Generally Worded Refund Claims Risk Falling Through the Cracks

(As originally published in GST & Commodity Tax Journal, November 2005)

 

Contrary to the popular practice of drafting a refund claim on such broad and general terms as to allow later adding specific items when issues become more clearly defined, the Federal Court has signaled in Scott Paper Limited v. The Queen ([2005] F.C.J. No. 1653 ) that this can practice can back-fire on the claimant.

The balance of this article discusses the Scott Paper case, and the implications for taxpayers seeking refunds.

The Facts

In this case, the Plaintiff, Scott Paper Limited (“Scott Paper”) manufactured paper products, including facial and bathroom tissues.  It was subject to the old Federal Sales Tax (“FST”).  After the elimination of the FST on January 1, 1991 (i.e., being replaced by the GST), Scott Paper submitted a Refund Claim (on May 15, 1992), alleging an “overpayment of F.S.T. on exempt sales”.   The total Refund Claim was in the order of $2.8 million, and was filed on a protective basis, relying on a Federal Court of Appeal decision (CIP Inc. v. Deputy Minister of National Revenue, [1988] F.C.J. No. 582, upholding a Tariff Board finding that facial tissues are cosmetics).

Scott Paper argued that facial tissues could be obtained on a tax exempt basis by persons who were licensed for federal sales tax purposes and fit the definition of manufacturer or producer under the Excise Tax Act (“ETA”, as it then was).

A Notice of Determination by the Minister disallowed the claim, and Scott Paper filed its Notice of Objection on December 9, 1993. On March 14, 1995, Scott Paper agreed to hold the Refund Claim in abeyance pending the outcome of a similar claim by Kimberly-Clark Inc., one of its major competitors.

On March 12, 1998, the Federal Court in that case determined that both facial and bathroom tissues were “cosmetics” for the purposes of the ETA, and the issue then became what effect that decision would have on the Scott Paper Refund Claim.  On June 24, 1998, the Minister requested documentation to support the Refund Claim regarding facial tissues, and sometime after January 1999, as the “desk audit” progressed, informed Scott Paper that its full refund would not be allowed.  On or about November 24, 1999, Scott Paper requested that the Minister consider a refund on taxes paid in error relating to bathroom tissues as part of the same Refund Claim.

A Notice of Decision issued May 30, 2000, allowed $1.6 million as a refund of FST regarding facial tissues, and denied the claim with respect to bathroom tissues on the ground that the original Refund Claim had not identified bathroom tissues, and the two year statutory time limitation for making a claim under section 68 ETA had expired.

An appeal by Scott Paper to the Canadian International Trade Tribunal (“CITT”), regarding the bathroom tissue rebate, was dismissed by decision rendered April 11, 2002.  Scott Paper then exercised its right under section 81.24 of the ETA, to a trial de novo in the Federal Court (Trial Division).

The Issue

The effective issue in the Federal Court was whether Scott Paper could effectively extend its original Refund Claim to include bathroom tissue sales, in this matter.

The Decision

The Federal Court dismissed the appeal, finding that the general wording of the Refund Claim was insufficient to satisfy the statutory requirements of section 68 ETA with respect to the bathroom tissue.

Section 68 provides as follows:

68.   Where a person, otherwise than pursuant to an assessment, has paid any moneys in error, whether by reason of mistake of fact or law or otherwise, and the moneys have been taken into account as taxes, penalties, interest or other sums under this Act, an amount equal to the amount of those moneys shall, subject to this Part, be paid to that person if he applies therefor within two years after the payment of the moneys.

At the time of the claim and shortly thereafter, Scott Paper had clarified the scope of its claim to the Minister by indicating that it was a protective claim with respect to the CIP Inc. decision, which addressed only the facial tissue point.  (In fact, all of the documentation provided to the Minister up to November 1999 related to facial tissue).

However, on the evidence before the Federal Court, it appeared that Scott Paper was aware of its competitor, Kimberly-Clark’s claim, regarding both facial tissue and bathroom tissue, and deliberately chose not to make the initial Refund Claim with respect to bathroom tissue.

(Apparently, Scott Paper decided that $2.8 million was likely the most it could recover by way of refund, and felt that its claim with respect to facial tissue would satisfy this amount.  It was only much later, during the 1999 desk audit that Scott paper realized that it had insufficient documentation to receive the full amount claimed, and attempted to introduce documentation regarding bathroom tissue as well).

The Minister’s Income Tax/Excise Tax Auditor testified before the CITT that the Canada Customs and Revenue Agency (“CCRA”, as it then was) “regularly accepted refund claims for which the reasons for refund were improperly or inadequately stated. She indicated that in such situations, auditors rely on working papers and attachments filed in support of the claim.” When the refund Claim was made, the CCRA auditors were curious as to why no documentation was filed regarding bathroom tissue, and waited for the issue to be raised. However, the issue was only raised seven and a half years after the original claim was filed.

The Federal Court followed, generally, the CITT’s own conclusions that in order to meet the normal limitations periods for the filing of a refund claim (here two years), a taxpayer must give a reasonable indication of what they are applying for, perhaps indicating the nature of the alleged error.[1] 

In result, the Federal Court rejected Scott Paper’s position, and noted that the imposition by statute of the two-year limitation period as part of the refund process, indicated Parliament’s intention to establish a degree of certainty with regard to refund claims.  In the Federal Court’s view, this meant that the proper administration of the ETA required certainty with respect to the nature and scope of the refund claimed.  If the category of products claimed for could be left indeterminate, Parliament’s intention of imposing a statutory limitation period would be effectively defeated, leading to an absurd result where the purpose of the provision would be defeated or rendered futile.

Accordingly, the Court held that the Refund Claim did not include bathroom tissue, and dismissed the appeal, with costs.

Commentary

The decision echoes W. Ralston (Canada) Inc. v. Canada (M.N.R.), 2002, 221 F.T.R. 30 (T.D.), where the Federal Court observed that section 68 ETA “commands that the “applicant” state the type of goods and the nature of the error” – clearly not a helpful case for Scott Paper.

The lesson that is reiterated for all taxpayers by the Scott Paper case is that when filing for a refund or rebate claim under modern taxing legislation (e.g., the GST portions of the ETA, income taxes, or provincial sales taxes), there is a certain degree of specificity that is required in outlining the reasons for the refund claim.

At the same time, cases like Scott Paper might provide the Crown with some useful ammunition for attaching “new arguments” on rebate claims made in future cases.  For example, suppose I file a section 261 rebate claim for GST paid “in error”, on the basis that business assets I purchase on the sale of a business were non-taxable because of section 167 (sale of a business).  If I find out later that section 167 really did not apply, but that the assets were still nonetheless non-taxable, perhaps under subsection 200(3) of the ETA (exempt user to exempt user), do I need to file a new Rebate Claim, and within the proper time limits ?

Scott Paper would seem to require a new Rebate Claim.

Something to think about, especially in a tax advisor’s world where what happened last month is hard to remember, let alone the reasons underlying a client’s GST Rebate claim over 2 years ago.

 

Authors:

Robert G. Kreklewetz & Simon Thang

Millar Kreklewetz LLP

 

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