Reduction of RDTOH When Dividend Refund Is Denied
Subsection 129(1) provides that if a private corporation files its tax
return within three years after the end of the taxation year, the
minister will refund the lesser of one-third of the taxable dividends
paid by the corporation and the corporation’s RDTOH. This dividend
refund will be denied (that is, not credited to the taxpayer) if the tax
return is not filed within this time limit; but, according to a CRA
technical interpretation, the amount denied should still reduce the
corporation’s RDTOH account (2012-0436181E5, October 18, 2012). This CRA
position has been called into doubt by two recent cases: Presidential MSH Corporation v. The Queen (2015 TCC 61) and Nanica Holdings Limited v. The Queen (2015 TCC 85).
These two cases confirm the holding in Tawa Developments Inc. v. The Queen (2011 TCC 440),
which the CRA declined to follow in its technical interpretation; it is
not clear whether the CRA will change its position now that the body of
case law on this issue has grown. Alternatively, as suggested by
Graham J in Presidential, it would help if “Parliament will see
fit to fix that drafting rather than leaving taxpayers to guess at the
meaning of those subsections.” This way, taxpayers would not have to go
through the court system each time to have a dispute resolved.
In Presidential, Graham J relied on the decisions in Tawa Developments
and determined that “dividend refund” in subsection 129(1) refers to
the refund actually received by the dividend payer. In addition, he
pointed out that the goal of punishing delinquent taxpayers is already
achieved because the taxable dividends paid by the corporation in the
year permanently lose the ability to generate a dividend refund;
reducing the RDTOH would sacrifice the goal of integration in favour of a
greater level of punishment.
In Nanica, Miller J cited Presidential with approval, and provided further supportive reasoning:
It is the act of refunding that gives meaning to the phrase “in
this Act referred to as its ‘dividend refund’ for the year.” Thus, if
the minister does not refund an amount, then the dividend refund is nil.
Subsection 129(2) supports the position that “dividend refund” in
subsection 129(1) refers to an amount actually refunded, because
subsection 129(2) would come into play only when a corporation is
entitled to receive a refund of an amount. If a corporation’s dividend
refund is nil due to late filing, the minister will not apply any amount
to the corporation’s liability under subsection 129(2). Similar
reasoning was also set out in Presidential. This reasoning directly contradicts the rationale provided by the CRA in the TI.
Miller J rejected the minister’s position that because the RDTOH
is a notional account, the components used to calculate it are also
notional. “Dividend refund” must refer to the actual repayment of tax
for integration to operate properly.
Miller J rejected the minister’s submission that the limitation
period is rendered ineffective and meaningless if the denial of the
dividend refund is not coupled with a reduction of the RDTOH in
subsequent years. The loss of the dividend refund in the current year
already results in double taxation when the payer corporation does not
receive a dividend refund.
Grant Thornton LLP, Markham