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CAE Inc. c. La Reine (2021)

 Key Lessons / Points

• Ensure any funds received are correctly classified and – as required – properly reported in SR&ED claims, including government assistance.
  • Both conditional and unconditional repayable contributions can be considered government assistance. They must be assessed against whether they are considered an “ordinary trade or commercial agreement”. 
  • Assistance involves predominantly a donative intent, rather than a business motive. An assistance agreement between the grantor and the recipient of the assistance will show that the main purpose of the agreement from the grantor’s point of view was something other than profit.
  • In this case, the agreement did not possess the attributes of a “trade or commercial enterprise”, and did not constitute an “ordinary trade or commercial agreement”. The agreement was determined to be government assistance which should have been reported as such on the Appellants’ SR&ED claims.
  • See the CRA’s Assistance and Contract Payments Policy for more information.
• Contractual arrangements will be closely scrutinized when assessing government involvement in SR&ED payments.

Fiscal Years in Question 

2012 & 2013

Court Heard In 

Tax Court of Canada (Montreal, Quebec)

Dates Heard 

June 3-4, 2019 & August 24-25, 2020

Length of Process

9 years

Neutral Citation 

2021 CCI 57 

Docket 

2016-4984(IT)G

Amount Under Dispute 

$57,084,395 & $59,148,888

Decision 

[145] For these reasons, the appeal is dismissed with costs. 

Summary 

CAE Inc. (“CAE”), the Appellant, entered into an agreement with the Minister of Industry of Canada, the Respondent, entitled the “SADI Agreement NO. 780-503924 – Strategic Aerospace and Defense Initiative – Project Falcon” (“SADI Agreement”). In this case, the Appellant is appealing two assessments made on December 15 and October 26, 2016, by the Minister of National Revenue (the “Minister”) relating to the Appellant’s 2012 and 2013 taxation years. In these assessments, the Minister concluded that the sums received by CAE under the SADI Agreement constituted as “government assistance” within the meaning of subsection 127(9) of the Income Tax Act (“ ITA”). The Appellant disagreed, stating that the amounts of $57,084,395 and $59,148,888 received under the SADI Agreement during the 2012 and 2013 taxation years respectively do not constitute “government assistance”, and treated the contributions received from the Minister of Industry of Canada, as a long-term obligation in CAE’s consolidated financial statements, and did not use the amounts to reduce their eligible SR&ED expenditures. 

In this case, the Judge reviewed the relevant sections within the ITA and the Civil Code of Quebec and considered the testimonies presented by both the Appellant and the Respondent’s witnesses. The services of Mr. Neil de Gray, the expert in corporate finance and the valuation of debt instruments and securities, were initially retained by the Respondent but were also retained to assist the Court during this case. Mr. de Gray was asked whether, in his view, the SADI Agreement has the attributes of a “trade” and constitutes an “ordinary trade agreement”. Mr. de Gray concluded, after a thorough and complete examination, that the SADI Agreement did not possess the attributes of a “commercial enterprise” and did not constitute an “ordinary commercial agreement”.

The judge concluded that the SADI Agreement was not an ordinary commercial agreement, and therefore the amounts paid to CAE under the agreement during the 2012 and 2013 taxation years respectively constituted amounts received as “government assistance”. The appeal was dismissed with costs.

Key Excerpts 

[1] CAE Inc. (“CAE”) is appealing two assessments made on December 15 and October 26, 2016, by the Minister of National Revenue (the “Minister”). These assessments relate to the 2012 and 2013 taxation years. In these assessments, the Minister concluded that the sums received by CAE under an agreement entered into with the Minister of Industry of Canada entitled “- SADI Agreement NO. 780-503924 – Strategic Aerospace and Defense Initiative – Project Falcon” (“SADI Agreement”) constituted as “government assistance” within the meaning of subsection 127(9) of the Income Tax Act, RSC 1985, c.1 (5th Supp.) (“ ITA”). More specifically, the Minister concluded that the amounts of $57,084,395 and $59,148,888 that CAE received or was entitled to receive under the SADI Agreement during the 2012 and 2013 taxation years respectively constituted a form of “government assistance”. 

[2] Having concluded that the amounts of $57,084,395 and $59,148,888 constituted a form of “government assistance” within the meaning of subsection 127(9) of the ITA, the Minister concluded that the amounts of $41,003,491 $ and $40,652,951 received by CAE under the SADI Agreement during the 2012 and 2013 taxation years and used for scientific research and experimental development (“SR&ED”) purposes were to be deducted from the number of expenditures CAE’s SR&ED deductible under paragraph 37(1)(d) of the ITA for those taxation years. 

[3] In addition, pursuant to subsection 127(18) of the ITA, the Minister has determined that the amounts that CAE received or was entitled to receive under the SADI Agreement during the 2012 taxation years and 2013, being $57,084,395 and $59,148,888 respectively, should be subtracted from the amount of eligible SR&ED expenditures for the purposes of CAE’s investment tax credit for those taxation years. 

[4] Finally, pursuant to subparagraphs 12(1)(x)(iv) and 12(1)(x)(v) of the ITA, the Minister concluded that the sum of $14,806,939, being the difference between the amount received by CAE during the 2012 taxation year under the SADI Agreement ($55,810,430) and the amount of CAE’s SR&ED expenditures during that same year in relation to the agreement ($41,003,491), was to be included in computing CAE’s income for the 2012 taxation year. 

