Statute-Barred Corporate Refunds


In general any taxpayer who has overpaid their taxes (federal or provincial), CPP, EI, GST/HST, payroll source deductions etc should be entitled to a refund of the overpayment without any time constraints. We know however that this is not the case specifically because of subsection 164(1) of the Income Tax Act (the “ITA”) which provides that refunds will only be made if the relevant return has been made within three years of the end of the year to which the refund relates. Refunds made after the three year threshold would become statute-barred meaning that the CRA would deny them simply on the basis that time had run out. For example an individual with a potential refund for the 2016 calendar year would have to file that 2016 T1 return by December 31. 2019 to ensure that the refund will be paid. Similarly a corporation with a potential refund for its’ March 31, 2016 taxation year would have to file the corporate T2 return by March 31, 2019.

In 1995, as part of the taxpayer relief provisions, the government added a series of relieving rules one of which addressed statute-barred refunds – specifically subsection 164(1.5) was added to the ITA permitting the Minister of Revenue to issue refunds to individuals and testamentary trusts as long as the tax return to which the refund related was filed within ten calendar years from the end of that taxation year. The rule was initially retroactive to 1985 and subsequently modified in 2016 to apply to individuals and Graduated Rate Estates (GRE) only. Absent from this refund relieving mechanism are corporations, personal trusts and testamentary trusts that are not GREs.

A little known provision – notably absent from the CRA Taxpayer Relief Information Circular IC07-1R1 – added as part of the legislative taxpayer relief package was section 221.2 of the ITA which was designed to address the statute-barred refund issue. This provision became effective June of 1993 and was written to allow the Minister of Revenue the discretion to authorize the re-appropriation of a statute-barred refund to another tax debt of the same taxpayer from one year to another across the ITA, the CPP and EI Acts as well as provincial tax acts where there was a collection agreement with the Federal government. The rule was expanded effective April of 2007 to allow payments between tax debts that would encompass the Excise Tax Act (ETA) as well as a few other statutes.

It is important to recognize that the wording of section 221.2 requires that there be a “particular amount” that is appropriated. The CRA view is that this means that specific amounts are actually paid on account of a tax debt which could be through installments, garnishments, payments of the final tax owing for a given year etc. This amount then becomes eligible to be effectively transferred to another tax debt of the same taxpayer in another year. On the basis of this interpretation the CRA is of the view that section 221.2 cannot be used to indirectly access a statute-barred dividend refund through ITA 129 since that refund does not represent an amount that has been appropriated to another tax debt.


To further explain the mechanics of this provision with a common fact pattern assume that a corporation did not file its 2010, 2011 and 2012 T2s on the basis that it was not profitable. Assume that the taxation year end was December 31st. In 2016 the CRA sent requests to file each of the three years returns. None of these returns were filed in 2016. In 2017 the CRA arbitrarily assessed each of the three years for a combined tax debt of $200,000. Collection action subsequently followed resulting in garnishments of the full amount. In 2018 the corporation filed the T2 returns for each of the three years indicating that only $10,000 should have been paid. CRA accepted the returns as filed but refused to issue the refund of the difference of $190,000 on the basis that the three year time limit set out in subsection 164(1) of the ITA had expired.

A request under section 221.2 could be filed to ask the Minister of Revenue (CRA) to apply the statute-barred refund to another tax debt of the corporation. If, for example, the corporation had a payroll debt for unremitted source deductions of $300,000 in 2018 the statute-barred debt of $190,000 could be applied to reduce that amount to $110,000 if the request was accepted. The wording of section 221.2 is such that the re-appropriation of $190,000 is deemed to have occurred at the earlier time that the original amounts of $200,000 were paid (garnished in this case). The result is that arrears interest on the source deduction debt disappear. The CRA has further clarified that interest is not due from the deemed earlier payment to the time that the source deduction debt is established. The CRA has also added that a re-appropriation cannot create an actual refund as this would be contrary to the three year limitation set out in subsection 164(1). In other words if the source deduction debt were only $100,000 then only $100,000 of the statute-barred refund could be re-appropriated.

CRA Policy and Procedures

In the first few years of the introduction of ITA 221.2 the CRA would routinely grant requests for re-appropriation but the policy within the CRA quickly changed to become so restrictive that requests to re-appropriate statute-barred refunds were routinely denied on the basis that allowing such a request was contrary to the limitation period set out in ITA 164(1). This changed somewhat dramatically with an about face in 2011 with a couple of CRA interpretations that clarified that requests for re-appropriation would not be denied simply on the basis of the three year limitation in ITA 164(1). However in July 2014 the CRA released form RC431 titled “Request for Re-appropriation of T2 Statute-barred Credits”. The new form required explanations as to why the three year limitation was not respected. Criteria were added reminiscent of the taxpayer relief conditions including extraordinary circumstances, actions of the CRA and financial hardship. Compliance history would increase in importance becoming a necessary requirement. The CRA appeared to be in a state of flux where indecision and uncertainty coloured the application of section 221.2. Surprisingly the CRA acknowledged this fact at the 2017 Canadian Tax Conference indicating that procedures for section 221.2 were written in 2013 by those not particularly receptive with the idea of giving back refunds that rightfully belonged to corporations. The CRA further agreed that the result was a return to the previous policy where requests were being routinely denied.

The Current State of Affairs

The change in policy by the CRA in 2014 to apply strict taxpayer relief guidelines has resulted in a steady flow of denied requests that have in turn resulted in requests for judicial review by the Federal Court. There have been four decisions of the Federal Court since 2017. The four cases are:

  • Cybernius Medical Ltd – 2017 FC 226
  • Pomeroy’s Masonry Ltd – 2017 FC 952
  • Referred Realty Inc – 2018 FC 59
  • Forbes Painting & Decorating Ltd – 2019 FC 160

All four cases involve non-filers arbitrarily assessed. The overpayment/statute-barred refunds were caused by collection action by garnishment in three of the cases and overpaid installments in the fourth (Referred Realty).

CRAs’ reasoning for denying the requests included absence of extraordinary circumstances as to why the three year limitation was not respected, inadequate records, unreasonable efforts to comply, late filed returns including GST/HST returns and other non-compliance not resolved within a reasonable timeframe.

In referring the matter back to the CRA The Federal Court found the CRA focus on extraordinary circumstances unreasonable in Cybernius and Pomeroy stressing that the CRA should be focusing more on the importance of being able to collect all tax debts particularly source deductions and HST which was their mandate. The court also added that the financial hardship impact of denying the requests was not properly considered particularly in Pomeroy.

At the 2017 Canadian Tax Conference the CRA promised to revisit section 221.2 in terms of the Federal court decisions in Cybernius and Pomeroy adding that the CRA would need to carefully consider the court’s comments and that the current status quo was untenable. The CRA promised clarity on re-appropriation applications in 2018. Unfortunately the CRA has yet to fulfill that promise. In the meantime the 2018 decision in Referred Realty continues the trend to refer the denied request back to the CRA for reconsideration and in 2019 the court I Forbes Painting rather than refer the case back to the CRA for consideration opted instead to require the CRA to reassign the request to a different employee on the basis that the first employee failed to consider important factors such as financial hardship.

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