REASONS
FOR DETERMINATION
C. Miller J.
[1]
This is a Rule 58 of the Tax Court of Canada
(General Procedure) Rules (the “Rules”)
Determination of the following question:
Whether, on the facts
agreed to by the Parties and any other facts found by the Court, the Appellant
is deemed to have incurred litigation costs in the course of a commercial
activity pursuant to subparagraph 141.1(3)(a) of the Excise Tax Act
( the “Act”).
[2]
The Parties did provide an Agreed Statement of
Facts attached as Appendix A hereto. There was no further evidence.
[3]
Paragraph 141.1(3) of the Act reads as
follows:
141.1(3) For
the purposes of this Part,
(a) to the extent that a person does anything (other than make a supply)
in connection with the acquisition, establishment, disposition or termination
of a commercial activity of the person, the person shall be deemed to have done
that thing in the course of commercial activities of the person; and
(b) to the extent that a person does anything (other than make a supply)
in connection with the acquisition, establishment, disposition or termination
of an activity of the person that is not a commercial activity, the person
shall be deemed to have done that thing otherwise than in the course of commercial
activities.
[4]
“Commercial activities” is defined as follows in section 123(1) of the Act:
(a) a business
carried on by the person (other than a business carried on without a reasonable
expectation of profit by an individual, a personal trust or a partnership, all
of the members of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person,
(b) an adventure
or concern of the person in the nature of trade (other than an adventure or
concern engaged in without a reasonable expectation of profit by an individual,
a personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the adventure or concern involves
the making of exempt supplies by the person, and
(c) the making of
a supply (other than an exempt supply) by the person of real property of the
person, including anything done by the person in the course of or in connection
with the making of the supply;
I note
specifically the definition is in terms of a business “carried
on”.
[5]
Subparagraph 141.1(1)(a) of the Act
reads as follows:
(a) where a
person makes a supply (other than an exempt supply) of personal property that
(i) was last
acquired or imported by the person, or was brought into a participating
province by the person after it was last acquired or imported by the person,
for consumption or use in the course of commercial activities of the person or
was consumed or used by the person in the course of a commercial activity of
the person after it was last acquired or imported by the person, or
(ii) was
manufactured or produced by the person in the course of a commercial activity
of the person or for consumption or use in the course of a commercial activity
of the person, or was manufactured or produced by the person and consumed or
used in the course of a commercial activity of the person, and was not deemed
under this Part to have been acquired by the person,
the person shall
be deemed to have made the supply in the course of the commercial activity; and
…
I read this
provision as bringing into the purview of a “business
carried on” a one-shot disposition such as the Spectrum Sale. The
Respondent’s argument is that to qualify for the input tax credit, the legal fees
incurred by the Appellant (I will refer to the Appellant at times as “Look”) must be proven to be grounded to that Spectrum
Sale; that is, it must be found to be “in connection”
with that sale. And, the Respondent argues, the legal fees are not so
connected.
[6]
While the Appellant in written argument agreed
with framing the matter in this manner, that is, requiring a connection to the
Spectrum Sale, at the hearing the Appellant appears to have taken a broader
view of the requisite connection: any activity during the wind up of the
commercial activity or perhaps even the corporation, other than the making of
exempt supplies or personal activity, qualifies. This may seem a fine
distinction and I confess it was me that raised with counsel a different
approach to the question for Determination. But, clearly, when Appellant’s
counsel (who initially made the connection between the legal fees and the Spectrum
Sale based on the fact the directors altered their remuneration package BEFORE
the completion of the Spectrum Sale) argued it would have made no difference to
their claim to input tax credits had the directors acted after the sale, it
struck me they must be arguing for the broader view mentioned earlier, as any
connection to the Spectrum Sale in such circumstances would, I respectfully
suggest, be tenuous.
