A pair of recent Tax Court of Canada judgments highlight the
unsustainable position taken by the CRA that a statute-barred
dividend refund that cannot be recovered by the taxpayer
nonetheless reduces taxpayer's "refundable dividend tax on
hand" ("RDTOH") balance.
written in this space before about the Tax Court's strict
interpretation of the three-year time limitation to receive a
dividend refund under subsection 129(1) of the Income Tax Act. A
consequence of this limitation is that where a taxpayer has missed
the three-year filing deadline to obtain a dividend refund there
can be "trapped" RDTOH which will require that the
corporation pay a taxable dividend at some point in the future in
order receive a dividend refund. The CRA, though, continues to take
the position that the original taxable dividend reduces the RDTOH
balance even where the dividend refund cannot be paid due to the
three-year window being missed.
Yet the CRA apparently continues to enforce the Act as though
the dividend refund is notional – no amount is required to be
paid in order for the corporation to obtain a "dividend
refund" and therefore the RDTOH balance is reduced without
Fortunately, the Tax Court takes a more sensible interpretation
in the recent decisions.
In Presidential, the Court undertook a textual, contextual and
purposive analysis of the dividend refund concept, concluding that
a payment was required before the RDTOH balance could be reduced.
In rendering his judgement, however, Justice David Graham noted
that the relevant provisions lack clarity and urged Parliament to
take corrective measures to clear up the language in this area.
In Nanica, which was released after the decision in
Presidential, Justice Valerie Miller reached the same conclusion,
ultimately agreeing with the earlier decisions that "the
phrase 'dividend refund' in section 129 is the refund of an
amount". There is no reduction of the RDTOH balance where the
corporation does not receive a refund.
In light of these decisions, we hope the CRA will align its
assessing position with the clear interpretation of the Tax
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