Immunovaccine Technologies Inc. v. The Queen

Immunovaccine Technologies Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-04-10
Neutral citation
2013 TCC 103
File numbers
2011-245(IT)G
Judges and Taxing Officers
Lucie Lamarre
Subjects
Income Tax Act
Decision Content
Docket: 2011-245(IT)G
BETWEEN:
IMMUNOVACCINE TECHNOLOGIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on November 29 and 30, 2012, at Halifax, Nova Scotia.
Before: The Honourable Justice Lucie Lamarre
Appearances:
Counsel for the Appellant:
Bruce S. Russell, Q.C.
Counsel for the Respondent:
Daniel Bourgeois
Frédéric Morand
____________________________________________________________________
JUDGMENT
The appeals from the determinations made by the Minister of National Revenue (Minister), pursuant to paragraph 152(1)(b) of the Income Tax Act (ITA), as to the appellant’s entitlement to refundable investment tax credits (RITCs) for each of the 2005, 2006, 2007 and 2008 taxation years, pursuant to subsection 127.1(1) of the ITA, are dismissed.
The said determinations dated March 14, 2008 for the 2005 and 2006 taxation years and July 15, 2009 for the 2007 and 2008 taxation years, in which the Minister determined the appellant’s entitlement to RITCs on the basis that contributions received from the Atlantic Canada Opportunities Agency were “government assistance” within the meaning of subsection 127(9) of the ITA, are confirmed, with costs to the respondent.
Signed at Ottawa, Canada, this 10th day of April 2013.
“Lucie Lamarre”
Lamarre J.
Citation: 2013 TCC 103
Date: 20130410
Docket: 2011-245(IT)G
BETWEEN:
IMMUNOVACCINE TECHNOLOGIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1] These are appeals from determinations made by the Minister of National Revenue (Minister) pursuant to paragraph 152(1)(b) of the Income Tax Act (ITA) as to the appellant’s entitlement to refundable investment tax credits (RITCs) for each of the taxation years ended March 31, 2005 through 2008. The Minister denied the scientific research and experimental development (SRED) claims and related RITCs for those taxation years pursuant to subsection 127.1(1) of the ITA on the basis that contributions made to the appellant by the Atlantic Canada Opportunities Agency (ACOA), an agency of the Government of Canada, under an agreement dated December 31, 2004 (Agreement) (see Exhibit R-1, Tab 2) constituted “government assistance” as defined in subsection 127(9) of the ITA. An amount received as government assistance reduces the amount of expenditure eligible for the RITCs (as per subsection 127(11.1) of the ITA).
[2] “Government assistance” is defined as follows in subsection 127(9):
127(9)
“government assistance” — “government assistance” means assistance from a government, municipality or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance or as any other form of assistance other than as a deduction under subsection 127(5) or 127(6).
[3] The position of the appellant is that the contribution from ACOA does not constitute “government assistance” but rather was an ordinary loan advanced on reasonable terms and for the business purposes of ACOA. Thus the appellant should be entitled to claim its SRED expenses and to receive the related RITCs for the years at issue.
Issue
[4] The issue is whether the amounts of $917,731, $692,806, $1,504,137 and $724,931 received by the appellant from ACOA during the 2005, 2006, 2007 and 2008 taxation years were “government assistance” as defined in subsection 127(9) of the ITA.
Admissions
[5] The appellant was incorporated in March 2000 as a research and development company to develop projects for the creation of vaccine technology. ACOA provided a contribution to the appellant of $3,786,474, spread over four years (2005 through 2008), in respect of costs incurred to complete such projects.
[6] The parties further admitted the facts referred to in the Appellant’s Response to Request to Admit and set out in the Respondent’s Request to Admit both of which were filed at the hearing. Those facts are as follows:
1. As of the year 2004, the appellant had not begun to commercialize products.
2. The appellant’s gross income and net losses for the years 2002 to 2004 were as follows:
Year Gross Income Net Loss
2002 $5,030 ($564,478)
2003 $21,078 ($1,094,063)
2004 $25,542 (1,016,327)
3. As of March 31, 2004, the appellant had current assets of $240,150 and capital assets of $58,867.
4. From the years 2000 to 2011, the sources of gross income of the appellant were as follows:
Year Source of gross income
2000 Nil
2001 Unknown
2002 Unknown
2003 Cost recovery
2004 Cost recovery
2005 Nil
2006 Nil
2007 Nil
2008 Pfizer license signing fee
2009 Pfizer license signing fee
2010 Pfizer license signing fee
2011 Nil
5. The appellant made repayments under the agreement with ACOA dated December 31, 2004, as follows:
Year Amount of repayment
2008 $4, 896.30
2009 $2,116.60
2010 $28,408.24
2011 $1,552.10
6. The Appellant made claims and received funding under the agreement with ACOA dated December 31, 2004, in accordance with the details set out in the chart found at tab 52, volume 3, of the appellant’s answers to undertakings.
