http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108764/index.do 
Presidential MSH Corporation v. The Queen (March 20, 2015 – 2015 TCC 61, Graham J.).
Précis: Presidential MSH Corporation (“Presidential”) paid taxable dividends in each of its 2004, 2005 and 2006 taxation years. It claimed a dividend refund for each taxation year which the Minister denied because it had failed to file its tax returns within three years of its year end as required by subsection 129(1) of the Income Tax Act (the “Act”). Presidential again paid taxable dividends in its 2010, 2011 and 2012 taxation years and claimed dividend refunds in each year. The Minister partially disallowed the refund claims on the basis that its refundable dividend tax on hand (“RDTOH”) had been reduced by the refunds claimed, but not received, in respect of its 2004, 2005 and 2006 taxation years. Paragraph 129(3)(d) of the Act reduces RDTOH by the amount of a corporation’s dividend refund for its preceding taxation years. Dividend refund is defined in subsection 129(1). The sole question before the Court was whether the term “dividend refund” in subsection 129(1) required that a refund have actually been paid. Presidential argued that it did require actual payment, the Crown argued that it did not. The Court found that a textual or a contextual analysis could support either position. A purposive analysis however favoured Presidential’s position. The three year limitation in subsection 129(1) of the Act closed the books in respect of the taxation years to which it applied, precluding dividend refunds in those years. The Crown’s interpretation, i.e., that the RDTOH was permanently eroded even if no refund was paid, was highly punitive and in the absence of evidence that Parliament intended that result the Court concluded that the term “dividend refund” did not extend to amounts not actually paid. The appeal was allowed with costs.
Decision: The issue before the Court was whether dividend refunds claimed, but not received, by Presidential in prior taxation years eroded its RDTOH:
[1] The Appellant paid taxable dividends in each of its 2004, 2005 and 2006 taxation years. When the Appellant filed its tax returns for those years, it claimed refunds under subsection 129(1) of the Income Tax Act. The Minister of National Revenue denied those refunds on the basis that the Appellant had not filed its tax returns within three years of their respective year ends as required by subsection 129(1). The Appellant does not dispute that denial.
[2] In calculating the Appellant’s refundable dividend tax on hand (“RDTOH”) balance at the end of its 2005, 2006 and 2007 taxation years under subsection 129(3), the Minister deducted the amount of the subsection 129(1) refunds that the Appellant had claimed, but not received, in its 2004, 2005 and 2006 taxation years respectively.
[3] The Appellant paid taxable dividends in each of its 2010, 2011 and 2012 taxation years. When the Appellant filed its tax returns for those years, it claimed refunds under subsection 129(1). The Minister denied a portion of those refunds on the basis that the Appellant did not have sufficient RDTOH available. Had the Minister not deducted the amount of subsection 129(1) refunds claimed but not received by the Appellant in its 2004, 2005 and 2006 taxation years, the Appellant would have had adequate RDTOH available to cover the refunds claimed in its 2010, 2011 and 2012 taxation years. The Appellant has appealed the denial of those refunds in its 2010, 2011 and 2012 taxation years
Issue
[4] The issue in this Appeal is whether the Minister erred in deducting the subsection 129(1) refunds claimed but not received by the Appellant in its 2004, 2005 and 2006 taxation years when determining its RDTOH balance at the end of its 2005, 2006 and 2007 taxation years under subsection 129(3).
[Footnote omitted]
The relevant legislation was the definition of “dividend refund” contained in subsection 129(1) of the Act:
[6] Paragraph 129(1)(a) reads:
Where a return of a corporation’s income under this Part for a taxation year is made within 3 years after the end of the year, the Minister
(a) may, on sending the notice of assessment for the year, refund without application an amount (in this Act referred to as its “dividend refund” for the year) equal to the lesser of
(i) 1/3 of all taxable dividends paid by the corporation on shares of its capital stock in the year and at a time when it was a private corporation, and
(ii) its refundable dividend tax on hand at the end of the year; …
Presidential contended that a dividend refund had to have actually been paid while the Crown contended payment was not an essential part of the definition:
[7] The Respondent takes the position that “dividend refund” means simply the amount that is determined by the formula set out in paragraph 129(1)(a). The Respondent reaches this conclusion by reading the definition as beginning with the words “an amount” and ending at the end of subparagraph (ii). The Respondent submits that a taxpayer’s “dividend refund” can therefore be determined whether that amount is actually refunded to the taxpayer or not. Thus, the Respondent concludes that the Minister correctly reduced the Appellant’s RDTOH by the amounts that were calculated under paragraph 129(1)(a) in 2004, 2005 and 2006 despite the fact that those amounts were never refunded to the Appellant.
