Date: 20011127
Docket: A-513-00
Neutral citation: 2001 FCA 364
CORAM: LINDEN J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
IRVING OIL LIMITED
Respondent
Heard at Toronto, Ontario, October 22, 2001
Judgment delivered at Ottawa, Ontario, November 27, 2001
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: LINDEN J.A.
ROTHSTEIN J.A.
Date: 20011127
Docket: A-513-00
Neutral citation: 2001 FCA 364
CORAM: LINDEN J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
IRVING OIL LIMITED
Respondent
[1] The issue in this case is whether, for the purposes of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, interest on an income tax refund received by the respondent in 1992 was income from an active business. The Crown takes the position that interest on an income tax refund can never be income from a business, and has assessed the respondent on that basis. The Tax Court allowed the respondent's appeal: Irving Oil Limited v. Canada, [2000] 3 C.T.C. 2823, 2000 D.T.C. 2164, [2000] T.C.J. No. 349 (T.C.C.). The Crown now appeals the judgment of the Tax Court.
[2] This appeal was heard on the same day as the hearing of the appeal of the judgment of the Tax Court in Munich Reinsurance Co. v. Canada, [2000] 2 C.T.C. 2785, 2000 D.T.C. 2009, [2000] T.C. J. No. 195 (T.C.C.). The appeals deal with similar issues. The judgment of this Court in the Munich Reinsurance case (A-282-00) is being issued concurrently with this one.
[3] The respondent is a New Brunswick corporation that carries on only one business in Canada. That business is an active one, consisting of refining crude oil and marketing refined petroleum products.
[4] In 1978, the Crown reassessed the respondent to increase its tax liability for the years 1971 through 1975. The respondent objected to those reassessments and, when they were confirmed, appealed to the Federal Court Trial Division as it was then entitled to do. Similar reassessments were issued in 1980 and 1984 that increased the respondent's tax liability for the years 1976 to 1980. Objections were also made against those reassessments.
[5] According to subsection 152(8) of the Income Tax Act, the reassessments were valid and binding as long as they were not varied or vacated. The respondent had a legal obligation to pay the assessed amounts despite any outstanding objections or appeals, subject to its right under subsection 220(4) to request that the Crown accept security pending the disposition of the objections or appeals.
[6] The provision of security was not an acceptable option for the respondent. The tax liability represented by the reassessments would continue to exist while the tax was in dispute. If the disputed tax remained unpaid and the reassessments were ultimately found to be correct, the respondent would be obliged to pay the full amount of the assessed tax, plus non-deductible interest. On the other hand, if the disputed tax was paid and the reassessments were ultimately found to be incorrect, the respondent would be entitled to a refund of the tax, with interest. With these considerations in mind, the respondent paid the assessed amounts while its objections and appeals were outstanding. The payments were made in 1980, 1981, 1982 and 1986 with funds generated from the respondent's active business.
[7] On March 4, 1988, the Trial Division determined the appeals in favour of the respondent: Irving Oil Ltd. v. Canada (1988), 16 F.T.R. 253, [1988] 1 C.T.C., 88 D.T.C. 6138, [1988] F.C.J. No. 201. The decision of the Trial Division was upheld by the Federal Court of Appeal on February 18, 1991: [1991] 1 C.T.C. 350, 91 D.T.C. 5106, [1991] F.C.J. No. 133 (F.C.A.). Leave to appeal to the Supreme Court of Canada was dismissed on September 5, 1991: 136 N.R. 320 (note) (S.C.C.). The Crown issued reassessments to give effect to these decisions and refunded the tax, with interest, in 1992. The interest on the tax refund was $240,114,465.
[8] The respondent filed its 1992 return on the basis that the refund interest was active business income. It is conceded by the Crown that if the refund interest is business income, it must be active business income. The Tax Court Judge considered that concession to be correct, and I agree.
[9] Active business income is one of the elements of the formula for the tax credit under section 125.1 (referred to as the "manufacturing and processing profit deduction"). The characterization of the refund interest as active business income rather than income from property was advantageous to the respondent because it resulted in a greater tax credit under section 125.1.
[10] The Crown reassessed the respondent's 1992 return on the basis that the refund interest was not business income and hence not active business income. In making that reassessment, the Crown did not rely on any facts peculiar to the respondent, the nature of its business, the manner in which it conducts its business, or the facts relating to the disputed assessments. The only fact relied upon by the Crown was that the interest was interest on an income tax refund. It was and remains the Crown's position that refund interest cannot possibly be business income.
[11] The Tax Court Judge did not accept the Crown's argument that refund interest can never be business income. He went on to consider the particular facts of this case, and concluded that the refund interest received by the respondent was business income. His reasoning is summarized in paragraphs 37 and 38 of his reasons:
[37] An error by the Minister in assessing should not prejudice a taxpayer's normal and intended course of action with respect to the monies used to pay assessments issued as a result of the error. An overpayment is the Minister's error. To determine whether refund interest on an overpayment of tax is income from property or business one must consider the origin of the funds used by the taxpayer to make the overpayment in the first instance. Was the money used to make the overpayment business income? One must also ask what was the taxpayer's probable intended use of that money. Was the money to be used in its business or for some other purpose? If the money used for the overpayment was business income that was intended for use in the business, then, once the courts have decided there was an overpayment of tax, the overpayment is no longer a tax but reverts to the time of overpayment to property owned by the taxpayer for use in its business and interest on that property is business income. [...]
