Citation: 2013 TCC 103
Date: 20130410
Docket: 2011-245(IT)G
BETWEEN:
IMMUNOVACCINE TECHNOLOGIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
These are appeals from
determinations made by the Minister of National Revenue (Minister)
pursuant to paragraph 152(1)(b) of the Income Tax Act (ITA)
as to the appellant’s entitlement to refundable investment tax credits (RITCs)
for each of the taxation years ended March 31, 2005 through 2008. The
Minister denied the scientific research and experimental development (SRED)
claims and related RITCs for those taxation years pursuant to subsection
127.1(1) of the ITA on the basis that contributions made to the appellant by
the Atlantic Canada Opportunities Agency (ACOA), an agency of the
Government of Canada, under an agreement dated December 31, 2004 (Agreement)
(see Exhibit R-1, Tab 2) constituted “government assistance” as defined in
subsection 127(9) of the ITA. An amount received as government assistance
reduces the amount of expenditure eligible for the RITCs (as per subsection
127(11.1) of the ITA).
[2]
“Government assistance”
is defined as follows in subsection 127(9):
127(9)
“government
assistance” — “government assistance” means
assistance from a government, municipality or other public authority whether as
a grant, subsidy, forgivable loan, deduction from tax, investment allowance or
as any other form of assistance other than as a deduction under subsection
127(5) or 127(6).
[3]
The position of the
appellant is that the contribution from ACOA does not constitute “government
assistance” but rather was an ordinary loan advanced on reasonable terms and
for the business purposes of ACOA. Thus the appellant should be entitled to
claim its SRED expenses and to receive the related RITCs for the years at
issue.
Issue
[4]
The issue is whether
the amounts of $917,731, $692,806, $1,504,137 and $724,931 received by the
appellant from ACOA during the 2005, 2006, 2007 and 2008 taxation years were
“government assistance” as defined in subsection 127(9) of the ITA.
Admissions
[5]
The appellant was
incorporated in March 2000 as a research and development company to develop
projects for the creation of vaccine technology. ACOA provided a contribution
to the appellant of $3,786,474, spread over four years (2005 through 2008), in
respect of costs incurred to complete such projects.
[6]
The parties further
admitted the facts referred to in the Appellant’s Response to Request to Admit
and set out in the Respondent’s Request to Admit both of which were filed at
the hearing. Those facts are as follows:
1. As
of the year 2004, the appellant had not begun to commercialize products.
2. The
appellant’s gross income and net losses for the years 2002 to 2004 were as
follows:
Year Gross
Income Net Loss
2002 $5,030 ($564,478)
2003 $21,078 ($1,094,063)
2004 $25,542 (1,016,327)
3. As
of March 31, 2004, the appellant had current assets of $240,150 and capital
assets of $58,867.
4. From
the years 2000 to 2011, the sources of gross income of the appellant were as
follows:
Year Source
of gross income
2000 Nil
2001 Unknown
2002 Unknown
2003 Cost
recovery
2004 Cost
recovery
2005 Nil
2006 Nil
2007 Nil
2008 Pfizer
license signing fee
2009 Pfizer
license signing fee
2010 Pfizer
license signing fee
2011 Nil
5. The
appellant made repayments under the agreement with ACOA dated December 31,
2004, as follows:
Year Amount
of repayment
2008 $4,
896.30
2009 $2,116.60
2010 $28,408.24
2011 $1,552.10
6. The
Appellant made claims and received funding under the agreement with ACOA dated
December 31, 2004, in accordance with the details set out in the chart found at
tab 52, volume 3, of the appellant’s answers to undertakings.
[The
chart was filed as Exhibit R-1, Tab 1]
Facts disclosed at the hearing
[7]
The agreement reached
between ACOA and the appellant on December 31, 2004, was filed as Exhibit
R-1, Tab 2, and is reproduced hereunder:
Atlantic Innovation Fund
Contract Number: 181989
This
Agreement made
Between: Atlantic Canada Opportunities Agency
(hereinafter referred to as “ACOA”)
AND: IMMUNOVACCINE
TECHNOLOGIES INC.,
a corporation duly
incorporated under the laws of Nova Scotia,
having its head office
located at 1819 Granville Street, Suite 303,
Halifax, Nova Scotia B3J 3R1
(hereinafter
referred to as “the Proponent”)
WHEREAS ACOA has established a program, the Atlantic Innovation Fund (AIF),
to strengthen the economy of Atlantic Canada by supporting the development of
knowledge-based industry. The AIF will help increase the region’s capacity to
carry out leading-edge research and development that directly contributes to
the development of new technology-based economic activity in Atlantic Canada;
and
WHEREAS the Proponent submitted a project proposal in response to ACOA’s
Request for Project Proposals, dated August 23, 2002.
IN
CONSIDERATION of their respective obligations set
out below, the parties hereto agree as follows.
Article 1 – Deadline
for Receipt of Signed Agreement
1.1 This Agreement must be signed
by the Proponent and received by ACOA on or before December 31, 2004, failing
which it will be null and void.
Article 2 –
Documents Forming Part of this Agreement
2.1 The following documents form an integral part of this
Agreement:
These
Articles of Agreement
Schedule
1 – General Conditions
Schedule
2 – Statement of Work
Schedule
3 – Claims and AIF Project Cost Principles
Schedule
4 – Commercialization
Schedule
5 – Reporting Requirements
Schedule
6 – Project Fact Sheet for News Release
Schedule
7 – Special Purpose Equipment
Schedule 8 – Pre-Authorized
Repayment/Direct Deposit Authorization
2.2 In the event of conflict or inconsistency, the order of
precedence amongst the documents forming part of this Agreement shall be:
These
Articles of Agreement
Schedule
1 – General Conditions
Schedule
2 – Statement of Work
Other
Schedules
Article 3 – The
Proponent’s Obligations
3.1 The Proponent will carry out the New Peptide-based
Vaccines Project (“the Project”) as described in Schedule 2, Statement of Work,
will make claims in accordance with Schedule 3, will commercialize as mentioned
in Schedule 4, will issue the reports required under Schedule 5 and will
fulfill all of its other obligations hereunder, in a diligent and professional
manner using qualified personnel.
3.2 The Proponent shall ensure that the Project is completed on
or before September 30, 2007 (“Project Completion Date”), unless
otherwise agreed to in writing by ACOA.
3.3 In the event the carrying out
of the Project involves collaboration with other parties, the Proponent shall
provide, prior to any disbursement of funds, satisfactory evidence to ACOA that
appropriate agreements exist to ensure the roles and responsibilities of each party
are defined.
Article
4 – The Contribution
4.1 Subject to all the other provisions of this Agreement, ACOA
will make a Contribution to the Proponent in respect of the Project, of the
lesser of:
(a) 51.825%
of all other Eligible Costs (estimated to be $7,306,297); or
(b) $3,786,474.
4.2 ACOA will not contribute to any Eligible Costs incurred by
the Proponent prior to November 27, 2002 nor after the Project
Completion Date, unless otherwise agreed to in writing by ACOA.
4.3 ACOA will pay the Contribution to the Proponent in respect of
Eligible Cost incurred on the basis of itemized claims submitted in accordance
with the procedures set out in Schedule 3.
