Canada: Late-Filing Penalties for Non-Resident Corporations

On June 11, 2010, the Federal Court of Appeal in Ltd. Liability Co. v. Her Majesty the Queen (2010 DTC. 6935) resolved two conflicting decisions of the Tax Court of Canada on the issue of whether a non-resident corporation that does not have any tax payable under the Tax Act may be subject to a late-filing penalty for failing to file an income tax return within the prescribed time in the Tax Act. The Tax Court in Exida (2009 DTC 1278) held that a non-resident corporation may be subject to a penalty under subsection 162(2.1) of the Tax Act for such failure. This decision was in contrast to an earlier decision of the Tax Court in Goar, Allison & Associates Inc. v. Her Majesty The Queen (2009 DTC 1125), which had come to the opposite conclusion. was an LLC carrying on business in Canada that failed to file income tax returns on the due date for its 2003, 2004 and 2005 taxation years. The company did not have any tax payable for those years. At issue in the case was whether was subject to penalties under any of subsections 162(1), 162(2.1) and 162(7) of the Tax Act.

Subsection 162(1) provides:

162(1) Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of

(a) an amount equal to 5 per cent of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed, and

(b) the product obtained when 1 per cent of the person's tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, from the date on which the return was required to be filed to the date on which the return was filed.

Subsection 162(2.1) provides:

162(2.1) Notwithstanding subsections (1) and (2), if a non-resident corporation is liable to a penalty under subsection (1) or (2) for failure to file a return of income for a taxation year, the amount of the penalty is the greater of

(a) the amount computed under subsection (1) or (2), as the case may be, and

(b) an amount equal to the greater of (i) $100, and (ii) $25 times the number of days, not exceeding 100, from the day on which the return was required to be filed to the day on which the return is filed.

Subsection 162(7) provides:

162(7) Every person (other than a registered charity) or partnership who fails

(a) to file an information return as and when required by this Act or the regulations, or

(b) to comply with a duty or obligation imposed by this Act or the regulations

is liable in respect of each such failure, except where another provision of this Act (other than subsection (10) or (10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty equal to the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.

Given that the penalty in subsection 162(1) is computed by reference to the amount of tax payable by the taxpayer, and that did not have any tax payable for the taxation years in question, argued that no penalty is exigible under subsection 162(2.1) on the basis that the precondition to the application of subsection 162(2.1) is that the non-resident corporation "is liable to a penalty under subsection (1) or (2)." In other words, in order for subsection 162(2.1) to apply, must have tax payable for the taxation years in question. This argument was in line with the decision in Goar, wherein Justice Miller held that a person is not liable to a penalty under subsection 162(1) unless tax was payable by the person in respect of a particular taxation year

At the Tax Court, Justice Woods concluded that the words "liable to a penalty" in subsection 162(2.1) includes circumstances where the non-resident corporation is "potentially subject to a penalty" under subsection 162(1), and not just circumstances where a positive amount can be computed under paragraphs 162(1) (a) and (b). In coming to her decision, she applied a textual, contextual and purposive approach to the interpretation of subsection 162(2.1). She concluded that the plain meaning of "liable" is broad, and is defined in part as "responsible at law" or "bound or obliged by law or equity," and that coupled with the legislative history and context it was clear that subsection 162(2.1) should apply in this circumstance.

The Federal Court of Appeal in an unanimous decision agreed with the rationale of Justice Miller's decision in Goar with respect to the proper interpretation and interaction of subsection 162(1) and 162(2.1): unless there is tax payable in respect of a particular taxation year, the non-resident corporation is not "liable to a penalty" under subsection 162(1) for the purposes of determining whether a penalty is exigible under subsection 162(2.1). The court disagreed with Justice Woods and stated that the textual, contextual and purposive approach to statutory interpretation cannot give the statutory provisions a meaning they cannot bear. In the view of the court, the failure to provide for a penalty in circumstances where the non-resident corporation did not have any tax payable was a fundamental drafting error that could not be cured by a purposive interpretation of the provisions.

However, the court went on to conclude that paragraph 162(7)(b) applied to impose a penalty on a non-resident corporation in circumstances where no tax is payable in respect of a particular taxation year. In contrast to Justice Woods's decision that subsection 162(1) "set out" a penalty for failure to file a return regardless of whether penalty was a nil amount, and that as such 162(7)(b) was not applicable, the Federal Court of Appeal concluded that no penalty was set out in the Tax Act for failure to file a return in circumstances where the non-resident corporation did not have tax payable in respect of a particular taxation year, and that as such paragraph 162(7)(b) was applicable. It is also worth noting that the Federal Court of Appeal agreed with the decision of Justice Miller in Goar that paragraph 162(7)(a) did not apply, as return of income did not constitute an information return. The court in Goar did not address whether paragraph 162(7)(b) was applicable.

In summary, a non-resident corporation that fails to file a return of income within the prescribed time in respect of a particular taxation year for which no tax is payable will be subject to a penalty pursuant to subsection 162(7). The maximum penalty under subsection 162(7) is $2,500 for each failure to file a return in a timely manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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