Pharma Coréalis Inc. v. Agence du revenu du Québec, 2023 QCCQ 156

The taxpayer (Coréalis) which, in addition to performing R&D services, entered into “service agreements” with pharmaceutical companies (the “customers”) pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient provided by the customers. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the customers.

Whether equipment that Coréalis had purchased and used in manufacturing the clinical lots qualified for investment tax credits under the Taxation Act (Quebec) turned on whether such equipment satisfied the requirement under the description of a Class 29 property that they had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.”

Art. 2103, para. 3 of the Civil Code of Quebec provided: “A contract is a contract of sale, and not a contract of enterprise or for services, where the work or service is merely an accessory in relation to the value of the property supplied.” The ARQ argued that this provision indicated that Coréalis was not making sales to its customers as it had not established that the manufacturing process regarding the clinical lots was more important than the services furnished by Coréalis to its customers, and in this regard further argued that the customers were essentially accessing Coréalis’ expertise and noted that the active ingredient (viewed by the ARQ as the key material) remained the property of the customers at all times.

In finding that Coréalis nonetheless had satisfied the Class-29 requirement for a “sale,” Lachapelle JCQ first referred with approval to the example provided by Joyal J in Ateliers Ferroviaires at para. 69 of a manufacturer using materials with a negligible value who nonetheless could be considered to be selling the manufactured product and to his conclusion (at para. 77) that “work or the service referred to in the third paragraph of article 2103 does not include a manufacturer's work to create property that it supplies to its customer.

Before allowing Coréalis’ appeal, she stated (at paras. 206-208, TaxInterpretations translation):

The ordering of clinical lots by the customers who supplied the active ingredient appears comparable to the ordering of the construction of a house by a customer who supplies only the exotic wood for the living room floor.

The contractor who supplies all the other materials and builds the house except for the exotic wood which it has incorporated into the house has nevertheless entered into a contract of sale since ownership transfers upon delivery of the completed house and payment of the price.

The most important element in this case is the manufacture of the physical product, the actual capsule, without which the clinical tests of Coréalis' customers could not take place. Of course, the customers call on Coréalis' knowledge, but ultimately they are ordering and paying for clinical lots and thus purchasing and receiving delivery of those clinical lots, which the customer will then use as it sees fit.

Coréalis entered into “service agreements” with pharmaceutical companies pursuant to which it would develop and manufacture clinical lots of solid oral dosage forms (tablets, capsules and granules) containing an active pharmaceutical ingredient provided by the companies. These along with placebos, which were also manufactured and provided by Coréalis, were used in clinical trials of the drugs by the companies.

Whether equipment that Coréalis had purchased and used in manufacturing the clinical lots qualified for Quebec investment tax credits turned on whether such equipment satisfied the requirement under the description of a Class 29 property that it had been acquired “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale.” The ARQ argued that Coréalis was not making sales to the companies as it had not established that the manufacturing process regarding the clinical lots was more important than the services furnished by Coréalis to them, and in this regard further argued that the companies were essentially accessing Coréalis’ expertise and noted that the active ingredient (viewed by the ARQ as the key material) remained their property at all times.

Before allowing Coréalis’ appeal, Lachapelle JCQ stated (at paras. 206-208, TaxInterpretations translation):

The most important element in this case is the manufacture of the physical product, the actual capsule, without which the clinical tests of Coréalis' customers could not take place. Of course, the customers call on Coréalis' knowledge, but ultimately they are ordering and paying for clinical lots and thus purchasing and receiving delivery of those clinical lots, which the customer will then use as it sees fit.