Gervais Auto Inc. v. Agence du revenu du Québec, 2019 QCCQ 5894, rev'd 2021 QCCA 459

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans from its shareholders, who were the three respective holding companies for the three Gervais brothers. The three loans totaled $6 million ($2 million each) and their interest of 10% p.a. had been set when they were first advanced and had remained unchanged since then. A secured credit line was available from the taxpayer’s bank (Desjardins) at a rate of 3.375%

When the ARQ reviewed the deductibility of the claimed interest deductions for the taxpayer’s 2013 to 2015 taxation years, the taxpayer provided a very brief letter from Desjardins stating that for an unsecured “cash flow” loan the interest rate in 2015 would fall in the range of 9% to 12%, and then a more detailed letter from its accountants (Deloitte) that, based on Moody’s metrics, concluded that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%.

After referring to the Quebec equivalent of s. 67, and in finding that the taxpayer had not met its burden of establishing that such assessments were incorrect, Allen JCQ stated (at paras. 61-64, TaxInterpretations translation):

Although the Court does not doubt the credibility of Mr. Giguère [of Desjardins], it nonetheless remains that he did not present in any precise manner what were the specific elements to which he made reference in placing the range between 9% and 12%.

The report of the Deloittte expert relied on an analysis using the Moody’s method which was much more detailed and convincing. That report explained the use of the Moody’s method , and the methodology and analysis by which Deloitte concluded that a financing rate would fall between 7.89% and 12.39%.

How can the plaintiff challenge the presumption of correctness of the notices of assessment where the 7.89% rate, considered to be reasonable and adopted by the defendant, falls within the range that its own expert considered to be a reasonable rate based on the current rates in the market for obligations with similar considerations and risks during the period in litigation?

Doubtless, the rate of 7.89% corresponds to the lowest rate in the range, but it nonetheless is within that range and cannot be considered to be prima facie unreasonable.

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans totaling $6 million from its shareholders, bearing interest at 10% p.a. When the ARQ reviewed the deductibility of the interest, the taxpayer provided a letter from its accountants (Deloitte) that concluded, based on Moody’s metrics, that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%.

After referring to the Quebec equivalent of s. 67, and in finding that the taxpayer had not met its burden of establishing that such assessments were incorrect, Allen JCQ stated (at paras. 63-64, TaxInterpretations translation):

How can the plaintiff challenge the presumption of correctness of the notices of assessment where the 7.89% rate, considered to be reasonable and adopted by the defendant, falls within the range that its own expert considered to be a reasonable rate based on the current rates in the market for obligations with similar considerations and risks during the period in litigation?

Doubtless, the rate of 7.89% corresponds to the lowest rate in the range, but it nonetheless is within that range and cannot be considered to be prima facie unreasonable.