A and B own 85% and 15% respectively of the voting shares of Opco. A and B deal at arm’s length, and each of them owns a different class of shares. B incorporates BCo and transfers his shares of Opco to BCo under section 85. Opco then pays a $400,000 dividend to BCo, which uses the money to buy all of A’s shares. The CRA was asked whether 55(2) would apply to the dividend paid to BCo, to which the CRA responded as follows:

It is possible that subsection 55(2) of the ITA would likely not apply in the hypothetical situation described above by reason of the application of paragraph 55(3)(a) of the ITA which provides that subsection 55(2) of the ITA does not apply to any dividend received by a corporation if, as part of a transaction or event or series of transactions or events as a
part of which a dividend was received, there was no disposition or increase in interest described in paragraph 55(3)(a) of the ITA.

Moreover, in general, it is the Agency’s position that section 84.1 of the ITA would not apply to a situation known as a ”leveraged buyout”. An example of a leveraged buyout transaction is described in paragraph four in Supplement 1 of Information Circular IC 88-2.

The position taken in the last paragraph is no surprise—it reflects a long-standing CRA view—but the first paragraph is odd. I don’t understand how the payment of a $400,000 dividend could fail to reduce the value of A’s shares. Leaving that aside, how does 55(3)(a) help BCo? B deal’s at arm’s length with Opco, and so one would think that one of the conditions in the 55(3)(a) would be met such that the exception would be unavailable. The trick, of course, is that BCo is the dividend recipient, and so it is not an unrelated person, per paragraph 55(3.01)(a). The unrelated persons in the scenario above, then, are Opco and A, which means that the exception in 55(3)(a) would appear to apply.

The employment contract is usually signed by the professional both in his or her personal capacity and on behalf of the PC as its President. Given that the professional signs in both capacities — and is really the directing mind of both persons involved — it seems like an odd practice, but the fact is that the CRA expects to see a written agreement. See Interpretation Bulletin IT-189R2 especially paragraph 1(j), which says the following:

[A] corporation is recognized as carrying on a professional practice if the activities of the corporation and its relationship to its employees and clients are similar to those ordinarily associated with a corporation carrying on a business. Such activities include … maintaining an employer-employee relationship between the corporation and the individual, with the services to be performed clearly set out in a dated, written agreement wherein specific provisions determine a reasonable salary for the services performed

See also CRA technical interpretation 2003-0030115 dated October 10, 2003, which summarizes the response to question 16 at the 2003 Table Ronde sur la Fiscalite Federale APFF.

This approach has been called “overly zealous” (see Colin Smith and John Loukidelis, “Professional Incorporations”, a paper presented at the Ontario Bar Association seminar “More Tax Issues You Cannot Afford to Miss”, Toronto, Ontario, November 22, 2005). I expect that a tax court would not insist on a written agreement as required by the CRA (unless, perhaps, the professional is purporting to assign amounts received to the PC eg where a doctor assigns OHIP billings to the PC). The fact remains, however, that auditors expect to see one (or so I’m told), and so, to avoid wasting time on a debate on the subject, we prepare the agreement.

The following are the highlights of the case.

1. For the purposes of the due diligence defence to a director-liability assessment for both source deductions and GST/HST assessments, the objective standard set out in Peoples Department Stores Inc.(Trustee of) v Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, has replaced the so-called “objective subjective” test set out in Soper v R, 1997 CanLII 6352 (FCA), [1998] 1 F.C. 124.

2. The consequences of this “new” standard, according to the FCA, are as follows (and are worth quoting at length):

[38] This objective standard has set aside the common law principle that a director’s management of a corporation is to be judged according to his own personal skills, knowledge, abilities and capacities: Peoples Department Stores at paras. 59 to 62. To say that the standard is objective makes it clear that the factual aspects of the circumstances surrounding the actions of the director are important as opposed to the subjective motivations of the directors: Peoples Department Stores at para. 63. The emergence of stricter standards puts pressure on corporations to improve the quality of board decisions through the establishment of good corporate governance rules: Peoples Department Stores at para. 64. Stricter standards also discourage the appointment of inactive directors chosen for show or who fail to discharge their duties as director by leaving decisions to the active directors. Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction: Kevin P. McGuinness, Canadian Business Corporations Law, 2nd ed. (Markham, Ontario: LexisNexis Canada, 2007) at 11.9.

