In Exida.Com Limited Liability Company v. The Queen, 2010 FCA 159, the Federal Court of Appeal dismissed the appeal of the taxpayer from the decision of Justice Woods (see “Contradiction“). The Federal Court of Appeal’s reasoning is surprising and, perhaps, disturbing.
The Court summarized the issue before it as follows:
At issue is whether non-resident corporations such as the appellant can be subjected to a penalty pursuant to subsection 162(2.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act) for failure to file their tax returns on time for a given taxation year, in circumstances where they have no taxes payable for that year. The Tax Court Judge [in Exida.com] found in the affirmative. In so doing, she declined to follow an earlier decision of her colleague Miller J. in Goar, Allison & Associates Inc. v. The Queen [2009 TCC 174] who had come to the opposite conclusion.
The Court disagreed with Justice Woods’ interpretation of subsection 162(2.1) as follows:
[28] […] As was found by the Tax Court Judge, the legislative history and context make it clear that the intention was to impose the higher of the “regular penalties” and the “alternative penalties” when a non-resident corporation has taxes payable and the higher of the “alternative penalties” when it has none (Reasons, para. 57). However, it is equally clear that those charged with implementing this last aspect of the legislative plan failed in their task. As noted, subsection 162(2.1) makes the application of the “alternative penalties” conditional upon the non-resident corporation being liable to the “regular penalties” under subsection 162(1) or (2), and no such liability can exist in circumstances where a non-resident corporation has no taxes payable. The question which arises in this appeal is whether this fundamental drafting error can be cured by the purposive interpretation proposed by the Tax Court Judge. In my respectful view, it cannot.
The Court, however, went on to dismiss the taxpayer’s appeal on the basis that the penalties provided by subsection 162(7) were applicable. That subsection reads as follows:
162. (7) Every person (other than a registered charity) or partnership who fails
(a) to file an information return as and when required by this Act or the regulations, or
(b) to comply with a duty or obligation imposed by this Act or the regulations is liable in respect of each such failure, except where another provision of this Act (other than subsection 162(10) or 162(10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty equal to the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.
The Court agreed with Justice Campbell in Goar that paragraph 162(7)(a) could not apply because the non-resident corporations had failed to file tax returns not “information returns”. The Court, however, held that paragraph 162(7)(b) could and did apply to taxpayer:
[38] In the present case, we have the advantage of knowing that the reason why no penalty can be imposed on a non-resident corporation pursuant to subsection 162(2.1) when no taxes are payable is that those charged with implementing the legislative plan failed in their task. The result, although unintended, is that no penalty is set out for the appellant’s failure to file its tax return on time under the Act.
[39] It follows that the first condition for the application of the residual penalty under paragraph 162(7)(b) is met. As otherwise, it is common ground that the appellants failed to file their tax returns on time in breach of the obligation created by paragraph 150(1)(a), all the elements required for the application of the residual penalty are present.
Does this mean that individuals who file late will now be subject to penalties even if they didn’t owe taxes or they had paid their taxes by the deadline? Traditionally, the CRA has not imposed penalties on such persons probably because section 162 calculates the penalty by reference to the taxes payable. The Court’s reasoning in Exida.com seems to permit the CRA to impose penalties under paragraph 162(7)(b) on individuals who don’t file even if they don’t owe tax.