4.4 ACOA may withhold up ten percent (10%) of the Contribution
prior to the completion of the Project or until such audit as ACOA may require
has been performed. In the event that no audit has been performed twelve (12)
months after receipt of the final claim, any amount so withheld shall be
released to the Proponent.
4.5 At the discretion of ACOA or at the request of the Proponent,
ACOA may make payment(s) jointly to the Proponent and a supplier for Eligible
Costs which have been incurred.
4.6 (a) At the discretion of ACOA, an advance payment may be
made to the Proponent.
(b) To
request an advance payment, the Proponent must submit a completed copy of the
Advance Payment Request form (provided by ACOA), including a monthly cash flow
forecast of requirements for the Eligible Costs to be incurred during the
advance period. Such documentation must demonstrate that an advance payment is
essential to the successful completion of the project. Each advance payment
must be accounted for, to the satisfaction of ACOA, within forty-five (45) days
of the end of the advance period for which that advance payment was made.
(c) Should ACOA determine that an advance payment will be made,
such payment will be made in accordance with the Treasury Board Policy on
Transfer Payments.
Article 5 – Repayment
5.1 The Proponent shall repay the Contribution to ACOA by annual
instalments calculated as a percentage of the Gross Revenues. The amount due to
ACOA at each repayment shall be calculated:
(a) at
2% when the Gross Revenues for the Fiscal Year immediately preceding the due
date of the respective payment are less than $5,000,000; and
(b) at
10% when Gross Revenues for the Fiscal Year immediately preceding the due date
of the respective payment is [sic] $5,000,000 or greater.
5.2 The first repayment is due on December 1, 2008, and
subsequent repayments are due annually until the Contribution has been repaid
in full.
5.3 The Proponent agrees that its
Fiscal Year presently begins on April 1 and ends on March 31 and
there shall be no change of that Fiscal Year except with the prior approval of
ACOA.
Article
6 – Other Government Assistance
6.1 The Proponent hereby acknowledges that, no other federal,
provincial or municipal government financial assistance other than that
described in Section 7.1 of Schedule 2 has been, or will be, requested or
received by the Proponent for the Eligible Costs of the Project.
6.2 The Proponent will inform ACOA
promptly in writing of any other federal, provincial or municipal government
assistance (except for scientific research and experimental development tax
credits, deductions or allowances) to be received for the Eligible Costs of the
Project, and ACOA will have the right to reduce the Contribution under this
Agreement to the extent of any such assistance.
Article
7 – Project Financing
7.1 Prior to first disbursement of funds the Proponent shall
provide ACOA with a copy of its audited financial statements for the Fiscal
Year ended March 31, 2004.
7.2 Prior to April 1 of each year until Project completion, the
Proponent shall provide ACOA with confirmation of adequate financing for the
next fiscal year in the form of a 12-month fiscal year cash flow statement,
such financial projections to demonstrate adequate funding to support the
Project and ongoing company operations for that 12-month period. These
financial statements must be satisfactory to ACOA.
7.3 Prior to first disbursement of funds, the Proponent will
confirm equity investment of $1,400,000 since January 1, 2004 with terms and
conditions acceptable to ACOA.
7.4 Prior to cumulative disbursement greater than $700,000 the
Proponent will confirm additional equity investment of $700,000, for a total of
$2,100,000 since January 1, 2004, with terms and conditions acceptable to ACOA.
7.5 Prior to cumulative
disbursement greater than $1,500,000 the Proponent will confirm additional
equity investment of $2,000,000, for a total of $4,100,000 since January 1,
2004, with terms and conditions acceptable to ACOA.
Article
8 – Research Involving Humans or Animals
8.1 Prior to the first disbursement of funds, the Proponent shall
provide evidence satisfactory to ACOA that the project has received approval
from a Research Ethics Board which is constituted and working in accordance to
the Tri-Council Policy Statement on Ethical Conduct for Research Involving
Humans and, in the case of a clinical trial, with Health Canada’s Food and
Drugs Act and Food and Drug Regulations. Research involving animals must be
approved by an Animal Care Committee, which is constituted and working in
accordance with the Canadian Council on Animal Care Guide to the Care and Use
of Experimental Animals.
8.2 The Proponent shall address
any further ethical issues which may arise during the course of the Project in
the same manner and shall provide ACOA with satisfactory evidence of same.
Article
9 – Special Conditions
9.1 (a) The Proponent shall attain Equity, satisfactory to ACOA,
in the total amount of $(594,506) on or before the date of the first
disbursement by ACOA to the Proponent.
(b) Unless otherwise authorized by ACOA in writing,
this level of Equity shall be maintained until all of the Proponent’s
undertakings in regard to commercialization mentioned in Schedule 4 have been
fulfilled.
Article
10 – Notice
10.1 Any notice to ACOA will be addressed to:
Atlantic Canada Opportunities Agency
1801 Hollis Street
Suite 600
Halifax, Nova Scotia
B3J 3C8
Attention: Ms. Mary-Ellen Valkenier
Fax No: (902)
426-2054
10.2 Any notice to the Proponent will be addressed to:
ImmunoVaccine Technologies Inc.
1819 Granville Street, Suite 303
Halifax, Nova Scotia
B3J 3R1
Attention: Dr. Warwick Kimmons
Fax No: (902) 492-0888
Article
11-Entire Agreement
11.1 This Agreement constitutes the entire agreement between the
parties and supersedes all previous documents, negotiations, arrangements,
undertakings and understandings related to its subject matter.
[8]
The general conditions
applicable to the Agreement as well as the definitions of some of the terms used
in the Agreement are found in “Schedule 1-General Conditions”. I reproduce hereunder
the relevant portions thereof:
schedule 1 – general conditions
1. Definitions
For the purposes of this
Agreement,
“Agreement” means the agreement to which these General conditions
relate, consisting of Articles of Agreement and the Schedules referred to in
these Articles.
…
“Contribution” means the funding, in Canadian dollars, payable by ACOA under the
Agreement.
…
“Gross
Revenues” means all revenues, receipts,
monies and other considerations of whatever nature earned or received by the
Proponent, whether in cash, or by way of benefit, advantage, or concession, and
without deductions of any nature, net of any returns or discounts actually
credited and any sales, excise, ad valorem or similar taxes paid but without
deduction for bad debts or doubtful accounts, as determined in accordance with
generally accepted accounting principles, applied on a consistent basis.
Transactions with related persons (as that term is defined in the Income Tax
Act) will be deemed made in an amount equal to the fair market value for a
similar product at the time of the transaction.
. .
.
4.1 Overpayment
by Minister
Where
for any reason:
(a) The
Proponent is not entitled to the Contribution; or
(b) ACOA
determines that the amount of the Contribution disbursed exceeds the amount to
which the Proponent is entitled,
the
Proponent will repay to ACOA, promptly and no later than thirty (30) days from
notice from ACOA, the amount of the Contribution disbursed or the amount of the
overpayment, as the case may be, together with interest at the Interest Rate
from the date of the notice to the day of repayment to ACOA in full. Any such
amount is a debt due to Her Majesty in Right of Canada and is recoverable as
such.
. . .
6.10 Other
Financing
The
Proponent remains solely responsible for providing or obtaining the funding, in
addition to the Contribution, required for the carrying out of the Project and
the fulfilment of the Proponent’s other obligations under the Agreement.
. .
.