[39] An objective standard does not however entail that the particular circumstances of a director are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard. As noted in Peoples Department Stores at paragraph 62:

The statutory duty of care in s. 122(1)(b) of the CBCA emulates but does not replicate the language proposed by the Dickerson Report. The main difference is that the enacted version includes the words “in comparable circumstances”, which modifies the statutory standard by requiring the context in which a given decision was made to be taken into account. This is not the introduction of a subjective element relating to the competence of the director, but rather the introduction of a contextual element into the statutory standard of care. It is clear that s. 122(1)(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, Re City Equitable Fire Insurance, supra [[1925] 1 Ch. 407].

[40] The focus of the inquiry under subsections 227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act will however be different than that under 122(1)(b) of the CBCA, since the former require that the director’s duty of care, diligence and skill be exercised to prevent failures to remit. In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.

3. The standards of care required with respect to unremitted GST/HST and unremitted source deductions do not differ. All of the amounts collected by a corporation for these purposes are paid by third parties (customers and employees) to satisfy their liabilities under the various statutes. All of these amounts are deemed to be held in trust by the statutes. In particular, “the liability of the directors under subsection 227.1(1) [of the ITA] is not conditional on the existence of sufficient cash in the corporation to pay the remittances of employee source deductions, quite the contrary.” [¶ 45]

4. The court reiterated the following (without overruling R v McKinnon, 2000 CanLII 16269 (FCA), [2001] 2 FC 203 (C.A) 2000 DTC 6593 sub nom. Worrell v R [2001] 1 CTC 79):

[49] The traditional approach has been that a director’s duty is to prevent the failure to remit, not to condone it in the hope that matters can be rectified subsequently: Canada v. Corsano, 1999 CanLII 9297 (CAF), [1999] 3 F.C. 173 (C.A.) at para. 35, Ruffo v. Canada, 2000 D.T.C. 6317, 2000 CanLII 15199 (FCA), [2000] 4 C.T.C. 39 (F.C.A.). … The defence under subsection 227.1(3) of the Income Tax Act and under subsection 323(3) of the Excise Tax Act should not be used to encourage such failures by allowing a due diligence defence for directors who finance the activities of their corporation with Crown monies on the expectation that the failures to remit could eventually be cured.

5. “A director of a corporation cannot justify a defence under the terms of subsection 227.1(3) of the Income Tax Act where he condones the continued operation of the corporation by diverting employee source deductions to other purposes.” (¶ 56)

In a previous post, I pointed out that naive but well-meaning family members who become directors of corporations to help out the entrepreneur in the family might find a sympathetic hearing at the Tax Court if they were assessed for unremitted source deductions or GST/HST. Query whether that is still true in light of Buckingham. All the more reason, then, to exercise caution in making a spouse, sibling or parent a director because “that’s what the bank wants” or whatever.

It’s an odd position to take given that the Business Corporations Act (Ontario) (OBCA) clearly contemplates the possibility that a corporation might be left without directors. Subsection 115(4) of the OBCA provides that

[w]here all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.

In Goicoechea v. The Queen, 2010 TCC 539 (informal procedure), a director liability case, the Tax Court seemed to accept that the corporation had been left without a director even though the evidence did not clearly establish when (or whether) a “first shareholder meeting” had been held and even though the taxpayer seemed not to have told the CRA about the resignation until rather late in the dispute resolution process.

Unfortunately for Mr. Goicoechea, he was caught by subsection 115(4) of the OBCA because, according to the court, it doesn’t take much to be considered to manage or supervise the management of the business and affairs of the corporation:

[21] No reference was made to any specific action undertaken by the Appellant on behalf of the Corporation after May 3, 2004 [the putative resignation date], but it appears reasonable to assume that some actions, albeit minimal perhaps, must have been taken by the Appellant, actions such as communicating and meeting with CRA officials to help them with the collection of the amounts due, making claims against the franchisor for the failure to remit the source deductions and against the former employees for the theft of inventory, making reports to the police and to the insurer concerning the missing inventory, taking steps with a view to the settlement of the bank debt and the landlord’s and other third‑party claims, etc. Such actions could in many cases have taken several months to complete.

[22] The Appellant has not shown that he did not take any actions on behalf of the Corporation after May 3, 2004 or that the Corporation was dormant or completely inactive. In the circumstances, I consider that the Appellant is deemed to have been a director of the Corporation after May 3, 2004 by virtue of subsection 115(4), and consequently, the two‑year limitation period in subsection 227.1(4) of the Act does not protect the Appellant from liability under the reassessment.