[8] The Appellant takes the position that “dividend refund” means the refund of the amount determined by the formula set out in paragraph 129(1)(a). The Appellant reaches this conclusion by reading the definition as beginning with the word “refund” and ending at the end of subparagraph (ii). The Appellant asserts that a taxpayer’s “dividend refund” is therefore either nil or indeterminable if no amount is actually refunded to the taxpayer. Thus, the Appellant argues that the Minister erred in reducing the Appellant’s RDTOH by the amounts that were calculated under paragraph 129(1)(a) in 2004, 2005 and 2006 because those amounts were never refunded to the Appellant.
The same point had been examined by Hogan J. in T
awa Developments Inc. v. The Queen, 2011 TCC 440. He decided that a refund had to in fact be paid in order to reduce RDTOH. His decision however was obiter since the RDTOH computation was not at issue (the case turned on result of late filing of the 2004 taxation year).
The Court first conducted a textual analysis of the term “dividend refund” and determined that it was ambiguous:
[22] Based on the foregoing, in my view, the plain and ordinary meaning of paragraph 129(1)(a) is ambiguous. It could either indicate that a “dividend refund” is the refund of the amount determined by the formula in the paragraph or that it is simply the amount determined by the formula regardless of whether it is refunded or not. There is an arguable position for both interpretations. While the use of the word “refund” in the defined term “dividend refund” suggests that the better interpretation may be the one proposed by the Appellant, its use is not enough for me to clearly conclude that the Appellant’s interpretation is correct. As a result, I must look to the contextual and purposive analyses.
Similarly the Court concluded that a contextual analysis was not helpful in deciding between the competing positions:
[54] The use and lack of use of the defined term “dividend refund” is inconsistent throughout the Act. Its use in three places supports the Appellant’s interpretation, in one place supports the Respondent’s interpretation and in two places supports both interpretations. Furthermore, its lack of use in one place somewhat supports both interpretations but, in another place, supports neither interpretation. This inconsistent drafting leaves me unable to draw sufficient comfort from the contextual analysis to reach a conclusion. The correct interpretation will therefore turn on a purposive analysis.
The Court found however that a purposive analysis tended to support the position of Presidential:
[58] The entire RDTOH system involves fiscal uncertainty. For any taxpayer, the Minister has no way of knowing when or whether a refund will have to be paid until after the taxpayer both declares a dividend and files a return. There is no limit on how long a taxpayer can string an RDTOH balance along. The Appellant’s interpretation of subsection 129(1) does not increase this level of uncertainty. The Minister still does not know whether a refund will be payable in the future until after the taxpayer both declares a dividend and files a return. The taxpayer’s failure to file a return leaves the Minister in no worse fiscal position that she would have been in if the Appellant had simply not declared a dividend at all. In fact, she is in a better fiscal position because she has the use of the Part IV tax paid by the taxpayer and the personal tax paid by the shareholder on the dividend without yet having had to pay out the refund.
[59] It is clear that Parliament designed the RDTOH system to promote the integration of corporate and individual taxes. It is also clear that Parliament designed subsection 129(1) to punish taxpayers who file their returns late. The Appellant’s interpretation of subsection 129(1) allows both of these objectives to be achieved. By contrast, the Respondent’s interpretation requires the goal of integration to be sacrificed in order to achieve a greater level of punishment. In the absence of a compelling reason why Parliament would want to do that, I find that the Appellant’s interpretation is more in keeping with the purposes of the Act.
As a result, the appeal was allowed with costs. The Court did end with a recommendation that Parliament act to clarify three other provisions of section 129 which were reviewed in the course of its contextual analysis:
[61] Despite my conclusion on the meaning of “dividend refund”, a lack of clarity remains regarding subsections 129(2), (2.2) and, to an extent, (2.1). It is my hope that Parliament will see fit to fix that drafting rather than leaving taxpayers to guess at the meaning of those subsections.
Comment: This decision is an extremely thorough review of the problem and well worth the read for those interested in the mechanics of a textual, contextual and purposive analysis of a taxing statute.