Litigation Costs in Course of Commercial Activity? – Sas Ansari

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Litigation Costs in Course of Commercial Activity?

OneEnergy Inc v The Queen, 2016 TCC 230

This was a Rule 58 application asking the court to determine a question of law or mixed fact and law prior to a hearing.  This is quickly becoming a cost-effective way of settling tax disputes between the Minister and Taxpayers.

At issue was whether the legal costs incurred were in the course of commercial activity, as required by the Excise Tax Act, paragraph 141.1(3)(a).


The Court reviewed the relevant statutory provisions (ETA ss 123(1) “commercial activity”, 141.1(1)(a); 141.1(3)).  Justice Campbell J Miller concluded that the provision brings “into the purview of a “business carried on” a one-shot disposition such as a Spectrum Sale” (para 5).  If the legal fees are in connection with the Spectrum Sale, they are eligible for Input Tax Credits. That said, the Court held that  any connection is at best tenuous (para 6).

The Court referred to the key dates in the agreed statement of facts, where the disputed legal fees were incurred well after the Spectrum Sale took place (para 8).  The legal fees were incurred in respect of claims for damages against directors for breach of their fiduciary duties, looking for misappropriation of proceeds from the Spectrum Sale (paras 8-9).

Justice Campbell J Miller, in his usual style, engaged in a detailed statutory interpretation analysis to determine whether the provision is to be interpreted broadly or narrowly.  The court identified the applicable principle in Nowegijick v R., [1983] 1 SCR 29 – textual, contextual, and purposive analysis (see also  Mantini v Smith Lyons LLP; [2003] OJ No. 1831 (ONCA)Kitchener-Waterloo Real Estate Board Inc v Ontario Regional Assessment Commissioner, Region No 21, 1986 CarswellOnt 691 (HCJ)).

The Court noted that the phrase “in connection with” is to be interpreted broadly, as requiring some relationship between the two things of activities – Kitchener-Waterloo Real Estate Board Inc v Ontario Regional Assessment Commissioner, Region No 21, 1986 CarswellOnt 691 (HCJ), para 32).  Similarly, the Supreme Court of Canada in Sarvanis v R, 2002 SCC 28, held that the phrase “in respect of” signals an intent to convey a broad set of connections, being one of the widest possible phrases that can be used to express a connection between or among items.

The phrase “in connection with” does not require or introduce a need for an integral connection, it must still be read in context and does not allow the remotest of links to be sufficient (for example links only connected by “but for”) (para 17).  Here, the Court held that chasing after money directors apparently absconded with, is a need that would have arisen irrespective of the spectrum sale (para 19).   The Court agreed with the reasoning in BJ Services Co Canada v R[7], holding that even a textual interpretation of the provision does not provide for tenuous links (para 21).  Here, there was no commercial connection based on a commercial expectation (para 21).

ETA s 141.1(3)(a) is meant to provide for the ability to claim input tax credits during the start-up or wind-up of business operations, NOT wind-up of a corporation (para 22).  The business operations must be considered separate from the corporate existence that operates the business. The connection is to be in the ordinary course of business – the connection of making supplies of goods or services (para 24). A sufficient connection does not exist simply because legal costs are incurred in the aftermath of the termination of commercial activities, with no link to the entering into, implementation, or enforcement of that commercial activity (para 34). The Court concluded:

[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.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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