[The chart was filed as Exhibit R-1, Tab 1]
Facts disclosed at the hearing
[7] The agreement reached between ACOA and the appellant on December 31, 2004, was filed as Exhibit R-1, Tab 2, and is reproduced hereunder:
Atlantic Innovation Fund
Contract Number: 181989
This Agreement made
Between: Atlantic Canada Opportunities Agency
(hereinafter referred to as “ACOA”)
AND: IMMUNOVACCINE TECHNOLOGIES INC.,
a corporation duly incorporated under the laws of Nova Scotia,
having its head office located at 1819 Granville Street, Suite 303,
Halifax, Nova Scotia B3J 3R1
(hereinafter referred to as “the Proponent”)
WHEREAS ACOA has established a program, the Atlantic Innovation Fund (AIF), to strengthen the economy of Atlantic Canada by supporting the development of knowledge-based industry. The AIF will help increase the region’s capacity to carry out leading-edge research and development that directly contributes to the development of new technology-based economic activity in Atlantic Canada; and
WHEREAS the Proponent submitted a project proposal in response to ACOA’s Request for Project Proposals, dated August 23, 2002.
IN CONSIDERATION of their respective obligations set out below, the parties hereto agree as follows.
Article 1 – Deadline for Receipt of Signed Agreement
1.1 This Agreement must be signed by the Proponent and received by ACOA on or before December 31, 2004, failing which it will be null and void.
Article 2 – Documents Forming Part of this Agreement
2.1 The following documents form an integral part of this Agreement:
These Articles of Agreement
Schedule 1 – General Conditions
Schedule 2 – Statement of Work
Schedule 3 – Claims and AIF Project Cost Principles
Schedule 4 – Commercialization
Schedule 5 – Reporting Requirements
Schedule 6 – Project Fact Sheet for News Release
Schedule 7 – Special Purpose Equipment
Schedule 8 – Pre-Authorized Repayment/Direct Deposit Authorization
2.2 In the event of conflict or inconsistency, the order of precedence amongst the documents forming part of this Agreement shall be:
These Articles of Agreement
Schedule 1 – General Conditions
Schedule 2 – Statement of Work
Other Schedules
Article 3 – The Proponent’s Obligations
3.1 The Proponent will carry out the New Peptide-based Vaccines Project (“the Project”) as described in Schedule 2, Statement of Work, will make claims in accordance with Schedule 3, will commercialize as mentioned in Schedule 4, will issue the reports required under Schedule 5 and will fulfill all of its other obligations hereunder, in a diligent and professional manner using qualified personnel.
3.2 The Proponent shall ensure that the Project is completed on or before September 30, 2007 (“Project Completion Date”), unless otherwise agreed to in writing by ACOA.
3.3 In the event the carrying out of the Project involves collaboration with other parties, the Proponent shall provide, prior to any disbursement of funds, satisfactory evidence to ACOA that appropriate agreements exist to ensure the roles and responsibilities of each party are defined.
Article 4 – The Contribution
4.1 Subject to all the other provisions of this Agreement, ACOA will make a Contribution to the Proponent in respect of the Project, of the lesser of:
(a) 51.825% of all other Eligible Costs (estimated to be $7,306,297); or
(b) $3,786,474.
4.2 ACOA will not contribute to any Eligible Costs incurred by the Proponent prior to November 27, 2002 nor after the Project Completion Date, unless otherwise agreed to in writing by ACOA.
4.3 ACOA will pay the Contribution to the Proponent in respect of Eligible Cost incurred on the basis of itemized claims submitted in accordance with the procedures set out in Schedule 3.
