Principal Issues: Position of the CRA following the Federal Court of Appeal decision in CAE Inc. v. Canada, 2022 FCA 178.
Position: General comments provided.
Reasons: Question of facts.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
6. CAE Inc. v. Canada (footnote 1) and application of subsection 127(18) and paragraph 12(1)(x) I.T.A.
On May 25, 2023, the Supreme Court of Canada dismissed CAE Inc.'s application for leave to appeal the Federal Court of Appeal's judgment of October 19, 2022.
The judgment of the Federal Court of Appeal and the precedent set by the Tax Court of Canada have raised a number of questions in the tax community regarding the treatment of loans granted with favorable conditions made by various government entities. The concern is that loans, the principal of which must be repaid by the corporations, will be considered government assistance for the purposes of subsection 127(18) and paragraph 12(1)(x).
For example, a loan with no interest or at a below-market rate may be granted to start-up companies or corporations to encourage specific projects. Another example would be a loan that bears interest, but no principal is due to be repaid for five years. In these situations, the loan remains an obligation of the company and must be repaid in full. There is no term in the loan agreement, meaning that the loan does not have to be repaid. It is only the absence of interest or an obligation to repay the principal that is a form of government assistance for the company receiving it. The loan itself is not government assistance.
Question to CRA
We wish to understand the CRA's position and the scope of the judgment rendered by the Federal Court of Appeal in the CAE Inc. case, particularly regarding the type of loan given above as an example.
CRA's Response
First, it should be noted that the rights and obligations of the parties under the financial contribution agreement at issue in CAE Inc. differed substantially from those that normally characterize a lender-borrower relationship, regardless of the specific terms and conditions of repayment of the contributions. In the context of agreements of this nature, it seems to us that it is appropriate to use the "ordinary business arrangement" test developed in the jurisprudence (notably in Immunovaccine Technologies Inc. v. Canada (footnote 2) to determine whether the amount received constitutes government assistance for purposes of paragraph 12(1)(x).
Whether the amount received constitutes a form of assistance described in paragraph 12(1)(x) is a question of fact that requires an analysis of all the facts and circumstances relating to a particular situation, including the intention of the parties.
Nancy Charlebois
November 2, 2023
2023-098283
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 2022 FCA 178 ("CAE Inc.").
2 2014 FCA 196.