[7]
An alternate view of the issue could therefore
be a distinction between an activity in connection with the winding up of the
business carried on by the corporate taxpayer versus an activity in connection
with the wind down of the corporation itself. I will mainly address whether the
legal fees were incurred in connection with the Spectrum Sale but then, if
necessary, address whether an activity in connection with the wind down of the
corporation, as opposed to the wind up of the commercial activity, qualifies.
[8]
There are a few key dates to note from the
Agreed Statement of Facts. Look announced in May 2009 it was selling the Spectrum
and licence subject to Court approval, which it also received in May 2009. On
June 16 of the same year, Look’s board decided to cancel options and the share
appreciation rights plan and set aside $11,000,000 for a severance retention
and bonus pool, understood to be made available from the Spectrum Sale. The Spectrum
Sale closed by September 11 and Look was paid the full amount owing. The
Parties agree that by selling the Spectrum and licence Look effectively
terminated or disposed of its telecommunication business. Further, the Parties
agree that Look ceased to provide wireless internet access and
telecommunication distribution services to any subscribers by November 15,
2009. The legal services to which the input tax credits in dispute relate were
rendered between July 2011 and July 2013. They were obtained by Look to
pursue legal action against the former directors and executives of Look for
misappropriation of proceeds from the Spectrum sale.
[9]
So, was the acquisition of legal services in the
years 2011 to 2013 to recover funds Look claims as “damages for breach of fiduciary duty and
the duties and standard of care prescribed by section 122 of the Canada
Business Corporations Act and relief from oppression pursuant to section 241 of
the Canada Business Corporations Act…in an amount equivalent to the amounts
paid to these defendants as “restructuring awards” in connection with the sale
of Look’s licence broadcast spectrum in 2009,” in
connection with the Spectrum Sale?
[10]
Certainly, the claim is framed in terms that the
“restructuring awards” were in connection with
the Spectrum Sale. The Appellant suggests the plan to restructure awards was
founded in the knowledge the Spectrum sale would proceed, putting Look into
considerable funds – a clear connection says the Appellant. The Respondent
argues, no, this is simply equivalent to a “but for”
argument: but for the Spectrum Sale there would not have been the restructuring
awards and, therefore, there would not have been any litigation. This is not a
sufficient link, according to the Respondent, between what she considers a pure
corporate governance matter and the Spectrum Sale.
[11]
Is subparagraph 141.1(3)(a) of the Act
to be interpreted in the somewhat more restricted sense suggested by the
Respondent of an integral (her word) connection between the legal services and
the Spectrum Sale, recognized as a commercial activity, or the expansive sense
suggested by the Appellant of a broad definition of connection, as really just
some connection between two related subjects. How is the provision to be
interpreted?
[12]
As is the modern custom of statutory
interpretation, I shall undertake a textual, contextual and purposive analysis
of the provision.
[13]
Textually, the Parties are not that far apart in
their view. It says what it says: there must be a connection, defined in the
Oxford Dictionary online as “a relationship in which a
person or thing is linked or associated with something else”. The Shorter
Oxford English Dictionary defines it as “relations
between things one of which is bound up with or involved in another”.
These broad definitions appear to be in line with case law. In Nowegijick v
R.,
the Supreme Court of Canada grouped this phrase with “in
respect of”, “in relation to” and “with
reference to”:
The words “in respect of” are, in my opinion, words to the
widest possible scope. They import such meanings as “in
relation to”, with “reference to” or “in connection with”. The phrase “in
respect of” is probably the widest of any expression intended to convey some
connection between two related subject matters.
[14]
This view of a wide meaning was also accepted at
the Ontario Court of Appeal in Mantini v Smith Lyons LLP:
19. In the
case of Denison Mines Ltd. v. Ontario Hydro, [1981] O.J. No. 807 (QL) (Div.
