Thinaddictives – Court of Quebec finds that a contribution of capital by a US shareholder was incorrectly recorded as debt, and reversed thin cap assessments

The Canadian taxpayer (“Thinaddictives”), which was initially formed by its US parent (“Nonni”) with nominal issued share capital, received approximately $19 million from Nonni to fund the cash portion of the purchase price for an asset acquisition. $10 million of this was clearly interest-bearing debt, but the balance of around $9 million did not have any resolution or other legal documentation establishing its character. Dortélus JCQ accepted testimony that it had been erroneously reported in the financial statements and tax return of Thinaddictives as being non-interest-bearing debt rather than a contribution of capital.

He quoted with approval the statement of Bowman J in Weisdorf that:

Accounting entries do not create reality. Their function is to reflect it.

Accordingly, assessments of the ARQ applying the Quebec thin cap rules were reversed.

Neal Armstrong. Summary of Thinaddictives Inc. v. Agence du revenu du Québec, 2022 QCCQ 3029 under s. 18(5) – equity amount – (a)(ii).