Overview

In CAE Inc. v. R,¹ the Tax Court of Canada ruled that a low-interest government loan constituted “government assistance” within the meaning of that term in subsection 127(9) of the Income Tax Act.²

Subsection 127(9) of the ITA defines “government assistance” as:³

[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);

The Federal Court of Appeal upheld the Tax Court’s decision,⁴ and on May 25, 2023, the Supreme Court of Canada dismissed CAE Inc.’s application for leave to appeal.

Analysis

The test for determining whether a payment constitutes “government assistance” turns on the underlying mechanism and purpose of the payment. A payment that is 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 generally not government assistance.⁵

During the fiscal periods under dispute, CAE Inc. received a low-interest loan from the Department of Industry Canada. CAE Inc. used such loan proceeds to incur scientific research and experimental development (SR&ED) expenditures and claimed available investment tax credits (ITCs) in respect of the same.

The Tax Court concluded that the loan agreement was not an “ordinary commercial agreement” and therefore constituted government assistance since: (1) the implicit interest rate of 2.5% was significantly less than the typical market rate for a comparable loan, (2) there was a lack of commercial covenants and (3) several conditions in the agreement were motivated by political considerations rather than commercial reasons.⁶

Accordingly, the loan amounts received or receivable by CAE Inc. were:⁷ (1) includible in income,⁸ (2) not deductible in computing CAE Inc.’s income from its SR&ED-related business⁹ and (3) excluded from the qualifying expenditure pool used to calculate ITCs.¹⁰

Significance

CAE marks a substantial departure from Canada Revenue Agency’s (CRA) interpretation bulletin IT-273R2.¹¹ Historically, CRA’s position has been that interest-free and low-interest loans were not typically considered government assistance and, therefore, such loan amounts were not includible in the debtor’s income.¹² It remains to be seen whether CAE will cause CRA to revise their position.

As noted, CAE stands for the proposition that a government loan lacking sufficient ordinary commercial terms will be considered government assistance. That said, with sufficient commercial terms, it may be that a low-interest loan could be structured so as not to constitute government assistance for purposes of the ITA.

Planning

CAE appears to broaden the types of government loans that may be considered government assistance for tax purposes. As a result, it could be that a particular debtor’s qualifying expenditure pool used for computing ITCs may be reduced. That said, debtors should also consider the tax implications of any repayment of such low-interest or interest-free loans. Depending on the circumstances, the repayment of such loans may allow debtors to claim available ITCs in the year(s) of repayment(s).¹³

The Canadian Federal Budget 2023 included a number of ITCs (collectively, the Green ITCs) in pursuit of advancing Canada’s “clean” economy.¹⁴ Legislation for the Green ITCs has not yet been enacted, but it is likely that the receipt and repayment of government assistance will affect the availability of Green ITCs in the same way it affects existing ITCs. As such, taxpayer-debtors should keep CAE in mind when planning for projects that involve both government loans (and other incentives) and the intent to claim SR&ED, existing ITCs, and the Green ITCs.

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

The authors would like to thank Amy Li, Summer Student for her valuable contributions to this article

1. 2021 CCI 57 [CAE]. ↩
2. RSC 1985, c-1 (5th Supp) [ITA]. ↩
3. Ibid [emphasis added]. ↩
4. See CAE Inc. v R, 2022 CAF 178 at paras 4—5. ↩
5. CAE, supra note 1at para 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]; Immunovaccine Technologies Inc. v R, 2014 FCA 196. ↩
6. CAE, supra note 1 at paras 128, 137. ↩
7. Ibid at paras 7, 143. ↩
8. ITA, supra note 2, s 12(1)(x). ↩
9. Ibid s 37(1)(d). ↩
10. Ibid s 127(18). ↩
11. IT-273R2, “Government Assistance – General Comments” (13 September 2000). ↩
12. Ibid at para 16. ↩
13. ITA, supra note 2, and, for instance, see s 127(9) “investment tax credit” (e.1)—(e.2), 127(18)—(20). ↩
14. See Budget 2023, A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future. For further commentary by Dentons on Budget 2023 see Mark Jadd, “Canada Federal Budget 2023” (29 March 2023), online (blog): <https://www.dentons.com/en/insights/articles/2023/march/29/ canada-federal-budget-2023>. ↩