7.1 Commercialization
(a) The
Agreement will terminate when all amounts due by the Proponent to ACOA under
this Agreement have been paid in full or until that obligation is otherwise
discharged to the satisfaction of ACOA.
(b) In the event all of the Proponent’s undertakings in
regard to commercialization mentioned in Schedule 4 have been fulfilled and the
Proponent has demonstrated to the satisfaction of the Agency that Gross
Revenues have not been or will not continue to be generated, notwithstanding
7.1(a), the Agreement will terminate.
. . .
8. Default
and Recovery
8.1 Events
of Default
The following constitute Events of Default:
. . .
(e) the
Proponent neglects or fails to pay to ACOA any amount due in accordance with
this Agreement; or
(f) in
the opinion of ACOA the Proponent ceases to carry on business,
provided that ACOA will
not declare an event of default has occurred by reason of subsections 8.1 (c),
(d) or (e) unless ACOA has given notice to the Proponent of the condition or event
which in ACOA’s opinion constitutes an event of default and the Proponent has
failed, within thirty (30) days of receipt of the notice, either to correct the
condition or event complained of or to demonstrate, to the satisfaction of
ACOA, that it has taken such steps as are necessary to correct the condition,
and has notified ACOA of the rectification.
8.2 Remedies
on Default
If
an Event of Default has occurred, or in the opinion of ACOA is likely to occur,
ACOA may exercise one or more of the following remedies:
. . .
(c) require the Proponent to repay to ACOA all or part of the
Contribution paid by ACOA to the Proponent, and pay ACOA any amounts due under
the Agreement, together with interest at the Interest Rate. The interest,
calculated daily and compounded monthly, shall accrue commencing upon the date
which, in the opinion of ACOA, the Event of Default occurred.
. . .
10.3 Overdue
The
Proponent shall pay, where the account is overdue, and in addition to any
amount payable, interest on that amount at the Interest Rate. The interest,
calculated daily and compounded monthly, shall accrue from the due date until
payment is received.
[9]
Further, Schedule 4 of
the Agreement stipulates that, unless otherwise agreed by ACOA, the appellant
is to ensure that the resulting products will be exploited through their
production in Atlantic Canada until September 30, 2017. Schedule 5 of
the Agreement provides for quarterly and annual reporting by the appellant to
ACOA on the progress made in the fulfillment of the statement of work and on
any revised estimated costs. The description of the appellant’s particular
project is provided in Schedule 6 of the Agreement, which specifies, among
other things, the project’s long-term potential benefits in terms of building
new capacity in the region and the creation of new jobs.
[10]
Mr. Brian Lowe,
co-founder and chief operating officer and, as of 2008, vice-president of the
appellant, testified that they not only sought support from ACOA but indeed
raised about $30 million in private equity and obtained some $10 million
in government support during his tenure on the vaccine project (see transcript,
page 21). With a view to obtaining ACOA funding through the Atlantic
Innovation Fund (AIF), the appellant submitted a letter of intent in
August 2002, and a complete submission by the end of November 2002. The final
agreement was signed on December 31, 2004 after a lengthy process of
negotiating the terms of the agreement (see transcript, pages 21 and 22). Mr. Lowe
pointed out that, as a result of those negotiations, the repayment terms under
article 5 of the Agreement were that the contribution made by ACOA had to be
fully repaid in payments calculated as a percentage of the appellant’s gross
revenues generated by the whole of its operations, and repayment was not tied
to the outcome of the specific project that was being funded; it was Mr. Lowe’s
understanding that this sort of provision was not common with ACOA (see transcript,
pages 25, 34 and 35). As a matter of fact, the appellant showed the
contribution by ACOA in its financial statements for the years 2006, 2007 and
2008 as a repayable long-term debt (see, as an example, the financial
statements for the period ending March 31, 2006, Exhibit A-2, Balance
Sheet, page 41, and page 47, note 5 referring to an ACOA interest-free loan).
Apparently the appellant, on advice from its auditors and accountants,
requested from ACOA an amendment to the agreement such that the terms of
repayment would be changed to provide for a fixed monthly repayment schedule
instead of repayment based upon a percentage of gross revenues. Mr. Lowe
explained that this amendment was sought to ensure that the scientific research
and development tax credits would be granted to the appellant. ACOA apparently
refused any such change (see transcript, pages 31 and 32).
[11]
In cross-examination,
Mr. Lowe acknowledged that the financial statements for the year ended
March 31, 2003 (see Exhibit R-1, Tab 7, note 1) indicated that the
company had not yet commenced commercial operations and that its ability to
continue as a going concern was dependent on, among other things, its ability
to obtain additional financing. He also confirmed that the same statement
appeared in note 1 to the financial statements for the year ended
March 31, 2007 (see Exhibit A-3). For the year ended
March 31, 2008, the company reported a net loss of approximately $2.7 million
and an accumulated deficit of roughly $11 million. In the financial
statements for that year, in note 1, it is stated: "In addition to its
ongoing working capital requirements, the Company must secure sufficient
funding for its research and development programs and to defend its patents.
These circumstances lend substantial doubt as to the ability of the Company to
meet its obligations as they come due and, accordingly, the appropriateness of
the use of accounting principles applicable to a going concern" (see Exhibit
A-4, page 7, note 1).
[12]
Mr. Lowe explained
that the appellant was no different than any other biotech company in that it never
stopped raising money (see transcript, page 55), but he admitted that there
were no other sources of income from which ACOA could expect to be repaid as of
the moment the Agreement was signed (see transcript, pages 57 and 58). He said
that at that particular time, the project had not yet started and the
understanding was that the ACOA contribution would be repaid “going forward out
of all of our gross revenue after we had completed the project” (see transcript,
page 58). In 2008, there was not yet a commercialized product, a fact which
is reflected by the following statement in note 1 to the 2008 financial
statements (see Exhibit A‑4): "These undertakings [issuance of
shares and additional debt financing], while substantial, are not sufficient in
and of themselves to enable the Company to fund all aspects of its operations
and, accordingly, management is pursuing other financing alternatives to fund
the Company's operations so it can continue as a going concern."
[13]
Ms. Kimberly
Stephens, CA, chief financial officer of the appellant since January 2011, also
testified. She said that the project they were working on comprised four components.
It would seem that they are currently working on different ways to fund two of these
research programs and, to that end, seeking to collaborate with other
partnerships or other entities (see transcript, page 115). Apparently, they
signed four agreements with Pfizer Animal Health from 2007 to 2010 with respect
to one component of the project, namely, the preventive vaccines for animal
bacterial and viral infectious diseases program, for which Pfizer paid in the
years 2008, 2009 and 2010 up-front licence-signing fees for the right to use
the appellant’s technology (for the year ended March 31, 2008, those signing fees appear to
be $244,815, which is, the revenue amount indicated on page 5 of the financial
statements filed as Exhibit A-4). Ms. Stephens said that she hoped they
would start receiving milestone payments on that part of the project by 2014,
that is, when Pfizer applied to market the product, then when the product was
approved by the FDA (Food and Drug Administration), and finally when the
product was marketed. After that, royalty payments would start (see transcript,
pages 115, 116, 126 and 127). Ms. Stephens also mentioned that they were
working on other research programs for which they had the patent rights and
which had potential for commercialization, but which are not related at all to
the part of the project for which ACOA is contributing. She confirmed that, to
the extent that these other programs generated revenue, such revenue would be
part of the pool of revenues that would be used to repay ACOA’s contribution
(see transcript, pages 117 to 119).