[38] I am satisfied that IOL [the respondent] made the overpayment out of profits earned in its business and that the amounts of overpayments of the Irvcal assessments would have been used by IOL in carrying on its business at the time of the overpayment. That a taxpayer opts to pay an assessment rather than giving security does not affect its use of the money. When IOL received a tax refund with respect to the Irvcal assessments, the refund, the overpayment, represented a return of money that was intended for use in IOL's business at the time of the overpayment and was made impossible by actions of the government.
[12] The sole basis of the Crown's appeal of the judgment of the Tax Court is its argument that refund interest can never be business income. Substantially the same argument was made by the taxpayer in the Munich Reinsurance case, unsuccessfully, in a different context. The Crown's position in Munich Reinsurance is that refund interest can be business income of an insurer.
[13] The Crown in this case, like the taxpayer in Munich Reinsurance, relies on the well established principle that the payment of income tax is not an expenditure made for the purpose of earning income because it is an expenditure of income already earned: Roenisch v. M.N.R., [1931] Ex.C.R. 1, [1931] 2 D.L.R. 90, 1 D.T.C. 199; First Pioneer Petroleums Ltd. v. M.N.R. [1974] C.T.C. 108, 74 D.T.C. 6109, 43 D.L.R. (3d) 722 (F.C.T.D.). In my view, the Roenisch principle has no relevance to this case. The question in Roenisch was whether an amount paid to discharge an income tax liability is an expenditure made for an income earning purpose. The question here is quite different. It is whether interest on an expenditure made to discharge an income tax liability assessed in respect of its business, which is later found to have been erroneously assessed, is income from the business or income from some other source.
[14] The Crown also relies on the principle that expenditures made in contesting an income tax assessment are not expenditures made to earn income: No. 195 v. M.N.R., 54 D.T.C. 465 (I.T.A.B.), which follows Smith's Potato Estates Ltd. v.Bolland, [1948] 2 All E.R. 367 (H.L.). This principle has no application here. The respondent is not seeking a deduction for the cost of challenging an assessment. (The deduction of the cost of objections and appeals under the Income Tax Act is now permitted under paragraph 60(o) of the Income Tax Act.)
[15] The Crown says that in this case, as in the Smith's Potato case, the respondent's business profits would have been no more and no less if there were no such thing as refund interest. That is simply not true. If there were no such thing as refund interest, the respondent might well have chosen to provide security for the disputed assessments rather than paying them, with the result that it probably would have made business profits from the use of its money for the many years it took to resolve the dispute. The availability of refund interest favoured its decision to pay the disputed tax. Because the respondent made that decision, it became entitled to the refund interest when the objections and appeals finally succeeded.
[16] The Crown in this case, like the taxpayer in Munich Reinsurance, also relies on more recent jurisprudence that stands for the proposition that, for income tax purposes, an advantage that flows exclusively from the provisions of the Income Tax Act is not income, and a business cannot consist solely of a transaction whose purpose is to reduce the income tax otherwise payable: Moloney v. Canada, [1992] F.C.J. No. 95, [1992] 2 C.T.C. 227, 92 D.T.C. 6570 (F.C.A.); Loewen v. Canada, [1994] 2 C.T.C. 75, 94 D.T.C. 6265 (F.C.A.). I am unable to draw any analogy between those cases and this one. The respondent was not engaging in tax avoidance transactions. It was not attempting to derive a profit from tax deductions or tax credits in the Income Tax Act. It simply paid an outstanding tax liability, having determined in the exercise of its business judgment that it would be preferable to pay the tax than to provide security.
[17] Finally, the Crown relies on the principles established in Ensite Limited v. R., [1986] 2 S.C.R. 509, [1986] S.C.J. No. 62, [1986] 2 C.T.C. 459, 86 D.T.C. 6521 to argue that a right to a tax refund cannot represent property employed or risked in a business because the right to the refund is contingent on the success of an objection or appeal. In my view, Ensite does not assist the Crown's position. On the contrary, Ensite confirmed that the tax character of income must be determined on the basis of the particular facts of the case. The issue in Ensite was whether certain investment activities were part of the taxpayer's manufacturing business or a separate business. Here it is not suggested that the respondent has two businesses; rather, the Crown argues that a decision to pay tax in dispute is not a business activity at all. In my view that proposition is not correct.
[18] I conclude, as did the Tax Court Judge, that there is no authority for the proposition that interest on an income tax refund can never be business income. As that proposition was the sole basis of the Crown's appeal, the appeal should be dismissed with costs.
"K. Sharlow"
J.A.
"I agree
A.M. Linden J.A."
"I agree
Marshall Rothstein"