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March 29, 2023

Tax Tips

Dividend Refund in Statute-Barred Years Cannot Be Adjusted
Subject: Dividend Refund
Number: 05-13
Date: 4/15/2005
If a corporate taxpayer received a dividend refund in a statute-barred year, the CRA cannot adjust it.

The Federal Court of Appeal recently had to determine whether a dividend refund paid to a corporation in a statute-barred year could be clawed back because of other adjustments (The Queen vs. Bulk Transfer Systems Inc. [2005 FCA 94]). In this case, the corporate taxpayer paid a taxable dividend in 1991 and received a dividend refund of approximately $65,000. At the same time, a Notice of Objection was filed for the 1987 taxation year. The matters raised in the Notice of Objection were settled on February 2, 1996. The net effect of the settlement was that a 1987 capital gain was eliminated because of the purchase of a replacement property. In February 1997, the Minister reassessed the 1991 taxation year, reducing the previously determined dividend refund of $65,000 to $8,400. The reassessment included arrears interest.

The taxpayer filed a Notice of Objection claiming that the Minister cannot open a statute-barred year under the provisions of subsection 152(4.3) of The Income Tax Act. The dispute went to the Tax Court of Canada, where the taxpayer won. The Minister appealed to the Federal Court of Appeal.

The major issue was how the dividend refund should be characterized. The Minister asserted that the amount of the refund applied to reduce tax otherwise payable is a "deemed payment" of that tax. Furthermore, the Minister claimed that the refund operates in the same way as a "tax credit." The Minister argued these issues because he may only reopen a statute-barred year to reassess "an amount deemed to have been paid or to have been an overpayment." The Federal Court of Appeal disagreed strongly with the Minister's argument. The Federal Court stated that a dividend refund is determined independently of tax credits and has no impact on the computation of tax under Part I of the Act. The Federal Court of Appeal also confirmed that there is no provision of the Act that deems the dividend refund to be an amount paid or overpaid under Part I of the Act. The Federal Court of Appeal concluded by saying "in the absence of a deeming provision... a dividend refund made by the Minister... cannot be considered to be or to result in 'an amount deemed to have been paid or to have been an overpayment' by a taxpayer under Part I of the Act."

A warning to bear in mind is the Court's comment that "It would be a simple matter to provide for this re-determination of refunds if that indeed was the intention of parliament." For now, statute-barred dividend refunds cannot be adjusted.

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