ONEnergy – Federal Court of Appeal finds that litigation services to recover fraudulent bonuses following a business’ termination were acquired in connection with that business

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. Webb JA found that Look was entitled to input tax credits for the HST on its related legal fees, as the litigation servicers were acquired “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a). In arriving at this characterization, he reasoned that the claim was essentially a claim for recovery of overpaid remuneration for services that had been rendered while Look was making taxable supplies, so that it did not matter that the legal fees were incurred after the business had ceased. The more specific provision, s. 141.1(3), effectively overrode s. 141.01(2), which arguably required that there still be a prospect of making taxable supplies at the time of acquiring the service in question.

Neal Armstrong. Summary of ONEnergy Inc. v. Canada, 2018 FCA 54 under ETA s. 141.1(3)(a) and s. 141.01(2).