Ct.), the court interpreted the words "arising in connection with" as
having "a very broad meaning". The court referred to the House of
Lords decision in Heyman v. Darwins, [1942] A.C. 356, [1942] 1 All E.R. 337
(H.L.) where Lord Porter stated at p. 399 A.C. that the words "'arising
out of' have a wider meaning" than "under". The Divisional Court
went on to hold that "the words 'arising in connection with' are at least
as wide as the words 'arising out of' and have a very broad meaning"
(para. 15). I agree with these interpretations and in particular with the
conclusion that the phrase "in connection with" has a very broad
meaning. In my view, it has a broader scope than the phrase "out of",
as the dispute need only be connected with the Partnership Agreement, even if
it does not arise from or out of a specific provision of the agreement. I
conclude that this clause represents a general or universal resort to
arbitration, but for the exception for any matters expressly within the sole
discretion or power of the Executive and Compensation Committees.
[15]
The Respondent pointed out that in the Kitchener-Waterloo
Real Estate Board Inc v Ontario Regional Assessment Commissioner, Region No 21 the court, while
accepting a broad view, added the need to consider context, which I will
soon address. The court stipulated:
32. The
respondent suggests that the words "in connection with" are broader
than the words "for the purpose of" and says that even if the
activity is not caught by the latter it is caught by the former. This is an
accurate interpretation of the plain meaning of the words of the statute. The
word "connection" simply means that there is some relationship
between two things or activities -- that they have something to do with each
other. The relationship need not be purposive to constitute a connection. Many
activities might be carried out in connection with a particular object, as
integrally related activities, without being carried out for the purpose of
that object. In this context I adopt what was said by Pennell J. in Re Grand
Valley Construction Ass'n and City of Cambridge (Ont. H.C.J., unreported,
February 27, 1979 [summarized [1979] 1 A.C.W.S. 272]). He was dealing there
with associational activities of the construction industry. Unlike the
multiple-listing service the activities of the occupant in Grand Valley were
not in themselves business activities or activities which generated profit. He
dealt with the words "in connection with" as follows (at pp. 13-4):
It remains to
consider the effect of the words "or in connection with" in s. 7(1)
which were introduced into the Act in 1947 (1947 (Ont.), c. 3, s. 6). In my
view, the words "in connection with" are broader in scope than the
words "for the purpose of" and have extended the boundaries within
which the taxing authority may assess land for business tax. However, I do not
think that this form of words should be given a purely literal interpretation. In
giving a fair application to the words "in connection with" the court
must remember that the words are coloured by the context of the terms of the
section. Merely because the preponderating purpose of the activity is related
to the contracting business does not necessarily bring it within the scope of
s. 7. In my view the preponderating purpose of the applicant must be related to
the building or contracting business not merely by loose threads but by solid
ties before it could be treated as being "in connection with" the
building industry as those words are used in s. 7.
It is difficult
to put in precise words the nature of the nexus or situation which would
constitute the use of land as being "in connection with" a business.
But an illustration is furnished in the dissenting judgment of Fraser J. in the
Divisional Court in the Windsor-Essex case, supra. He expresses himself thus at
p. 464:
"None of the
cases to which we were referred were ones in which the major function of an
occupant was to carry on an activity to increase the profits of a separate
entity or entities by whom it was owned or controlled. It would seem anomalous
if a person or a corporation, or a group of them, can separate some of their
necessary business operations and have them carried on by a non-profit
corporation on premises not subject to business tax."
It seems to me
that this is precisely the type of situation that the words "in connection
with" are intended to cover.
The issue, as I
see it, is whether the preponderating purpose and the type of services provided
by the applicant are so tied in with the business of its members that its
activities are a mere extension and integral part of the contracting industry.
[16]
In the Supreme Court of Canada decision of Sarvanis
v R
the Court displayed a similar attitude:
22. It is
fair to say, at the minimum, that the phrase “in respect of” signals an intent
to convey a broad set of connections. The phrase is not, however, of infinite
reach. Although I do not depart from Dickson J.’s view that “in respect of” is
among the widest possible phrases that can be used to express connection
between two legislative facts or circumstances, the inquiry is not concluded
merely on the basis that the phrase is very broad.