[14]
Ms. Stephens
explained that, originally, the appellant had worked on a research project
related to an animal fertility-control vaccine (referred to as a “product
candidate” as it was not actually a marketable product). One component of that
project involved collaboration with the Hong Kong government. She said that the
gross revenue declared by the appellant in 2003 and 2004 was not in fact
revenue but cost recovery, that is, the reimbursement by the Hong Kong
government of costs incurred by the appellant on that project, as the appellant
did not have any product to sell (see transcript, pages 122 to 125).
[15]
The appellant also
called as a witness, Mr. Nicholas John Franklin, sales manager at the
Atlantic Acura car dealership, to establish that, in a commercial context,
interest rates of zero percent are realistic on automobile purchases. In
cross-examination, Mr. Franklin agreed that in that case the cars are used
as security for the loans.
[16]
Counsel for the
respondent called Ms. Janice Ann Nishikawa, a director at ACOA who
has been responsible for the Atlantic Provinces since 2006, to testify. In
2004, she was the manager of the AIF for the New Brunswick region, and was
responsible for coordinating and administering the day-to-day valuation of projects
for the AIF’s clients in New Brunswick. She said that ACOA is a regional
development agency created by the Government of Canada. Its statutory mandate is
to promote economic development in the Atlantic Region with the objective of
creating employment and increasing earned income for Atlantic Canadians (see transcript,
pages 131 and 132). The AIF is a program offered by ACOA for investment in
research and development that will eventually lead to “commercializable” products,
technologies and processes in Atlantic Canada (see transcript, pages 134 and 135;
see also the objectives for the AIF program, Exhibit R-3, page 22). The AIF is
governed by the Treasury Board, which approves the terms and conditions of the AIF
program, i.e., the terms and conditions for allocating grants and contributions
(see transcript, page 136).
[17]
Clause 2.4, entitled “Repayability”,
of ACOA’s online AIF document “Request for Project Proposals” (Exhibit R-3)
states that “[t]he federal repayable contribution policy is based on the
premise that when a business, as a result of a contribution from the Government
of Canada, earns a profit or otherwise increases in value, the business should
return the contribution to the government. Accordingly, contributions to the
private sector that involve the commercialization of a technology, product,
process or service will be conditionally repayable based on the
commercial success of the project.”
[18]
Ms. Nishikawa
testified that, when a project has been selected, a repayable contribution
agreement is negotiated. Terms of repayment are reviewed to determine how ACOA will
be repaid should the proponent have commercial success. Milestones would be
agreed to in order to be able to better monitor the project, and the key
expected results would be defined (see transcript, pages 144 and 145). She said,
echoing what is stated in the document filed as Exhibit R-3, that AIF funding is
conditionally repayable for commercial clients and not repayable for
non-commercial organizations (see transcript, page 146). This is in conformity
with the Policy on Transfer Payments taken from the Treasury Board’s website,
which states that where a contribution is made to a business and is intended to
allow the business to generate profits or to increase the value of the
business, the business is required to repay the contribution or to share the
resulting financial benefits with the government commensurate with its sharing
of the risks (see Exhibit R-4, clause 7.8.1, and transcript, page 148).
[19]
Ms. Nishikawa also
indicated that once a project has started and the contribution has been granted,
the proponent has to submit quarterly progress reports in order to draw
contribution funds (see transcript, page 149). An annual monitoring report on
the results achieved was also required. Success is measured on the basis of
identified success indicators over the lifetime of the project. However, when
measuring the success of a project, the repayment of the contribution is not a
criterion that is considered (see transcript, pages 150 to 152).
[20]
In cross-examination,
Ms. Nishikawa acknowledged that the terms and conditions she referred to
in her examination in chief (in particular, those regarding the objectives of
the AIF program and those relating to application requirements, and the repayment
of contributions) and that are dealt with in the Request for Project Proposals
(see Exhibit R-3, clause 2.2 and Annex A) did not form “word for word” an
integral part of the Agreement at issue in the present case. But she explained
that, nevertheless, the Agreement was based on the Policy on Transfer Payments
discussed earlier and respected the terms and conditions referred to above (see
transcript, pages 165 to 169). In re-examination, she went through the requirements
for contribution agreements in the Treasury Board Policy on Transfer Payments (see
Exhibit R-4, clause 8.2.1 and Appendix C) and confirmed that all of them were included
in the Agreement at issue here (see transcript, pages 186, 187 and 192).
[21]
She further confirmed
that this was the first time, to the best of her recollection, that she had
seen a repayment clause that applied to all gross revenues as opposed to just
those gross revenues that are tied to the project that was funded (see transcript,
pages 172 to 174).
Appellant’s arguments
[22]
The appellant’s
position is that the contribution from ACOA does not constitute government
assistance within the meaning of subsection 127(9) of the ITA, but rather an
ordinary loan advanced on reasonable terms for business purposes. The
contribution was an advance of funds in consideration of a promise to repay.
[23]
When the monies
advanced to a business are to be repaid and the terms of repayment are
specified, the transaction is classified as a loan. In the appellant’s view, it
had an obligation to repay and there were mandatory terms of repayment. There
was a bona fide business loan even though it was not interest bearing, as
interest is not an essential element of a loan (Canada Deposit Insurance
Corp. v. Canadian Commercial Bank, [1990] 4 W.W.R. 445, at 459, 1990 CanLII
5504 (Alta. Q.B.) at paragraphs 38 and 39; Steckel v. M.N.R., 92 DTC
1904 (TCC) at page 1908). The appellant also refers to Interpretation Bulletin
IT-151R5, Scientific Research and Experimental Development Expenditures,
at paragraph 40, where it is stated that “[t]he fact that a full recourse loan
is interest-free or is made at a lower than commercial rate of interest will
generally not classify the loan as government or non-government assistance.”
[24]
Further, the appellant
argued that the contribution from ACOA was not a forgivable loan. The appellant
referred to the definition of forgivable loan found in Interpretation Bulletin
IT-340R, Scholarships, Fellowships, Bursaries and Research Grants - Forgivable
Loans, Repayable Awards and Repayable Employment Income, at paragraph 2: “a
loan which is made to enable the borrower to pursue an education or to carry
out a research project and which the lender is committed to forgive if certain
conditions are met by the borrower”. In the appellant’s view, it was required
to repay in full to ACOA the amount advanced, according to a mandatory
repayment schedule. It submitted that there were no criteria or conditions that
would commit ACOA, as the lender, to forgiving the loan. In its view, the
provision in section 7.1(b) of Schedule 1 of the Agreement (which states that
the Agreement will terminate in the event that the appellant fulfils its
Schedule 4 undertakings and demonstrates that it will not continue to generate
gross revenues) only reflects the de facto business reality, applicable to all
investments in start-ups and business ventures, that, in the event that the
company is not successful, a loan or investment will not be recoverable. In the
appellant’s view, it is the lender’s choice to write off the debt without
resorting in vain to extraordinary remedies to enforce repayment (see Appellant’s
Submissions, paragraphs 39 to 42).
