Overview

In CAE Inc. c. R. (“CAE”),¹ the Tax Court of Canada ruled (affirmed by the Federal Court of Appeal) that a full-recourse, low-interest government loan (with other “non-commercial” terms) was “government assistance” within the meaning of that term in subsection 127(9) of the Income Tax Act (Canada) (the “Tax Act”).² Consequently, the loan was included in income,³  and reduced scientific research and experimental development (SR&ED)⁴ expenditures and investment tax credits (ITC).⁵ On May 25, 2023, the Supreme Court of Canada dismissed CAE Inc.’s application for leave to appeal.

The 2023 Fall Economic Statement (the "Economic Statement"), released on November 21, 2023, proposes to amend the Tax Act to affirm that repayable, low-interest or even zero-interest loans will generally not be considered government assistance.

Analysis

Subsection 127(9) of the Tax Act defines “government assistance” as:

[A]ssistance 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).

CAE held whether a payment constitutes “government assistance” turns on the underlying mechanism and purpose of the payment. Generally, a payment made to promote the commercial interests of the payer, “in exactly the same way and for exactly the same reasons as payments made by private businesses, that is, for the purpose of advancing the interests of the payor” (i.e., pursuant to an “ordinary commercial agreement”), is not government assistance.⁶ On the other hand, a government loan without ordinary commercial terms will be considered government assistance.

Generally, the receipt of government assistance by a taxpayer will result in all or a portion of the amount of the government assistance being (i) includible in income, (ii) not otherwise deductible, (iii) not otherwise available to be added to the tax cost of a capital asset, and/or. (iv) not available in calculating potential ITCs. The Canada Revenue Agency’s (CRA) historical position, found in Interpretation Bulletin IT-273R2,⁷ had been that full-recourse, low-interest or even zero interest government loans would “not normally cause the loan to be considered as [government] assistance.”

The Economic Statement proposes to amend the Tax Act, with effect from November 21, 2023, to provide that repayable, low-interest or zero-interest government (i.e., public authority) loans with otherwise “reasonable repayment terms” will generally not be considered government assistance. The purpose of this amendment appears to attempt to address concerns regarding the potential claw-back or denial of ITC incentives, particularly those related to “clean energy” projects, where government loan incentives are available and accessed to help fund the project.

Significance

CAE marked a substantial departure from the CRA’s historical position. The Economic Statement recognizes the broad wording of the legislation and decision in CAE runs counter to government policy underpinning certain incentivizing government loans. Investors in “green” energy projects and technologies may now access complimentary government incentives (i.e., attractive government loans and “green” ITCs)⁸ rather than having such incentives potentially offset each other.

If you have any questions about this topic, please reach out to the author Brian Kearl. 

1. 2021 CCI 57, aff’d 2022 CAF 178. ↩
2. RSC 1985, c-1 (5th Supp). ↩
3. Supra note 1 at paragraphs 7 and 143; paragraph 12(1)(x) of the Tax Act. ↩
4. Paragraph 37(1)(d) of the Tax Act. ↩
5. Subsection 127(18) of the Tax Act.↩
6. Supra note 1, at paragraph 108, citing Consumers’ Gas Co. v. R , [1987] 1 CTC 79, 87 DTC 5008 (FCA); Canada v. CCLC Technologies Inc. v. R, 139 DLR (4th) 765, [1996] 3 CTC 246 (FCTD); and Immunovaccine Technologies Inc. v. R, 2014 FCA 196.↩
7. IT-273R2, “Government Assistance – General Comments” (13 September 2000).↩
8. “Green” ITCs include: (i) carbon capture, utilization and storage, (ii)  clean hydrogen, (iii) clean technology, (iv) clean technology manufacturing and processing and critical mineral extraction and processing, and (v) clean electricity; see Canada, Department of Finance, Budget 2023, Chapter 3: “A Made-In-Canada Plan: Affordable Energy, Good Jobs, and a Growing Clean Economy”, online: https://www.budget.canada.ca/2023/report-rapport/chap3-en.html.