FTQ – Federal Court of Appeal affirms that a payment in substance made to walk away from a worthless investment did not qualify under s. 18(1)(a)

The taxpayer agreed with the City of Chandler that it would no longer use any loan repayment proceeds received by it from a City-owned corporation - that had failed in an costly attempt to restart a paper mill close to the City – to invest in a prospective replacement economic-development LP to be sponsored by the City, but would instead make a “gift” of the loan repayment proceeds (which ended up totalling $9.3 million) to the City, for which it received charitable receipts. Ouimet J found that there was no “gift” in the context of the taxpayer being relieved of its obligation to invest in an enterprise of questionable worth.

He also rejected the taxpayer’s alternative argument that the payments qualified for current deduction consistently with the s. 18(1)(a) income-producing purpose test given that their purpose instead was to avoid involvement in the proposed LP and to leave to the City alone the responsibility of using the sums to economically develop the region.

The case was appealed on the second ground and has now been briefly affirmed by the Federal Court of Appeal.

Summaries of Fonds de solidarité des travailleurs du Québec (F.T.Q) v. The Queen, 2018 CCI 3, aff'd on s. 18(1)(a) grounds 2019 CAF 36 under s. 110.1(1)(a) and s. 18(1)(a) – income-producing purpose.