ONEnergy Inc. v. R. - TCC: No ITCs for legal fees incurred 2 years after sale of business

ONEnergy Inc. v. R. - TCC:  No ITCs for legal fees incurred 2 years after sale of business

ONEnergy Inc. The Queen (October 14, 2016 – 2016 TCC 230, C. Miller J.).

Précis:   The taxpayer, formerly known as Look Communications Inc. (“Look”), sold its business in 2009 (the “Spectrum Sale”).  In 2011 it commenced action against its former directors to recover roughly $15 million in payments made to them for “equity cancellation” and as bonuses.  Look claimed ITCs on the legal fees in connection with the litigation.  CRA denied the ITCs on the basis that the legal fees were not incurred “in the course of a commercial activity pursuant to subparagraph 141.1(3)(a) of the Excise Tax Act” ( the Act).  The point came before the Tax Court on an application under Rule 58 of the Tax Court of Canada (General Procedure) Rules.

The Court held that the commercial activities of Look ceased once its business was sold in 2009 and that the legal fees were therefore not part of a commercial activity and not subject to ITCs.  There was no award of costs since neither party sought an award of costs.

Decision:   The point before the Court was extremely narrow and the Court found the taxpayer’s position not to be persuasive:

[21]        Keep in mind, I am still just looking at this from a textual perspective, which, on its face, given jurisprudence’s acceptance of a relatively broad view of the term, would appear to link, albeit tenuously, the legal services to the commercial activity of the Spectrum Sale, thus giving it the requisite commercial nature. But is it of that nature? I do not believe it is. In line with my thinking in BJ Services, I conclude there is no commercial expectation that directors on winding up a corporation will abscond with funds and that the cost of such contingency is somehow worked into the cost of the supply. This is unlike the situation in BJ Services where I was satisfied the activity went to “the company’s ability to sustain a profitable business”. Not so here. The business of Look was effectively wound up before there was any activity necessitating the acquisition of legal services. What was not wound up was the corporation itself. This was not a matter of incurring legal fees to collect accounts receivables, which clearly are part of the termination of the business. This expense is as close to what I would consider a “personal expense” in a corporate context as I can imagine. The business is over. Going after greedy directors, who may have lined their own pockets, to redistribute monies recovered from them to shareholders has no connection to where those monies came from. It matters not that the directors concocted their plan when the possibility of significant proceeds from a sale became real. So what? The activity to recoup arose from the directors actually taking the funds once in Look’s accounts. I conclude that even on a textual approach there is no link between the Spectrum Sale and the legal activity to go after the directors.

[35]        In summary, I distinguish between the termination of the business and the consequences flowing from such termination. I also distinguish between the wind up of the business and the wind down of the corporation. I emphasize it is the connection that is paramount, not the timing of the activity. And the connection must be one that on a textual, contextual and purposive interpretation recognizes the commercial expectation of a business supplying goods or services. In this case that means a connection between the litigation activity and the entering into, implementation of or enforcement of the Spectrum sale. There is simply no such connection.

[36]        Turning briefly to the second possibility, is it only necessary to connect the legal activity with the wind down of the corporation itself rather than the business of the corporation. I believe I have made clear throughout these Reasons that that is not sufficient. I would suggest that would run contrary to the very scheme of the Act. I find it is not necessary to explore this point further.

[37]        In conclusion, in answer to the question of the Determination whether, on the facts agreed to by the Parties and any other facts found by the Court, the Appellant is deemed to have incurred litigation costs in the course of a commercial activity pursuant to subparagraph 141.1(3)(a) of the Act, the answer is no. No costs were sought by either side and I make no award of costs.