The trustee in bankruptcy ("Richter") for Castor Holdings Ltd. (whose audited financial statements had disclosed $1.8 billion in assets and who essentially only invested in high-yield loans) was only able to recover $25 million when the liquidation of the Castor estate was largely completed in 1994. In addition to suing - in its capacity of trustee in bankruptcy for the Castor estate (the "Estate") - the former Castor auditors ("C&L") for $40 million in damages sounding in contract, Richter began a "litigation support business" of providing assistance to the creditors (including hiring professionals and experts) in connection with their action sounding in negligence against C&L for $800 million in damages. The creditors lent money to Richter on a non-interest-bearing basis to fund the related costs of Richter (mostly fees of professionals and experts). It was understood that to the extent that, on settlement of the litigation, Richter was not able to recover its costs out of the proceeds of an award made to it on its own claim, Richter at such time would invoice the creditors for its remaining unrecovered costs, to be paid by set-off against the loans. Most of the Richter costs were incurred respecting a test case brought by one of the creditors ("Widdington"), which at the time of this GST case was still on-going.
In finding that it was reasonable for Richer to treat the bulk of its related GST costs as being creditable, Archambault J stated (at para. 38):
Given that Castor's main activities involved making exempt supplies, the activities of the Trustee would be deemed [by s. 141.1(3)(b)] not to be carried on in the course of commercial activities. Therefore, the costs of the litigation support services that the Estate enjoyed in prosecuting its own claim against C&L would not qualify for ITCs. … However, the portion of the services and properties in question that was acquired for the purpose of prosecuting the claims of the Participating Creditors would be considered to have been acquired in the course of commercial activities. … The allocation by the Estate of the use of its inputs between its taxable supplies and its other activities (exempt supplies) appears to me to be a fair and reasonable one and it complies with subsection 141.01(5)... .
See summary under s. 123(1) - business.