Sentinel Hill

It was not that long ago that the Ontario Court of Appeal released an unsettling decision concerning overpaid withholding tax under Part XIII of the Income Tax Act (Canada). In Sentinel Hill1, limited partnerships withheld too much Part XIII withholding tax and the Canada Revenue Agency ("CRA") refused to refund the overpaid withholding tax to the partnerships. The non-residents did not claim the refund because they were not out-of-pocket as the agreement between the parties contained a gross-up clause that kept the non-residents whole. In its chilling June 2008 decision, the Court of Appeal found that the non-residents, and no other person, had a cause of action against the CRA, notwithstanding that the partnerships were out-of-pocket and the CRA was unjustly enriched. The Court of Appeal held that the statute provided a complete code for the return of overpaid withholding tax and the remedy thereunder rested solely with the non-residents as the parties with the liability to pay the tax. The court would not interfere with the statutory lay of the land. Leave to appeal to the Supreme Court of Canada was denied and so the partnerships were out of luck and pocket.


On the heels of Sentinel Hill, the Supreme Court of Canada released its decision in United Parcel Services Canada Ltd. v. The Queen2 (“UPS”) at the end of April 2009. All nine Supreme Court Justices heard the case and delivered a unanimous decision denying what would otherwise be a windfall to the Minister. In UPS, instead of directly applying for a rebate of overpaid goods and services tax ("GST") paid in its capacity as a customs broker, the taxpayer set-off its overpaid GST against its GST liability in its capacity as a supplier of goods and service under another division of the Excise Tax Act. The Minister vigorously opposed the taxpayer offsetting overpaid GST as a customs broker against its GST liability as a supplier of goods and services.

The relevant statutory provisions at play in Sentinel Hill and UPS were different, with the latter affording the court more interpretive room. Nevertheless, in contrast to the Ontario Court of Appeal in Sentinel Hill, the Supreme Court in UPS took a purposive approach to interpreting subsection 261(1) of the Excise Tax Act. In particular, with respect to the connection between liability to tax and entitlement to a rebate, the court found that "Actual liability is not relevant in this context since there is no liability to pay tax that was paid in error"3. Furthermore, "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"4. The court analyzed procedural arguments put forth by the Minister, but found no merit in these arguments. In the end, the Supreme Court held that the rebate applied and the taxpayer was allowed to offset the rebate against its GST otherwise payable.

Looking Forward

Following the Sentinel Hill decision, tax practitioners revised gross-up clauses to oblige non-residents to apply for a refund and remit the same to the resident payor in the event that withholding tax was overpaid. The decision in UPS does not alter that advice. However, if precautions are not taken in an agreement, precautions taken are not successful, or other overpaid tax issues arise, we now have the strongest possible authority from the highest level of court, being a unanimous decision of the Supreme Court of Canada, for taking a purposive approach to interpreting relevant rebate and refund provisions of tax statutes. The UPS decision is very strong ammunition for putting tax paid in error back in the hands of the party who paid it.