Agence du revenu du Québec v. Pharma Coréalis Inc., 2025 QCCA 1346

Coréalis entered into “service agreements” with pharmaceutical companies pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient (API) provided by the companies. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the companies.

Hamilton JCA affirmed the trial judge’s finding below that the equipment which Coréalis had purchased and used in manufacturing the clinical lots qualified for Quebec investment tax credits based on its having satisfied the requirement under the description of a Class 29 property that it had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.”

In rejecting the ARQ submission that the contracts between Coréalis and its customers were service contracts for design and development and the transfer of this knowledge, and the goods (the capsules) provided as part of such service contracts were not sold but were an integral part of the service rendered, Hamilton JCA stated (at para. 66, TaxInterpretations translation):

[T]he development of the formulation and the production of clinical batches are distinct transactions and … the clinical batches are not provided under the service contract for the development of the formulation, but under a separate contract, whether or not it is included in the same contractual document.

In rejecting a further ARQ submission that there was no sale because the API, which was the “epicenter” of all the design and development work carried out by Coréalis, belonged to the drug-company customer throughout the process, so that the capsules passed to the customers by accession to their API rather than by sale,, Hamilton JCA noted that the trial judge had found that the orders for clinical batches by customers providing the active ingredient was analogous to the construction of a house for a customer who supplied only the exotic wood for the living room floor, stated (at para. 78):

Obviously, she believed that the API is a specialized high-value product (exotic wood) but that it represents only a small part of the whole (the house) and that the added value provided by Coréalis was greater.

and then found no reversible error in this finding.

Coréalis entered into “service agreements” with pharmaceutical companies pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient (API) provided by the companies. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the companies.

Hamilton JCA affirmed the trial judge’s finding below that the equipment which Coréalis had purchased and used in manufacturing the clinical lots qualified for Quebec investment tax credits based on its having satisfied the requirement under the description of a Class 29 property that it had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.”

First, the production of clinical batches for the drug companies were distinct transactions from the services of Coréalis in formulating the product so that (subject to the second point below) the capsules were to be considered as sold to those companies rather than being assimilated to a provision of services to them.

Second, although the API was a specialized high-value product, the trial judge had made a non-reversible finding that it represented only a small part of the total property provided by Coréalis to the drug companies, so that the property in the capsules was transferred to them by sale rather than by accession to the API.