23. The
breadth and ambiguity of the words used to express the connection between the
pension or compensation paid and the loss to which the payment relates is
equally present in the French version. This is seen most clearly in the verb
phrase connecting the loss to the pension, that is, “ouvrant droit au paiement
d’une pension ou indemnité” (emphasis added). It is important to keep in mind
the distinct manner in which Parliament has chosen to frame the section in the
two languages. However, I would note, crucially, that it is the same connection
— the link between the pension paid and the loss sustained — that Parliament
has rendered somewhat obscure by the use of both “in respect of” and “ouvrant
droit”. The distinct features of phrasing in each official version do not, in
themselves, remedy the central ambiguity with which this appeal is concerned.
24. In both
cases, we must not interpret words that are of a broad import taken by
themselves without looking to the context in which the words are found. Indeed,
the proper approach to statutory interpretation requires that we more carefully
examine the wider context of s. 9 before settling on the correct view of its
reach. In Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1
S.C.R. 27, in discussing the preferred approach to statutory interpretation,
the Court stated, at para. 21:
. . . Elmer Driedger in Construction
of Statutes (2nd ed. 1983) best encapsulates the approach upon which I prefer
to rely. He recognizes that statutory interpretation cannot be founded on the
wording of the legislation alone. At p. 87 he states:
Today there is only one principle or
approach, namely, the words of an Act are to be read in their entire context
and in their grammatical and ordinary sense harmoniously with the scheme of the
Act, the object of the Act, and the intention of Parliament.
In my view, the nature and content of
this approach, and the accuracy of Professor Driedger’s succinct formulation,
have not changed. Accordingly, we cannot rely blindly on the fact that the
words “in respect of” are words of broad meaning.
[17]
While I do not accept that a simple textual view
of “in connection with” requires or introduces a
concept of an integral connection, the case law does appear to suggest that the
word cannot be looked at in a vacuum. Certainly, it is a broad expression but
does not, I would suggest, even on a textual reading allow for the remotest of
links, such as a link only arising by way of the “but
for” test. Let me explore that further.
[18]
The Respondent raises the Supreme Court of
Canada’s decision in Symes v Canada
to dispute that a “but for” test is sufficient
to link legal services at issue with the Spectrum Sale, even on a straight
textual interpretation of the term “in connection with”.
The Respondent refers me to an interesting passage from the Supreme Court of
Canada’s decision in Symes’:
73. Since I
have commented upon the underlying concept of the "business need"
above, it may also be helpful to discuss the factors relevant to expense
classification in need-based terms. In particular, it may be helpful to resort
to a "but for" test applied not to the expense but to the need which
the expense meets. Would the need exist apart from the business? If a need
exists even in the absence of business activity, and irrespective of whether the
need was or might have been satisfied by an expenditure to a third party or by
the opportunity cost of personal labour, then an expense to meet the need would
traditionally be viewed as a personal expense. Expenses which can be
identified in this way are expenses which are incurred by a taxpayer in order
to relieve the taxpayer from personal duties and to make the taxpayer available
to the business. Traditionally, expenses that simply make the taxpayer
available to the business are not considered business expenses since the
taxpayer is expected to be available to the business as a quid pro quo for
business income received. This translates into the fundamental distinction
often drawn between the earning or source of income on the one hand, and the
receipt or use of income on the other hand.
74. It
remains to consider the appellant's child care expenses in light of this
discussion. First, it is clear on the facts that the appellant would not have
incurred child care expenses except for her business. It is relevant to note
in this regard that her choice of child care was tailored to her business
needs. As a lawyer, she could not personally care for her children during the
day since to do so would interfere with client meetings and court appearances,
nor could she make use of institutionalized daycare, in light of her working
hours. These are points which were recognized by the trial judge.
