The reserve granted to the administration for payable net tax refunds

In this article, our expert explains to you the position of the Federal Court of Appeal on the interpretation of section 229 (1).

MARCH 30, 2021

12:00 AM

By Pauline Pacosi

In this article, you will find out about the position of the Federal Court of Appeal on the interpretation of section 229 (1) of the Excise Tax Act. when a taxpayer is seeking in court for net tax refunds while being audited by the Ministry of National Revenue.

The Federal Court of Appeal issued a judgment on July 8th, 2020, regarding the extent of the administration’s obligation to pay the tax credit requested by a company when it is audited.

In this case, Iris Technologies Inc. is being audited by the Ministry of National Revenue. The company is suspected of collecting GST/HST tax credits without ever paying those taxes. Pending the results of the audit, the Minister has suspended the payment of net tax refunds requested by Iris Technologies.

This decision was the subject of an appeal for an interim mandatory injunction before the Federal Court from the company which requests that the Minister would pay 62,300,000 CAD in GST/HST refunds. The company also started a judicial review application seeking mandamus to compel the assessment and release the refunds. They argue that the retention of these sums places the company in a difficult financial situation that could go as far as the inability to continue its activity.  The Court refused the company’s application on the grounds that the mandamus application was premature, in the face of this decision, the company appealed.

In addition, the Minister also submits a counter-appeal concerning the injunction sought by the company and its application for interim relief, on the basis that they were moot. Indeed, after an initial reassessment of GST/HST amounts for part of the audited period, the company was already debiting 52,191,893.01 CAD and that, even if the tax refunds requested were to be confirmed as due, the balance of the sums would not result in any reimbursement for the company. The Federal Court rejected also the Minister’s notice, considering a concrete dispute remained between the parties.

The company argues, in the context of this appeal, that the Minister has a duty to pay the net tax refund owed to the taxpayer without the need to verify firstly the existence of any debt of the company compensating for this payment.

The Federal Court of Appeal acknowledges that the Minister has a legal duty to reimburse the net tax refund owed to a taxpayer under subsection 229 (1) of the Excise Tax Act, however, the question remains whether this duty can be exercised after the conclusion of an ongoing audit. The Court’s analysis is based on a comprehensive interpretation of the spirit of the text and the will of the legislator in its writing.

As a result, the Minister is entitled to verify beforehand that the amounts requested are in fact due, including through an audit. In this case, the judge finds that the appellant has not demonstrated the urgency and immediate necessity of this reimbursement, which, combined with the diligence granted to the Minister in considering an application, does not allow the Court to comply with the company’s argument. Indeed, the complexity and amounts involved must be taken into account in order to give the administration the time required to consider the taxpayer’s request.

The Court refuses to interpret the legislation in the form of “pay now and ask questions later” idea [47].

Both the appeal of Iris Technologies and the Ministry’s counter-appeal are dismissed. The Court rules that the administration must pay “with diligence” (229(1)) the net tax refund ask by a business and that in this case, the company did not have strong enough claims to authorize its motion for a peremptory injunction to pay the tax credits and underlying application for judicial review.

Should you need help with your business to detect and recover your net taxes, Leyton can help you. For any assistance or advice on these matters you can contact our experts at Leyton.

Pauline Pacosi – Sales Tax Consultant

Author

Pauline Pacosi

Pauline Pacosi

Sales Tax Consultant

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