Federal appeal | Tax | Goods and Services Tax | Input tax credits
Registrant announced that telecommunications business would be wound up and received approval for sale of assets. Registrant had share option plan and share appreciation rights plan (SAR plan), and between time sale was announced and closing of transaction, board of registrant cancelled all options and SARs and used valuation of $0.40 per share. Net proceeds from sale were $64 million and payments for cancellation of options and SARs and bonuses were made to former executives. Shareholders of registrant commenced action against former executives to recover amount they identified as excess payments. Registrant claimed input tax credit for legal fees. Tax Court judge determined that on question of whether, on facts agreed to by parties and found by court, registrant would be deemed to have incurred litigation costs in course of commercial activity pursuant to s. 141.1(3) of Excise Tax Act, answer was no. Registrant appealed. Appeal allowed. Tax Court judge made palpable and overriding error in finding that amounts paid for legal services were “personal” and that there was no connection between litigation and source of funds used to pay former executives. Amounts paid to former executives were inextricably linked to sale and there was direct connection between source of funds and litigation. Legal expenses incurred to attempt to recover any overpaid remuneration were not personal. Because s. 141.1(3) was more specific provision that only applied in certain situations, it would override s. 141.01(2) of Act. In both litigation to establish and collect amounts receivable and litigation to establish appropriate amount payable for remuneration and collect any overpaid remuneration, underlying activity which gave rise to litigation was completed before registrant stopped making taxable supplies. There was connection between termination of registrant’s commercial activity and legal services acquired in relation to litigation against former executives that would be sufficient to permit registrant to claim input tax credits for GST or HST paid in relation to those legal services.
Onenergy Inc. v. Canada (2018), 2018 CarswellNat 1079, 2018 FCA 54, Wyman W. Webb J.A., D.G. Near J.A., and Mary J.L. Gleason J.A. (F.C.A.); reversed (2016), 2016 CarswellNat 11598, 2016 CarswellNat 5245, 2016 TCC 230, 2016 CCI 230, Campbell J. Miller J. (T.C.C. [General Procedure]).