4.4 ACOA may withhold up ten percent (10%) of the Contribution prior to the completion of the Project or until such audit as ACOA may require has been performed. In the event that no audit has been performed twelve (12) months after receipt of the final claim, any amount so withheld shall be released to the Proponent.
4.5 At the discretion of ACOA or at the request of the Proponent, ACOA may make payment(s) jointly to the Proponent and a supplier for Eligible Costs which have been incurred.
4.6 (a) At the discretion of ACOA, an advance payment may be made to the Proponent.
(b) To request an advance payment, the Proponent must submit a completed copy of the Advance Payment Request form (provided by ACOA), including a monthly cash flow forecast of requirements for the Eligible Costs to be incurred during the advance period. Such documentation must demonstrate that an advance payment is essential to the successful completion of the project. Each advance payment must be accounted for, to the satisfaction of ACOA, within forty-five (45) days of the end of the advance period for which that advance payment was made.
(c) Should ACOA determine that an advance payment will be made, such payment will be made in accordance with the Treasury Board Policy on Transfer Payments.
Article 5 – Repayment
5.1 The Proponent shall repay the Contribution to ACOA by annual instalments calculated as a percentage of the Gross Revenues. The amount due to ACOA at each repayment shall be calculated:
(a) at 2% when the Gross Revenues for the Fiscal Year immediately preceding the due date of the respective payment are less than $5,000,000; and
(b) at 10% when Gross Revenues for the Fiscal Year immediately preceding the due date of the respective payment is [sic] $5,000,000 or greater.
5.2 The first repayment is due on December 1, 2008, and subsequent repayments are due annually until the Contribution has been repaid in full.
5.3 The Proponent agrees that its Fiscal Year presently begins on April 1 and ends on March 31 and there shall be no change of that Fiscal Year except with the prior approval of ACOA.
Article 6 – Other Government Assistance
6.1 The Proponent hereby acknowledges that, no other federal, provincial or municipal government financial assistance other than that described in Section 7.1 of Schedule 2 has been, or will be, requested or received by the Proponent for the Eligible Costs of the Project.
6.2 The Proponent will inform ACOA promptly in writing of any other federal, provincial or municipal government assistance (except for scientific research and experimental development tax credits, deductions or allowances) to be received for the Eligible Costs of the Project, and ACOA will have the right to reduce the Contribution under this Agreement to the extent of any such assistance.
Article 7 – Project Financing
7.1 Prior to first disbursement of funds the Proponent shall provide ACOA with a copy of its audited financial statements for the Fiscal Year ended March 31, 2004.
7.2 Prior to April 1 of each year until Project completion, the Proponent shall provide ACOA with confirmation of adequate financing for the next fiscal year in the form of a 12-month fiscal year cash flow statement, such financial projections to demonstrate adequate funding to support the Project and ongoing company operations for that 12-month period. These financial statements must be satisfactory to ACOA.
7.3 Prior to first disbursement of funds, the Proponent will confirm equity investment of $1,400,000 since January 1, 2004 with terms and conditions acceptable to ACOA.
7.4 Prior to cumulative disbursement greater than $700,000 the Proponent will confirm additional equity investment of $700,000, for a total of $2,100,000 since January 1, 2004, with terms and conditions acceptable to ACOA.
7.5 Prior to cumulative disbursement greater than $1,500,000 the Proponent will confirm additional equity investment of $2,000,000, for a total of $4,100,000 since January 1, 2004, with terms and conditions acceptable to ACOA.
Article 8 – Research Involving Humans or Animals
8.1 Prior to the first disbursement of funds, the Proponent shall provide evidence satisfactory to ACOA that the project has received approval from a Research Ethics Board which is constituted and working in accordance to the Tri-Council Policy Statement on Ethical Conduct for Research Involving Humans and, in the case of a clinical trial, with Health Canada’s Food and Drugs Act and Food and Drug Regulations. Research involving animals must be approved by an Animal Care Committee, which is constituted and working in accordance with the Canadian Council on Animal Care Guide to the Care and Use of Experimental Animals.
8.2 The Proponent shall address any further ethical issues which may arise during the course of the Project in the same manner and shall provide ACOA with satisfactory evidence of same.
Article 9 – Special Conditions
9.1 (a) The Proponent shall attain Equity, satisfactory to ACOA, in the total amount of $(594,506) on or before the date of the first disbursement by ACOA to the Proponent.
