The taxpayer (Alcoa) entered into a supply agreement with a purchaser (Sural), which provided that Sural would maintain a standby letter of credit of US$25 million (later reduced to US$16 million) to ensure payment by Sural of the amounts invoiced by Alcoa. After Sural entered into CCAA proceedings, and was in default as to the payment of US$52.7 million (including GST and QST) in invoices, Alcoa made a demand for, and was paid, US$16 million by the Bank of Montreal (BMO) under the L.C. By virtue of BMO’s rights of subrogation, Sural now owed US$16 million to BMO. In its books, Alcoa initially only recorded a doubtful debt provision that was net of the US$16 million, but later reversed this provision and recorded a provision for the invoices’ full (tax included) amounts. The ARQ denied the portion of Alcoa’s bad debt deduction under QSTA s. 444 (and ETA s. 231(1)) that corresponded to the QST (and GST) components of US$16 million.
After referring to the presumption in Re Rizzo & Rizzo Shoes Ltd., [1998] 1 S.C.R. 27, at para. 27 that “the legislature does not intend to produce absurd consequences,” Bourgeois JCQ indicated that the position of Alcoa entailed it both claiming a bad debt deduction for the QST and GST included in the US$16 million and also receiving compensation for those amounts under the L.C.
After also noting that the L.C. was issued pursuant to the agreement for the supply of aluminum to Sural and for invoicing Sural therefor, he concluded that the US$16 million should be considered as a partial payment of the unpaid Sural invoices, so that the ARQ position was confirmed.
In Policy Statement P-058R - Recovery Of Bad Debts (obsolete from September 2011), CRA concluded that a credit insurance claim payment that related to the indemnification of an account receivable that became a bad debt did not constitute the recovery of the bad debt for the purposes of ETA s. 231(3). Bourgeois JCQ distinguished P-058R on the grounds that it dealt with credit assurance rather than a stand-by letter of credit, unlike that Policy, here it was clear that the sum received included amounts for QST and GST and, here, the sum related to a taxable-supply contract rather than a financial service (an insurance policy).
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