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T-3313-74
The Great Atlantic and Pacific Tea Company Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Toronto, May 6; Van- couver, June 19, 1975.
Income tax—Plaintiff, with fiscal period ending February 26, 1972, having taxable income of $3,160,057.29—Tax of $474,008.59 levied—Plaintiff calculating allowable refund equal to tax payable, not remitting payment—Minister con tending refund nil and that tax must be remitted even if full amount ultimately refunded—Plaintiff paying tax and inter- est—Plaintiff paying $4,700,000 in dividends, subject to with holding tax prior to fiscal year-end—Whether plaintiff had taxable income—Income Tax Act, S.C. 1970-71-72, c. 63, s. 133.
Plaintiff, a non-resident owned investment company with a February 28 to February 26 fiscal period, had taxable income of $3,160,057.29 for the period ending February 26, 1972; tax amounting to $474,008.59 was levied. Plaintiff, calculating its allowable refund as equal to the tax, did not remit payment. The Minister contended that the refund was nil and that, in any event, the taxpayer had to remit the tax, and charged interest of $14,193.61. Prior to the end of its fiscal year, plaintiff had paid taxable dividends of $4,700,000, subject to withholding tax. Plaintiff claims an "allowable refund" of $474,008.59 and other relief under section 133(6) of the Act. Defendant argued that, while plaintiff is entitled to a refund, the issue is whether this amount is to be refunded in respect of dividends paid in 1972, or whether the right will arise when taxable dividends are paid at a time subsequent to the end of the 1972 taxation year. Defendant contends that plaintiff did not, at the material dates, have taxable income, and its cumulative taxable income, for purposes of the formula, is nil.
Held, the main part of the claim is allowed. Defendant shall refund $474,008.59, but the Court can not require the repay ment of the interest of $14,193.61, though demanded by equity and justice; plaintiff's claim for interest, which is really a pre-judgment interest, is rejected. The Court agrees with defendant that, generally, in order to calculate income or taxable income for a year, one can not normally arithmetically do so until the end of that particular period. The legislators had this in mind in respect of all fiscal periods commencing after 1971. Those fiscal periods must end before the time of dividend payment, and, therefore, taxable income, and tax payable are either ascertained at the date of the dividend payment or are capable of precise ascertainment. However, in respect of the straddle year provisions, under sections 133(9)(a)(ii) and
133(9)(b)(ii), there is no stipulation that the fiscal period must have ended before the dividend payment date, nor that the taxable income and amounts payable be, at that precise time ascertained or capable of ascertainment. 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 have been arrived at until after payment of the dividends.
INCOME tax appeal. COUNSEL:
J. A. F. Miller, Q.C., and M. A. Mogan for
plaintiff.
G. W. Ainslie, Q.C., for defendant.
SOLICITORS:
Miller, Thomson, Sedgewick, Lewis & Healy, Toronto, for plaintiff.
Deputy Attorney General of Canada for defendant.
The following are the reasons for judgment rendered in English by
COLLIER J.: The plaintiff is claiming from the defendant an "allowable refund" of $474,008.59 and certain other relief. The claim is founded on subsection 133(6) of the Income Tax Act.'
The facts are not in dispute. The plaintiff is a non-resident owned investment company (para- graph 133(8)(d)). Its fiscal period at the material times was from February 28 to February 26. The calendar year relevant for tax purposes was 1972. For its fiscal period ending February 26, 1972, its taxable income was $3,160,057.29. Tax of $474,- 008.59 was leviable. The plaintiff calculated its allowable refund was equal to the tax payable and did not remit payment. The Minister of National Revenue contended the allowable refund was nil and, that in any event the taxpayer had to remit the tax, even though there might ultimately be a refund of the full amount. The taxpayer was then charged interest of $14,193.61. The tax and inter est were paid on January 22, 1973.
R.S.C. 1952, c. 148 as amended by section 1 of c. 63, S.C. 1970-71-72. The amending provisions are commonly referred to as the new Income Tax Act or the new Act. I shall adopt that description.
