Alcoa – Court of Quebec finds that an unrecoverable receivable was not a bad debt to the extent compensated under a standby letter of credit

The supply agreement between Alcoa and a purchaser (Sural) provided that Sural would maintain a standby letter of credit of 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 under the L.C. However, Alcoa treated the full invoice amounts as bad debts for QSTA and ETA purposes. The ARQ denied the portion of Alcoa’s bad debt deduction that corresponded to the QST (and GST) components of US$16 million.

After referring to the presumption in Re Rizzo, [1998] 1 SCR 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.

He attempted to distinguish Policy Statement P-058R (now obsolete), in which 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).

Neal Armstrong. Summaries of Alcoa Canada Cie v. ARQ, 500-80-042769-225 (6 September 2024, Court of Quebec) under ETA s. 231(1) and s. 123(1) - money.