INCOME TAX
Income Calculation
Dividends
Appeal from Tax Court of Canada (T.C.C.) decision ([2004] 2 C.T.C. 2995) holding Income Tax Act, s. 152(4.3) not empowering M.N.R. to reduce respondent’s refundable dividend tax on hand (RDTOH) account, corresponding refund paid to respondent with respect to its 1991 taxation year—In 1990 reassessment, 1987 disposition of business property by respondent treated as giving rise to taxable capital gain—As result, respondent’s RDTOH account at end of 1987 taxation year increased by fraction of non-taxable portion of capital gain—In 1991 taxation year, prior to final disposition of respondent’s objection to appeal from 1987 taxation year, respondent paid taxable dividend for which Minister subsequently made requested $65,000 dividend refund— M.N.R. effected refund by applying portion against respondent’s Part I tax liability for 1991 taxation year, delivering respondent cheque for balance ($43,992)—By consent judgment in February 1996, capital gain realized by respondent in 1987 taxation year from disposition of former business property declared nil as result of respondent’s acquisition of replacement property for its business—Pursuant to consent judgment, M.N.R. reassessed respondent’s 1987 taxation year to remove taxable portion of capital gain from income—By reassessment in February 1997, M.N.R. reassessed respondent’s 1991 taxation year by reducing previously determined dividend refund of $65,000 to $8,420.68—In June 2000, M.N.R. dismissed respondent’s notice of objection to 1991 reassessment on basis issued in accordance with ITA, s. 152(4.3)—T.C.C. allowed respondent’s appeal, holding dividend refund neither “tax” nor “amount deemed to have been paid or to have been an overpayment,” emphasizing if Parliament had intended to give M.N.R. power to reduce amount of refund, would have included language to that effect in ITA, s. 152(4.3)—Appeal from T.C.C. decision dismissed—Only issue to be decided herein whether M.N.R.’s authority in ITA, ss. 152(1), 160.1(1) to determine dividend refund within normal reassessment periods contemplated in ITA, s. 152(4) can be exercised outside normal reassessment period by issuance of consequential assessment pursuant to ITA, s. 152(4.3)— M.N.R.’s authority thereunder limited to reassessing “tax, interest or penalties payable” or redetermining “amount deemed to have been paid or to have been an overpayment” —M.N.R. relying exclusively on second phrase, asking Court to conclude “deemed payment” resulted from M.N.R.’s redetermination of refund, and that T.C.C. erred in holding otherwise—No merit to argument that, to extent amount of refund applied to reduce taxes otherwise payable pursuant to ITA, s. 129(2), such refund “deemed payment” of those taxes —Rather, ITA, s. 129(2) providing in effect for set-off of amounts owing by taxpayer to M.N.R. against dividend refund properly payable—Set-off giving rise to actual payment—No deemed payment arising from operation of ITA, s. 129(2)— Amount in taxpayer’s RDTOH account not credit against taxes, nor operating same way as tax credit—Corporation’s RDTOH account determined independently of, having no impact on, computation of corporation’s tax under ITA, Part I—Merely notional account determining maximum amount of dividend refund corporation may receive upon payment of taxable dividends—In contrast, tax credits applied directly in computation of taxpayer’s tax under ITA, Part I, operating to reduce federal tax otherwise payable—No provision in ITA deeming dividend refund made by M.N.R. to taxpayer to be amount paid or overpaid under ITA, Part I by taxpayer—In absence of such deeming provision, dividend refund made by M.N.R. in accordance with ITA, s. 129(1) cannot be considered to be or to result in “amount deemed to have been paid or to have been an overpayment” by taxpayer under ITA, Part I—Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 129(1) (as am. by S.C. 1994, c. 7, Sch. VIII, s. 73; 1996, c. 21, s. 32; 1998, c. 19, s. 154), (2), 152(1) (as am. by S.C. 2000, c. 19, s. 44), (4) (as am. by S.C. 1998, c. 19, s. 181), (4.3) (as enacted by S.C. 1994, c. 7, Sch. VIII, s. 90; c. 21, s. 76), 160.1(1) (as am. by S.C. 1994, c. 7, Sch. VII, s. 16).
Canada v. Bulk Transfer Systems Inc. (A-190-04, 2005 FCA 94, Noël J.A., judgment dated 10/3/05, 13 pp.)