[25]
The appellant argued lastly
that the contribution from ACOA was not another form of assistance within the
meaning of subsection 127(9) of the ITA either. Referring to the decision of
the Supreme Court of Canada in National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029 at 1040, (1990), 74 D.L.R. (4th) 197, the appellant
stated at paragraph 47 of its submissions:
47. In National Bank of Greece (Canada) v. Katsikonouris (1990),
74 D.L.R. (4th) 197 (S.C.C.) Justice La Forest described the rule as
follows:
[12] Whatever
the particular document one is construing, when one finds a cause [clause] that
sets out a list of specific words followed by a general term, it will normally
be appropriate to limit the general term to the genus of the narrow enumeration
that precedes it.
National
Bank of Greece (Canada) v. Katsikonouris
(1990),
74 D.L.R. (4th) 197 (S.C.C.)
[26]
The appellant suggested
that the phrase “or . . . any other form of assistance” in the definition of
“government assistance” in subsection 127(9) must be confined to the “genus of
the narrow enumeration that precedes it”.
[27]
The appellant submitted
that the common factor linking the narrow enumeration of “grant, subsidy,
forgivable loan, deduction from tax, investment allowance or . . . any other
form of assistance” is that each represents a transfer of funds advanced with
no expectation of repayment. In the appellant’s view, the class of items
constituting government assistance is limited to non-repayable forms of
assistance and closed to any transfer or advance of funds for which repayment
is required (see Appellant’s Submissions, paragraph 49). In contrast, the
contribution from ACOA was advanced with mandatory terms for its repayment. The
Agreement obliged the appellant to make ACOA whole through a mandatory
repayment schedule and, significantly, the repayment was not limited to being
made just out of the proceeds from the funded project, but was to be made from
gross revenues in their entirety (see Appellant’s Submissions, paragraph 50).
[28]
According to the
appellant, this particularity distinguishes the present case from the situation
that prevailed in CCLC Technologies Inc. v. Canada, [1996] F.C.J. No.
1226 (QL) (FCA), 1996 CarswellNat 1652. In that case, the Federal Court of
appeal held that an advance of funds from the Alberta government to CCLC
Technologies Inc. (CCLC) constituted “government assistance” and,
specifically, that it fell within the general phrase “any other form of
assistance”. The Government of Alberta provided technology and advanced funds
to CCLC in exchange for an equity interest in CCLC. In the event that the
venture was successful, the Government of Alberta was obliged to sell its
equity interest back to CCLC in return for its monetary investment plus
interest thereon. In the event that the venture was unsuccessful, the Government
of Alberta was left with an arguably worthless equity interest. The Court said
the following at paragraphs 2 and 5:
2 With
respect to the first question, we are of the view that the sums provided to the
respondent amounted to government assistance. This Court in The Queen v.
Consumers Gas Company Ltd. [(1986) 87 DTC 5008 at 5011], contrasted
“government assistance” to payments made by public authorities
in
exactly the same way for exactly the same reasons as payments made by private
business, that is, for the purpose of advancing the interests of the payor.
In
this context it is clear that the Court was speaking of payments made for
advancing the business interests of the payor.
. .
.
5 In
the language of the Income Tax Act, subparagraph 12(1)(x)(iv),
and the definition of “government assistance” in subsection 127(9), the
government payments under the Coal Research Agreement became, in the
circumstances of non-commercialization of the technology, a grant, subsidy, a
forgivable loan, or similar form of assistance.
[29]
The appellant is of
the view that its case is different as its obligation to repay remained, even in
the event of failure of the project, because of the requirement that it pay out
of its gross revenues the total amount contributed by ACOA (paragraphs 52 and
53 of Appellant’s Submissions). In fact, the appellant started to repay in
2008, as appears from the Appellant’s Response to Request to Admit and from
paragraph 5 of the respondent’s Request to Admit (referred to in paragraph 6 of
these reasons). Therefore, the contribution by ACOA was more akin to a bona
fide loan with fixed terms of repayment than government assistance.
Respondent’s argument
[30]
The respondent referred
first to the Atlantic Canada Opportunities Agency Act, R.S.C. 1985, c.
41 (4th Supp.), Part I (ACOA Act), to establish that ACOA’s object was
essentially to promote opportunities for the economic development of Atlantic
Canada. Sections 4, 12 and 13 of the ACOA Act state:
Purpose
4.
Purpose
The
purpose of this Part is to increase opportunity for economic development in
Atlantic Canada and, more particularly, to enhance the growth of earned incomes
and employment opportunities in that region.
Object,
Powers and Duties
12.
Object
The
object of the Agency is to support and promote opportunity for economic
development of Atlantic Canada, with particular emphasis on small and
medium-sized enterprises, through policy, program and project development and
implementation and through advocacy of the interests of Atlantic Canada in
national economic policy, program and project development and implementation.
13.
Powers
In
carrying out its object, the Agency may
(a) in
concert with other concerned departments and agencies of the Government of
Canada, formulate plans and integrated federal approaches to support
opportunity for economic development of Atlantic Canada;
(b) plan,
direct, manage and implement programs and projects intended to contribute
directly or indirectly to
(i) the
establishment, development, support and promotion of enterprises, and more
particularly small and medium-sized enterprises, in Atlantic Canada,
(ii) the
development of entrepreneurial talent in that region, and
(iii) the
economic prosperity of that region;
(c) plan,
direct, manage and implement programs and projects to improve the business
environment in Atlantic Canada, including programs and projects
(i) of
support to business associations, conferences, studies, consultations, trade
shows, demonstration projects and market research,
(ii) related
to the development of business opportunity data banks and networks,
(iii) to
improve business communication and cooperation, and
(iv) to
promote scholarship related to business and investment;
(d) assist
investors to locate enterprises, and more particularly small and medium-sized
enterprises, in Atlantic Canada, consistent with Atlantic Canada and federal
investment requirements;
(e) make
loans to any person with respect to the establishment and development of
enterprises, and more particularly small and medium-sized enterprises, in
Atlantic Canada;
(f) guarantee
the repayment of, or provide loan insurance or credit insurance in respect of,
any financial obligation undertaken by any person in respect of the
establishment and development of enterprises, and more particularly small and
medium-sized enterprises, in Atlantic Canada;
(g) in
accordance with terms and conditions approved by Treasury Board, make grants
and contributions in support of programs and projects undertaken by the Agency
or the Minister;
(h) enter
into contracts, memoranda of understanding or other arrangements in the name of
Her Majesty in right of Canada or in the name of the Agency;
(h.1)
enter into an agreement with the Enterprise Cape Breton Corporation that allows
that corporation within the limits of its objects and powers as set out in
sections 33 and 34 of the Enterprise Cape Breton Corporation Act, to
exercise the powers or perform the duties or functions of the Agency under this
section, including the power to enter into agreements that commit money
appropriated by Parliament for the purposes of the Agency; and
(i) do all such other things as are necessary or incidental
to the attainment of the object of the Agency.
[31]
The respondent argued
that in providing a contribution of $3,786,474 to the appellant, ACOA was
carrying out its legislative mandate to encourage economic development in the Atlantic
Region and implementing a specific program, the AIF, created to promote
research and development activity in that region. For the purpose of achieving
its object, ACOA is given a wide array of powers, including making loans,
providing loan insurance and guarantees, and making “grants and contributions
in support of programs and projects undertaken by the [ACOA]’ (section 13 of
the ACOA Act).
