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Legal Expenses “In Connection With” Wind Down of Corporation Not Deemed to Have Incurred in Course of Commercial Activity Pursuant to Section 141.1(3): Onenergy

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Section 141.1(3) of the of Excise Tax Act (“ETA”) broadens the scope of what is considered to be in the course of commercial activities to activity done “in connection with” extraordinary transactions such as starting and winding-up commercial activities.  The Tax Court of Canada (“TCC”), in Onenergy Inc. v. The Queen (2016 TCC 230), discussed how the section should be interpreted.


In Onenergy, the appellant, formerly known as Look Communications (“Look”), was in the telecommunications business and its principal assets consisted of the spectrum and a broadcast licence (“Spectrum”).  In 2009, Look sold the Spectrum, effectively terminated the telecommunication business. Look’s directors and executives (“Executives”) received over $15 million from the net proceeds of the Spectrum sale as payments for equity cancellation and bonuses. In 2011, Look sued its former Executives for misappropriation of proceeds from the Spectrum sale (“Litigation”).  The appellant paid GST/HST on legal expenses incurred in respect of the Litigation and claimed ITCs based on section 141.1(3)(a) of the ETA.  The ITC claim was denied by the CRA and the appellant appealed to the TCC.


The issue before the TCC was to determine whether the appellant was deemed to have incurred legal expenses in the course of a commercial activity pursuant to section 141.1(3)(a) of the ETA.


The appellant’s position was that a broader view should be taken on the requisite connection and argued that any activity during the wind up of the commercial activity or even the corporation (other than making of exempt supplies or personal activity) should qualify. The respondent’s position was that an integral connection must be found between the legal expenses and the Spectrum sale. 


TCC agreed that “in connection with” was a broad expression, however, a textual reading would not allow for the remotest links.  TCC found that the telecommunication business was terminated before the Litigation and the legal expenses incurred to go after the former Executives was in the nature of a “personal expense” in a corporate context.  TCC further determined that the connection, as contemplated in section 141.1(3)(a), must be with the commercial activities of the corporation, not with the wind down of the corporation.  At the end, TCC concluded that there was no connection between the litigation activity and the entering into, implementation of or enforcement of the Spectrum sale and, therefore, dismissed the appeal.


The Onenergy decision clearly illustrates that statutory interpretation is a complex process.  Other than case law, one will have to consider the legislative purpose of a particular legal provision, the whole scheme of an Act and the particular facts in the case on hand.  When in doubt, it is always advisable to seek legal advice.


Jenny Siu


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