GOODS AND SERVICES TAX (GST) – Input tax credits – Commercial activities

GOODS AND SERVICES TAX (GST) - Input tax credits - Commercial activities

Appeal by the taxpayer, ONEnergy Inc., from a determination made by a Tax Court judge under Rule 58 of the Tax Court of Canada Rules that the appellant was not deemed to have incurred litigation costs in the course of a commercial activity pursuant to s. 141.1(3)(a) of the Excise Tax Act and thus not entitled to input tax credits for GST or HST paid in relation to legal costs. The appellant carried on a telecommunications business that was not successful. It proceeded to sell its band of 100 MHz of contiguous licence spectrum (Spectrum) and its CRTC broadcast license (License), which effectively terminated its telecommunications business. The appellant had a share option plan and a share appreciation rights (SARs) plan. These plans were cancelled and payments for the cancellation of the options and SARs, as well as bonuses, were made to the appellant’s former executives. The appellant’s shareholders opposed what they identified as excess payments to the former executives and commenced an action against the former executives to recover these payments. The Tax Court judge found that in applying a textual, contextual and purposive analysis to s. 141.1(3) of the Excise Tax Act, there was a difference between winding down a business and winding down a corporation. While he found that the Spectrum sale was part of the appellant’s commercial activities, the litigation against the former executives was not. The Tax Court judge also found that any connection between the litigation and the winding down of the corporation would not be sufficient to allow the appellant to claim input tax credits for the GST or HST paid in relation to the legal services provided in connection with the litigation against the former executives.

HELD: Appeal allowed. The Tax Court judge erred in finding that the amounts paid for legal services were “personal” and that there was no connection between the litigation and the source of the funds used to pay the former executives. The options, SARs and bonuses would have been part of the compensation or remuneration payable to the former executives. Although the legal basis for the claim against the former executives might be a breach of fiduciary duty, the result of that breach, if established, would be an overpayment of remuneration. Accordingly, the litigation should be characterized as a claim for overpaid remuneration. The remuneration would have been paid for services rendered as part of the appellant’s commercial activities or the termination of those activities and, therefore, not personal. Legal expenses related to employment matters, including litigation related to allegedly overpaid remuneration, were not personal expenses. The only source for the payment of the amounts in excess of $14 million to the former executives was the proceeds from the sale of the Spectrum and License. The amounts paid to the former executives were therefore inextricably linked to the sale of the Spectrum and License and there was a direct connection between the source of the funds (the proceeds from the sale of the Spectrum and License sale) and the litigation. There was a connection between the termination of the appellant’s commercial activity and the legal services acquired in relation to the litigation against the former executives that would be sufficient to permit the appellant to claim the input tax credits for the GST or HST paid in relation to those legal services. The determination made by the Tax Court judge was set aside.

Source : https://www.thelawyersdaily.ca/articles/6294/goods-and-services-tax-gst-input-tax-credits-commercial-activities-

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