75. Second,
however, it is equally clear that the need which is met by child care expenses
on the facts of this case, namely, the care of the appellant's children, exists
regardless of the appellant's business activity. The expenses were incurred to
make her available to practise her profession rather than for any other purpose
associated with the business itself.
[19]
The Respondent makes the point, in line with
these comments, that the cost of legal services to chase after directors, who
the Appellant claims have absconded with its money, is a need that would have
been fulfilled regardless of where the funds emanated from. I agree. I also agree
with the Supreme Court of Canada that a “but for”
test should be approached with caution. In this case, there seems little tie
between the actual Spectrum Sale and the lawsuit to go after directors and
executives who paid themselves funds that Look had in its account because of
the sale. This seems to be the essence of the connection claimed, and it is
very much a “but for” connection.
[20]
What I suggest is at issue in looking at this
from a strictly textual broad interpretation of “in connection
with” is whether a corporation can ever be considered to incur a “personal expense” or is every expense “in connection” with its business? I dealt with
something similar in the BJ Services Co Canada v R case concluding:
72. Nowsco's
fees are not directly part of the production chain, but I am satisfied there is
no policy which requires that they must be; otherwise, there is a risk no
indirect inputs would be entitled to the ITCs. GST policy clearly recognizes
the entitlement of indirect inputs to ITC. So, how do the fees paid by Nowsco
differ? The Respondent might say because they have no link at all to the
production chain, whereas other indirect inputs have some link. It is up to
each company to determine how resources, financial and otherwise, are allocated
between direct inputs and accepted ancillary inputs. In the circumstances of
this case, the Appellant maintains there is indeed some link to the making of
taxable supplies. The policy debate, I would suggest, should be less concerned
with the technical debate of whether or not there is a requirement for a
connective link between the input and the making of taxable supplies, and more
concerned with the connection between the input and what is acceptable in the
commercial forum of a public company engaged in international work, as part of
the company's business. If that latter link exists, then it must fall within
the scheme of the Excise Tax Act to treat such an input as entitled to the ITC.
Some might argue this would lead to the conclusion that every corporate
expense, no matter how ancillary to the production chain, is incurred in the
course of commercial activity. In these days of intense scrutiny of public
companies and their executives, I find this is not an inevitable conclusion.
Some expenses simply will not be commercially acceptable.
[21]
Keep in mind, I am still just looking at this
from a textual perspective, which, on its face, given jurisprudence’s
acceptance of a relatively broad view of the term, would appear to link, albeit
tenuously, the legal services to the commercial activity of the Spectrum Sale,
thus giving it the requisite commercial nature. But is it of that nature? I do
not believe it is. In line with my thinking in BJ Services, I conclude
there is no commercial expectation that directors on winding up a corporation
will abscond with funds and that the cost of such contingency is somehow worked
into the cost of the supply. This is unlike the situation in BJ Services
where I was satisfied the activity went to “the
company’s ability to sustain a profitable business”. Not so here. The
business of Look was effectively wound up before there was any activity necessitating
the acquisition of legal services. What was not wound up was the corporation
itself. This was not a matter of incurring legal fees to collect accounts
receivables, which clearly are part of the termination of the business. This
expense is as close to what I would consider a “personal
expense” in a corporate context as I can imagine. The business is over.
Going after greedy directors, who may have lined their own pockets, to
redistribute monies recovered from them to shareholders has no connection to
where those monies came from. It matters not that the directors concocted their
plan when the possibility of significant proceeds from a sale became real. So
what? The activity to recoup arose from the directors actually taking the funds
once in Look’s accounts. I conclude that even on a textual approach there is no
link between the Spectrum Sale and the legal activity to go after the
directors.
