October 07, 2011

Her Majesty the Queen (Appellant) v. CCLC Technologies Inc. (Respondent)

96 DTC 6527
Federal Court of Appeal
September 19, 1996

(Court File No. A-801-95.)

Refundable investment tax credit (“ITC”) — Corporate taxpayer incurring scientific research and experimental development expenditures in 1987 on a technological project under a Coal Research Agreement with the province of Alberta — Whether payments made to taxpayer by Alberta under the Agreement “government assistance”, or “any other form of assistance”, precluding taxpayer from claiming refundable ITC claimed by it for 1987 — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 12(1)(x), 37(1)(a), 37(1)(b), 127(9) and 127(11.1).

On April 1, 1986, the corporate taxpayer entered into a Coal Research Agreement with the province of Alberta concerning a coal and heavy oil project (“the Agreement”). During its 1987 taxation year, the taxpayer incurred scientific research and experimental development expenses on the project which it deducted under paragraphs 37(1)(a) and (b) of the Act in computing its income for 1987. During 1987, the taxpayer also received some $725,000 from Alberta under the terms of the Agreement, in addition to becoming entitled thereunder to a further sum approaching $1.5 million. In reassessing the taxpayer for 1987, the Minister disallowed the refundable investment tax credit (“ITC”) which it had claimed, alleging that the amounts paid to the taxpayer by Alberta under the terms of the Agreement fell within the phrase “other form of assistance” in subparagraph 12(1)(x)(iv) of the Act, as well as within the phrase “government assistance” in paragraph 127(11.1)(c) of the Act. (Sub-paragraph 12(1)(x)(iv) includes in income from a business amounts received from a government comprising “a grant, subsidy, forgivable loan, deduction from tax, allowance, or any other form of assistance in respect of the cost of property or in respect of an expense”. Paragraph 127(11.1)(c) reduces, for ITC purposes, the amount of any qualified expenditure by the amount of any “government assistance” in respect of the expenditure, as defined in subsection 127(9)). The taxpayer’s appeal to the Federal Court-Trial Division was allowed (95 DTC 5685) and the Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was allowed. Contrary to the findings of the trial judge, the Agreement did not establish an ordinary business relationship between the parties. Under its terms Alberta was required to sell its equity interest in the project to the taxpayer if it became commercially successful. Accordingly, Alberta’s payments thereunder constituted both “government assistance” (paragraph 127(9) of the Act), and “any other form of assistance” (sub-paragraph 12(1)(x)(iv)). The second question concerned sub-paragraph 12(1)(x)(viii) of the Act. (That sub-paragraph includes in business income any payment mentioned in sub-paragraph 12(1)(x)(iv) to the extent that it may not reasonably be considered as having been made “. . . in respect of the acquisition by the payor . . . of an interest in the taxpayer, his business or his property . . .”.) Under the terms of the Agreement, if the project had been successful, Alberta would have acquired no lasting property rights in a going concern. Hence sub-paragraph 12(1)(x)(iv) was inapplicable. The Minister’s reassessment was affirmed accordingly.