Prior to the end of its fiscal year, the plaintiff paid to its shareholders taxable dividends, as follows:
June 1, 1971 $ 750,000
December 29, 1971 $2,000,000
February 24, 1972 $1,950,000
$4,700,000
Those dividends, of course, had been subject to withholding tax. As I understand it, one of the purposes of section 133 is to return to non-resident owned investment companies some part of the tax paid by them on their taxable income, when some portion of that taxable income has been distributed in the form of taxable dividends. The formula for calculating the amount of the refund is set out in the section.
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. 2
The defendant's position is, that on the correct construction of the statutory provisions, the plain tiff did not (at the material dates) have any tax able income, and its cumulative taxable income, for the purposes of the formula, is therefore nil. The plaintiff disagrees.
To understand the intricacies of the problem it is necessary to set out the applicable provisions of the statute. To attempt a solution to the problem, I am faced with the scary task of trying, for my first time, to penetrate a portion of the jungle of unpruned verbiage found in the new Act:
133. (8) In this section
(a) "allowable refund" of a non-resident-owned investment
corporation for a taxation year means the aggregate of
2 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.
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;
(9) In paragraph (8)(a),
(a) "allowable refundable tax on hand" of a corporation at any particular time means the amount, if any, by which the aggregate of
(i) all amounts each of which is an amount 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
exceeds the aggregate of amounts each of which is
(iii) an amount in respect of the 1972 taxation year or any taxation year referred to in subparagraph (i), equal to 25% of the amount, if any, by which the aggregate of the corporation's taxable capital gains for the year from dispo sitions after 1971 of property described in paragraph (1)(c) exceeds the aggregate of
(A) its allowable capital losses for the year from dispo sitions after 1971 of property described in that para graph, and
(B) the amount deductible from its income for the year by virtue of paragraph (2)(c)
(such gains and losses being computed in accordance with the assumption set forth in paragraph (1)(d)),
(iv) 1/3 of any amount paid or credited by the corporation after the commencement of its 1972 taxation year and before the particular time, as, on account or in lieu of payment of, or in satisfaction of interest, or
(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" of a corporation at any particular time means the amount, if any, by which the aggregate of
(i) its taxable incomes for taxation years commencing after 1971 and ending before the particular time, and
(ii) where the corporation's 1972 taxation year com menced before 1972, the amount, if any, by which its taxable income for that year exceeds the aggregate of
(A) all amounts received by the corporation as described in paragraph 196(4)(b), and
(B) the lesser of the amount determined under para graph 196(4)(e) in respect of the corporation and the amount, if any, by which the aggregate of amounts determined under paragraphs 196(4)(d) to (/) in respect of the corporation exceeds the aggregate of amounts determined under paragraphs 196(4)(a) to (c) in respect of the corporation,
exceeds the aggregate of amounts each of which is
(iii) an amount in respect of the 1972 taxation year or any taxation year referred to in subparagraph (i), equal to the amount, if any, by which the aggregate of the corpora tion's taxable capital gains for the year from dispositions after 1971 of property described in paragraph (1)(c) exceeds the aggregate of
(A) its allowable capital losses for the year from dispo sitions after 1971 of property described in that para graph and
(B) the amount deductible from its income for the year by virtue of paragraph (2)(c)
(such gains and losses being computed in accordance with the assumption set forth in paragraph (1)(d)),
(iv) 4/3 of any amount paid or credited by the corpora tion, after the commencement of its 1972 taxation year and before the particular time, as, on account or in lieu of payment of, or in satisfaction of interest, or
(v) the amount of any taxable dividend paid by the corpo ration on a share of its capital stock before the particular time and after the commencement of its first taxation year commencing after 1971.
The formula, or equation, for calculating the allowable refund appears to be reducible to the following (I have substituted A.R. for allowable refund, A.R.T. for allowable refundable tax on hand, C.T.I. for cumulative taxable income, and D. for dividend):
A.R. = A.R.T. X D.
C.T.I. or D.
It is then necessary to determine A.R.T. and C.T.I. The "particular time" referred to in the definitions is, in this case, immediately before the payment of the three amounts of dividends (June 1, 1971, December 29, 1971, and February 24, 1972).