[22]
I am reinforced in my view by interpreting
subparagraph 141.1(3)(a) of the Act from a contextual and
purposive view, as directed by the jurisprudence. I agree with the
Appellant that applying the input tax credit rules to an operating business is
somewhat intuitive (a business acquires supplies to make supplies). It becomes
less so for businesses in a start-up or wind down phase, where taxable supplies
are likely not being made, thus the introduction of the predecessor to
paragraph 141.1(3) of the Act, being subsection 141(5). When this
provision was introduced, Department of Finance Technical Notes stated it “allows input tax credits to be claimed for purchases made
during the start-up or winding down phase of operations”. Note it does
not say the winding down phase of a corporation, but the operations.
[23]
The Appellant also referred me to a GST
Headquarters Letter dated February 16, 1994. It is worth reproducing all of
question 1 and the Canada Revenue Agency’s answer:
Q.1.
(a) Are there any
restrictions on the types of activities that may be considered to have been
done in connection with the termination of a commercial activity pursuant to
paragraph 141(5)(c) for the period January 1, 1991 to September 30, 1992? It
appears the subsection 141.1(3) excludes making a supply effective October 1,
1992.
(b) For purposes
of paragraph 141(5)(c) would the following activities be included in
termination activities:
Collecting
receivables
Preparing f/s for
prior years
Completing
outstanding income tax returns
Reporting to the
Court in the case of receivership
Selling capital
assets
Selling inventory
(c) If a company
involved in commercial activity is placed in receivership by the Court, is
everything done by the receiver considered to be in connection with the
termination of the commercial activity, even if it takes 5 or 6 years for the
receiver to complete the wind up of the business?
A.1. Paragraph
141(5)(c) prior to October 1992 and paragraph 141.1(3)(a) after September 1992
are in the legislation to provide greater certainty that activities done in
connection with the acquisition, establishment, disposition or termination (and
reorganization in the case of paragraph 141(5)(c)) of a commercial activity are
done in the course of that commercial activity. It is our view that even in the
absence of such provisions, activities done in connection with the acquisition,
establishment, disposition or termination (and reorganization in the case of
paragraph 141(5)(c)) of a commercial activity are still part of the commercial
activity. However, to the extent there is doubt, the above provisions clarify
that the activities are part of the commercial activity. The legislative
changes made by the addition of paragraph 141.1(3)(a) ensures that an activity
associated with the acquisition, establishment, disposition or termination of a
commercial activity is a commercial activity only of the person who is
undertaking the acquisition, establishment, disposition or termination. It also
requires, where appropriate, pro-rating of inputs for input tax credit purposes
in connection with the acquisition, establishment, disposition or termination
of a commercial activity. While paragraph 141(5)(c) does not expressly require
pro-rating of activities where something is done in connection with the
establishment, acquisition, reorganization, disposition or termination of a
commercial activity, we interpret paragraph 141(5)(c) as requiring such
pro-rating. The wording of paragraph 141(5)(c) does not tie the commercial
activity in question to the person engaging in the establishment, acquisition,
reorganization, disposition or termination of the commercial activity. As a
result, it may be possible to argue that a corporation's activities of
establishing a new business can constitute a commercial activity of that new
business. However, we do not agree with this interpretation since such an
interpretation is not contemplated in the scheme of the Act. The inclusion of
the phrase “other than a supply” in paragraph 141.1(3)(a) is to ensure that the
provision applies only to inputs. For activities that are supplies, e.g. sale
of capital assets and inventory, even though they are excluded under paragraph
141.1(3)(a), their status and eligibility for input tax credits would be
subject to the other provisions of the Act, i.e. if it is a taxable supply GST
is exigible and input tax credits may be claimed. The activities listed under
(b) above are in connection with the termination of a commercial activity and
therefore are part of the commercial activity. Once it is established that the
activities are in the course of the commercial activities of the person, input
tax credits may be claimed with respect to property and services acquired for
consumption, use or supply in the course of those activities subject to the
normal rules concerning input tax credits and the use of property and services,
e.g. subsection 169, section 185, section 198, section 199.There is no time
limit on the activities done by the receiver for such activities to be
considered part of the termination of the commercial activity. However, the
activities done by the receiver may not all relate to the “termination” of the
commercial activity since the receiver is likely to try and operate the
business for a period of time. If this is the case, since paragraph 266(2)(a)
deems the receiver to be acting as agent for the person, all provisions that
would apply if the person was still carrying on the commercial activity apply
to the receiver who is carrying on the commercial activity.