(b) Unless otherwise authorized by ACOA in writing, this level of Equity shall be maintained until all of the Proponent’s undertakings in regard to commercialization mentioned in Schedule 4 have been fulfilled.
Article 10 – Notice
10.1 Any notice to ACOA will be addressed to:
Atlantic Canada Opportunities Agency
1801 Hollis Street
Suite 600
Halifax, Nova Scotia
B3J 3C8
Attention: Ms. Mary-Ellen Valkenier
Fax No: (902) 426-2054
10.2 Any notice to the Proponent will be addressed to:
ImmunoVaccine Technologies Inc.
1819 Granville Street, Suite 303
Halifax, Nova Scotia
B3J 3R1
Attention: Dr. Warwick Kimmons
Fax No: (902) 492-0888
Article 11-Entire Agreement
11.1 This Agreement constitutes the entire agreement between the parties and supersedes all previous documents, negotiations, arrangements, undertakings and understandings related to its subject matter.
[8] The general conditions applicable to the Agreement as well as the definitions of some of the terms used in the Agreement are found in “Schedule 1-General Conditions”. I reproduce hereunder the relevant portions thereof:
schedule 1 – general conditions
1. Definitions
For the purposes of this Agreement,
“Agreement” means the agreement to which these General conditions relate, consisting of Articles of Agreement and the Schedules referred to in these Articles.
…
“Contribution” means the funding, in Canadian dollars, payable by ACOA under the Agreement.
…
“Gross Revenues” means all revenues, receipts, monies and other considerations of whatever nature earned or received by the Proponent, whether in cash, or by way of benefit, advantage, or concession, and without deductions of any nature, net of any returns or discounts actually credited and any sales, excise, ad valorem or similar taxes paid but without deduction for bad debts or doubtful accounts, as determined in accordance with generally accepted accounting principles, applied on a consistent basis. Transactions with related persons (as that term is defined in the Income Tax Act) will be deemed made in an amount equal to the fair market value for a similar product at the time of the transaction.
. . .
4.1 Overpayment by Minister
Where for any reason:
(a) The Proponent is not entitled to the Contribution; or
(b) ACOA determines that the amount of the Contribution disbursed exceeds the amount to which the Proponent is entitled,
the Proponent will repay to ACOA, promptly and no later than thirty (30) days from notice from ACOA, the amount of the Contribution disbursed or the amount of the overpayment, as the case may be, together with interest at the Interest Rate from the date of the notice to the day of repayment to ACOA in full. Any such amount is a debt due to Her Majesty in Right of Canada and is recoverable as such.
. . .
6.10 Other Financing
The Proponent remains solely responsible for providing or obtaining the funding, in addition to the Contribution, required for the carrying out of the Project and the fulfilment of the Proponent’s other obligations under the Agreement.
. . .
7.1 Commercialization
(a) The Agreement will terminate when all amounts due by the Proponent to ACOA under this Agreement have been paid in full or until that obligation is otherwise discharged to the satisfaction of ACOA.
(b) In the event all of the Proponent’s undertakings in regard to commercialization mentioned in Schedule 4 have been fulfilled and the Proponent has demonstrated to the satisfaction of the Agency that Gross Revenues have not been or will not continue to be generated, notwithstanding 7.1(a), the Agreement will terminate.
. . .
8. Default and Recovery
8.1 Events of Default
The following constitute Events of Default:
. . .
(e) the Proponent neglects or fails to pay to ACOA any amount due in accordance with this Agreement; or
(f) in the opinion of ACOA the Proponent ceases to carry on business,
provided that ACOA will not declare an event of default has occurred by reason of subsections 8.1 (c), (d) or (e) unless ACOA has given notice to the Proponent of the condition or event which in ACOA’s opinion constitutes an event of default and the Proponent has failed, within thirty (30) days of receipt of the notice, either to correct the condition or event complained of or to demonstrate, to the satisfaction of ACOA, that it has taken such steps as are necessary to correct the condition, and has notified ACOA of the rectification.
8.2 Remedies on Default
If an Event of Default has occurred, or in the opinion of ACOA is likely to occur, ACOA may exercise one or more of the following remedies:
. . .
