27 September 2011 Internal T.I. 2011-0405061I7 - Government assistance

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Is a portion of the Government assistance (called the Contribution) a repayable loan?

Position: No

Reasons: Only one agreement - meant as government assistance with terms that are made to stimulate the economy and not made in the same way as in private business.

								September 27, 2011

	XXXXXXXXXX  Tax Services Office		Income Tax Rulings
	Large File Case Manager				   Directorate
								C. Tremblay, CMA
	XXXXXXXXXX 						(819) 281-6906

								2011-040506

XXXXXXXXXX ("ACo")
Application of Paragraph 12(1)(x) of the Income Tax Act (the "Act")

This is in reply to your memorandum of April 21, 2011, wherein you requested our views on the application of paragraph 12(1)(x) of the Act to a contribution received by ACo under the Program XXXXXXXXXX administered by Technology Partnerships Canada ("TPC"), an agency of Industry Canada.

The key background facts are as follows:

1. ACo submitted a proposal to the Minister of Industry Canada (the "Minister"), called XXXXXXXXXX setting out how ACo would make certain investments in its facilities in XXXXXXXXXX , and, in doing so, develop and exploit new capabilities at these facilities.

2. An agreement (the "Agreement") signed with Industry Canada provided ACo with a "conditional repayable contribution" (the "Contribution") under XXXXXXXXXX which was administered by TPC.

3. ACo agreed to invest $XXXXXXXXXX in its XXXXXXXXXX facility. The Contribution disbursed by the Minister totalling $XXXXXXXXXX was received by ACo based on XXXXXXXXXX % of eligible costs for each year as follows:

XXXXXXXXXX

4. The first $XXXXXXXXXX received was recorded as a long-term debt, the other $XXXXXXXXXX was credited against the category of related expenditures.

5. ACo has XXXXXXXXXX years to repay the Contribution, but because of a XXXXXXXXXX -year grace period, ACo has in substance XXXXXXXXXX years to repay the Contribution. The first repayment is not due until XXXXXXXXXX , with the last payment being due in XXXXXXXXXX .

6. Based on the formulas in the repayment calculations, the conditional repayments are capped at $XXXXXXXXXX . There is also a minimum residual payment due no later than XXXXXXXXXX calculated as the greater of: (a) $XXXXXXXXXX , and (b) $XXXXXXXXXX . This requirement ensures that a minimum $XXXXXXXXXX of the Contribution will be repaid. The Agreement provides for a guarantee to TPC by ACo's parent in respect of all payments owed by ACo under the Agreement.

7. ACo has taken the position that of the $XXXXXXXXXX received from the Minister, the first $XXXXXXXXXX has to be repaid, and accordingly, that portion is a loan and need not be included as government assistance under paragraph 12(1)(x) of the Act. In addition, ACo has filed its corporate tax returns based on the view that the part of the Contribution (i.e., the first $XXXXXXXXXX ) that is repayable is not "government assistance" within the meaning of subsection 127(9) of the Act for SR & ED purposes.

8. XXXXXXXXXX

TSO's Views:

In your view, paragraph 12(1)(x) of the Act captures any and all forms of assistance from all levels of government, including quasi-government public authorities. You have reviewed the Agreement in detail and note that the Minister is "making available a conditionally repayable Contribution". Contribution is a defined term and means "the conditionally repayable amount in Canadian dollars disbursed by the Minister to the Proponent [Aco] with respect to certain eligible costs". The Agreement does not provide for any other form of payment including a loan as there is only one type of support amount that the TPC is to disburse under the Agreement and it is a Contribution. In your view, the provisions of paragraph 12(1)(x) of the Act are satisfied.

You also note the lack of normal commercial aspects of the Agreement as it relates to the Contribution amount. The Agreement provides for a minimum mandatory repayment of $XXXXXXXXXX in the form of a royalty. The available repayment time is XXXXXXXXXX years from the date of the initial instalment of the Contribution and there is no interest charged over the entire period except in cases where a calculated royalty is not paid on time. In your view, the Contribution does not have the quality of a loan both in definition and in substance. In your view, The Radio Engineering Products Limited v. M. N.R. (73 DTC 5071) case supports that having a repayment provision does not, in and by itself, characterize funding as a loan. You do not believe that this Contribution is a normal commercial investment or a loan that the government made or intended to make. Industry Canada and TPC are not, under normal circumstances, considered to be normal commercial investors. A previous ITRD document (2007-0224191E5) indicates that amounts received from TPC are considered to be government assistance and not commercial investments.