[24]
I note the Department’s view that, even in
absence of these clarifying provisions, activities in connection with the
termination activity are still part of the commercial activity. This suggests
to me the connection is to be to the ordinary course of business, which in the
context of legislation providing for input tax credits on supplies used in
making supplies, necessarily requires the connection to the making of supplies.
In this case, by operation of section 141.1 of the Act this, as I have
already indicated, also encompasses the Spectrum Sale, though, I would suggest,
the connection must be to the sale itself, not consequences of the sale.
[25]
It is also noteworthy what actions the Department
acknowledges are connected to a business’ termination: collecting receivables,
preparing financial statement for prior years, completing outstanding income
tax returns, reporting to the court in the case of receivership, selling
capital assets and selling inventory. There is a common thread in these
activities in that there is a direct link between the activity and making of
supplies, or in the case of selling capital assets, to a deemed commercial
activity. I do not read this letter as providing any support for a link between
an activity of pursuing directors after the commercial activity has ceased,
where that pursuit is for money taken from the corporation’s account,
notwithstanding the funds went into that account from a deemed commercial
activity. It is simply one step removed. It breaks the link.
[26]
To be clear, this is not an issue of timing. For
example, had the Board discovered two years after the Spectrum sale that a
competitor had wronged Look in some fashion, diminishing sales, and the Board
commenced a lawsuit, I would see no difficulty in finding such litigation activity
was connected with commercial activity, notwithstanding some considerable time
had passed since the termination of the business. Similarly, if Look had to sue
the purchaser of Spectrum long after the completion of the sale for breach of a
confidentiality provision, again timing would not preclude a finding of a
connection.
[27]
From a purposive perspective, the Appellant
points out that the Department of Finance’s Technical Notes released in
February 1993 (upon the release of section 141.1 of the Act) stated:
Existing
subsection 141(5) is repealed and replaced by new section 141.1. The purpose of
this section is to provide rules that clarify the GST treatment of
extraordinary transactions that do not necessarily occur in the ordinary course
of a business such as…winding up commercial activities.
[28]
The Appellant argues the litigation to pursue
the directors is an extraordinary transaction on winding up commercial
activities contemplated by this specific purpose. While I grant the litigation was
an extraordinary transaction, and that it did not occur in the ordinary course
of business, I find it was not part of the wind up of commercial activity. It
was part of the wind up of the corporation after the termination of the
commercial activity. Allowing input tax credits on this type of activity which
bears no relation to the Appellant’s business, as that expression is
contemplated in the GST legislation that deals solely with supplies, would be
counter to the very essence of a goods and services tax. Again, there is no
connection to goods and services.
[29]
The Spectrum Sale was completed. Look got paid.
The directors then took the money. The Appellant stressed that the directors
put in place their scheme to take more remuneration before the Spectrum Sale closed
and in contemplation of that sale, and that this therefore creates the link.
Yet, in the same breath, the Appellant suggested it would still be seeking the
input tax credits if such a plan had been arranged after closing of the Spectrum
Sale. This suggests to me that it is not perhaps the link to the sale that the
Appellant believes brings it within subparagraph 141.1(3)(a) of the Act
but simply that the litigation is part of the winding up of a business.
[30]
In any event, does the timing of the creation of
the remuneration plan, create the connection to the Spectrum Sale? No, not in
the sense I find a connection is required given the context and purpose. The
directors’ plan was in connection with funds arising from the completion of the
Spectrum Sale, not with the sale itself. By the sale itself, I mean the
negotiations leading up to the sale, the entering into of the sale, the
implementation and enforcement of the sale. The legal activity two years later,
which is the activity to be connected, is even one step further removed from
the sale. I find the timing of the origin of the remuneration plan does not
create the requisite connection.