[32]
The respondent
submitted that the contributions under the AIF program are administered under
the AIF’s own terms and conditions as evidenced by the Second Request for Project
Proposals, Annex A (Exhibit R-3, page 18 et seq.), and that the payments of
contributions are administered in accordance with the Treasury Board Policy on
Transfer Payments, under which, among other things, contributions to the
private sector are conditionally repayable on the basis of successful
commercialization of the project (Exhibit R-3, Annex A, sections 13 and 14). In
the present case, the Agreement was signed on December 31, 2004, and
the obligation to repay only arose in December 2008. As a matter of fact, the
appellant reimbursed less than one percent of the total contribution from 2008
through 2011. Indeed, as shown by the admission made in paragraph 1 of the Appellant’s
Response to Request to Admit and from paragraph 5 of the Respondent’s Request
to Admit, it reimbursed a total of $36,973.24 from 2008 to 2011 on a total
contribution by ACOA of $3,786,474.
[33]
Counsel for the
respondent stated that the only issue raised in this appeal is whether the
contributions received by the appellant pursuant to the Agreement are
“government assistance” within the meaning of subsection 127(9) of the ITA. He
referred to the general principles of statutory interpretation in tax matters
adopted by the Supreme Court of Canada in Canada Trustco Mortgage Co. v. Canada,
[2005] 2 S.C.R. 601, 2005 SCC 54 at paragraphs 10 to 12, which he summarized as
follows in paragraph 35 of his written submissions:
A. Meaning of government assistance
35. The terms “government assistance” are to be interpreted in
accordance with the accepted rules of statutory interpretation. In Canada
Trustco Mortgage Co., the Supreme Court of Canada summarized the general
principles of statutory interpretation in tax matters as follows:
a) The interpretation of a statutory provision must be made
according to a textual, contextual and purposive analysis to find a meaning
that is harmonious with the Act as a whole;
b) When the words of a provision are precise and
unequivocal, the ordinary meaning of the words play [sic] a dominant
role in the interpretive process. On the other hand, where the words can
support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role;
c) It would introduce intolerable uncertainty into the Income
Tax Act if clear language in a detailed provision of the Act were to
be qualified by unexpressed exceptions derived from a court’s view of the
object and purpose of the provision; and
d) The provisions of the Income Tax Act must be
interpreted in order to achieve consistency, predictability and fairness so
that taxpayers may manage their affairs intelligently.
[34]
Counsel for the
respondent also referred to the Supreme Court of Canada decision in Will-Kare
Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, at paragraph 31,
in reiterating the principle that when the ITA uses a word that is referable to
a concept of private law, the meaning of that word must be derived from private
law. In counsel’s view, the term “government assistance” is not a technical
term, nor does it have a well-defined meaning that can be derived from private
law, and as a result it must be given its ordinary meaning. The word
“assistance” is defined in the Concise Oxford Dictionary as “an act of
helping”. The ITA’s definition of “government assistance” contains an
enumeration of specific types of assistance followed by the phrase “any other
form of assistance”. By contrast, in a previous version of the provision
(former paragraph 20(6)(h) of the ITA), the expression used was “grant,
subsidy or other assistance from a government”. In the modern version, the
enumerated terms “grant, subsidy, forgivable loan, deduction from tax,
investment allowance” appear to be an attempt to describe all possible forms of
assistance, regardless of form, whether provided by contract or by statute. The
inclusion of “forgivable loan” suggests that the definition of “government
assistance” extends beyond acts of the government which are purely gratuitous
and unilateral.
[35]
Counsel for the
respondent went through the provisions of the ITA governing the deductibility
of SRED expenses and the calculation of the investment tax credit and analyzed
their application when government assistance is at issue (under paragraph 37(1(d),
SRED expenses are reduced by the amount of any “government assistance” received,
and under paragraph 37(1)(c) the repayment of government assistance qualifies
as a deductible SR&ED expense, and the same applies to the investment tax
credit, as can be seen from subsection 127(18) and paragraphs (e.1) and
(e.2) of the definition of investment tax credit in subsection 127(9)).
In the respondent’s view, the statutory context of the above-noted provisions
makes it clear that contributions made by the government that are repayable may
nevertheless constitute “government assistance”. Where such is the case, the
benefit of claiming SRED expenses and associated investment tax credits is
deferred until the assistance is actually repaid. In that context, counsel
argued, if the assistance is not in fact repaid, the scheme of the ITA recognizes
that the taxpayer should not receive tax benefits in respect of expenses which
were essentially paid by the government. In the respondent’s view, the purpose
behind these provisions is to prevent a taxpayer from receiving benefits twice,
namely, those associated with the incentives represented by the research and
development expenditures scheme and those represented by the government
assistance, as long as the government assistance is not repaid (paragraphs 42
to 49 of the respondent’s submissions, and transcript, pages 71 to 73).
[36]
Counsel for the
respondent relied on the cases of Canada v. Consumers’ Gas Co.,
[1987] 2 F.C. 60 (FCA) and CCLC Technologies Inc. v. Cananda., supra,
to state that a payment will escape the definition of “government assistance”
if it is made “in exactly the same way and for exactly the same reasons as
payments made by private business; that is, for the purposes of . . . advancing
the business interests of the payer”. On the other hand, if the public
authority is carrying out some legislative scheme of distributing grants to
encourage those engaged in business to embark on certain classes of enterprise,
then those payments are government assistance (see Consumers’ Gas,
supra, at 66-67). In CCLC Technologies, at paragraph 2, the
Federal Court of Appeal clarified that “advancing the interests of the payor”
meant “advancing the business interests of the payor”. It was thus made clear
that payments made for public policy reasons would not fall within the category
of payments intended to advance the payor’s business interests. The Court said
at paragraph 4:
4 The agreement does not in our opinion establish an
ordinary business arrangement between the parties. For its part the Government
of Alberta undertook to provide technology and to pay money to the respondent.
While in the short term the government obtained an equity interest, if the
project were to prove commercially successful the Government would be obliged
to sell its interest to the respondent, the price being simply the return of
its money contribution plus its interest costs in having made that
contribution. If the project did not prove to have commercial value, as in fact
it did not during the period in question, the Government was entitled to
nothing except an equity interest in a technology demonstrated not to have
present commercial value. We find it impossible to characterize this as an
ordinary business arrangement. Whatever public policy merits the agreement may
have had from the standpoint of Alberta, it does not amount to an arrangement
that a business would enter into to advance its business interests. A business
which invested money in ventures on the basis that it could not receive any net
profit if the venture succeeded, and would gain an equity interest only if the
venture proved uncommercial, would not long survive.
[37]
In that case, although the
agreement provided that the Alberta government’s contribution could be returned
to it with interest and although it took eleven months of protracted
negotiations between the parties to reach that agreement and although the
Alberta government obtained a joint ownership interest in the technology
produced under the agreement, the Court was of the view that the contribution still
constituted “government assistance”. Further, the Court found that the project
surveillance and participation in the management of the project were consistent
with the role of a prudent grant-giver assuring itself that its contribution
was being spent as intended, and did not indicate any commercial role of the government
(paragraph 6).
