Canada: Bobby Solhi Quoted By Bloomberg Tax On Tax Credits For Legal Fees
Last Updated: April 6 2018

Bobby Solhi of TaxChambers LLP is quoted by Bloomberg BNA International Tax Monitor on the ONEnergy Inc. decision.

Below is an excerpt of the featured article for Bloomberg:

Canadian Court Broadens Access to Tax Credits for Legal Fees

  • Allows credits for legal fees in winding down of business
  • Ruling overturns Tax Court's narrow interpretation of Excise Tax Act

By Peter Menyasz

Canada's Federal Court of Appeal ruled that ONEnergy Inc. is entitled to claim tax credits on legal fees spent to recoup C$14.7 million ($11.4 million) in excess payments to executives of a failed subsidiary firm.

The ruling indicates Canadian courts may be willing to take a more relaxed approach to requiring a direct connection between expenses and a taxpayer's business activities when determining access to tax credits for the expenses, tax lawyer Joel Nitikman told Bloomberg Tax.

There is a strong enough connection between litigation to establish overpaid compensation and the commercial activity of the closing-down business, Look Communications Inc., to justify claiming input tax credits for the goods and services tax and harmonized sales tax, Justice Wyman W. Webb said March 19 in the court's 3-0 ruling, overturning a decision by the Tax Court of Canada. The amount of the legal fees hasn't been determined.

"There is a connection between the termination of Look's commercial activity and the legal services acquired in relation to the litigation against the former executives that would be sufficient to permit Look to claim the input tax credits," Webb said.

ONEnergy's operation of Look Communications in Quebec and Ontario proved unsuccessful, and it announced in December 2008 that it would close the business and sell the assets. Look's board of directors had set aside funds for severance and bonus payments to executives, but shareholders filed suit in Ontario to block what they identified as C$14.7 million in excess payments.

Look claimed input tax credits on its legal fees in contesting the suit, but the Tax Court found the connection between the litigation and winding down wasn't enough to justify the claim. But the appellate court said it was a "palpable and overriding error" deeming the legal services as "personal," as the only logical source of the payments was the sale of spectrum, part of winding down the business.

"If the registrant is acquiring a property or a service in connection with the acquisition, establishment, disposition, or termination of a commercial activity, that person will not lose the entitlement to claim an input tax credit solely because that person is not making any taxable supplies at the time that such property or services is acquired," it said.

Ruling Broadens Access to Tax Credits

The ruling is surprising because the Court of Appeal generally doesn't overturn the Tax Court in fact-based situations, Nitikman, a tax partner in the Vancouver office of Dentons Canada LLP, said March 22.

"The Federal Court of Appeal has almost turned it into a legal test of how you discern whether things are closely connected," Nitikman told Bloomberg Tax.
That suggests the Tax Court may need to take a broader view of what is connected to the business rather than drawing the "fine distinctions" it made in the ONEnergy case, he said.

It also suggests previous cases should have been resolved differently, including the Tax Court's September 2017 rejection of a Vancouver swimming instructor's claim for input tax credits on legal bills totaling C$176,000 ($138,000) to fight sexual assault allegations that threatened his business, he said.

Bobby Solhi, a tax partner with TaxChambers LLP in Toronto and a GST/HST specialist, agreed March 22 that the appellate' court's ruling broadens the interpretation taken by Canadian courts of Section 141.1(3) of the Excise Tax Act.

"A registrant can claim input tax credits for certain expenses even after it has ceased business operations, so long as the expense is sufficiently connected to the source of the funds and made in connection with the termination of the commercial activity," Solhi told Bloomberg Tax.

ONEnergy didn't respond to a request for comment.

The Canada Revenue Agency doesn't comment on ongoing court cases.

The case is ONEnergy Inc. v. The Queen (No. A-415-16).

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