One wouldn’t think that entering into a shareholder agreement should have anything to do with the availability of the $500,000 small business deduction for a corporation, but in fact such an agreement could require the corporation to share the deduction with another that is otherwise unrelated. Buy-sell arrangements or rights to purchase shares in shareholder agreements can have unexpected results for the ownership or deemed ownership of shares for the purposes of the deduction. The results of the application of the rules relating to share ownership can be a nasty shock for the entrepreneurs seeking to take advantage of the low tax rates available to Canadian controlled private corporations (CCPCs) through the deduction.

A Canadian controlled private corporation that earns active business income pays tax on the first $500,000 of that income at a favourable rate (currently 15.5% in Ontario) unless the corporation is associated with another corporation. The favourable rate is still available for associated corporations, but they must share the $500,000 “limit”. If each of two associated corporations earns $400,000, then they must file an agreement with the CRA in which they agree to allocate the limit between them. $500,000 of the $800,000 total income earned by the corporations will be taxed at the favourable rate; the remaining $300,000 will be taxed at the general corporate rate applicable to active business income (currently about 28% in Ontario).

The Income Tax Act (the “Act”) contains complex rules for determining whether two corporations are associated. Essentially, the Act treats corporations with certain degrees of common ownership and de facto control as associated. Two corporation controlled by the same individual will be associated. Two corporations controlled by the same group of individuals will be associated. The Act contains a series of deeming rules that will treat a person as an owner of shares who is not otherwise a shareholder of a corporation. For example, a shareholder of a corporation is deemed to own shares in another corporation owned by the first corporation.

For those tasked with drafting shareholder agreements, one of the trickier deeming rules relates to options or rights to acquire shares. The Act, subject to several narrow exceptions, deems a person with almost any right to acquire shares, contingent or otherwise, to be the owner of the shares subject to the right. Paragraph 256(1.4)(a) of the Act states that, if a person has a right, under a contract, in equity or otherwise, “either immediately or in the future, and either absolutely or contingently,” to acquire shares or to control their voting rights, the shares are deemed to be issued and outstanding and to be owned by the person.

Given the phrase “either immediately or in the future, and either absolutely or contingently,” the CRA has taken the position that almost any right to acquire shares will trigger the application of the rule.# The Act provides, however, that paragraph 256(1.4)(a) does not apply to a right that is exercisable only upon the death, bankruptcy or permanent disability of an individual. As a result, the deeming rule would not apply to an option to purchase shares upon the death of an individual. The CRA has also said that paragraph 256(1.4)(a) will not be considered to apply to rights under a standard shotgun clause or a right of first refusal.

The exceptions set out above, however, have some limitations that are not immediately apparent. The exception relating to bankruptcy, for example, applies only in respect of the bankruptcy of an individual. If a right to acquire shares is exercisable upon the bankruptcy of a corporate party to the agreement, then the exception will not apply, and the person entitled to acquire shares upon the bankruptcy of the corporation will be deemed to own them. Similarly, it might be argued that “bankruptcy” has its technical meaning so that a right exercisable upon the insolvency of an individual will not come within the exception either. In the same vein, the exception relating to disability requires that the relevant individual be permanently disabled. As a result, the CRA has stated that the exception will not be available for a typical disability clause in a shareholder agreement that defines an individual to be disabled if the person is disabled for, say, nine months in a 12-month period.#

An example will help to clarify the operation of thes rule and their exceptions. Suppose that X owns all of the shares of XCo and 30% of the shares of YCo. The remaining 70% of the issued shares of YCo are owned by YHoldco, which is wholly-owned by Y. X and Y are unrelated, and they deal at arm’s length. All other things being equal, then, XCo and YCo should not be considered to be associated. Unfortunately, however, X and YHoldco have entered into a shareholder agreement under which X, among other things, is entitled to purchase the shares of YHoldco in the capital of YCo if YHoldco goes bankrupt. The exception for bankruptcy will not apply because YHoldco is not an individual, of course, and so X will be deemed to own YHoldco’s shares. X will be deemed to control YCo, and so YCo and XCo will be associated and required to share the $500,000 small business deduction. (It doesn’t matter, by the way, that YHoldco actually controls YCo. The Act provides that control by one person does not exclude control by another for the purposes of the association rules.) X and Y will be unhappy with their lawyer if this result was unexpected.

Of course, generally speaking, a shareholder agreement will not create unexpected association problems if all of the parties to it do not hold interests in other corporations, and many entrepreneurs find coping with an interest in one corporation more than enough to go on. Some entrepreneurs find running only one business “limiting”, however, and so they buy shares in multiple corporations. The lawyer advising such an entrepreneur will need to keep in mind the deeming rule described above if the entrepreneur will sign a shareholder agreement for one or more of the corporations.

