Words and Phrases - "forgivable loan"
18 July 2006 Internal T.I. 2006-0184431I7 F - Prêt d'un gouvernement
In finding that a participating loan to the taxpayer (Xco) was not a forgivable loan, the Directorate stated:
[T]he [Loan] Agreement states that Xco shall repay the principal of the Loan in full and the capitalized interest in annual repayments … [and] specif[ies] that repayments will be based on the income generated but that any amount still owing on the date of the XXXXXXXXXX anniversary of the first disbursement of the Loan will then become due. Based on those terms, we are of the view that there was no doubt that the Loan was repayable at the time it was made. It was therefore a true and unconditional loan, and not a forgivable loan subject to paragraph 12(1)(x). Consequently … the $XXXXXXXXXX received by Xco under the Agreement is considered a loan for the purposes of the Act and is not taxable. …
In general, if paragraph 12(1)(x) is not applied at the time a loan was made, the loan would come within section 80 at the time it is settled or extinguished.
PCI Géomatics Entreprises Inc. v. Agence du revenu du Québec, 2019 QCCQ 2688, rev'd 2020 QCCA 1342
In order to encourage the SR&ED activities of the plaintiff (“PCI”) in the field of geomatic solutions, the Federal Minister of Industry made a $6.6M non-interest-bearing loan to PCI through the Strategic Aerospace Defence Initiative (SADI) program. Upon signing the loan agreement (the “SADI Agreement”), PCI chose the second of the following two options:
a) A fixed repayment schedule equal to 1.5X the total loan amount; or
b) A variable repayment schedule equal to 1.65X the total loan amount based on annual growth of business revenues.
Accordingly, PCI was required each year to repay an amount equal to 1/15 of the $7.6M amount advanced multiplied by an adjustment factor which was: 0 if annual growth in revenues was negative; 1 if such growth was positive but not exceeding 3%; and ranged up to 1.5 for higher growth rates.
S. 1029.8.18 of the Taxation Act reduced PCI’s total qualified expenditures available for the Quebec SR&ED tax credit for a particular taxation year by any “government assistance” attributable to such expenditures, whose definition included a “forgivable loan.”
Before concluding that the loan was a repayable loan rather than a forgivable loan, Dortélus JCQ noted that repayments were established as a function of the growth in revenues, PCI was required to provide security for the loan and was subject to various restrictive covenants under the loan. He then stated (at paras. 125-128, TaxInterpretations translation):
The situation was more one of a sort of “joint venture” than of government assistance. The fact that there existed a certain uncertainty as to the frequency of repayment of the loan which, under the terms agreed to by the parties, depended on fluctuations in the PCI revenues does not suffice to qualify the amounts advanced as government aid.
No clause for extinguishing the debt after 15 years appeared in the agreement. The submissions of the ARQ on this point are pure speculation. …
PCI justifiably submitted that the position adopted by the ARQ, that the SADI Agreement was a forgivable loan given that the required repayments were a function of the growth in future revenues (so that the obligation to repay depended on the occurrence of an uncertain and future event), was a position which was relied upon in the dissent and rejected by the majority in McLarty.
Applying the position of the majority in McLarty, and for the reasons previously expressed, the ARQ position has not been sustained.