(c) require the Proponent to repay to ACOA all or part of the Contribution paid by ACOA to the Proponent, and pay ACOA any amounts due under the Agreement, together with interest at the Interest Rate. The interest, calculated daily and compounded monthly, shall accrue commencing upon the date which, in the opinion of ACOA, the Event of Default occurred.
. . .
10.3 Overdue
The Proponent shall pay, where the account is overdue, and in addition to any amount payable, interest on that amount at the Interest Rate. The interest, calculated daily and compounded monthly, shall accrue from the due date until payment is received.
[9] Further, Schedule 4 of the Agreement stipulates that, unless otherwise agreed by ACOA, the appellant is to ensure that the resulting products will be exploited through their production in Atlantic Canada until September 30, 2017. Schedule 5 of the Agreement provides for quarterly and annual reporting by the appellant to ACOA on the progress made in the fulfillment of the statement of work and on any revised estimated costs. The description of the appellant’s particular project is provided in Schedule 6 of the Agreement, which specifies, among other things, the project’s long-term potential benefits in terms of building new capacity in the region and the creation of new jobs.
[10] Mr. Brian Lowe, co-founder and chief operating officer and, as of 2008, vice-president of the appellant, testified that they not only sought support from ACOA but indeed raised about $30 million in private equity and obtained some $10 million in government support during his tenure on the vaccine project (see transcript, page 21). With a view to obtaining ACOA funding through the Atlantic Innovation Fund (AIF), the appellant submitted a letter of intent in August 2002, and a complete submission by the end of November 2002. The final agreement was signed on December 31, 2004 after a lengthy process of negotiating the terms of the agreement (see transcript, pages 21 and 22). Mr. Lowe pointed out that, as a result of those negotiations, the repayment terms under article 5 of the Agreement were that the contribution made by ACOA had to be fully repaid in payments calculated as a percentage of the appellant’s gross revenues generated by the whole of its operations, and repayment was not tied to the outcome of the specific project that was being funded; it was Mr. Lowe’s understanding that this sort of provision was not common with ACOA (see transcript, pages 25, 34 and 35). As a matter of fact, the appellant showed the contribution by ACOA in its financial statements for the years 2006, 2007 and 2008 as a repayable long-term debt (see, as an example, the financial statements for the period ending March 31, 2006, Exhibit A-2, Balance Sheet, page 41, and page 47, note 5 referring to an ACOA interest-free loan). Apparently the appellant, on advice from its auditors and accountants, requested from ACOA an amendment to the agreement such that the terms of repayment would be changed to provide for a fixed monthly repayment schedule instead of repayment based upon a percentage of gross revenues. Mr. Lowe explained that this amendment was sought to ensure that the scientific research and development tax credits would be granted to the appellant. ACOA apparently refused any such change (see transcript, pages 31 and 32).
[11] In cross-examination, Mr. Lowe acknowledged that the financial statements for the year ended March 31, 2003 (see Exhibit R-1, Tab 7, note 1) indicated that the company had not yet commenced commercial operations and that its ability to continue as a going concern was dependent on, among other things, its ability to obtain additional financing. He also confirmed that the same statement appeared in note 1 to the financial statements for the year ended March 31, 2007 (see Exhibit A-3). For the year ended March 31, 2008, the company reported a net loss of approximately $2.7 million and an accumulated deficit of roughly $11 million. In the financial statements for that year, in note 1, it is stated: "In addition to its ongoing working capital requirements, the Company must secure sufficient funding for its research and development programs and to defend its patents. These circumstances lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern" (see Exhibit A-4, page 7, note 1).
[12] Mr. Lowe explained that the appellant was no different than any other biotech company in that it never stopped raising money (see transcript, page 55), but he admitted that there were no other sources of income from which ACOA could expect to be repaid as of the moment the Agreement was signed (see transcript, pages 57 and 58). He said that at that particular time, the project had not yet started and the understanding was that the ACOA contribution would be repaid “going forward out of all of our gross revenue after we had completed the project” (see transcript, page 58). In 2008, there was not yet a commercialized product, a fact which is reflected by the following statement in note 1 to the 2008 financial statements (see Exhibit A‑4): "These undertakings [issuance of shares and additional debt financing], while substantial, are not sufficient in and of themselves to enable the Company to fund all aspects of its operations and, accordingly, management is pursuing other financing alternatives to fund the Company's operations so it can continue as a going concern."
