102751 Canada Inc. – Court of Quebec finds that legal fees incurred to recover misappropriated funds were not capital expenditures

After substantially all of the assets of a Canadian corporation (Mobile) owned by a German family were misappropriated by a Canadian director (Black), Mobile brought an action against him, with the action subsequently being settled in 2012 by the payment by Black of an agreed sum plus interest thereon at 5%. In finding, contrary to an ARQ reassessment, that the various legal and other professional fees incurred by Mobile were fully deductible rather than being capital expenditures, Cameron JCQ found that the expenses had been incurred to preserve its income-producing assets and that there had been a resulting generation of the interest of 5%.

Before so concluding, Cameron JCQ also had to address a procedural issue. A few days after Mobile had appealed the reassessment to the Court of Quebec, the ARQ issued a fresh reassessment that effectively consolidated the appealed reassessment with reassessments dealing with loss carryforwards. Cameron JCQ was inclined to agree with the proposition that the second reassessment nullified the first, so that the appeal also potentially was a nullity unless Mobile had objected to the second reassessment, which in form it had not. However, he found that Mobile should be considered to have objected to the second reassessment given that, shortly after its issuance, Mobile and the ARQ signed a protocol reaffirming the points in contention for all the reassessed years. He stated:

It would therefore be difficult for the Minister to argue that he has not received written notice of objection to [the second reassessment] as he has agreed in writing that the contest is about the subject matter of that assessment.

Neal Armstrong. Summaries of 102751 Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 7378 under s. 18(1)(b) – capital expenditure v. expense – damages and s. 169(1).