ONEnergy – Tax Court of Canada states obiter that services acquired long after the cessation of commercial activity may give rise to ITCs

A company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. In finding that Look was not entitled to input tax credits for the GST on its related legal fees and, in particular, that the lawsuit was not brought “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a), C Miller J stated:

“[I]n connection with”… is a broad expression but does not…, even on a textual reading allow for the remotest of links, such as a link only arising by way of the “but for” test. …

[T]he 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. …

He added this helpful (likely obiter) comment:

[T]his is not an issue of timing. For example, had the Board discovered two years after the [asset] sale that a competitor had wronged Look…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 [its assets] long after the completion of the sale for breach of a confidentiality provision, again timing would not preclude a finding of a connection.

Neal Armstrong. Summary of ONEnergy Inc. v. The Queen, 2016 TCC 230 under ETA s. 141.1(3)(a).