The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada recommends the Income Tax Act be amended to exclude loans that are unconditionally repayable from being “government assistance” for the purposes of paragraph 12(1)(x) and subsection 127(9).
This is in reaction to CAE Inc. v. Canada, which is causing significant concern within the tax community. “In particular, we are concerned that the decision in CAE may result in immediate income inclusions under paragraph 12(1)(x) and/or the immediate denial of investment tax credits pursuant to section 127 of the Income Tax Act (Canada) (the “Act”) in inappropriate circumstances from a policy perspective,” the letter says.
If a loan agreement is determined to constitute government assistance, it can lead to significant consequences for a taxpayer including that amounts received or receivable in each year in respect of SR&ED are excluded from qualified expenditures for input tax credit (ITC) purposes, and could be included as income under paragraph 12(1)(x) of the Act, among other possibilities.
“The Courts’ reasoning, coupled with the broad language used in paragraph 12(1)(x) and subsection 127(9) may cause various loan amounts to be captured as government assistance,” writes the Joint Committee on Taxation. “The reasoning appears to apply to loans that don’t meet normal commercial terms including low-interest loans which are made directly by the government, by a Crown corporation, or by other public authority.”
Further, the letter states, treating government loans as assistance appears to run contrary to the “policy considerations underlying the Budget 2023 announcements relating to measures, including a number of new ITCs, in pursuit of advancing Canada’s ‘clean’ economy. Where government financing is involved in such ventures, the potential for immediately denied ITCs or immediate income inclusions may make such projects undesirable,” it concludes.
The Joint Committee suggests amending the Act to exclude unconditionally repayable loans from being considered government assistance and in the interim ask for a comfort letter to clarify the issue.