back of that loss to 2008.

[9] Ontario very quickly followed Ottawa's lead on the file and issued its own re-assessment pursuant to s. 92 of the CTA. This resulted in an amount of tax payable of $560,000 plus interest.

[10] Stonehouse objected to the re-assessments in September 2013 but, as it was required to do, Stonehouse repaid the amount of the refund to Ontario plus interest on October 11, 2013 pending a final determination of the objection. The amount it paid – including interest – was $668,801.75.

[11] While it took two years, Stonehouse was largely – but not completely – successful in its objection. The originally claimed $14.5 million NCL was reduced to $13,327,329, but the full $4 million loss carry-back was restored. Ontario re-assessed the 2008 taxation year pursuant to s. 92(2) and s. 92(2.1) of the CTA on September 22, 2015 and on October 4, 2015 made a refund payment to Stonehouse of $663,129.

[12] Stonehouse objected to that re-assessment. The Minister disallowed the objection and confirmed the re-assessment on December 8, 2017 resulting in the present proceedings being initiated before the Superior Court of Justice to appeal the disallowance. The basis of the taxpayer objection was the failure of the Minister to have allowed enhanced interest pursuant to s. 82(5) of the CTA.

Issue to be decided

[13] The parties have framed the following question of law for determination:

Whether, in determining a corporation's entitlement to an enhanced refund interest rate under subsection 82(5) of the [CTA], tax payable must take a deduction from a loss carried back into account.

Discussion and analysis

[14] The starting point for resolving this dispute must be the statute itself, in this case, s. 82(5) of the CTA. This provision reads as follows:

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 an 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.

[15] Section 82(5) of the CTA establishes a series of conditions precedent to the application of the enhanced interest entitlement that it creates. For present purposes, these may be summarized as follows:

a. There is a decision made under s.92 (there is no dispute that such a decision was made in this case);

b. The decision in question has "finally determined that the tax payable" by the corporation for the taxation year is less than the amount that has been assessed to which objection was made; and

c. As a result of the decision, there is a "surplus" in the corporation's tax account for the taxation year.

[16] The dispute in this case concerns the interplay between s. 82(5) of the CTA and the deeming language of s. 79(7) of the CTA which provides in its relevant portions as follows:

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, …

(a) the tax payable by the corporation 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 which is the latest of,

(ii) the day on which the corporation's return for the loss year is delivered to the Minister, ….

(a) Summary of position of the parties

[17] The appellant Stonehouse submits that its entitlement to the enhanced interest is clear.

[18] The result of the decision in question was the issuance of a Notice of Reassessment dated September 22, 2015. That decision finally determined the tax payable by the corporation for the 2008 taxation year. Whereas the July 22, 2013 reassessment (to which objection was taken) assessed income tax liability for the 2008 tax year of $4,054,360, the September 22, 2015 re-assessment revised that income tax liability to $3,494,360 (the original November 24, 2010 assessment had been slightly lower: $3,490,160). As a result of the decision, Stonehouse therefore claims that the "tax payable" for the taxation year 2008 as reflected on the assessment flowing from the decision in question (issued in 2015) was less than the amount of "tax payable" for the 2008 year as determined by the 2013 reassessment from which the appeal was taken. Stonehouse therefore asserts that the second condition imposed by s. 82(5) of the CTA has been satisfied.

[19] Finally, as a result of the 2015 decision in question, a surplus in the tax account for the 2008 taxation year existed (being the credit balance reflected upon the Notice of Reassessment issued September 22, 2015 giving rise to the refund paid the following month).

[20] "Tax payable" by a corporation is defined in s. 1(1) of the CTA for the purposes thereof as "the tax payable by the corporation … as fixed by assessment or reassessment, subject to variation on objection or appeal, if any". The taxpayer submits that this clear definition refers to the actual amount of tax payable as determined by the assessments and reassessments made from time to time. The limited-purpose deeming provision of s. 79(7)(a) of the CTA ought, in Stonehouse's view, be interpreted as purely a timing provision applicable only to the mechanical calculation of interest from time to time without relevance to the question of entitlement to interest or to the applicable rate of such interest. In Stonehouse's submission, s. 79(7) simply clarifies that interest does not run on a refund arising from the retrospective application of tax losses from a later year until the conditions for applying those losses to a prior year have been satisfied. Stonehouse therefore urges me to answer the agreed question posed in the affirmative and find that "tax payable" in s. 82(5) of the CTA refers to the actual tax payable and is thus determined by taking a deduction for losses carried back from subsequent years.

