At the heart of tax integration in Canada is the refundable tax
and dividend refund mechanism in subsection 129(1) of the
Income Tax Act (the "Act").
Generally, to avoid undue deferral of tax on investment income
earned through a "Canadian-controlled private
corporation", such corporations must pay refundable tax on
investment income (either under Part I or Part IV of the Act),
which effectively brings the corporate tax rate on such income to
the same rate had the income been earned directly by the Canadian
In order to ensure that such income once distributed to an
individual shareholder is not subject to double taxation, the Act
provides that taxable dividends paid by a private corporation
entitle the corporation to a refund of the lesser of
1/3rd of the taxable dividends paid and the balance of
the corporation's "refundable dividend tax on hand"
("RDTOH") account. Importantly, the Act imposes a strict
deadline for obtaining the refund: the return for the year in which
the refund is claimed must be filed within three years of the end
of the year in which the dividend is paid.
Despite this seemingly clear-cut limitation period, a number of
taxpayers over the years have turned to the courts to seek what
amounts to a judicial extension of the filing deadline. 1057513 Ontario Inc. v. The Queen (2014
TCC 272) is the latest in a line of recent decisions
considering whether the three-year refund limitation period is
In 1057513, the taxpayer declared and paid dividends to
its shareholder in the 1997-2004 tax years. The taxpayer's
director and officer was unaware that a personal holding
corporation had an obligation to file a tax return in the years in
question. Upon the filing of the tax returns in 2008, the CRA
assessed Part IV dividend tax (and interest and penalties) and
denied the dividend refund claim.
On appeal, the taxpayer made three arguments: (i) the language
in subsection 129(1) was ambiguous (or "at least not
unambiguous"), (ii) a textual, contextual and purposive
("TCP") analysis of the provision reveals latent
ambiguities which should allow for a late refund, and (iii) the
filing deadline is directory, not mandatory, meaning that not
filing the return on time is not fatal to the refund claim.
Not surprisingly, the Tax Court dismissed the appeal. Relying on
Tawa Developments Inc. v. The Queen (2011
TCC 440) and other relevant decisions, the Tax Court determined
that there was nothing textually unambiguous about the requirement
to file a return within three years, finding the statutory language
to be "strikingly lucid and abundantly clear".
Under the TCP argument, the taxpayer argued that the Court
should read out the deadline because it was "antipodal"
to the integration principal. The Court disagreed, and concluded
that the rule was necessary in the context and for the purpose of
achieving an effective self-assessing system. Finally, the Court
was not swayed by the taxpayer's argument that a filing
deadline without a penalty is directory and not mandatory. The
Court noted that while there may be no penalty per se,
there was certainly a consequence of the failure to file –
that being the inability to access the dividend refund.
It seems clear from the jurisprudence to date that the
three-year filing deadline for obtaining a dividend refund under
subsection 129(1) is absolute. Taxpayers and their advisors are
encouraged to file returns as soon as possible to avoid the
potential punitive double-taxation.
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