Gestion Jean & Guy Hurteau inc. c. Québec – QCCQ: Québec tax legislation held retroactive – prohibited capital gain election

Bill Innes on Current Tax Cases

Gestion Jean & Guy Hurteau inc. c. Québec (Sous-ministre du Revenu) (Agence du revenu du Québec) (December 16, 2014 – 2014 QCCQ 12452, Hamel, J.C.Q.) (not yet translated into English).

Héléna Gagné of Davies Ward Phillips Vineberg LLP has been kind enough to provide the following commentary (I am indebted to Guy Du Pont, Ad. E., for initiating the collaboration).

This is an interesting decision about retroactive legislation in general and the conditions of its application. It also reminds its readers that although taxpayers can always plan their affairs to minimise tax, they now bear the added increased risk of unfavourable retroactive changes in legislation. It may be noted however that there was no constitutional attack of the retroactive aspect of the legislation.
The issue was raised in the context of a designation for the purpose of exemption from the presumption of a capital gain (re: subsection 55(2) of the Income Tax Act (the “ITA”)).

The Cour du Québec had to decide whether it is appropriate to give effect to the retroactive amendment to the Québec Taxation Act (the “QTA”) pursuant to which Gestion Jean & Guy Hurteau Inc. (“GJ & GH”) was no longer allowed to elect for Québec income tax purposes differently than for federal income tax purposes in the context of designations for the purpose of exemption from the capital gain presumption (subsection 55(2) ITA).

Following the Information Bulletin 2006-6 (the “Bulletin”) issued by the Ministry of Finance on or about 20 December 2006 and the amendment to the QTA following the enactment of Bill 2 (2009), the Agence du Revenu du Québec (the “ArQ”) refused the separate and different dividend election made by GJ & GH under the QTA.

Therefore, the question raised was the following: may a dividend declared and paid before the publication of the Bulletin, be subject to an election in Québec that differed from the federal income tax election, when that election was made after the publication of the Bulletin?

The facts, which were not in dispute, were as follows:
  • GJ & GH was a Canadian-Controlled Private Corporation (“CCPC”).
  • Its taxation year ended 31 August.
  • Therefore, for its 2006 taxation year, its statutory filing date was on 28 February 2007.
  • Prior to 14 July 2006, GJ & GH owned 95,23% of Groupe Fruits & Passion Inc. (“GFP”).
  • On 14 July 2006, GJ & GH reduced its participation in GFP by 30%.
  • On 14 July 2006, GFP declared a dividend of $8,537,606 to GJ & GH (the “Dividend”).
  • The Dividend exceeded the safe income attributable to GJ & GH.
  • With its federal income tax return for its 2006 taxation year, no designation was made pursuant to paragraph 55(5)(f) ITA and as a consequence, the amount of $8,537,606 was deemed to be a capital gain.
  • As a result, GJ & GH included in its income a taxable capital gain of $4,268,803 based on the 50% rate in effect at the time.
  • For QTA purposes, GJ & GH made an election, when filing its tax return on 27 February 2007, to designate a portion of the dividend equal to its attributable safe income at the time, i.e. $6,878,687. Therefore, an amount of $1,658,919 was declared as dividend income.
  • On 17 July 2007, the ArQ assessed GJ & GH and denied the election. As a result, the dividend in the amount $8,537,606 was treated as a capital gain.

For the Cour du Québec, it was strictly a question of analyzing (i) the interpretation principles; (ii) the text, the context and the purpose of the provision; (iii) and the legislation by way of administrative publications and the presumption of non-retroactivity of laws.

The Cour du Québec pointed out that historically, the interpretation of tax laws was strict and literal, giving taxpayers flexibility in planning and organizing their affairs. Any ambiguity of a provision was interpreted in favor of the taxpayer.

