Although it’s common to hear complaints that judgments from the Supreme Court of Canada are confusing or overly complex, a recent tax case comes down firmly on the side of common sense when it comes to interpreting tax law.

In United Parcel Service v. Canada, the top court unanimously ruled that a corporate taxpayer entitled to a GST repayment should receive the money, whether or not it made the claim in the manner demanded by the CRA.

The decision, in essence, says that the crucial issue is whether or not the taxpayer made the overpayment and was entitled to the rebate, not whether it followed a particular procedure when applying for it.

If that sounds like a sensible response, it’s worth noting that it was not the approach taken by the Federal Court of Appeal, which found for the CRA when it heard the matter. It was discomfort with that decision that likely led to the Supreme Court deciding to hear the matter, noted UPS’s lawyer, Jeff Galway of Blake Cassels & Graydon LLP in Toronto.

“My own sense is that they felt there was an inequity here of a taxpayer, UPS, paying tax and not being able to claim a refund. It was a situation where, if UPS could not claim the refund, it was likely that no one else could get the refund, so there would be this windfall to the Crown,” Galway noted.

The dispute arose out of the cross-border aspect of UPS’s courier business in Canada. UPS acts as a licensed customs broker for goods entering Canada from other countries (foreign residents are subject to different GST rules.) In its capacity as a broker, UPS was charged with taking all steps necessary to make sure the goods it carried cleared customs, including payment of taxes on behalf of its customers. Essentially, UPS was paying the tax in order to expedite the delivery of cross border goods, with the expectation that overpayments made by it could be claimed as a rebate later.

The decision notes that it was common for errors to occur in the calculation of the GST owed; these miscalculations could range from predictable matters such as incorrect values for goods, to returned shipments. It was agreed between UPS and the Canada Revenue Agency that over-payments of the GST by UPS had indeed occurred as a result oferrors and those amounts were not in issue. It was important that none of the overpayments were actually remitted to the government by customers of UPS.

UPS accounted for the overpayments by deducting those amounts from its total GST bill, but the CRA balked.

After reassessing the company for most of the 1996 and 1997 tax years, it disallowed the rebates and presented UPS with a bill for almost $3 million for the two-year period: in addition, the CRA tacked on penalties and interest amounting to more than $1 million.

UPS appealed the assessment and the Tax Court of Canada allowed the appeal, finding in UPS’s favour. The Federal Court of Appeal then overturned that decision, reinstating the CRA’s assessment.

The Supreme Court of Canada however, agreed with UPS. In holding for the company, the top court reached several conclusions that generally seem to favour the common sense approach adopted by the taxpayer (setting off the amount of the rebate against its own tax bill): at the same time, the court took aim at decisions of the CRA that seemed to turn on an overly narrow interpretation of the Excise Tax Act.

All three of the CRA’s arguments were dismissed by the court. The CRA’s most important contention (and the point on which it was successful in the Federal Court) was that because UPS was not the entity potentially liable for the GST, it should not be eligible for a rebate in the case of an overpayment. But, as Galway noted, UPS successfully contended that, “on a plain reading of the section [261.(1)], it says that a person who has overpaid an amount shall be entitled to a rebate.” Further, as Galway put it, “the court accepted that, on a plain reading of the stature, the person that overpaid was UPS [not the customer].”

To find otherwise, Galway, added, would have led to a windfall for the CRA, because none of the customers had actually made any payments for which they could claim a rebate. As Justice Marshall Rothstein noted in the decision: “If the Minister’s argument were correct, a stranger who mistakenly paid GST on goods imported by someone else…could not obtain a release. 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.”

@page_break@The CRA also tried to argue that, because a customs officer was not involved in making the formal decision that there was a GST overpayment, no decision on entitlement to the rebate had occurred within the meaning of the statute. Justice Rothstein was similarly unimpressed with this argument, noting that that CRA itself had already agreed in the course of the litigation that UPS paid too much GST because of errors.

The final blow for the government came with the CRA’s third contention that, “UPS did not follow the required procedure for obtaining a rebate and therefore was not entitled to a rebate.” In dismissing this contention, Rothstein noted that the statutory provision relied on by the CRA was intended to avoid paying out rebates twice, not to prevent rebates being given when they were otherwise found to be owing.

Many taxpayers may feel that Canadian courts and the CRA don’t always approach tax statutes using plain meaning as their guide and that this decision may help alter that balance in favour of taxpayers. But although courts at least generally say that “plain meaning, in context” should guide such cases, the influence of this decision will likely not travel much beyond situations covered by the Excise Tax Act. However, as Galway also noted, the decision also makes it clear that it’s always a good idea to obtain a clear and formal ruling from the CRA about the procedure to be followed when claiming a rebate.

IE