You also note that in considering the scheme of the Act, paragraph 12(1)(x) of the Act requires an income inclusion and paragraph 20(1)(hh) of the Act allows a deduction for amounts repaid in the year pursuant to a legal obligation for amounts included in income in the year or a preceding year.

You further note that, as stated in Simmonds & Sons v M.N.R. (89 DTC 707), the definition of loan in Black's Law Dictionary, 5th (1979) ed., is "delivery by one party to and receipt by another party of a sum of money upon agreement, express or implied, to repay it with or without interest."

You have reviewed the Agreement which reflects the fact that ACo is required to repay a minimum of $XXXXXXXXXX over XXXXXXXXXX years, and that repayment of the remaining $XXXXXXXXXX is contingent on certain levels of production XXXXXXXXXX . There is no legal requirement to repay that remaining balance unless certain production levels are not met. In your view, the structure and terms of the Agreement, in conjunction with the conditional nature of the repayment terms, illustrate that the entire $XXXXXXXXXX sum is not a loan and is subject to paragraph 12(1)(x) of the Act as a contribution. You note that the Agreement is not divisible and does not provide for ACo to repay the $XXXXXXXXXX amount in full; there is but a provision for a minimum repayment of $XXXXXXXXXX .

Taxpayer's Views:

ACo agrees that the portion of the funding which is not subject to the compulsory repayment obligation and is thus repayable by ACo only on a conditional basis based on annual production targets, is properly subject to the provisions of paragraph 12(1)(x) of the Act pursuant to the wording of subparagraph 12(1)(x)(iv) of the Act. By contrast, however, ACo states that where the government is unconditionally entitled to a full return of its originally advanced funds, those funds do not fall within the purview of paragraph 12(1)(x) of the Act. In their view, since ACo is required under the Agreement to make a minimum repayment of $XXXXXXXXXX , this amount constitutes a loan and should not be considered government assistance.

ACo points to Article XXXXXXXXXX , entitled "XXXXXXXXXX ", wherein it states that "XXXXXXXXXX ."

The representatives see the issue as whether or not the Agreement meets the definition of a loan and conclude that the $XXXXXXXXXX minimum repayment is a loan because it is "a sum of money to be returned". They further argue that a legal obligation to repay an amount came into existence at XXXXXXXXXX , thus, the amount was a legal liability; it is an amount required to be paid without any conditions. They further argue that the Agreement between Industry Canada and ACo required a minimum and unconditional repayment, and constituted a legal liability, that is, a repayable loan, at that date and is not forgivable under any circumstance. In simple terms, they state, it is a loan because it must be repaid.

To summarize their initial arguments, the representatives are maintaining that the minimum repayment amount of $XXXXXXXXXX does not constitute government assistance as defined in the Act because it is not a forgivable loan or any other form of assistance; it must be repaid.

The taxpayer and their representatives sent a further submission and broke the arguments into five headings, as follows:

1. XXXXXXXXXX :

ACo asserts that case law requires that two forms of repayment be separately respected for tax purposes. They mention Fonthill Lumber Ltd v R.,(81 DTC 5333) where the plaintiff borrowed $103,950 from the Ontario Development Corporation under terms whereby half of the loan was repayable (referred to as the "term monies") and the other half was forgivable provided the plaintiff met certain terms of the condition (the "demand monies"). "XXXXXXXXXX ".

2. XXXXXXXXXX :

ACo also argues that a contribution requires a donative intent and that the ordinary meaning of "contribution" implies a donative intent. ACo noted that it was decided in GTE Sylvania Canada Limited v The Queen (1974 DTC 6673) that a tax concession, which allowed a deduction for amounts invested in new capital, was not "a grant, subsidy or other assistance" within the meaning of those words in calculating the capital cost of the equipment. This was predicated upon the ejusdem generis rule of construction whereby the specific words "grant" and "subsidy" do not introduce changes of a different character in the general words, "or other assistance".