Fortunately for me, counsel advised the defini tions of allowable refundable tax on hand and cumulative taxable income can be restricted (for the purposes of the facts and issue in this action) to the following:
133. (9)(a)...
"allowable refundable tax on hand" ... at any particular
time means the ... aggregate of
(i) all amounts ... in respect of any taxation year com mencing 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. [The amount referred to is its taxable income for 1972.]
133. (9)(b) ...
"cumulative taxable income" ... at any particular time means the aggregate of
(i) its taxable incomes for taxation years commencing after 1971 and ending before the particular time, and
(ii) where the corporation's 1972 taxation year com menced before 1972, the amount, ... by which its taxable income for that year ....
Counsel for the plaintiff turns first to cumula tive 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. Subpara- graph (ii), it is pointed out, does not state the taxation year there referred to (the straddle year) 3 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 is no requirement stated that the taxable income must in fact have been ascer tained before the date of dividend payments; the legislators intended, in respect of those non-resi dent 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.
3 Counsel for the plaintiff used this convenient term to describe the fiscal period in question: it straddled the two calendar years 1971 and 1972, as well as the expiry of the old Act and the commencement of the new.
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 cumula tive taxable income, when one is calculating allow able 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 defendant fastens on the words in subpara- graph 133(9)(b)(ii) " ... its [the plaintiffs] ... taxable income for that year ... " ["that year" meaning the corporation's 1972 taxation year]. Counsel for the defendant says the plaintiffs taxa tion year in question ended February 26, 1972; at any date before then it had no taxable income because taxable income can only be ascertained at or after the close of the fiscal period; at the date of each payment of dividends taxable income had not, and could not, be ascertained; it was therefore zero or nil; when one then goes to the formula set out in subsection 133(8), the allowable refund becomes nil.
I do not dissent from the defendant's- submis sions that, generally speaking, in order to calculate income or taxable income for a year, one cannot normally arithmetically do so until after the end of that particular business period. In my view, the legislators had that general proposition in mind in respect of all taxation years (fiscal periods) com mencing after 1971; those fiscal periods must end before the time or times of the dividend payments; it follows (not by express statutory words, but only by logic) that the taxable income, 4 and therefore the amounts of tax payable' are either ascertained at the date of dividend payment, or capable of precise ascertainment.
4 Subparagraph 139(9)(6)(i).
5 Subparagraph 133 (9) (a) (i).
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.
The plaintiff is, in my opinion, entitled to suc ceed on the main branch of its claim. The defend ant shall therefore make a refund to the plaintiff of the sum of $474,008.59.
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 avail able in this case. 6 I cannot therefore require the defendant to make a refund in the sum of $14,963.61.
To my mind, equity and justice demand, in view of the result reached in this action, the plaintiff should be refunded the interest paid. The tax collector has had, for a period of time, the use of what is in effect double tax monies. The plaintiff, in its calculations, felt there was, for practical purposes, a set-off. It did not remit tax, as techni cally required, and then wait for a refund. It seems unjust the revenue department should, in addition to the use of the $474,008.59, keep the interest charged on that now refundable sum. As I have stated, I have not the power to make the direction sought. The power to do what appears in the
6 See section 177 and subsection 178(1).
circumstances to be right may lie elsewhere.'
Finally, the plaintiff seeks interest from the date of payment of the refundable tax and interest (January 22, 1973) to the date of judgment. The plaintiff is really asking for pre-judgment interest. 8 It is said authority to make this type of award can be found in subsections 164(3) and (4). In my view, those provisions are applicable to the type of refunds or overpayments specified in that section. No such provisions are found in respect of the refunding authorizations of section 133. The claim for interest is therefore rejected.
In the result there will be judgment that the defendant make a refund of $474,008.59. The plaintiff is entitled to its costs.
7 See the Financial Administration Act, R.S.C. 1970, c. F-10.
8 In some jurisdictions pre-judgment interest, in proper cases, can be given. See, in England, Law Reform (Miscellaneous Provisions) Act, 1934, section 3 and Administration of Justice Act 1969, section 22; in British Columbia, S.B.C. 1974, c. 65.
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