[38]
Counsel for the respondent
suggested that, in the present case, ACOA was not carrying on a business but
rather was executing a legislative scheme for the distributing of funds to
promote economic development in Atlantic Canada. Indeed, under the ACOA Act,
ACOA is given a broad array of powers to enable it to achieve its objectives
but is not authorized to carry on business; rather, it is authorized to assist
those who do (sections 4, 12 and 13 of the ACOA Act). As a matter of fact, the
objectives of the AIF program are explicitly stated in the recitals of the
Agreement signed by the appellant. The interest that the government was
advancing in agreeing to provide a contribution to the appellant was that of
“strengthen[ing] the economy of Atlantic Canada by supporting the development
of knowledge-based industry” and “help[ing] increase the region’s capacity to
carry out leading-edge research and development”. In the respondent’s view,
those objectives illustrate a desire to help and support the Atlantic Region
and are clearly not indicative of the type of “ordinary business arrangement”
that the Federal Court of Appeal contemplated in the cases of CCLC
Technologies, supra, and Consumers’ Gas, supra.
[39]
Further, the substantive
provisions of the agreement impose conditions on the appellant which show that
ACOA was making the contribution in the public interest and not for its own commercial
gain. Indeed, the appellant was required to carry out a research and
development project in Atlantic Canada and incur significant research and
development expenses in Atlantic Canada, to exploit the resulting intellectual
property through production in Atlantic Canada, to account for the use of the
contributed funds, and to update ACOA regularly on the progress of the project,
in particular with regard to the number of new jobs created in Atlantic Canada.
The respondent argued that all this shows that ACOA places significant emphasis
on the appellant’s incurring the expenses and performing the work in Atlantic
Canada, which is what provides the public benefit. The evidence also revealed that
ACOA assesses the progress and success of a project according to a variety of
criteria, which do not, however, include the ability of the proponent to repay
the contribution. The respondent argued that the number of jobs created by a
borrower or the number of new alliances formed is not the concern of businesspeople
looking after their own business interests, but rather that of the government
promoting public policies.
[40]
The respondent also referred to
the test suggested by the Federal Court of Appeal in CCLC Technologies,
which consists in determining what the risks and rewards are to the government
arising from the agreement. Looking at the best- and worst–case scenarios, the
respondent is of the view that it is impossible to believe that ACOA would have
entered into the Agreement absent public policy reasons and solely as an
ordinary business transaction. If the project is unsuccessful, the appellant
would only be required to repay the contribution to the extent that it earns
gross income from unrelated sources of revenue. The evidence revealed that at
the time the Agreement was entered into, the appellant had not commenced
commercial operations, had little or no revenue and was dependent on further
financing to carry on its operations. The total repayments made by the
appellant in the years 2008 to 2011 amounted to less than one percent of the
ACOA contribution. If, on the other hand, the appellant achieves overwhelming
success in the project, the most that ACOA can hope to receive is repayment of its
contribution, without interest. The best-case scenario can be compared to the
situation in CCLC Technologies, where the most the Government of Alberta
could hope to receive was the return of the money it contributed plus interest.
In the CCLC Technologies case, the Court did not consider such an
arrangement as a normal business arrangement but determined it to be
“government assistance”.
[41]
Finally, the respondent is of the
view that the classification of the Agreement as a loan arrangement, as argued
by the appellant, is simplistic because it focuses chiefly on the repayment
terms at the expense of the more important features of the Agreement. In the
respondent’s view, the repayment of the contribution from gross revenues was
not the primary goal of ACOA. The respondent referred to section 7.8.1 of the
Treasury Board Policy on Transfer Payments (Exhibit R-4), which reads in part
as follows:
. . . Where a
contribution is made to a business and is intended to allow the business to
generate profits or to increase the value of the business, the business is
required to repay the contribution or to share the resulting financial benefits
with the government commensurate with its sharing of the risks.
[42]
The respondent states that this policy
shows that repayment is required only to the extent that the government funding
contributes to the profits of the recipient.
Analysis
[43]
The sole issue before me is
whether the contribution made by ACOA to the appellant during the years in
question constituted “government assistance” within the meaning of subsection
127(9) of the ITA. The appellant does not dispute the fact that it received
amounts from “a government, municipality or other public authority”. It argues
however that the amounts received were not “assistance . . . whether as a
grant, subsidy, forgivable loan, deduction from tax, investment allowance or as
any other form of assistance . . .”
[44]
In summary, the appellant is of the
view that the contribution was an ordinary loan advanced on reasonable terms
for business purposes. In the appellant’s view, such a loan cannot constitute
“government assistance”. The respondent submits that the question whether the
Agreement can be characterized as a loan arrangement is irrelevant for the
purpose of determining whether the contribution paid was “government
assistance”. The respondent is not arguing that there was a forgivable loan (except
should I decide to characterize the Agreement as a loan arrangement). In the
respondent’s view, the contribution falls within the phrase “any other form of
assistance” in the definition of “government assistance”.
[45]
I agree with the respondent that
the enumerated terms in the definition of “government assistance” appear to be
an attempt to describe all possible forms of assistance. I also agree that the
inclusion of “forgivable loan” in the definition suggests that “government
assistance” extends beyond acts of the government which are purely gratuitous. This
can also be inferred from the statutory context of the provisions of the ITA
dealing with the deductibility of SRED expenses and with the related investment
tax credits. Under those provisions, the deductions and credits are deferred
until the government assistance is actually repaid. This would reflect
Parliament’s intention to restrict access to tax relief for SRED expenditures
and to RITCs where relief was provided in some other form. In other words, if
another party has borne the economic cost of a taxpayer’s participation in
scientific research and experimental development, there is no need to allow
deductions or credits as an incentive for that taxpayer to engage in SRED
activities. At least, the appellant did not convince me that some other
interpretation should be adopted. Under such circumstances, it is reasonable to
conclude that a contribution that is made by the government and is repayable
may constitute “government assistance”. I therefore disagree with the appellant
that the common factor linking the terms enumerated in the definition of
“government assistance” is that each represents a transfer of funds advanced
with no expectation of repayment.
[46]
In fact, the real test, as
suggested by the Federal Court of Appeal in CCLC Technologies, supra,
referring to Consumers’ Gas, supra, is whether the contribution
made by ACOA was made “in exactly the same way for exactly the same reasons as
payments made by private business, that is, for the purpose of advancing the
interests of the payor”.
[47]
In CCLC Technologies, if
the project had proved commercially successful the Government of Alberta would have
had its contribution paid back with interest, while if the project proved to
have no commercial value, as in fact turned out to be the case during the
period in question, the Government of Alberta kept an equity interest in a
technology with no commercial value. The Federal Court of Appeal concluded that
this was not an arrangement that a business would enter into to advance its
business interests, and that the government payments became, under the
circumstances of non-commercialization of the technology, government assistance
under the ITA.
[48]
In Consumers’ Gas, the
taxpayer was a public gas company that had to relocate its gas lines at the
request of third parties from time to time. In the years at issue, Consumers’
Gas incurred the expense of moving its gas lines, but later collected the cost thereof
from the public authorities, such as Ontario Hydro, which had requested the
relocations. The Federal Court of Appeal concluded at page 66 of its decision, that
the payments made to Consumers’ Gas by such public authorities were made in
exactly the same way and for exactly the same reasons as payments made by
private businesses, that is, for the purpose of advancing the interests of the
payor, and therefore were not received as “any other form of assistance” from a
government, municipality or other public authority within the meaning of former
subsection 13(7.1) of the ITA. The Court quoted with approval the comment of
Jackett P. of the Exchequer Court of Canada in Ottawa Valley Power Co. v.