Consider the position of Mr. X who owns 100 Common Shares that have a total tax cost and value of $100 but PUC of only $50. Let’s say that Mr. Y owns another 100 Common Shares with a total tax cost that is nominal and PUC of $50. The issuer of X’s Common Shares (“Opco”) wishes to purchase them from X for $100. If Opco simply purchases the shares for $100, X will be deemed to receive a dividend of $50 and to realize a capital loss in that same amount.

X can likely avoid this problem if he incorporates a new corporation (“Newco”) and then transfers his Opco shares to Newco for a note for $100. Section 84.1 should not apply to the transaction because X’s shares have “hard basis”. When Opco redeems the shares held by Newco, Opco is deemed to pay a dividend equal to $50 to Newco, but Newco should be entitled to receive the dividend tax free (subsection 55(2) of the Act shouldn’t apply because the proceeds received for the shares are equal to their tax cost). X can then cause Newco to repay his note. As a result, X receives back his investment tax free, which is the “right” result.

Some time ago, the CRA issued a technical interpretation on a method that is easier and cheaper to implement than the one described above, provided X and Y can cooperate (see document 9613115 dated May 8, 1996). Opco could file articles of amendment to create two new classes of common shares (let’s call them Class 1 and Class 2 Common Shares. X and Y, as part of the series of transactions that included the filing of the articles of amendment, would exchange their Common Shares of the old class for shares of the new classes. X would receive 100 Class 1 Common Shares and Y would receive 100 Class 2 Common Shares. The share exchange would occur on a tax-deferred basis under section 86 of the Act. In the directors’ resolutions issuing the shares of the new classes to X and Y, the directors would specify that $100 would be added to the stated capital of the Class 1 Common Shares belonging to X and a nominal amount would be added to the stated capital of the Class 2 Common Shares belonging to Y. X’s shares in the capital of Opco would then have a PUC equal to their tax cost and fair market value. Opco could purchase the shares for cancellation for $100, and X would receive the proceeds (a return of his investment) tax free.

In its technical interpretation (document 9613115), the CRA stated that it did not find the transactions offensive

where one class of shares owned by three shareholders who deal with each other at arm’s length will be exchanged for three new classes of shares of the same corporation in order to restore each shareholder to the amount of PUC each would have had, had he originally purchased a separate class of shares.

The CRA agreed that the Act did not provide for a PUC grind or a deemed dividend where the total PUC of the issued shares before and after the reorganization did not change even though the PUC of one shareholder’s shares increased and the PUC of the other shareholder’s shares decreased. The CRA also volunteered that the GAAR should not apply in these circumstances.

Of course, a PUC shift using section 86 of the Act will work only if the shareholders can cooperate. It is almost certain that, under corporate law, it will be necessary for the shareholders to approve the transactions—particularly the additions to stated capital—by way of special resolutions (see, for example, subsection 24(6) of the Ontario Business Corporations Act). If X can’t convince Y to play ball for whatever reason, then X might be stuck with having to use Newco to avoid the income inclusion associated with receiving a return of his investment.

Why have separate classes of shares in the capital of a corporation for new investors? Creating separate classes of shares creates its own problems both from a tax and non-tax perspective. Nonetheless, for tax purposes it is sometimes desirable to have different groups of investors subscribe for different classes of shares in the capital of a corporation.

Consider the position where Mike and John decide to form Opco to operate that lemonade stand business they’ve always wanted to run. On the incorporation of Opco under the Business Corporations Act (Ontario), each of Mike and John subscribe for 50 Common Shares in the capital of Opco at $1 per share. As a result, the tax cost and tax paid-up capital (”PUC”) of their shares is $100 in total.

Let’s move forward three years. Opco has been a success. Edgar, who is a friend of Mike and John, wants in. Mike and John are amenable—serving lemonade is hard work, and they could use the help and the extra capital—and so they agree to allow Edgar to subscribe for 50 Common Shares. Opco’s value, however, has increased so that its issued shares are worth $500 in total ($5 per share), and so it is only fair that Edgar pay more for his shares than $1 per share (the original subscription price paid by Mike and John). Edgar should pay $5 per share, or $250 in total, for his 50 Common Shares.

