J.D. Irving – Quebec Court of Appeal finds that servicing fees paid by a property user to the owner for services that it performed on behalf of the owner were not leasing revenues

A loss consolidation transaction involved a company (“IPPL”) in the Irving group of companies transferring, in December, its pollution control equipment on a rollover basis to an affiliated lossco, which then sold the equipment for $120M to the group profitco (“JDI”), which then claimed $120M of CCA and, in January of the next year, transferred the equipment back to IPPL on a rollover basis. The ARQ denied most of JDI’s $120M CCA claim on the basis that servicing fees of $1.2M that JDI earned from IPPL during its one month of ownership of the equipment were in substance leasing revenues. In particular, the ARQ appeared to be struck by the artificiality of the agreement between JDI and IPPL that JDI would accomplish its servicing of the equipment under its “services agreement” with IPPL by means of delegating to IPPL the performance of such services as its agent, in consideration for fees going in the opposite direction.

In rejecting the ARQ submission that IPPL did not validly operate the equipment on behalf of JDI, Mainville JCA stated (at paras. 43-44, 46):

[I]t is undisputed that a taxpayer may carry on a business through an agent. …

The fact that the agent and the principal are related companies does not change this principle. This was the case in Stubart … .

As the trial judge concluded, we are dealing with clear contracts and uncontradicted evidence that confirm that the designation of the transactions as services agreements does reflect their true legal effects. It is a principle of tax law that, in the absence of sham, recharacterization is only possible where the label attached to a transaction does not properly reflect its actual legal effects.

Neal Armstrong. Summary of Agence du revenu du Québec v. J.D. Irving Limited, 2022 QCCA 241 under Reg. 1100(17).