Minister of National Revenue, [1969] 2 Ex. C.R. 64 at 71, 1969 CarswellNat
283 at paragraph 11, that what were involved were ordinary business
arrangements between a public authority and a taxpayer in a situation where the
public authority carries on a business and has transactions with a member of
the public of the same kind as the transactions that any other person engaged
in such a business would have with such a member of the public. Jackett P.
added that if Ontario Hydro were used by the legislature to carry out some legislative
scheme of distributing grants to encourage those engaged in business to embark
on certain classes of enterprise, then he would have no difficulty in treating
the grants as assistance from a government, municipality or other public
authority under former paragraph 20(6)(h) of the ITA (which used the
same terminology as that found in present subsection 127(9)). In Ottawa
Valley Power, expenses incurred by Ontario Hydro to make improvements to Ottawa
Valley Power Co.’s power production plant were considered as having been so
incurred as part of an ordinary business arrangement and as not constituting assistance.
As a matter of fact, it was more economical for Ontario Hydro to enter into a
new contract with Ottawa Valley Power Co. and to incur the costs related
thereto than to continue buying electricity under the existing contract.
Jackett P. considered that the legislature had merely authorized Ontario Hydro
to do certain things deemed expedient to carry out successfully certain changes
in its method of carrying on its business. He could not regard what was done in
such circumstances as being “assistance” given by a public authority, and
determined that former paragraph 20(6)(h) of the ITA had no application
in that case.
[49]
In the present case, I agree with
the respondent that in entering into the Agreement with the appellant, ACOA was
carrying out its object and exercising its powers under the ACOA Act. Its
object, as defined in section 12 of the ACOA Act, was to support and promote
opportunity for economic development of Atlantic Canada, with particular
emphasis on small and medium-sized enterprises, through policy, program and
project development and implementation and through advocacy of the interests of
Atlantic Canada in a national economic policy. The preamble of the Agreement states
that the AIF is a program established by ACOA to strengthen the economy of
Atlantic Canada by supporting the development of knowledge-based industry and
by directly contributing to the development of new technology-based economic
activity in that region. The Agreement is the result of a project proposal
submitted by the appellant in response to ACOA’s request for project proposals.
[50]
In those circumstances, I find that,
as argued by the respondent and paraphrasing Ottawa Valley Power,
supra, at 71-72 Ex. C.R., paragraph 11 CarswellNat, ACOA was carrying out a
legislative scheme of distributing funds to encourage those engaged in business
to embark on certain classes of enterprise, and did not make the contribution at
issue in order to advance its own business interests. This is all the more true
in light of the evidence given by Ms. Nishikawa that ACOA assesses the
progress and success of a project according to a variety of criteria, none of
which is the ability of the appellant to repay the contribution. Payments
pursuant to such legislative schemes are “government assistance” (Consumers’
Gas, supra, at 66, and CCLC Technologies, supra, at
paragraph 2).
[51]
I find unconvincing the
appellant’s argument that its case is different as its obligation to repay the
contribution remained, even in the event of failure of the project, because of the
requirement that it pay out of all its gross revenues. At the time of the signing
of the Agreement on December 31, 2004, the appellant had not
commenced commercial operations, had little or no revenue and was dependent on
further financing in order to carry on its operations. The appellant was only
required to repay the contribution - and then only starting in 2008, which is a
four‑year respite - to the extent that it earned gross revenues from any
source, and the repayment rate was a fairly moderate one (two percent of gross
revenues if these were less than $5,000,000). As a matter of fact, the total
repayments for the years 2008 to 2011 amounted to less than one percent of ACOA’s
contribution. Furthermore, from ACOA’s perspective, it would not recover more
than the amount of the contribution advanced however positive the appellant’s financial
results might be. ACOA would collect interest on payments due by the appellant
only in case of default (if the appellant neglected to pay any amount due under
the agreement, for example) or in case of an over-contribution by ACOA (see
sections 4.1 and 8 of Schedule 1, General Conditions, of the Agreement). As
argued by the respondent, the best-case scenario under the Agreement can be
compared to the situation described by the Federal Court of Appeal in CCLC
Technologies, where the most the Government of Alberta could hope to
receive was the return of the money it contributed plus interest. That Court
did not consider such a scenario as being indicative of a viable commercial
venture. The fact that ACOA could not receive any net profit on the money
invested in the appellant’s ventures, combined with ACOA’s objectives under the
ACOA Act, makes it clear that ACOA was not dealing with the appellant on basic
commercial terms. To say the least, ACOA was not acting in its own business
interests.
[52]
Moreover, the obligations imposed on
the appellant under the Agreement are representative of what is required when
money is disbursed in the public interest. The appellant had to ensure that the
resulting products were exploited through their production in Atlantic Canada and
was required to provide regular reports to ACOA on, among other things, the
project’s potential benefits in terms of building new capacity in the region and
the creation of jobs. I agree with the respondent that this shows that ACOA
places significant emphasis on the appellant’s incurring the expenses and
performing the work in Atlantic Canada, which is what provides the public
benefit. To paraphrase the Federal Court of Appeal in CCLC Technologies,
supra, at paragraph 6, the various forms of surveillance of the
management of the project by ACOA are equally consistent with the role of a
prudent grant-giver assuring itself that its contribution was being spent as
intended.
[53]
Finally, I would add that a close
reading of the Agreement tends to show that the intent of the parties was to
consider the contribution as “government assistance”. In article 6 of the
Agreement entitled “Other Government Assistance”, the proponent (the appellant)
acknowledged that no federal, provincial or municipal government financial assistance
other than that described in section 7.1 of Schedule 2 had been, or would
be, requested or received by the proponent for the eligible costs of the project.
Section 6 further stipulated that the proponent had to inform ACOA of any other
government assistance and that ACOA had the right to reduce the contribution
under the Agreement to the extent of any such assistance. Section 7.1 of
Schedule 2 shows the AIF contribution of $3,786,474 as part of the total cash
contributions (Exhibit R-1, Tab 2, page 38). Those two provisions read
together show that the contribution at issue here was considered as government
assistance by both parties to the Agreement.
[54]
In closing, I would point out that
the fact that the appellant became a public company in 2009 and as a result
will not be entitled to the full benefit of the RITCs if and when it repays
ACOA, as briefly explained by Ms. Stephens in her testimony, does not alter the
interpretation to be given to the Agreement that was entered into in 2004. I have
to determine whether the contribution made and agreed upon by ACOA in signing
the Agreement constituted “government assistance” pursuant to subsection 127(9)
of the ITA. For the reasons explained above, I am of the view that the
contribution at issue does qualify as “government assistance”, with the result
that the Minister was right in denying the SRED claims and the related RITCs
for the taxation years ended March 31, 2005 through 2008, pursuant to
subsections 127.1(1) and 127(9) of the ITA.
[55]
The appeals are dismissed with
costs.
Signed at Ottawa, Canada, this 10th day of April 2013.
“Lucie Lamarre”
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