March 06, 2012

Sentinel Hill No. 29 Limited Partnership, Sentinel Hill No. 30 Limited Partnership, Sentinel Hill No. 31 Limited Partnership, Sentinel Hill No. 116 Limited Partnership, Sentinel Hill No. 155 Limited Partnership, Sentinel Hill No. 178 Limited Partnership, Sentinel Hill No. 73 Limited Partnership, Sentinel Hill No. 77 Limited Partnership et al. (Plaintiffs (Appellants)) v. Attorney General of Canada (Defendant (Respondent))

2008 DTC 6568
Neutral Citation: 2008 ONCA 132
Ontario Court of Appeal
Date: February 22, 2008

Court File No. C47102

Federal income tax — Non-resident withholding tax — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 169, 212, 215, 227.

Facts: The appellants were Ontario limited partnerships formed to participate in tax-sheltered investments in film and television productions with non-resident film studios. The Appellants deducted certain payments made to the non-residents from their income tax, and remitted withholding tax under Part XIII of the Income Tax Act (the “Act”) on these payments to the CRA, on behalf of the non-residents. Under an agreement between the appellants and the non-residents, the payments made to the non-residents were grossed up by sufficient amounts so that the appellants effectively absorbed the Canadian withholding tax. Subsequently, the CRA reassessed the appellants, denying the deductibility of a portion of the non-resident payments. Since these payments were non-deductible, no withholding tax was owed in respect of them. The appellants brought an action against the CRA for unjust enrichment, seeking a return of the withholding tax remitted on the non-deductible payments. The CRA made a motion to have the action dismissed as a matter of law and for lack of jurisdiction. The motions judge granted the motion, and the appellants appealed.

Held: The appeal was dismissed. The Court found that the appellants had no cause of action against the CRA. Although the appellants may have suffered the deprivation, and the CRA may have been unjustly enriched, only the non-residents could seek any refund of an overpayment of withholding tax. The Act provides that the liability for the tax is the non-residents’. The gross-up clause contained in the agreement between the parties was a private arrangement, and does not affect the parties’ legal relationships with the CRA. The fact that the remedy provided for is only for non-residents is consistent with the scheme of Part XIII of the Act. Part XIII provides a complete procedural code for the return of non-resident withholding tax where tax has been paid under mistake or without liability. With respect to jurisdiction, any application must be made to the Tax Court of Canada, not the provincial court.