In a rare tax ruling, the Ontario Court of Appeals ruled that the Ontario government must pay a Toronto company an increased interest rate for an overpayment of taxes under the provincial Corporations Tax Act.
In a January 11 ruling in the Stonehouse Group Inc. v. Ontario (Finance) 2021 ONCA 10 case, the appeals court overturned an August 2019 order from Supreme Court Justice Sean F. Dunphy, who sat as a petitioner judge, ruling that he's wrong have interpreted. 79 (7) of the Corporations Tax Act (CTA) – a special provision relating to loss carryforwards.
The petitioner accepted the Ontario Treasury Department's argument, responding to the appeal, that the application of pp. 79 (7) through p. 82 (5) of the CTA meant that "refunds based on some type of successful objection (tax loss) not receiving the increased interest rate prescribed by s. 82 (5) of the CTA, while reimbursements resulting from other types of successful objections are benefited. "
"The difficulty with this interpretation, however, is that it denies a company any refund interest, rather than just refunding interest at the increased rate," wrote Ian Nordheimer, a judge on the Ontario Court of Appeals, for the three-judge panel, including Judge Peter belonged to Lauwers and Bradley Miller.
Following the 1967 report that formed the basis of the legislation, the appellate court added: “This result is not only manifestly unfair, it also directly contradicts the legal context in which the interest payment regulations were passed more than 60 years ago . And as I mentioned earlier, there is no explanation as to why the legislature would have wanted this result in this particular situation. "
The motion judge incorrectly relied on Connaught Laboratories Ltd. against Canada 94 DTC 6697 to aid its interpretation of s. 79 (7), but not, the court of appeal ruled.
Based on the facts set out in the decision, a federal re-evaluation campaign in 2013 prompted the Treasury Department to re-evaluate Stonehouse Group Inc., a Toronto-based golf club and restaurant owner, for the 2008 tax year in July of that year. After being ineligible for a deduction for a loss carried back under the CTA, the province found that the company owed additional taxes of $ 560,000, including interest. Stonehouse paid the amount in October, despite an objection.
In September 2015, after reversing federal revaluations, the province reassessed the Stonehouse Group for the 2008 tax year, allowing 100 percent of the loss carryforward. In October 2015, the overpayment of $ 560,000 was refunded without interest.
The Stonehouse Group objected to the province's failure to pay interest on the grounds that it was eligible under s. 82 (5) of the CTA on an increased interest rate applicable when taxes have been overpaid due to a compulsory payment while an appeal is pending.
The Court of Appeal's decision finds that the formula used to calculate the normal interest rate for such refunds currently sets the zero interest rate to zero due to the now so low interest rates, while the increased interest rate is only moderately higher.
In view of the 2006 Supreme Court of Canada ruling in Placer Dome Canada Ltd. 2006 Ontario (Treasury Secretary) SCC 20, the Court of Appeal found that tax laws are to be interpreted in accordance with the text and the law rather than any other law in the context of the law "in harmony with the scheme of the law, the subject matter of the law and the intent of the law Parliament. "
To clarify the context, the appeals court referred to Volume 3 of the 1967 Ontario Committee on Taxation report entitled The Provincial Revenue System, which resulted in the passage of laws giving taxpayers the right to receive interest on overpayments.
"The committee concluded that it is fundamentally unfair for taxpayers not to receive interest on overpayments," the appeals court concluded. “The committee also concluded that if the overpayment was the result of a compulsory payment due to a dispute between the taxpayer and the government, the taxpayer should receive interest at a higher rate if the taxpayer finally managed to collect the tax deny. ”
The appeals court added that the Respondent's confidence in s.79 (7) (a) of the CTA cannot be rationalized with s. 79 (7) (b), which makes it necessary to establish a date by which the tax is deemed to have been paid.
"The respondent's confidence in the principle that governments have the right to legislate illogically is not convincing," wrote Richter Nordheimer. "Nor is it a principle of legal interpretation to be asserted without further ado."
Angela Salvatore, Rogerson Law Group
Angela Salvatore, a tax and litigation attorney with Toronto-based Rogerson Law Group and chair of the tax law division of the Ontario Bar, said the decision provides tax attorneys with key guidance on subsections of the CTA that are "of great concern" to corporate taxpayers .
"Prior to that decision," she said in a written statement to The Lawyer & # 39; s Daily, "there was no judicial review of subsections 82 (5) and 79 (7) of the CTA period – let alone the Ontario Court of Appeal. " So this is an extremely relevant and useful decision for the tax authority.
"Many tax attorneys forget the importance of the provincial tax laws," she added. "This case shows that we need to focus on what the finance minister is doing under the CTA."
With more than 830,000 small, medium, and large businesses in Ontario, the total amount at stake in the province is significant, even with low interest rates, according to the latest data from the Canada Revenue Agency, Salvatore said.
"Companies in Ontario will benefit from this decision in terms of increased interest in loss carryforwards of the type at issue," she said in her written observations. “It would be the hope of the tax authorities that after this decision, which is supposed to guide us, the finance minister will be more cautious in his evaluations and re-evaluations, as he knows that under circumstances like this one an increased interest rate will be achieved to the taxpayer be payable. "
Given the potential cumulative cost to the province, she speculated that she could seek to appeal the decision to the Supreme Court of Canada.
"But the other thing is that so few cases, particularly tax cases, are given leave of absence from the Supreme Court," she added in a telephone interview. There has been no tax judge on the Supreme Court since 2015, when Marshall Rothstein retired.
Even so, Salvatore said, the Supreme Court recently granted leave to two or three tax cases, which are expected to be pending in 2021 or 2022.
Amit Ummat, Principal Counsel and Tax Law Specialist at Umlington Tax Law in Burlington, Ontario, agreed that the decision is important to tax lawyers on several fronts, including the appeals court's comments on the interpretation of tax law.
"They made comments such as that there was a residual presumption in favor of the taxpayer," he said in an interview with The Lawyer & # 39; s Daily.
"Basically, ambiguities in tax legislation are generally resolved in favor of the taxpayer," he added. “I found it really important that the Ontario Court of Appeals point out that there are cases where judges may not be as familiar with tax laws as a specialized court like the Canadian Finance Court, for example. "
Ummat said he was also impressed with the appeals court's emphasis on fairness and equity for taxpayers, as those considerations don't play a huge role in decisions made by the Canadian tax court, which solves most tax cases.
In particular before provincial courts, the decision could remind tax attorneys to emphasize elements of fairness in their arguments. "Tell your story in a way that if your customer loses, there will be patent infringement," he suggested. "If the appellant's attorney had focused solely on legal interpretation and completely ignored patent injustice in the way the appellant was treated, it might have been different."
However, it differed in terms of the overall effect of the decision, as it is of limited application.
"It really only applies when you have a loss carryforward and are looking for interest on a tax surplus," he said. "But the general principles for interpreting tax law are incredibly important."
In his assessment, Ummat added, the chances that the decision will be challenged in the Supreme Court are slim.
"The fact is that the court hit the respondent's attorney pretty hard because they basically said: Look, you are saying that this exception is only in order not to arouse heightened interest but to dissuade the applicant from any interest ", he said. "But that's not how the legislation is read. And that's why I don't think they're going to challenge that. I think the court got it right."
Justin Kutyan and Thang Trieu, tax attorneys at KPMG Canada who acted as advisors to Stonehouse Group Inc., declined to comment on the decision. Arnold Bornstein, Toronto General Counsel for Justice Canada's Tax Services Division and senior counsel for the Ontario Treasury Department, also declined to comment. A spokesman for the Canada Revenue Agency also did not comment on the decision.
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