However, over time, with the increasing importance of the public policy objectives behind tax measures, the Supreme Court of Canada recognized that tax laws should be interpreted like any other law according to their plain meaning having regard to context and purpose. This included cases of ambiguity (re: Antosko, Friesen and Canada Trustco Mortgage Company).

Based on the modern rules of interpretation expressed by Driedger, the words of statutes must be read in their entire context and in their ordinary meaning and grammatical sense, harmoniously with the scheme of the act, the object of the law and the legislative intent. The Court insisted on the quest for the purpose of the provision and for the mischief that the new rule sought to resolve.

With respect to the text, the Court found no distinction between the terms “election” and “designation”. The making of either an election or of a designation by taxpayers was optional and constituted a fiscal planning possibility until the election or designation was actually made and brought to the attention of the ArQ.

The Court then turned to the rule of interpretation by context and purpose of the provision. It referred to Canada v. Nassau Walnut Investments Inc., [1997] 2 FCR 279 (CA), where the Federal Court of Appeal stated that an election under paragraph 55(5)(f) ITA must be filed with the tax return for the taxation year when the dividend was paid.

The Court then concluded that the Bulletin was a measure of harmonization with the ITA in order to ensure that taxpayers did not avoid Québec tax. In addition, the Court noted that tax measures are generally announced during the Budget Speech. Although they are intended to take effect immediately or at a date to be fixed, they are set into law at the date of the sanction of the legislation, meaning at the end of the legislative process which may take months or years.

Although this legislation by way of administrative fiat appears to raise criticism amongst the practitioners, the Court stated that this modus operandi had been generally approved by the jurisprudence to the extent that the new rule was announced and justified by the public interest.

The Court then referred to the principle established in Gustavson Drilling (1964) Ltd. v. MNR, [1977] 1 SCR 271 to the effect that when the legislature clearly expressed its will, a law may have a retroactive effect. It also accepted the distinction between a retroactive and a retrospective statute as proposed by Driedger: “[…] A retroactive statute is one that operates as of a time prior to its enactment. A retrospective statute is one that operates for the future only […]”

In the same vein, the Court took note of the teachings of professor Côté in the context of legal interpretation of taxation:

Original text in French : « 516. En matière fiscale, la loi peut conférer à la survenance de certains faits la conséquence d’attribuer à un contribuable un avantage dont il pourra se prévaloir au cours des années fiscales subséquentes. Si, après que soient survenus les faits en question, le législateur retire les avantages accordés par la loi antérieure, mais ne les retire qu’à l’égard de la période postérieure au jour de la modification, il revient sur des faits accomplis, mais seuls les effets fiscaux futurs de ces faits sont atteints, et non les effets passés.”, Pierre-André Côté (avec la collaboration de Stéphane Beaulac et Mathieu Devinat), Interprétation des lois, 4e édition, Montréal, Éditions Thémis, 2009, par. 516

It may be that various tax consequences would only be triggered upon the occurrence of subsequent facts. Where these consequences translate in an advantage for a taxpayer, that advantage would only be realized in a subsequent taxation year. In that case, if the legislator happens to later deny that benefit by legislative change although the facts might have already taken place, that denial would nevertheless apply to the future benefit. In other words, proposed amendments may impact future tax consequences while applying to facts that have already happened.

For those reasons, the Court concluded that the QTA’s amendment had a retroactive effect since it contained a provision that made it effective prior to its sanction. The QTA’s amendment, as introduced in 2009 to remove a tax benefit with respect to the transaction carried out by GJ & GH, but for the future only i.e. at the time of the filing of an election on 27 February 2007.

The election is certainly linked to transactions that took place before the amendment of the Act in 2009, but the tax consequences for GJ & GH materialized at the time of filing the tax return on 27 February 2007, following the release of the Bulletin in 2006.

The appeal by GJ &GH was dismissed by the Cour du Québec which pointed out that although a taxpayer may organise its affairs in the hope that the tax law remains static, there is always a possibility of a change. There was no further appeal from that judgement.