https://decisia.lexum.com/fca-caf/decisions/en/item/307455/index.do
Onenergy Inc. v. Canada (March 19, 2018 – 2018 FCA 54, Webb (author), Near, Gleason JJ. A.).
Précis: The taxpayer (formerly known as Look Communications Inc. and sometimes referred to in the decision as “Look”) commenced proceedings to recover $14,700,000 in what were alleged to be excessive payments made to former executives. The proceedings were commenced after it terminated its telecommunications business and was no longer making taxable supplies. The sole issue before the tax court was whether subparagraph 141.1(3)(a) of the Excise Tax Act (the “Act”) deemed the litigation costs to have been incurred in the course of a commercial activity. The question was posed to the Tax Court in an application under Rule 58 of the Tax Court of Canada Rules (General Procedure) (“Rule 58”). The Tax Court answered in the negative and the taxpayer appealed to the Federal Court of Appeal. The Federal Court of Appeal held that there was a direct connection between the sale and winding up of the taxpayer’s business and the litigation expenses. As a result the appeal was allowed with costs since the Tax Court should have answered the question posed in the affirmative.
Decision: The taxpayer sold its business and commenced winding up its enterprise. In the course of that activity and after it had ceased making taxable supplies it commenced proceedings to recover $14,700,000 in what were alleged to be excessive payments made to former executives. The sole question at issue in the Tax Court and in the Federal Court of Appeal was whether subparagraph 141.1(3)(a) of the Act deemed the litigation costs to be incurred in the course of a commercial activity:
[27] Subsection 141.01(2) of the Act provides that:
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(2)Where a person acquires or imports property or a service or brings it into a participating province for consumption or use in the course of an endeavour of the person, the person shall, for the purposes of this Part, be deemed to have acquired or imported the property or service or brought it into the province, as the case may be,
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(2)La personne qui acquiert ou importe un bien ou un service, ou le transfère dans une province participante, pour consommation ou utilisation dans le cadre de son initiative est réputée, pour l’application de la présente partie, l’acquérir, l’importer ou le transférer dans la province, selon le cas, pour consommation ou utilisation :
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(a) for consumption or use in the course of commercial activities of the person, to the extent that the property or service is acquired, imported or brought into the province by the person for the purpose of making taxable supplies for consideration in the course of that endeavour; and
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a) dans le cadre de ses activités commerciales, dans la mesure où elle l’acquiert, l’importe ou le transfère dans la province afin d’effectuer, pour une contrepartie, une fourniture taxable dans le cadre de l’initiative;
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(b) for consumption or use otherwise than in the course of commercial activities of the person, to the extent that the property or service is acquired, imported or brought into the province by the person
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b) hors du cadre de ses activités commerciales, dans la mesure où elle l’acquiert, l’importe ou le transfère dans la province :
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(i) for the purpose of making supplies in the course of that endeavour that are not taxable supplies made for consideration, or
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(i) afin d’effectuer, dans le cadre de l’initiative, une fourniture autre qu’une fourniture taxable effectuée pour une contrepartie,
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(ii) for a purpose other than the making of supplies in the course of that endeavour.
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(ii) à une fin autre que celle d’effectuer une fourniture dans le cadre de l’initiative.
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The Tax Court, in a Rule 58 application, held that such costs were not deemed to be incurred in the course of a commercial activity. The offshoot of that finding was that they did not generate any ITCs. The Taxpayer appealed to the Federal Court of Appeal which disagreed with the conclusions of the Tax Court:
[32] In this case, even though Look had ceased making taxable supplies when it commenced the litigation against the Former Executives, it was pursuing these Former Executives for amounts that Look was claiming were excess compensation paid to these persons. These amounts would have been paid (rightly or wrongly) for services rendered while Look was carrying on a commercial activity or while Look was terminating its commercial activity.
[33] In both situations (litigation to establish and collect the accounts receivable and litigation to establish the appropriate amount payable for remuneration and collect any overpaid remuneration) the underlying activity which gave rise to the litigation was completed before the registrant stopped making taxable supplies. However, the dispute relating to the amount payable (either to or by the registrant) commences after the registrant has ceased making taxable supplies. In my view, since the necessary connection would be there for legal services to collect amounts owing to the registrant, it should also be there for legal services for amounts payable by the registrant.
[34] Therefore, in my view, there would be a connection between the litigation to establish (after the registrant has stopped making taxable supplies) that there was an amount of overpaid compensation (and collecting that amount) and the termination of the commercial activity of the registrant because that compensation would be related to services rendered while the registrant was making taxable supplies. Therefore, there is a connection between the termination of Look’s commercial activity and the legal services acquired in relation to the litigation against the Former Executives that would be sufficient to permit Look to claim the input tax credits for the GST or HST paid in relation to those legal services.
As a result the appeal was allowed with costs to the taxpayer.