[31]
The Appellant raises two cases that address
subparagraph 141.1(3)(a) of the Act to support their position.
First, in Perfection Dairy Group Ltd v R,
Justice Webb stated the following:
42. Since
subsection 141.1(3) of the Act is not dependent on any finding of any certain
extent to which a person does something in connection with the termination of a
commercial activity, the acquisition of the claim by PFL under the Legal Action
for the purposes of subsection 141.1(3) of the Act is not subject to the
provisions of subsection 141.01(6) of the Act. As a result, to the extent that
PFL does anything in relation to the termination of its business, it is deemed
to have done that thing in the course of commercial activities. Therefore the
claim under the Legal Action (which was acquired in connection with the
termination of the business) will be deemed to have been acquired in the course
of commercial activities of PFL.
[32]
This comment has to be viewed, however, with an
eye to the nature of the legal action referred to. It was in part for damages
for loss of income. This is not the nature of the litigation brought by Look
that in no way ties into loss of income, presumably arising from the supply of
goods or services. There was no issue of connectivity. In any event, Perfection
Dairy was not decided on the basis of subparagraph 141.1(3)(a)
of the Act.
[33]
The Appellant also relied on 614730 Ontario
Inc v R,
where Justice Webb wrote:
38. It is
not clear whether the property was leased after it was rebuilt or whether it
was sold before it was leased. However, it does seem to me that the commercial
activity of leasing the property was terminated by the fire as the fire
destroyed the property. It also seems to me that the activities related to the
attempt to collect the amount under the insurance policy were done in
connection with the termination of that activity as the fire was the cause of
the termination of that activity. There is also a connection between the
insurance litigation and the commercial activity of selling the property as the
insurance proceeds would be used to rebuild the structure (or to now repay the
amounts borrowed to rebuild the structure).
[34]
Again, this is a very different kettle of fish.
As the Respondent pointed out, Look’s litigation did not contribute to the
restoration and ultimate sale of Spectrum and the licence: nothing in the sale
itself triggered litigation. I find no support in the case law for the
Appellant’s position that there can be a connection for purposes of
subparagraph 141.1(3)(a) of the Act between legal activity simply
because it arises in the aftermath of the termination of the commercial
activity without any link to the entering into, implementation of or
enforcement of that commercial activity. The Spectrum Sale put the company in
funds – that’s all. The lawsuit is what happened to those funds after the
termination of that commercial activity. It is not a connection contemplated by
a textual, contextual or purposive interpretation of the provision.
[35]
In summary, I distinguish between the
termination of the business and the consequences flowing from such termination.
I also distinguish between the wind up of the business and the wind down of the
corporation. I emphasize it is the connection that is paramount, not the timing
of the activity. And the connection must be one that on a textual, contextual
and purposive interpretation recognizes the commercial expectation of a business
supplying goods or services. In this case that means a connection between the
litigation activity and the entering into, implementation of or enforcement of
the Spectrum sale. There is simply no such connection.
[36]
Turning briefly to the second possibility, is it
only necessary to connect the legal activity with the wind down of the
corporation itself rather than the business of the corporation. I believe I
have made clear throughout these Reasons that that is not sufficient. I would
suggest that would run contrary to the very scheme of the Act. I find it
is not necessary to explore this point further.
[37]
In conclusion, in answer to the question of the
Determination whether, on the facts agreed to by the Parties and any other
facts found by the Court, the Appellant is deemed to have incurred litigation
costs in the course of a commercial activity pursuant to subparagraph 141.1(3)(a)
of the Act, the answer is no. No costs were sought by either side and I
make no award of costs.
Signed at Ottawa,
Canada, this 14th day of October 2016.
“Campbell J. Miller”
APPENDIX
A
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