Let’s say that Edgar pays the required $250 in total for his 50 Common Shares. What are the tax consequences? The tax cost of Edgar’s shares is $250 in total or $5 per share, but their stated capital per share is only $2.33 because the stated capital of a share is the total stated capital of the class to which the share belongs divided by the number of issued shares of the class.

PUC is valuable because it can be returned to a shareholder tax free. The calculation of PUC begins with stated capital for corporate law purposes (not accounting purposes). If the stated capital of a class of shares issued by an Ontario corporation is $50, then, in general, the PUC will be $50 as well. Of course, the Income Tax Act (Canada) wouldn’t be the Income Tax Act (Canada) if it didn’t contain numerous rules that provide for adjustments to PUC to ensure that a taxpayer can’t artificially increase it. Nevertheless, if one is concerned only with subscriptions for shares, then stated capital and PUC are usually equal to each other.

The key point to note is that both stated capital and PUC are calculated by reference to a class of shares unlike tax cost or “adjusted cost base”, which is calculated by reference to the holder of the shares. PUC is averaged across all of the shares of a particular class rather than just all shares held by a particular individual. As a result, Edgar’s cost per share of his Common Shares in the capital of Opco is $5 ($250/50), but the PUC of each of his shares is only $2.33¹.

As for Edgar’s proceeds of disposition, the Act reduces them by the amount of the deemed dividend he received, so that on the purchase for cancellation he is deemed to receive proceeds equal to $2.33 per share ($5 – $2.66). That is, Edgar is deemed to realize a capital loss on the purchase for cancellation of his shares in an amount equal to the deemed dividend. The capital loss, however, cannot be used to reduce or eliminate the deemed dividend. Economically, when Edgar’s shares are purchased by Opco for $5 per share, he is simply receiving his money back. For tax purposes, he is treated as having received income![1]

The results described above are perverse. An experienced and intelligent Justice lawyer of my acquaintance once attempted to provide a policy justification for these rules. She didn’t convince me; I’m not sure she convinced herself. In any case, rational or not, these are the rules.

Issuing separate classes of shares will avoid this problem. If Edgar, instead of subscribing for Common Shares in the capital of Opco, subscribes for Class 1 Common Shares (common shares of a different class), and no one else subscribes for shares of that class, then the tax cost and PUC of his shares will be equal to his purchase price. If, therefore, Opco repurchases Edgar’s shares immediately after he paid for them, he will not receive a deemed dividend or realize proceeds of disposition, and all will be right with the world.[2]

Issuing multiple classes of common shares has its own problems, however. If the different classes have different rights to dividends or liquidation amounts, then a shareholder agreement might be necessary to protect the minority shareholders. If the classes have identical rights, then the issue becomes whether the classes really are separate classes such that their stated capital and PUC can be computed separately (see blog.simpsonwigle.com/2007/10/classes-of-shares/). A cautious tax adviser, who decides to insert, say, a liquidation preference to ensure that classes can be distinguished, will need to consider the implications under Parts IV.1 and VI.1 of the Act. In short, the decision to issue multiple classes to avoid the complexities associated with Edgar’s circumstances will create their own complexities. The tired tax adviser, who is confident that Opco will never repurchase Edgar’s shares, might content herself with allowing him to subscribe for ordinary Common Shares in the capital of that corporation.

[2] All is not lost even if multiple shares weren’t used but it becomes necessary to repurchase shares. Extra steps, such as the incorporation of a holdco for the seller, can be taken to ensure that the shareholder doesn’t end up in Edgar’s predicament.

1. $250+$100)/150).

   So what? This discrepancy is only likely to matter if Opco purchases Edgar’s shares for cancellation. On a sale to an arm’s-length third party, it is highly likely that the only relevant tax characteristic of Edgar’s shares will be their tax cost. He paid $250 for his shares. If he sells them for $500, he will realize a gain of $250. There’s no magic to that, and it’s the appropriate result. It’s what a rational person would expect.

   A rational person will have a much harder time with a purchase for cancellation of shares that have attributes like Edgar’s. On a purchase for cancellation, the Act deems a shareholder to have received a dividend and proceeds of disposition. The deemed dividend is calculated first, and it is equal to the purchase price paid for the shares minus their PUC. If Edgar were to turn around and sell his shares back to Opco for the amount he paid ($250), he would be required to include in income a deemed dividend! The amount of the deemed dividend would be equal to $133.33 (50*($5 – $2.33

x = (10y – z)/9

where

x is the value of the bad assets to be removed from the corporation;

y is the value of the bad assets before anything is removed from the corporation; and

z is the value of all assets of the corporation before anything is removed from it.

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.