[21] The Respondent Crown takes the position that the term "tax payable" when used in s. 82(5) is subject to the very particular definition of that phrase contained in s. 79(7) of the CTA in the context of losses carried back from a later taxation year. This definition applies to all of s. 82 of the CTA to the extent s. 82 concerns the calculation of interest notwithstanding the general language of s. 1(1) of the CTA. The Crown submits that the rate of interest applicable is just as much a part of "calculating interest payable" as is the determination of the principal amount to be used or the period for which interest will be paid. The attempt to confine s. 79(7) of the CTA to "timing" as if this were somehow disconnected from the principal amount or the rate is misguided.

[22] The application of s. 79(7) to the calculation to be performed in accordance with the plain language of the statute under s. 82(4) and (5) does not alter the principal amount of the refund to which the taxpayer is entitled but merely deprives the taxpayer of the benefit of the enhanced rate sometimes applicable. There is nothing absurd or incongruous about narrowing the application of a beneficial provision in this fashion.

[23] The Crown urges me to answer the agreed question posed in the negative.

(b) Principles of statutory construction to be applied

[24] There was no serious dispute between the parties regarding the principles of statutory construction to be applied by me in tackling this narrow question. The parties both referred me to the decision of the Supreme Court of Canada decision in Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20 which re-affirmed the Court's rejection of the former strict interpretation approach of taxation statutes and the application of the more general rule that the words of an enactment 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 intentions of Parliament.

[25] There is another rule of statutory construction that applies where a general provision of a statute creates a potential conflict with a more specific provision thereof. This is of particular relevance given the definition of "tax payable" in s. 1(1) of the CTA applicable to the entire statute and the very specific deeming provision regarding "tax payable" applied by s. 79(7) for the specific purpose of calculating interest under s. 82(5) of the CTA. In such cases, the conflict is avoided by applying the specific provision to the exclusion of the general one: National Bank Life Insurance v. Canada, 2006 FCA 161 at para. 9.

(c) Legislative history

[26] The parties assembled for my review the legislative history of s. 79(7) and s. 82(5) of the CTA. The CTA was very extensively amended in 1994 (S.O. 1994, c. 14). Those amendments included the repeal and replacement of both s. 79(7) and s. 82(5). The amendments made were both fundamental and structural in nature.

[27] Prior to the 1994 amendments, the calculation of interest payable by the corporation was addressed in s. 79 of the CTA while interest payable by the Minister on refunds due to the corporation was dealt with in s. 82 thereof. Interest was payable by the Minister on the refund of an "overpayment" pursuant to s. 82(4) of the CTA, with the start date being the later of the day the "overpayment arose" or the day the balance of the tax payable for the taxation year was required to be paid. Section 82(9) (applying to refund interest) and s. 79(7) (applying to interest owing by the taxpayer) both contained similar language deeming tax payable for the taxation year to be calculated without regard to the loss carried back from a subsequent year but only did so for "any portion of a period in respect of which the interest is payable on or before the last day of the taxation year" Section 82(5) created the right to an enhanced rate of interest to be applied to the s. 82(4) calculation where the final decision "makes it appear that there has been an overpayment".

[28] The Legislature chose an entirely different way to approach the refund and refund interest question with the 1994 amendments. A single provision – section 79(7) – provided for the impact of losses carried back upon the calculation of interest due from the taxpayer and the refund interest due from the Minister. The former s. 82(9) was deleted and the amended s. 79(7) was made explicitly applicable to s. 82 of the CTA. The former general concept of an "overpayment" conditioning the entitlement to refund interest was replaced with the new concept of "surplus in the corporation's tax account" and a very specific definition of that phrase was provided in s. 82(6).

[29] In addition to combining former s. 82(9) and s. 79(7) into a single provision, the amended s. 79(7) substitutes two "deemed" amounts for two actual amounts for the purposes of the interest calculation. The amount of tax payable is deemed to be the amount calculated without regard to the deduction of subsequent year losses while the amount of tax paid is deemed to include a credit for the corresponding amount. Mathematically, the same surplus in the tax account arises but – for purposes of calculating interest under s. 82 – the surplus arises from a deemed credit to tax paid on and not from a reduction of tax payable.

(d) Language of statute in context

[30] How then ought the language employed in s. 79(7) and s. 82(5) to be construed?

[31] I start with the rather basic proposition that the Legislature did not adopt detailed and in-depth alterations to so fundamental a statute as the CTA simply to keep the Queen's Printer in business. Section 64(1) of the Legislation Act, 2006, S.O. 2006, c. 21, Sched. F provides that every Act "shall be interpreted as being remedial and shall be given such fair, large and liberal interpretation as best ensures the attainment of its objects." My task is not to substitute my judgment for that of the Legislature but to give full effect to that which the Legislature has chosen to do.

