Exida.com LLC v. Canada: The Federal Court of Appeal Clarifies the Income Tax Filing Requirements of Non-Resident Corporations
Do non-resident corporations carrying on business in Canada have to pay a penalty for failing to file an income tax return on time, even though no tax is owed? This question was answered in the affirmative by the Tax Court of Canada (pursuant to s. 162(2.1) of the Federal Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA)) in Exida.Com Limited Liability Company v. The Queen, 2009 TCC 373 [Exida I]. The Federal Court of Appeal disagreed in Exida.Com Limited Liability Company v. Canada, 2010 FCA 159 [Exida II], ruling that a penalty was only applicable per s. 162(7), the “catch all” penalty provision within the ITA.
The Tax Court of Canada recently ruled in Goar, Allison & Associates Inc. v. The Queen, 2009 TCC 174, that the penalty only applied if tax was owed, the opposite of the Tax Court’s latest determination in Exida I. Furthermore, both Goar and Exida I were conducted according to the rules of “informal procedure”, outlined in section 18 of the Tax Court of Canada Act, R.S.C. 1985, c. T-2. Per subsection 18.28, proceedings conducted by informal procedure lack “precedential value.” Hence, it was up to the Federal Court of Appeal to clarify the discrepancy between Goar and Exida I.
According to ss. 162(1) & (2) of the ITA, failure to file an income tax return (as required by s. 150(1)) will result in a financial penalty, which is normally calculated as a percentage of the tax owed. Under s. 162(2) the penalty is increased for repeated late or missed filings. Subsection 162(2.1) applies specifically to non-resident corporations. A non-resident corporation that does not file an income tax return is subject to specific financial penalties, the greater of $100 or a maximum amount of $2500 ($25 per day to a maximum of 100 days). Finally, s. 162(7) provides additional sanctions for failure to comply with the ITA, except in instances where the ITA already provides a penalty for the impugned behaviour. It operates as a catch-all provision.
Before the Tax Court of Canada
Exida.com, a US corporation carrying on business in Canada, was penalized under s. 162(2.1) for its failure to submit an income tax return for 2003, 2004, and 2005. The company did not owe tax for those years.
Before the Tax Court, the primary issue was the interaction between ss. 162(1), 162(2.1), and 162(7) of the ITA. Again, s. 162(2.1) refers specifically to penalties for late or missed income tax filings of non-resident corporations. However, this provision only applies if a non-resident corporation is “liable to a penalty under” under ss. 162(1) & (2). The relevant subsections are as follows:
162(1) Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of…
162(2.1) … if a non-resident corporation is liable to a penalty under subsection (1) or (2) for failure to file a return of income for a taxation year, the amount of the penalty is the greater of…[emphasis added].
The key phrase is “liable to a penalty under subsection (1) or (2).” The penalty is a product of the tax owed and a predetermined percentage. According to ss. 162(1) & (2), if the tax owed is nil then the penalty is nil. Per a strict interpretation of the provision, advanced by Exida, s. 162(2.1) only applied if the non-resident corporation was “liable to a penalty” under ss. 162(1) or (2); in other words, only if they owed tax for the years in question.
Exida’s reasoning was in line with the Goar decision in which Justice Miller of the Tax Court ruled that s. 162(1) was not triggered unless tax was owed. In the present case, the Minister argued that the taxpayer was “liable to a penalty” as long as an income tax return had not been filed on time. According to the government’s submission, it did not matter that the penalty was nil. Furthermore, the catch-all provision in s. 162(7) could be applied if s. 162(2.1) was not.
Subsection 162(7) is relevant only in instances where another provision in the ITA does not provide a penalty for the impugned behaviour. According to Justice Woods s. 162(2.1) provided a penalty, and it was “not relevant that the penalty could be nil.” Therefore, s. 162(7) had no application. Refusing to follow the decision in Goar, Woods held the issue should be resolved by applying a textual, contextual and purposive approach.
First, the meaning of “liable” is broad and is defined in part as “responsible at law” or “[b]ound or obliged by law or equity.” Furthermore, the history of the legislation, including a technical note released in conjunction with s. 162(2.1), is evidence that the failure to submit the return is the conduct Parliament intended to penalize, regardless of whether there was unpaid tax. The relevant portion of the technical note is as follows:
New subsection 162(2.1) is a special rule for the computation of penalties under subsections 162(1) (failure to file return) and 162(2) (repeated failure to file). The rule, which applies to all non-resident corporations, provides that a penalty under either of those subsections is to be computed as the greater of two amounts. The first amount is the amount determined under subsection 162(1) or 162(2). The second amount is the greater of $100 and $25 for each day, up to 100, that the failure to file continues. New subsection 162(2.1) thus operates to subject non-resident corporations to the effect of the “regular” penalties under subsections 162(1) and (2) in respect of a failure to file an income tax return and, consistent with the role of that tax return as an information return for those corporations that claim an exception from Canadian tax as a result of the application of a tax treaty, to the alternative penalties that would apply under subsection 162(7) of the Act if a separate information return had been required in respect of those corporations.
The Federal Court of Appeal
Justice Noel provided the written reasons for judgement, with Justices Trudel and Dawson concurring. Referring to the legislative history of s. 162(2.1), the Court of Appeal determined that the provision was implemented to specify the obligations related to non-resident corporate income tax filings. Prior to this, s. 150(1) only referred to “corporations”. Addressing the technical note, the Court of Appeal ruled that it was evidence of intent to subject a non-resident corporation to alternative penalties, but it did not demonstrate intent related to circumstances when no tax was owed. Furthermore:
[t]he reasoning of the Tax Court Judge results in a penalty being levied under subsection 162(2.1) even though the stated condition precedent for its application—“if a non-resident corporation is liable to a penalty under subsection 162(1) or (2)”—is not met. No textual or purposive analysis can justify such a result…”
According to Justice Noel, “it is equally clear that those charged with implementing this past aspect of the legislative plan failed in their task.” The alternative penalties in s. 162(2.1) are only triggered if the non-resident corporation is “liable” under ss. 162(1) & (2). The Federal Court referred to this as a “fundamental drafting error.” And, as a result of that error the ITA does not provide a specific penalty for the failure of a non-resident corporation to file a tax return. Therefore, the Court of Appeal held, the catch-all penalty provision found in s. 162(7) was triggered and Evida was liable for the respective penalty as a result.
Ultimately, a non-resident corporation is only liable for penalties under s. 162(2.1) if they are liable under ss. 162(1) & (2). And they are only liable per ss. 162(1) & (2) if taxed is owed. However, the Federal Court of Appeal ruled that under the circumstances s. 162(7) is applicable if tax is not owed. The maximum penalty under s. 162(7) is $2500 for each contravention or failure to file a return.
In my opinion, the Federal Court of Appeal was reasonable in its decision. The definition of “penalty”, outside of the monetary penalty referenced in the relevant provisions, was not explicitly examined in conjunction with the word “liable” in Exida I or Exida II. The Oxford Dictionary defines a “penalty” as a “punishment imposed for breaking a law” or a “disadvantaged suffered as a result of an action or situation.” Again, “liable” was defined by the Tax Court as “responsible at law” and other analogous phrases. In the end, “liable to a penalty” suggests being “responsible at law” for a “punishment imposed for breaking a law.” Here, the “penalty” was nil under ss. 162(1) & (2). A “penalty” of nil is not a punishment or disadvantage suffered. Therefore, Exida was not “liable to a penalty” and s. 162(2.1) was not triggered.
The fact that s. 162(2.1) provides a minimum penalty applicable to non-resident corporations makes it reasonable that such a penalty was implemented to account for situations where tax was not owed and the resulting calculation would be nil. However, as noted by Justice Noel, “[w]hile a contextual and purposive analysis is useful…it cannot be used to give the legislative language a meaning which it cannot bear…”