PCI Géomatics – Court of Quebec applies McLarty to find that a loan which was repayable only out of increasing revenues was not a forgivable loan
The ARQ assessed on that basis that a non-interest-bearing loan received by a satellite–imaging company (PCI) from Industry Canada was a “forgivable loan,” so that its amount reduced the SR&ED pools of PCI for investment tax credit purposes. PCI was required each year to repay an amount equal to 1/15 of the amount advanced multiplied by an adjustment factor which was: 0 if annual growth in revenues was negative; 1 if such growth was positive but not exceeding 3%; and ranged up to 1.5 for higher growth rates. Thus, there was no explicit requirement to repay the loan if revenues declined.
In finding that the loan was not a forgivable loan, Dortélus JCQ noted that PCI was required to provide loan security and was subject to various restrictive covenants, and then stated:
The fact that there existed a certain uncertainty as to the frequency of repayment of the loan which … depended on fluctuations in the PCI revenues does not suffice to qualify the amounts advanced as government aid.
…PCI justifiably submitted that the position adopted by the ARQ, that [it] was a forgivable loan given that the required repayments were a function of the growth in future revenues (so that the obligation to repay depended on the occurrence of an uncertain and future event), was a position which was relied upon in the dissent and rejected by the majority in McLarty.
Neal Armstrong. Summary of PCI Géomatics Entreprises Inc. v. Agence du revenu du Québec, 2019 QCCQ 2688 under s. 127(9) – government assistance.