[13] Ms. Kimberly Stephens, CA, chief financial officer of the appellant since January 2011, also testified. She said that the project they were working on comprised four components. It would seem that they are currently working on different ways to fund two of these research programs and, to that end, seeking to collaborate with other partnerships or other entities (see transcript, page 115). Apparently, they signed four agreements with Pfizer Animal Health from 2007 to 2010 with respect to one component of the project, namely, the preventive vaccines for animal bacterial and viral infectious diseases program, for which Pfizer paid in the years 2008, 2009 and 2010 up-front licence-signing fees for the right to use the appellant’s technology (for the year ended March 31, 2008, those signing fees appear to be $244,815, which is, the revenue amount indicated on page 5 of the financial statements filed as Exhibit A-4). Ms. Stephens said that she hoped they would start receiving milestone payments on that part of the project by 2014, that is, when Pfizer applied to market the product, then when the product was approved by the FDA (Food and Drug Administration), and finally when the product was marketed. After that, royalty payments would start (see transcript, pages 115, 116, 126 and 127). Ms. Stephens also mentioned that they were working on other research programs for which they had the patent rights and which had potential for commercialization, but which are not related at all to the part of the project for which ACOA is contributing. She confirmed that, to the extent that these other programs generated revenue, such revenue would be part of the pool of revenues that would be used to repay ACOA’s contribution (see transcript, pages 117 to 119).
[14] Ms. Stephens explained that, originally, the appellant had worked on a research project related to an animal fertility-control vaccine (referred to as a “product candidate” as it was not actually a marketable product). One component of that project involved collaboration with the Hong Kong government. She said that the gross revenue declared by the appellant in 2003 and 2004 was not in fact revenue but cost recovery, that is, the reimbursement by the Hong Kong government of costs incurred by the appellant on that project, as the appellant did not have any product to sell (see transcript, pages 122 to 125).
[15] The appellant also called as a witness, Mr. Nicholas John Franklin, sales manager at the Atlantic Acura car dealership, to establish that, in a commercial context, interest rates of zero percent are realistic on automobile purchases. In cross-examination, Mr. Franklin agreed that in that case the cars are used as security for the loans.
[16] Counsel for the respondent called Ms. Janice Ann Nishikawa, a director at ACOA who has been responsible for the Atlantic Provinces since 2006, to testify. In 2004, she was the manager of the AIF for the New Brunswick region, and was responsible for coordinating and administering the day-to-day valuation of projects for the AIF’s clients in New Brunswick. She said that ACOA is a regional development agency created by the Government of Canada. Its statutory mandate is to promote economic development in the Atlantic Region with the objective of creating employment and increasing earned income for Atlantic Canadians (see transcript, pages 131 and 132). The AIF is a program offered by ACOA for investment in research and development that will eventually lead to “commercializable” products, technologies and processes in Atlantic Canada (see transcript, pages 134 and 135; see also the objectives for the AIF program, Exhibit R-3, page 22). The AIF is governed by the Treasury Board, which approves the terms and conditions of the AIF program, i.e., the terms and conditions for allocating grants and contributions (see transcript, page 136).
[17] Clause 2.4, entitled “Repayability”, of ACOA’s online AIF document “Request for Project Proposals” (Exhibit R-3) states that “[t]he federal repayable contribution policy is based on the premise that when a business, as a result of a contribution from the Government of Canada, earns a profit or otherwise increases in value, the business should return the contribution to the government. Accordingly, contributions to the private sector that involve the commercialization of a technology, product, process or service will be conditionally repayable based on the commercial success of the project.”
[18] Ms. Nishikawa testified that, when a project has been selected, a repayable contribution agreement is negotiated. Terms of repayment are reviewed to determine how ACOA will be repaid should the proponent have commercial success. Milestones would be agreed to in order to be able to better monitor the project, and the key expected results would be defined (see transcript, pages 144 and 145). She said, echoing what is stated in the document filed as Exhibit R-3, that AIF funding is conditionally repayable for commercial clients and not repayable for non-commercial organizations (see transcript, page 146). This is in conformity with the Policy on Transfer Payments taken from the Treasury Board’s website, which states that where a contribution is made to a business and is intended to allow the business to generate profits or to increase the value of the business, the business is required to repay the contribution or to share the resulting financial benefits with the government commensurate with its sharing of the risks (see Exhibit R-4, clause 7.8.1, and transcript, page 148).
