Industry Canada loan was considered “government assistance”
Businesses can claim substantial investment tax credits for “scientific research and experimental development” (SR&ED) that is done in areas of technological uncertainty. However, the credits are reduced where the business has received “government assistance”, such as a grant to fund the SR&ED work.
In the recent CAE Inc. case, CAE received a large loan from Industry Canada to help fund a particular technology development project. The loan was made over a five-year period, and was repayable over 15 years with an effective interest rate of 2.7% (substantially lower than the 7.15% CAE was paying to private lenders). The loan also had some features that a private lender would not require, such as requiring the work to be done in Canada, and restricting CAE from selling the resulting technology.
The CRA assessed CAE to reduce its investment tax credits and to include part of the loan in CAE’s income, on the basis that the loan was “government assistance”. CAE appealed to the Tax Court of Canada, arguing that a loan that was always going to be repaid in full was not “government assistance”.
The Tax Court agreed with the CRA and dismissed CAE’s appeal. Based on previous case law, any loan that was not done in the same way as a normal commercial loan could be considered “government assistance”.
CAE has appealed this decision to the Federal Court of Appeal. If the decision is upheld, it will be a reminder to all businesses that get government loans on favourable terms that there may be negative tax consequences to receiving the loan, even if the loan bears interest and is repayable.