Canada: Dissolved Corporation Lacks Standing In Tax Court

In 1455257 Ontario Inc. (2016 FCA 100), the Federal Court of Appeal ("FCA") overruled its prior precedent and held that a dissolved corporation lacked capacity to initiate a Tax Court of Canada ("TCC") appeal. In so doing the FCA upheld the TCC's decision, but for different reasons.

The taxpayer was dissolved and its corporate charter cancelled in early 2007 pursuant to the Ontario Business Corporations Act ("OBCA"). In October 2010, the CRA assessed the taxpayer under s. 160 of the Income Tax Act ("ITA") in respect of a tax debt of a related corporation. After exhausting the administrative appeal process the taxpayer commenced TCC proceedings and completed the usual procedural steps set out in a TCC timetable order. However, at that point the Crown put in issue whether the taxpayer had capacity to prosecute an appeal and brought a motion seeking either: an adjournment to allow the taxpayer to revise its corporate status; or that the appeal be quashed. The TCC granted an adjournment to allow the taxpayer to be revived since it otherwise did not have capacity to pursue its TCC appeal. However, the taxpayer appealed to the FCA rather than seeking to be revived.

Under ss. 241(5) of the OBCA, a dissolved corporation may be revived and deemed for all purposes to have never been dissolved. Under para. 242(1)(a), despite a dissolution, a civil, criminal or administrative action or proceeding by or against the corporation, commenced before dissolution, may be continued as if the corporation had never been dissolved. Under para. 242(1)(b), a civil, criminal or administrative action or proceeding may be brought against the corporation as though it had never been dissolved. Absent from the relevant provisions is any allowance for a dissolved corporation to commence an action or proceeding after dissolution, even though they may be commenced against the corporation.

The FCA began by summarizing the TCC's analysis. The TCC considered 495187 Ontario Ltd. (94 DTC 6229 – FCA) - a case in which the FCA held that a dissolved corporation could pursue its tax appeal, - which was based on the FC's reasoning in 460354 Ontario Inc. (92 DTC 6534). In 460354, the FC held that it was "untenable" for a dissolved taxpayer to be unable to defend itself against a civil, criminal or administrative action or proceeding. Thus, once subjected to a tax assessment, the taxpayer must be allowed to exercise appeal rights: exercising those rights was not the commencement of an "action" but rather the final stage of the appeal process. Consequently, the dissolved corporation in 460354 had capacity to conduct an action to challenge the assessments against it. The TCC distinguished 495187 and 460354 based on amendments to the OBCA since those cases were decided.

The FCA rejected this view, holding that the substance of the OBCA had not changed and that the reasoning in 495187 and 460354 could not be ignored. However, the FCA went on to overrule those cases.

The FCA first noted that it may reconsider and overturn prior decisions in "special circumstances." As stated in Miller (2002 FCA 370), the FCA would only depart from a prior decision if the decision was manifestly wrong. The FCA went on to say that its judgment in 495187 is no longer good law.

This was because 495187 relied on a misinterpretation of Johnson ([1948] SCR 486), and Johnson did not actually hold that a Court appeal was a continuation of the administrative dispute process. Further, Johnson was an Income War Tax Act appeal, and that statute set out a different appeal process than we have under the ITA and the Tax Court of Canada Act. In the modern era, a proceeding before the TCC is "instituted" by filing an "originating document" received by the TCC, which is an initiation of a legal proceeding as contemplated by the OBCA. Thus, the FCA reversed previous case law: a dissolved Ontario corporation cannot institute legal proceedings, and instituting legal proceedings includes commencing a TCC appeal. Finally, the taxpayer argued that not all dissolved corporations may be revived, which the FCA partially accepted: the revival provision in the OBCA applies only when a corporation is dissolved by the province for defaulting on specified obligations. The FCA also acknowledged that corporations that are voluntarily dissolved, dissolved for cause or dissolved more than 20 years before the intended revival cannot be revived under the OBCA. However, the FCA noted that corporations that cannot be revived under the OBCA may be revived by a private act of the Ontario legislature, which apparently occurs on a regular basis.

The take-away points from this case are that dissolution risk should be treated carefully if an OBCA corporation (or a corporation governed by a similarly –worded statute of another province) has a real or potential tax exposure, since revival is necessary to prosecute a TCC appeal, and the procedural wrangling associated with revival may be challenging.

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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