[32] I am also mindful of the fact that I am interpreting a fiscal statute. Because the stakes are often so high for governments and taxpayers alike, a great deal of care and attention is often lavished upon the legislative drafting process where taxation is involved. This is not an area where devotees of plain English will find many adherents. Legislative drafting favours the frequent use of precisely-defined terms to avoid any ambiguity and, to the extent possible, prefers to follow well-worn (and understood) paths of structure and meaning that will be instantly familiar to the cadre of accountants, lawyers and fiscal administrators tasked with applying these provisions on a daily basis. The strict and predictable application of defined terms as written is very often the surest means of granting a "fair, large and liberal construction" to the enactment in question. I echo here the comment of Lebel J. in Placer Dome that "because of the degree of precision and detail characteristic of many tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned": Placer Dome at para. 21.

[33] Section 82(4) of the CTA applies to the calculation of interest on all refunds due to a taxpayer for each day that there is a surplus in the corporation's tax account for a taxation year while s. 82(5) of the CTA prescribes a different rate to be applied to the particular subset of tax refund claims described therein. I agree with the Crown that there is nothing unusual or incongruous to be seen in the decision of the Legislature to confer a particular benefit in certain circumstances and not to confer it in another.

[34] In this case, the Legislature chose to condition eligibility for the higher rate of refund interest by reference to "tax payable" before and after the resolution of the taxpayer's objection. Other conditions might have been selected but were not. The CTA did not, for example, condition eligibility by comparing the refund resulting from the decision when compared to the decision being appealed. I am bound to respect the choice the Legislature has made in selecting the criteria for determining which refunds are entitled to the enhanced rate of interest and which are not.

[35] While there is no case precisely on point, the Crown did cite to me the case of Connaught Laboratories Ltd. v. Canada, 1994 CanLII 19218 (FC), [1994] F.C.J. No. 1681 as offering a close analogy to the present case, albeit in the context of the Income Tax Act.

[36] In Connaught, the taxpayer had been re-assessed to attribute a capital gain in respect of its 1981 taxation year in 1985. As re-assessed, tax would have been payable in 1981 and interest would also have accrued on the tax thereafter. The re-assessment was not challenged. As it turned out, the taxpayer had two roads available to eliminate the resulting 1981 tax completely. It could apply the next year's tax losses (that had been identified and declared by the time the reassessment occurred) or it could apply unused scientific research tax credits that were available for the tax year in question. It was more advantageous to apply the (perishable) tax losses and to keep the (longer-lived) tax credits for use in a future year. The taxpayer logically chose to use the 1982 tax losses for this purpose. While the 1981 tax bill was thereby eliminated, the Minister assessed the taxpayer with interest owing for the time from when the tax owing from the 1981 gain would have been originally due until the time when the principal amount of the tax was eliminated by the (permitted) retroactive application of the 1982 tax losses. In so doing, the Minister applied the analogous language of s. 161(7) of the ITA as it then read which provided that "for the purpose of calculating interest …. the tax payable shall be deemed to be the amount that it would have been" had the subsequently incurred tax loss not been deducted.

[37] While not identical, the deeming language of s. 161(7) of the ITA is very similar to the language found in s. 79(7) of the CTA dealing with a similar issue. Reed J. upheld the Minister's interpretation of s. 161(7) of the ITA which he found contained no ambiguity and had been applied by the Minister consistent with the objectives of the Act.

[38] In my view, the same interpretation approach must be applied here. The defined term "tax payable" in s. 79(7) of the CTA was made specifically applicable to all of s. 82 of the CTA. This necessarily includes s. 82(5) thereof. 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. I cannot assume that consequence to have been an accidental or unintended one arising as it does from the application of a defined term made specifically applicable to that section of the CTA by the Legislature. There is no ambiguity in the language used.

[39] The suggestion made by the appellant Stonehouse that the determination of the rate applicable to the refund interest calculation in s. 82(5) is not a part of the "calculation of interest payable" referenced in s. 79(7) is simply not tenable. The calculation of interest payable on a refund requires (i) the determination of the principal amount of the payment upon which interest is to be calculated; (ii) the determination of the period of time over which interest is to be calculated (start date and end date); and (iii) the applicable rate. The determination of each of these inputs is a necessary and integral part of calculating the interest payable. By its express terms, s. 79(7) is applicable for the purposes of calculating interest payable and the specific definition of "tax payable" provided in paragraph (a) thereof must be applied to s. 82 in its entirety, including in s. 82(5).

[40] Deeming a particular definition to apply for one purpose and not for another is not unusual. Similar legislative drafting techniques are commonly employed, particular in taxation statutes. A consistent approach to the interpretation and application of such provisions is desirable. 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.

Disposition

[41] In conclusion, I must answer the question posed by the parties in the negative. The term "tax payable" in s. 82(5) is to be calculated as prescribed by s. 79(7)(a) of the CTA without taking account of tax losses from subsequent years.

[42] The parties advise that they have resolved entitlement and quantum of costs between themselves depending only upon the answer given by me to the question posed.

[43] Order accordingly.

S.F. Dunphy J.

Date: August 20, 2019