[19] Ms. Nishikawa also indicated that once a project has started and the contribution has been granted, the proponent has to submit quarterly progress reports in order to draw contribution funds (see transcript, page 149). An annual monitoring report on the results achieved was also required. Success is measured on the basis of identified success indicators over the lifetime of the project. However, when measuring the success of a project, the repayment of the contribution is not a criterion that is considered (see transcript, pages 150 to 152).
[20] In cross-examination, Ms. Nishikawa acknowledged that the terms and conditions she referred to in her examination in chief (in particular, those regarding the objectives of the AIF program and those relating to application requirements, and the repayment of contributions) and that are dealt with in the Request for Project Proposals (see Exhibit R-3, clause 2.2 and Annex A) did not form “word for word” an integral part of the Agreement at issue in the present case. But she explained that, nevertheless, the Agreement was based on the Policy on Transfer Payments discussed earlier and respected the terms and conditions referred to above (see transcript, pages 165 to 169). In re-examination, she went through the requirements for contribution agreements in the Treasury Board Policy on Transfer Payments (see Exhibit R-4, clause 8.2.1 and Appendix C) and confirmed that all of them were included in the Agreement at issue here (see transcript, pages 186, 187 and 192).
[21] She further confirmed that this was the first time, to the best of her recollection, that she had seen a repayment clause that applied to all gross revenues as opposed to just those gross revenues that are tied to the project that was funded (see transcript, pages 172 to 174).
Appellant’s arguments
[22] The appellant’s position is that the contribution from ACOA does not constitute government assistance within the meaning of subsection 127(9) of the ITA, but rather an ordinary loan advanced on reasonable terms for business purposes. The contribution was an advance of funds in consideration of a promise to repay.
[23] When the monies advanced to a business are to be repaid and the terms of repayment are specified, the transaction is classified as a loan. In the appellant’s view, it had an obligation to repay and there were mandatory terms of repayment. There was a bona fide business loan even though it was not interest bearing, as interest is not an essential element of a loan (Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1990] 4 W.W.R. 445, at 459, 1990 CanLII 5504 (Alta. Q.B.) at paragraphs 38 and 39; Steckel v. M.N.R., 92 DTC 1904 (TCC) at page 1908). The appellant also refers to Interpretation Bulletin IT-151R5, Scientific Research and Experimental Development Expenditures, at paragraph 40, where it is stated that “[t]he fact that a full recourse loan is interest-free or is made at a lower than commercial rate of interest will generally not classify the loan as government or non-government assistance.”
[24] Further, the appellant argued that the contribution from ACOA was not a forgivable loan. The appellant referred to the definition of forgivable loan found in Interpretation Bulletin IT-340R, Scholarships, Fellowships, Bursaries and Research Grants - Forgivable Loans, Repayable Awards and Repayable Employment Income, at paragraph 2: “a loan which is made to enable the borrower to pursue an education or to carry out a research project and which the lender is committed to forgive if certain conditions are met by the borrower”. In the appellant’s view, it was required to repay in full to ACOA the amount advanced, according to a mandatory repayment schedule. It submitted that there were no criteria or conditions that would commit ACOA, as the lender, to forgiving the loan. In its view, the provision in section 7.1(b) of Schedule 1 of the Agreement (which states that the Agreement will terminate in the event that the appellant fulfils its Schedule 4 undertakings and demonstrates that it will not continue to generate gross revenues) only reflects the de facto business reality, applicable to all investments in start-ups and business ventures, that, in the event that the company is not successful, a loan or investment will not be recoverable. In the appellant’s view, it is the lender’s choice to write off the debt without resorting in vain to extraordinary remedies to enforce repayment (see Appellant’s Submissions, paragraphs 39 to 42).
[25] The appellant argued lastly that the contribution from ACOA was not another form of assistance within the meaning of subsection 127(9) of the ITA either. Referring to the decision of the Supreme Court of Canada in National Bank of Greece (Canada) v. Katsikonouris, [1990] 2 S.C.R. 1029 at 1040, (1990), 74 D.L.R. (4th) 197, the appellant stated at paragraph 47 of its submissions:
47. In National Bank of Greece (Canada) v. Katsikonouris (1990), 74 D.L.R. (4th) 197 (S.C.C.) Justice La Forest described the rule as follows:
[12] Whatever the particular document one is construing, when one finds a cause [clause] that sets out a list of specific words followed by a general term, it will normally be appropriate to limit the general term to the genus of the narrow enumeration that precedes it.
