2014-0538901E5 Refund Sought/Notices of Objection, ss. 164(1)

Principal Issues: A corporate taxpayer does not file returns of income within three years of the end of the taxation year. The Minister assesses the taxpayer using subsection 152(7). The taxpayer then pays the balance shown on the assessment and files a Notice of Objection. If the taxpayer’s objection is allowed, can the Minister refund the resulting overpayment?

Position: No.

Reasons: Subsection 164(1) only permits the Minister to refund the overpayment if the corporation's return of income was filed within three years from the end of the taxation year.

Author: Ouimet, Jennifer
Section: 164(1), 164(4.1), 164(7), 221.1(1), 225.1(7)

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                                                                                                                                           2014-053890
                                                                                                                                           J. Ouimet, CPA, CA

November 5, 2014

Dear XXXXXXXXXX:

Subject: Subsection 164(1) – Refund after successful objection,

We are writing in response to your letter dated June 26, 2014, requesting our views regarding whether the application of subsection 164(1) of the Income Tax Act (the “Act”) would deny a refund of disputed amounts paid in the situation described. We also acknowledge our various telephone conversations (Young / XXXXXXXXXX).

You have advised us that your client XXXXXXXXXX (the “Taxpayer”), a non-resident of Canada, carried on business in Canada during its XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years. You advised us that the Taxpayer did not file corporate returns of income (“T2 return(s)”) for these taxation years because it was not aware that it was required to do so. Throughout the period in question, the Taxpayer had income tax deducted pursuant to section 105 of the Income Tax Regulations (the “Regulations”) from various payments that it received for services provided in Canada. Since the Taxpayer had not filed T2 returns, the CRA issued assessments dated XXXXXXXXXX, for the above taxation years pursuant to subsection 152(7) of the Act, each assessment indicating that the Taxpayer owed Part I tax. The total assessed in respect of the above taxation years less amounts tax previously withheld was $XXXXXXXXXX.

You indicated to us that your firm advised the Taxpayer to pay the $XXXXXXXXXX owing in order to mitigate interest. By way of wire transfer, the Taxpayer made a payment of $XXXXXXXXXX to the CRA on XXXXXXXXXX. On review of the Taxpayer’s situation, your firm concluded, based on XXXXXXXXXX (the “Treaty”), that the Taxpayer was not carrying on business in Canada through a permanent establishment situated in Canada (in respect of the above taxation years), and was, therefore, not subject to income tax in Canada. On XXXXXXXXXX, the Taxpayer filed T2 returns and Notices of Objection for each of the taxation years in question claiming an exemption under the Treaty. The CRA acknowledged the receipt of returns and Notices of Objection on XXXXXXXXXX. The acknowledgement letter in respect of the Notice of Objection filed included the following statement:

“Although you do not have to pay the amount in dispute now, you can minimize interest charges by making a payment on your account. If you choose to pay the amount outstanding, the payment does not imply agreement with the assessment.”

On XXXXXXXXXX, the CRA informed the Taxpayer that the Notices of Objection in respect of the above taxation years were being allowed with respect to the issue at hand. However, in allowing the appeal, the CRA notice indicated that:

       “…the corporation…was, in accordance with section 164 of the Act:
(a)   not eligible for a refund in respect of any overpayment for the XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years as the tax returns were filed more than three years after the end of the applicable taxation year…”.

You state that that in the context of subsection 164(1), you agree with the CRA’s decision not to refund the amounts withheld pursuant to section 105 of the Regulations is correct. However, you do not agree that subsection 164(1) should apply to deny a refund of the $XXXXXXXXXX of Part I tax that was paid by the Taxpayer in good faith pending the outcome of the Notices of Objection.

Specifically, you asked for our views regarding whether subsection 164(1) of the Act would deny a refund of monies remitted by the Taxpayer while Notices of Objection were under consideration.

Our Comments

Subsection 164(1) of the Act authorizes the Minister, on or after mailing the notice of assessment for a year, to refund any overpayment of tax for the year provided the taxpayer’s return of income for the year is filed within three years from the end of the year. One of the purposes of subsection 164(1) is to ensure that all taxpayers file returns of income in accordance with the Act. Where the taxpayer has not filed the applicable return of income within the three-year limit, the Minister is precluded from refunding any “overpayment” of tax. 

Under section 164, no distinction can be made between the tax that was withheld pursuant to section 105 of the Regulations and the payment made by the Taxpayer upon receipt of the Notices of Assessment. Paragraph 164(7)(b) defines overpayment for a corporation to mean the excess of all amounts paid on account of the corporation’s liability under Part I (or Parts I.3, VI or VI.1) minus all amounts payable in respect thereof. Amounts withheld pursuant to section 105 of the Regulations are withheld and remitted to the Receiver General on account of the payee’s tax for the year pursuant to subsection 153(1) of the Act. As you noted in your letter and in our conversations, the XXXXXXXXXX payment of $XXXXXXXXXX was made on account of the Taxpayer’s tax liability under Part I. Accordingly, the amounts withheld pursuant to section 105 of the Regulations and the payment of $XXXXXXXXXX were amounts paid on account of the Taxpayer’s liability and are components of the Taxpayer’s overpayment. Since the Taxpayer did not file the T2 returns within three-year limit, the Minister does not have the authority to refund the overpayment to the Taxpayer.

All taxpayers, whether resident of Canada or non-residents operating in Canada are required to be aware of and comply with their obligations under the Act. In the instant case, the Taxpayer was required to file an income tax return in accordance with clause 150(1)(a)(ii)(B) of the Act given that it was carrying on business in Canada, notwithstanding the application of the Treaty.

This obligation is clearly stated on the CRA website and in the guide, T4012 Rev. 2013, T2 Corporation – Income Tax Guide, 2013 (the “T2 Guide”), which states:

“A non-resident corporation has to file a T2 return if, at any time in the year, one of the following situations applies:

*     it carried on business in Canada;
*     it had a taxable capital gain; or
*     it disposed of taxable Canadian property, unless the disposition meets all the criteria listed below in the section “Dispositions of taxable Canadian property (certificates of compliance)”.

This requirement applies even if any profits or gain(s) realized are claimed by the corporation to be exempt from Canadian income tax due to the provisions of a tax treaty.” (emphasis added)

and:

“Note

You must file a return no later than three years after the end of a tax year to receive a tax refund.”

It is also noteworthy that the Taxpayer received XXXXXXXXXX requests to file its T2 returns for the above taxation years prior to the issuance of the arbitrary assessments.

The statement contained in the acknowledgement letter that the Taxpayer, although not obligated to do so, could pay the amount in dispute to minimize interest charges is general in nature and intended to provide taxpayers with information that may be helpful.

In our view, it is the taxpayer’s responsibility to determine whether paying the amount in dispute is appropriate in their particular circumstances.

Nonetheless, it seems unlikely that the Taxpayer relied on the statement in the acknowledgement letter to voluntarily pay the amount in dispute given that the Taxpayer made the payment prior to filing the Notices of Objection and prior to receiving the letter containing the comment.

In conclusion, the Minister is unable to refund the Taxpayer’s overpayment for the taxation years in question because the Taxpayer did not file the applicable T2 returns within three years of the end of the respective taxation years.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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