Tax Court of Canada


Income Tax

Tax Credits

Experimental development tax credits denied where requirement for arm’s length dealings not satisfied

S, US citizen and resident, acquired intellectual property rights to aircraft. S attempted to have aircraft certified. S alleged that he was approached by financing corporation and Industry Canada to carry out certification work and subsequent production of certified aircraft in Quebec, and claimed that he was advised by that he could become eligible to receive refundable scientific research and experimental development tax credits (ITCs) if development work was carried out in Canada by Canadian controlled private corporation (CCPC). S established corporate structure for purpose of allowing S to gain access to ITCs. Corporation that initially took on certification work in Canada went bankrupt and S acquired its assets, including database pertaining to certification work for restarting certification in Canada. In 2009 S caused A Corp. to be incorporated as Nova Scotia unlimited corporation. S Corp, US corporation controlled by S, became sole shareholder of A Corp. A Corp entered into agreement with S Corp to provide services to complete prototyping and certification of aircraft. Intellectual property rights resulting from A Corp’s work became property of S and S Corp. A Corp’s prototyping and certification expenses were to be reimbursed by S Corp. A Corp was required to remit amount of refundable ITCs that it received to S Corp. Four months after execution of agreement, A Corp issued additional common shares such that from that date onward, majority of its common shares were directly and indirectly held by persons residing in Canada. A Corp recorded full amount of refundable ITC claim for 2011 but failed to show offsetting liability to S Corp. Amount of A Corp’s refund claim exceeded retained earnings. A Corp’s financial statements for 2009 and 2010 were prepared on similar basis. Material, equipment and tools acquired by A Corp and funded by S Corp were to become property of S Corp on completion of certification work. A Corp claimed refundable ITCs for 2009 through 2011 taxation years. Minister disallowed refundable ITCs on basis that A Corp was not CCPC. A Corp appealed. Appeal dismissed. Requirement for arm’s length dealings was not satisfied. Evidence showed that A Corp was economically dependent on S and/or S Corp. It was hard to conceive that Canadian resident shareholders would have exercised voting rights independently of S’s wishes.

Aeronautic Development Corp. v. R. (2017), 2017 CarswellNat 759, 2017 TCC 39, Robert J. Hogan J. (T.C.C. [General Procedure]).


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