https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/344772/index.do
Borealis Geopower Inc. v. The Queen (September 13, 2018 – 2018 TCC 189, Campbell J.).
Précis: The factual basis for this case is somewhat complex technically:
[2] The Appellant is a privately owned Canadian corporation involved in geothermal power exploration, development and utilization in Canada. The Appellant was involved in 2014 in a project involving extensive field exploration, scientific analysis and proof of a geothermal resource at its properties in British Columbia. The Appellant received government assistance from Sustainable Development Technology Canada (“SDTC”) in respect to this project.
[3] SDTC is a “not for profit foundation constituted for the purpose of fostering the development and adoption of technologies that contribute to Sustainable Development Technologies infrastructure in Canada by contributing to the rapid development, demonstration and pre-commercialization of technological solutions which address climate change, clean air, clean water and clean soil;…”. (Exhibit A-1, Contribution Agreement, page 3, paragraph 2)
[4] The Contribution Agreement between SDTC and the Appellant set out the terms and conditions respecting this project. In August, 2014, the Appellant received an advance of $528,560.00 from SDTC. The Appellant deposited the cheque into a trust account established for this purpose at CIBC. The Minister of National Revenue (the “Minister”) determined that this project met the definition of Scientific Research & Experimental Development (“SR&ED”), pursuant to subsection 248(1) of the Income Tax Act (the “Act”) and this is not at issue in this appeal.
[5] On December 23, 2015, the Appellant late filed its income tax return for the taxation year ending December 31, 2014. However, the Appellant was required to file its return on July 2, 2015. In its return, the Appellant reported net taxable income of over $91,000.00, claimed the SR&ED Investment Tax Credit (“ITC”) and also filed a SR&ED Expenditures Claim Form. The Appellant’s position is that the SDTC funds were not received nor were they entitled to be received in 2014 as the funds were in a trust account. Consequently, it did not include the funds advanced from SDTC in its 2014 income tax return. Therefore no tax was owing by the Appellant due to the tax credit.
[6] After an audit review, the Minister accepted the SR&ED expenditures of approximately $373,000.00 but the Appellant was assessed on the basis that it had received government assistance of $528,560.00 from SDTC in the 2014 taxation year. Due to the Minister’s inclusion of this amount in respect to the 2014 taxation year, the allowable SR&ED expenditures were reduced and a recapture of SR&ED expenditures in the amount of $188,704.00 was assessed. As a result, the Minister made total adjustments to the Appellant’s net income in the amount of $494,066.00. In addition, an ITC in the amount of $108,657.00 was denied due to the inclusion of the government assistance amount. (This amount should actually be $102,497.00 instead of $108,657.00 as the Appellant did not consider the receipt of non-government assistance of $17,600.00 in calculating the qualified expenditures for ITC purposes). All of this resulted in tax payable of $67,907.00, a repeat late filing penalty of $13,581.40 together with accrued interest on the outstanding tax arrears.
Notwithstanding that complexity the question boiled down to whether the advance of $528,560.00 from SDTC was taxable in 2014, notwithstanding that it was paid in trust to the Appellant.
Justice Campbell concluded that the degree of control exercised by the Appellant over the advance from SDTC was sufficient to bring the advance into income in 2014. As a result the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.
Decision: In Justice’s Campbell’s view the issue turned upon the degree of control that the Appellant exercised over the advance from SDTC:
[24] Applying the foregoing to the facts before me, I conclude that the Appellant received the SDTC funds in the amount of $528,560.00 in the 2014 taxation year. SDTC issued a cheque to the Appellant in 2014. It was issued despite the fact that the second condition precedent to the advance of that amount had not and never has been fulfilled (Schedule C.3, Contribution Agreement). At paragraph 3.5 of the Contribution Agreement, the obligation of SDTC to make an instalment payment to the Appellant:
…is subject to the fulfillment, or the waiver by SDTC, in its sole discretion, of each of the following conditions on or before the time of each such payment:
a) Accuracy of Representations and Warranties….
b) Performance. The Eligible Recipient shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by the Eligible Recipient prior to or on the Payment Date; and
c) Disbursement….
(Emphasis Added)
[25] According to the wording in this provision, SDTC could advance and transfer an instalment under the Contribution Agreement prior to the completion of the Milestone objective established in the Agreement. This is what occurred here. When the Appellant received the advance, the funds were deposited to a CIBC trust account. On cross-examination, Mr. Timothy Thompson, the current Chairman of Borealis Geopower, testified that the funds were left in the trust account “until such a time as we were allowed to withdraw”. (Transcript, page 38, lines 21-22). The Contribution Agreement however is silent respecting Milestone achievements once such an advance is made and it is also silent in respect to advances that are deposited to a trust account set up by an eligible recipient.
[26] The Appellant had sole access to the funds in this trust account. It had the authority to deposit and withdraw. There was no trust agreement between SDTC and the Appellant. There may have been an informal agreement respecting those funds but there was no obligation for the Appellant to notify SDTC when it transferred amounts from the trust account to another account. (Transcript, page 40). The Appellant notified SDTC “…occasionally when upon their request what the balance was…” (Transcript, page 40, lines 21-22). In fact it does not appear that SDTC placed any formal restrictions on the use of the remaining funds in this trust account until September 16, 2016 when in a letter to the Appellant, it instructed that no further funds were to be withdrawn from the account without written consent from SDTC. (Exhibit A-3).
[27] Further evidence of the control that the Appellant exercised over the funds in the trust account was Mr. Thompson’s testimony in re-direct where he stated that withdrawals were made as the work continued but at year end some money was redeposited because of overdraws. “…we put ourselves in the position where we had taken less than what we were obliged, and that’s kind of how we did it.” (Transcript, page 48, lines 13-15).
[28] In accordance with the ordinary dictionary meaning of “receive”, the Appellant physically acquired and accepted an advance of funds by way of a cheque from SDTC. The advance was given prior to the completion of the first Milestone and no conditions were superimposed on the transfer. The Appellant accepted delivery. It had possession of the cheque. It was the Appellant’s decision to open a trust account and deposit those funds to that account. It exercised control over the funds in relation to expenditures in the work project, when to withdraw and how much to withdraw.
Justice Campbell concluded that the degree of control exercised by the Appellant over the advance from SDTC was sufficient to bring the advance into income in 2014. As a result the appeal was dismissed. There was no order as to costs since this was an informal procedure appeal.