3. XXXXXXXXXX :

ACo submits that, in their view, the compulsory repayment obligation creates a loan and the terms of the Agreement regarding the Compulsory Repayment constitute a normal commercial arrangement. Further, ACo states that paragraph 12(1)(x) does not include a loan other than a forgivable loan and argues that the Radio Engineering case has no application to amounts which are unconditionally repayable.

4. XXXXXXXXXX :

In their reading of CCLC Technologies Inc. v The Queen ( 96 DTC 6527 (FCA)), ACo does not agree that the case supports the XXXXXXXXXX TSO's contention that any arrangement which is not commercially motivated is government assistance; in their view, the holding in that case is simply inapplicable to the loan funding which is absolutely repayable. ACo believes that it was the conditional nature of repayment which was the deciding factor, not the non-commercial nature of the agreement.

5. XXXXXXXXXX :

TPC has a guarantee by ACo's parent and there are numerous events of default and obligations in the Agreement.

Our Comments:

We have reviewed the Agreement and did not see any mention of the word "loan". The announcement of the support to ACo (Industry Canada's reference submitted to us in part XXXXXXXXXX of the binder (marked as reference #XXXXXXXXXX )), refers only to a contribution. In the last paragraph of that page, it is stated "XXXXXXXXXX ." In the Backgrounder dated XXXXXXXXXX , it is stated "XXXXXXXXXX ."

We have also reviewed the Agreement and in Article XXXXXXXXXX , entitled "XXXXXXXXXX ", we note that ACo agrees to repay the Contribution to the Minister in accordance with Schedule XXXXXXXXXX . ACo must repay not less than $XXXXXXXXXX in variable repayments. Under the Agreement, "Contribution" is defined as the funding in Canadian dollars by the Minister. As mentioned in the previous paragraph, the word "loan" is not mentioned anywhere in the Agreement, and as mentioned below, paragraph XXXXXXXXXX of Schedule XXXXXXXXXX specifically states that "XXXXXXXXXX ". Schedule XXXXXXXXXX , which contains the definitions, states that "Federal Support" has the same meaning as Contribution.

The issue, as we understand it, is whether the repayable portion of the contribution (the first $XXXXXXXXXX ) is a loan. In our view, a loan would require that money be lent and later required to be returned with or without interest, subject to a loan agreement (either written or oral) which would govern the payment terms. No separate loan agreement exists to justify a $XXXXXXXXXX loan repayable as claimed by ACo, and with that large an amount, we would expect such an agreement, although the Agreement itself under Article XXXXXXXXXX and Schedule XXXXXXXXXX sets out a repayment obligation and a schedule of payments.

We would also expect that a relationship of lender and borrower between the parties be created. It does not appear that ACo borrowed any money from Industry Canada; rather ACo received a contribution or assistance and part of the funds that ACo received is required to be repaid at no interest for a term that extends to XXXXXXXXXX years from the date of the initial instalment of the Contribution.

The representatives, XXXXXXXXXX , have attempted to define the term "loan" and have quoted from Canada Deposit Insurance Corp. v Canada Commercial Bank, 73 Alta. LR (2d) at paragraph 40 as follows:

"...A "loan" is the lending of money with the expectation that the money will be repaid...."

The TSO raises the point that the Agreement was not made as a commercial loan, it was only made as a government contribution, of which $XXXXXXXXXX must be repaid. There is only expectation that half the amount of the Contribution will be repaid. Further, paragraph XXXXXXXXXX of Schedule XXXXXXXXXX of the Agreement, is entitled 'XXXXXXXXXX , and clearly states just that, i.e., that "XXXXXXXXXX ". There are, however, repayments required under Schedule XXXXXXXXXX of the Agreement.

XXXXXXXXXX

XXXXXXXXXX

It has been the position of ITRD XXXXXXXXXX that all the various types of receipts received by taxpayers under TPC contracts are government assistance. The definition of government assistance is broad. The contracts do not contain ordinary commercial terms and since the government is not making an ordinary commercial investment, the government is providing assistance. The main objective of TPC is the advancement and support of government initiatives and not to engage in a business investment for profit. In our view, the definition of government assistance is broad enough to include contributions received from TPC.