National Bank of Greece (Canada) v. Katsikonouris
(1990), 74 D.L.R. (4th) 197 (S.C.C.)
[26] The appellant suggested that the phrase “or . . . any other form of assistance” in the definition of “government assistance” in subsection 127(9) must be confined to the “genus of the narrow enumeration that precedes it”.
[27] The appellant submitted that the common factor linking the narrow enumeration of “grant, subsidy, forgivable loan, deduction from tax, investment allowance or . . . any other form of assistance” is that each represents a transfer of funds advanced with no expectation of repayment. In the appellant’s view, the class of items constituting government assistance is limited to non-repayable forms of assistance and closed to any transfer or advance of funds for which repayment is required (see Appellant’s Submissions, paragraph 49). In contrast, the contribution from ACOA was advanced with mandatory terms for its repayment. The Agreement obliged the appellant to make ACOA whole through a mandatory repayment schedule and, significantly, the repayment was not limited to being made just out of the proceeds from the funded project, but was to be made from gross revenues in their entirety (see Appellant’s Submissions, paragraph 50).
[28] According to the appellant, this particularity distinguishes the present case from the situation that prevailed in CCLC Technologies Inc. v. Canada, [1996] F.C.J. No. 1226 (QL) (FCA), 1996 CarswellNat 1652. In that case, the Federal Court of appeal held that an advance of funds from the Alberta government to CCLC Technologies Inc. (CCLC) constituted “government assistance” and, specifically, that it fell within the general phrase “any other form of assistance”. The Government of Alberta provided technology and advanced funds to CCLC in exchange for an equity interest in CCLC. In the event that the venture was successful, the Government of Alberta was obliged to sell its equity interest back to CCLC in return for its monetary investment plus interest thereon. In the event that the venture was unsuccessful, the Government of Alberta was left with an arguably worthless equity interest. The Court said the following at paragraphs 2 and 5:
2 With respect to the first question, we are of the view that the sums provided to the respondent amounted to government assistance. This Court in The Queen v. Consumers Gas Company Ltd. [(1986) 87 DTC 5008 at 5011], contrasted “government assistance” to payments made by public authorities
in exactly the same way for exactly the same reasons as payments made by private business, that is, for the purpose of advancing the interests of the payor.
In this context it is clear that the Court was speaking of payments made for advancing the business interests of the payor.
. . .
5 In the language of the Income Tax Act, subparagraph 12(1)(x)(iv), and the definition of “government assistance” in subsection 127(9), the government payments under the Coal Research Agreement became, in the circumstances of non-commercialization of the technology, a grant, subsidy, a forgivable loan, or similar form of assistance.
[29] The appellant is of the view that its case is different as its obligation to repay remained, even in the event of failure of the project, because of the requirement that it pay out of its gross revenues the total amount contributed by ACOA (paragraphs 52 and 53 of Appellant’s Submissions). In fact, the appellant started to repay in 2008, as appears from the Appellant’s Response to Request to Admit and from paragraph 5 of the respondent’s Request to Admit (referred to in paragraph 6 of these reasons). Therefore, the contribution by ACOA was more akin to a bona fide loan with fixed terms of repayment than government assistance.
Respondent’s argument
[30] The respondent referred first to the Atlantic Canada Opportunities Agency Act, R.S.C. 1985, c. 41 (4th Supp.), Part I (ACOA Act), to establish that ACOA’s object was essentially to promote opportunities for the economic development of Atlantic Canada. Sections 4, 12 and 13 of the ACOA Act state:
Purpose
4. Purpose
The purpose of this Part is to increase opportunity for economic development in Atlantic Canada and, more particularly, to enhance the growth of earned incomes and employment opportunities in that region.
Object, Powers and Duties
12. Object
The object of the Agency is to support and promote opportunity for economic development of Atlantic Canada, with particular emphasis on small and medium-sized enterprises, through policy, program and project development and implementation and through advocacy of the interests of Atlantic Canada in national economic policy, program and project development and implementation.
13. Powers
In carrying out its object, the Agency may
(a) in