The Role of Statutory Interpretation in Tax Law

As the tax deadline of April 30th for most corporations has passed, some corporations have paid their taxes, others have claimed a refund and others like United Parcel Services (UPS) have paid their taxes and claimed it back as an error. The journey of United Parcel Services v. Canada, 2009 SCC 20, through the hierarchy of courts up to the SCC clearly indicates the importance of due diligence to ensure an error-free tax return. Instead of paying taxes, UPS asserted their claim over more than $2 million in taxes that was already paid to the government in the form of GST payments. UPS made an error in filing their taxes that led to an overpayment of $2,937,123 in GST.

The GST, or the Goods and Services Tax, is a 5% tax that applies to most goods and services in Canada. Although the consumer ultimately pays the GST, generally businesses are responsible for collecting and remitting the GST to the government. Businesses register with the government stating their intent to collect and remit GST. The GST paid on purchases to operate the business is negated by the GST collected from sales. The difference is claimed as a refund or payment to the government.

In this case, other than acting as a courier, UPS took on the role of a licenced customs broker for goods entering into Canada from a foreign country. As a broker, UPS had the authority to take all steps to clear Canadian customs and pay or remit duties and taxes on behalf of its customers. Over a period of 23 months, a number of errors resulted in overpayment of GST including wrong value for duty, returned shipments, Canadian goods returning to Canada, GST free goods and others. The various reasons for the overpayment could be attributable to either UPS or its customers.

The error in GST payment amounted to $2,937,123 from February 1, 1996 to December 31, 1997. UPS claimed a rebate for the overpayment. However, the respondent put forward three main arguments that Justice Rothstein dealt with in detail in his judgment:
1. Should UPS be entitled to the rebate under s.261(1) of the Excise Tax Act?
2. Does the amount paid by UPS constitute an amount that was “not payable” as per s.261(1)?
3. Did UPS follow the required procedure to obtain a rebate under s.261(1)?

Although both parties agreed to the definition of overpayment as being “an amount of GST that would not have been payable had the errors…not been made” (para 12), the parties disagree on whether the meaning of overpayment implies a right of repayment.

1. Should UPS be entitled to the rebate under s.261(1) of the Excise Tax Act?
Under s.261(1) of the Excise Tax Act:

261.(1) Where a person has paid an amount
(a) as or on account of, or
(b) that was taken into account as tax, net tax, penalty, interest or other obligation under this part in circumstances where the amount was not payable or remittable by the person, whether the amount was paid by mistake or otherwise, the Minister shall, subject to subsections (2) and (3), pay a rebate of that amount to the person. [Emphases added]

The Minister claimed that UPS should not be entitled to the rebate because UPS was the broker and as such UPS customers were liable to pay GST, not UPS itself. He claimed that the person who “paid an amount” is the person with legal liability (customers) and not the person who simply remitted the money to the government (UPS), and that s.261(1) should not be interpreted in a contextual vacuum.

Justice Rothstein disagreed with the Minister’s interpretation. He stated that “[i]f the Minister’s argument were correct, a stranger who mistakenly paid GST on goods imported by someone else (perhaps because the names of two importers were similar) could not obtain a rebate. It cannot have been the intention of Parliament that persons who were not liable for GST but paid GST in error could not obtain a rebate.” He took a broad, purposive approach and interpreted the words of the statute in context of the provision as a whole, while trying to determine the intention of the drafters.

2. The amount of $2.9 million was “not payable” as per the statute
Justice Rothstein disagreed with the Minister. He decided that the fact that the $2.9 million is considered as overpayment and the amount would “not be payable” had the errors not been made guarantees its authority under s.261(1) of the Excise Tax Act.

3. UPS followed the required procedures
Justice Rothstein, again, interpreted the statute broadly and determined that the definition of “allowable rebate” is a rebate that would have been allowed had the applicable procedure been followed. Yet, he concluded that, this does imply that not following the procedure is fatal to the rebate claim. Since the Minister agreed that the $2.9 million is overpayment and not payable, “[b]y necessary implication, these concessions must mean that had the appropriate procedures been followed, the rebate would have been allowable.” (para 33)

Justice Rothstein decided in favor of the appellants and granted them the rebate. He utilized the various tools of statutory interpretation available to him including plain meaning of the words, and intention of the drafters.

This case further establishes the role of statutory interpretation for judges when making a decision relating to tax law. This implies that the final interpretation of tax law belongs to the judiciary. Unlike a civil law court, Canada’s common law court tends to consider the context of the case including the facts of the case when interpreting the statute, exercising more freedom in their legal reasoning. On the other hand, civil law courts tend to follow the exact wording of the statute and are more strict in their legal reasoning.

It is unclear whether one approach is better than the other, especially with regard to tax law. On the one hand, the importance of certainty for taxpayers is essential as provided by civil courts. However, the intention of the Parliament and other interpretive tools must be considered in context of the facts of the case to determine a fair judgment.

As seen in this case, Canadian courts have taken a more balanced approach, taking a broad, purposive approach to the interpretation of the statute, along with the facts and circumstances of the case to reach a fair judgment. This approach may incur the wrath of critics against judicial activism, for judicial restraint.

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