In addition, the term "government assistance", as used in section 127 of the Act, is defined in subsection 127(9) thereof as follows:

"government assistance" means assistance from a government, municipality or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance or as any other form of assistance other than as a deduction under subsection (5) or (6);

We have previously opined in technical interpretation 2002-0109835, "to the extent that a government is not making an ordinary commercial investment in respect of contributions that it makes to the taxpayer, the government would be providing "assistance" within the definition of "government assistance" in subsection 127(9) of the Act".

In response to the 5 arguments advanced by ACo, we offer the following:

1. XXXXXXXXXX :

The agreement in Fonthill Lumber referred to a loan agreement with terms reflecting two loans such that one half was repayable at interest in regular instalments while the other half was borrowed money without interest and was forgivable. Both forms were loans; in the case at hand, we are of the view that there is only one Contribution with a repayable portion.

2. XXXXXXXXXX :

ACo also argues that the contribution requires a donative intent and uses the Federal Court case GTE Sylvania to consider that the ordinary meaning of "contribution" implies a donative intent. In our view, what seems to be overlooked is that there was another ground upon which the GTE Sylvania decision was based. The province reduced taxes to companies which met prescribed conditions under provincial legislation; that differed from a "grant, subsidy" and was not "other assistance" within the meaning of those words in paragraph 20(6)(h). The ejusdem generis rule was also relevant to the case but this was later overcome in the amendment effected in subsection 13(7.1). In addition to the words "grant" and "subsidy", the following words: "forgivable loan, deduction from tax, investment allowance" were introduced after "grant, subsidy" and before general words reading "or as any form of assistance". The words in subparagraph 12(1)(x)(iv) "...as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance,..." were addressed in Iron Ore Company of Canada v The Queen (2001 DTC 5411) in paragaph 6 and 7 where the judge ruled that the associated words rule does not apply to subparagraph 12(1)(x)(iv) of the Act. That case considered the inclusion under subparagraph 12(1)(x)(iv) of the Act to amounts received as "assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance" (essentially the same test contained in the above definition of "government assistance") with it being indicated in part, that:

"the words "any other form of assistance" found in the subparagraph clearly refer to an amount received "as assistance" and broaden the form of assistance enumerated in the subparagraph." This discards the application of the norscitur a sociis rule which in English is the "associated words rule".

3. XXXXXXXXXX :

XXXXXXXXXX . However, we agree with the TSO that Radio Engineering Products Ltd. is on point. In that case, the Federal Court held that the character of the payment of the $450,000 was that of a contribution towards the costs of the project, and although there were provisions for repayment and contingencies, it was not a loan or an advance in the nature of a loan of capital or a payment on capital account. That is, although a contribution may have provisions for repayments, it may not be a loan.

4. XXXXXXXXXX ":

See our comments under heading 2 "XXXXXXXXXX " above.

In our view, in CCLC Technologies it was not the conditional nature of the repayment that was the deciding factor. The decision clearly states that the arrangement was government assistance and that whatever public policy merits the agreement might have, it was not an arrangement that a business would enter into to advance its business interests. The court held that where public authorities advance money for the same reason as private business, that is, to advance business interests, the payments do not constitute "government assistance" under the Act. Still, in our view, in a situation where the contribution by a government constitutes a bona fide loan, it can nevertheless be considered "government assistance", where the contribution lacks normal commercial arrangements.

5. XXXXXXXXXX :

ACo states that the terms of the Agreement regarding the compulsory repayment do in fact constitute a normal commercial arrangement. We do not agree with that statement. In our view, a Contribution of $XXXXXXXXXX , with a requirement that only half be repaid at XXXXXXXXXX % interest over a term of XXXXXXXXXX years, would not be considered a normal commercial arrangement.

Accordingly, we support the inclusion of the Contribution under paragraph 12(1)(x) of the Act and agree with the TSO that a deduction is available under paragraph 20(1)(hh) of the Act in respect of the repayment of government assistance that was previously included in income under paragraph 12(1)(x) of the Act, provided that the taxpayer is under a legal obligation to repay such an amount.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Celine Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the client.

R. Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch