Canada: Heads I win, tails you lose: Canada Revenue Agency refuses to refund overpaid tax after statutory limitation periods expire
Canada's federal Income Tax Act (Act) contains rules governing refunds of overpayments of tax and generally precludes the Minister of National Revenue from issuing such refunds to a taxpayer unless the taxpayer's tax return for a taxation year was filed within three years from the end of the year. This limitation period was recently considered by Canada Revenue Agency (CRA) in the following circumstances. A non-resident corporation carried on business in Canada for purposes of the Act but the taxpayer did not file its returns of income for particular taxation years because it was not aware that it was required to do so. Throughout the period in question, the taxpayer had income tax deducted from various payments that it received for services rendered in Canada. The CRA issued assessments for the relevant taxation years indicating that the taxpayer owed tax under the Act, and the taxpayer paid the assessed tax to mitigate potential interest charges thereon if tax was ultimately found to be owing. Subsequently, on review of the taxpayer's circumstances, the taxpayer's adviser concluded that, in respect of the relevant taxation years, the taxpayer did not have a Canadian tax liability. This was because the taxpayer was not carrying on business in Canada through a permanent establishment situated in Canada and was eligible for an exemption under the applicable tax treaty between Canada and the taxpayer's country of residence. The taxpayer thereafter filed its tax returns and objected to the issued assessments claiming the treaty-based exemption.
In acknowledging receipt of the tax returns and notices of objection, the CRA stated that the taxpayer could choose to minimise interest charges by paying the outstanding tax amount, which would not imply agreement with the assessments. Later, the CRA agreed with the taxpayer's notices of objection that the taxpayer was not subject to Canadian tax but concluded that the taxpayer could not obtain a refund of taxes paid under the Act because the taxpayer ultimately filed its tax returns more than three years after the end of the applicable taxation year. The CRA stated that it is the taxpayer's responsibility to determine whether paying the tax amount in dispute is appropriate in the taxpayer's circumstances and observed that it was unlikely that the taxpayer relied on its statements in the acknowledgment letter to voluntarily pay the amount in dispute given that the taxpayer had made the payment before filing the notices of objection and before receiving the acknowledgment letter.
In another recent pronouncement, the CRA refused to refund an overpayment of non-resident withholding tax because the taxpayer in that situation did not, as required under the Act, make a written application for the refund within two years after the end of the calendar year in which the excess amount was paid.
Even though in the aforementioned circumstances certain remedies may be available to taxpayers to obtain a refund under another provision of the Act or an applicable tax treaty, these CRA positions demonstrate the importance of filing tax returns even if no tax would be owing and making applications, as the case may be, before any statutory limitation period expires and of carefully considering the taxpayer's circumstances before making payments on the outstanding tax amounts to the CRA. In a situation where a non-resident has carried on business in Canada (but not through a permanent establishment) and has failed to file tax returns reporting its income from the Canadian business, the non-resident would be better off resolving any dispute as to whether it actually owes Canadian tax before paying any amount on account of such potential tax.
Blake, Cassels & Graydon
Tel: +1 403 663 2825 and +1 403 260 9725