In a recent Ontario Court of Appeal decision, the court ruled that the Ontario government had to pay an Ontario company the enhanced interest rate on the company’s tax overpayment.

Company Challenges Tax Rate on Overpayment

The company at issue is an Ontario corporation subject to the Corporations Tax Act (“CTA”) as well as the Income Tax Act.  As such, it is required to file tax returns pursuant to both statutes.

On July 22, 2013, and as a result of some reassessments done by the federal tax authorities, the Ontario government (“Ontario”) reassessed the company, with respect to its 2008 taxation year, to disallow a deduction for a loss carried back under theCTA. This resulted in $560,000 of taxes, plus interest, owed by the company for the 2008 taxation year. 

On October 11, 2013, the company paid the $560,000 of taxes, plus interest, as it was statutorily required to do regardless of the fact that an objection was outstanding.

On September 22, 2015, as a result of the reversal of the federal reassessments, Ontario reassessed the company for the 2008 taxation year to allow 100% of the loss carry back. On October 4, 2015, Ontario made a refund payment to the company, without any refund interest. 

The company objected to Ontario’s failure to pay refund interest on the tax overpayment of $560,000. The company claimed that interest ought to be paid calculated at the enhanced rate that is applicable when taxes have been overpaid as a result of a compelled payment while an objection is outstanding. 

Thus, Ontario’s failure to pay the enhanced refund interest was at the heart of the dispute. Specifically, two provisions of the CTA were at issue: ss. 82(5) and 79(7).

The company’s position was that it was entitled to interest calculated at the enhanced rate under s. 82(5) because, after the reassessment in 2013, it had a surplus in its tax account and that surplus was the amount of tax that it had been required to pay because of Ontario’s refusal to permit the loss carry back when that tax was not, in fact, properly payable.

Ontario’s position was that s. 79(7) is a special provision relating to loss carry backs that took the company’s situation out of the effect of s. 82(5). It argued that the effect of s. 79(7) was that the tax payable was deemed to be the same as it had been before the deduction of the loss.

The motion judge agreed with Ontario’s position, concluding:

“The consequence of applying the deeming provision to s. 82(5) of the CTA is that refunds arising from one type of successful objection (tax losses) do not receive the benefit of the enhanced rate of interest prescribed by s. 82(5) of the CTA while refunds arising from other types of successful objections do receive the benefit.”

The company appealed the motion judge’s decision.

Court of Appeal Orders Payment of Enhanced Tax Rate 

The court began by observing:

“I begin my analysis by noting that s. 79(7) is not a model of legislative clarity. If one reads s. 79(7)(a) alone, it would tend to support the position of [Ontario]. Indeed, on its face, s. 79(7)(a) would deem the tax payable by a corporation to be the tax payable without taking into account any deduction allowed as a result of a loss carry back with the result that there would not be any surplus in the taxpayer’s account on which interest would be payable. 

However, the difficulty with that interpretation is that it would operate to deny a corporation any refund interest, not just refund interest at the enhanced rate. On [Ontario]’s interpretation, the tax payable is deemed not to take into account the deduction of the loss carry back and, thus, the tax payable is not reduced from the amount that the [company] was compelled to pay. There is, consequently, deemed to be no surplus in the [company]’s tax account resulting from its payment of the $560,000 in taxes.”

The court went on to state that both Ontario and the motion judge’s interpretations of these provisions were manifestly erroneous as they would result in denying the company any interest payment, stating: 

“That result is not only manifestly unfair, it is directly contrary to the legislative context in which the interest payment provisions were adopted more than 60 years ago…. [T]here is no explanation offered for why the Legislature would have desired that result in this particular situation.”

Further, the court noted that there is a “residual presumption in favour of the taxpayer”. As such, the court held that an interpretation which favours the underlying policy choice of fairness to the taxpayer should be preferred.

As a result, the court allowed the appeal and set aside the motion judge’s order, holding that the Ontario government had to pay the company an enhanced interest rate on its tax overpayment. 

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Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.

Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.

With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.

If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.