[7] The issues are as follows: 

1. Did the Minister correctly conclude that the sums of $57,084,395 and $59,148,888 that CAE received or was entitled to receive under the SADI Agreement over the years 2012 and 2013 tax returns, respectively, constituted “government assistance” within the meaning of subsection 127(9) of the ITA?
2. Did the Minister correctly conclude that the sums of $57,084,395 and $59,148,888 that CAE received or was entitled to receive under the SADI Agreement should be deducted from the amount of its SR&ED expenditures eligible for the purposes of calculating CAE’s investment tax credit for the 2012 and 2013 taxation years respectively, pursuant to subsection 127(18) of the ITA?
3. Did the Minister correctly conclude that the sums of $41,003,491 and $40,652,951 [1] received by CAE under the SADI Agreement for the 2012 and 2013 taxation years should be subtracted from the amount of SR&ED expenditures deductible from CAE’s income for the 2012 and 2013 taxation years respectively, under paragraph 37(1)(d) of the ITA?
4. Did the Minister correctly conclude that the sum of $14,806,939 should be included in the calculation of CAE’s income for the 2012 taxation year under subparagraph 12(1)(x)(iv) of the ITA? 

[11] In 2007, as part of a strategic initiative aimed at the aerospace and defence industries, Canada’s Minister of Industry created the Strategic Aerospace and Defense Initiative “SADI program” [5]. 

[12] The objectives of the SADI Program were: 

1. Encourage strategic research and development leading to innovation and excellence in products, services and processes;
2. Increase the competitiveness of Canadian businesses;
3. Foster collaboration between research institutes, universities, colleges and the private sector [6].

[13] Under the SADI Program, a financial contribution to a research and development project could be granted to a company working in the aerospace, space or defence sectors [7]. The Industrial Technologies Office of the Department of Industry Canada was responsible for administering this program [8]. 

[14] On March 30, 2009, within the framework of the SADI Program, an agreement was concluded between the Minister of Industry Canada and CAE [9]. This agreement, the SADI Agreement, was entered into with respect to CAE’s SR&ED project known as “Project Falcon”. This project required SR&ED expenditures of $700,000,000 over a five-year period, from 2009 to 2014 [10]. It focused on the development of technologies related to flight simulators as well as certain products in the health field [11]. Under this agreement, Canada’s Minister of Industry contributed financially to the project by making “contributions” to CAE between 2009 and 2014 inclusive. These contributions are defined in the agreement as “financial assistance” intended to fund CAE’s SR&ED activities in relation to Project Falcon [12]. These contributions constituted 35% of the total “eligible expenses” [13] incurred by CAE in relation to Project Falcon and could not exceed $250,000,000 [14]. More specifically, the annual contributions that could be paid to CAE could not exceed the following amounts [15]: 

Government fiscal years     Maximum contributions that can be made

2009/2010                            $31,750,000

2010/2011                           $53,250,000

2011/2012                           $57,100,000

2012/2013                           $63,000,000

2013/2014                           $44,900,000

TOTAL                                  $250,000,000

[15] CAE received the maximum amount that could be paid to it under the SADI Agreement, namely $250,000,000. 

[16] During the 2012 and 2013 taxation years, the amounts that CAE received or was entitled to receive under the SADI Agreement were $57,084,395 and $59,148,888 respectively [16]. Only a portion of these amounts was used by CAE to pay SR&ED expenses incurred in relation to Project Falcon, namely $41,003,491 in 2012 and $40,652,951 in 2013 [17]. 

[17] Under the SADI Agreement, repayment of contributions must be made in fifteen annual instalments. The total reimbursements correspond to the sum equivalent to the total contributions paid to CAE multiplied by a factor of 1.35. CAE having received contributions totaling $250,000,000, the total amount to be reimbursed is $337,500,000 ($250,000,000 X 1.35) [18]. 

[18] According to the SADI Agreement, the reimbursement of contributions is unconditional and without any security [19]. The contributions must be reimbursed according to the schedule and according to the conditions provided for in the agreement. Annual repayments must be made no later than July 31 of each year beginning in 2015, approximately six years after receipt of the first contributions. The last of the fifteen repayments must be made on July 31, 2029 [20]. Under the repayment conditions provided for in the agreement, the contributions paid to CAE implicitly provide the Canadian Minister of Industry with a rate of return of approximately 2.50% on an annual basis [21]. 

[19] The amounts to be reimbursed annually by CAE under the SADI Agreement are as follows [22] : 

Refunds               Payment                   Year

1                           $11,250,000              2015

2                           $11,250,000              2016

3                           $11,250,000              2017

4                           $11,250,000              2018

5                           $22,500,000              2019

6                           $22,500,000              2020

7                           $22,500,000              2021

8                           $22,500,000              2022

9                           $22,500,000              2023

10                         $22,500,000              2024

11                         $33,750,000              2025

12                         $33,750,000              2026

13                         $33,750,000              2027

14                         $33,750,000              2028

15                         $33,750,000              2029

TOTAL                 $337,500,000

[20] Under the SADI Agreement, certain restrictions are imposed on CAE. For example, CAE is committed to manufacturing exclusively in Canada all products that may result from Project Falcon and certain other restrictions apply to CAE’s ability to transfer title or intellectual property rights relating to the project. CAE is also required to notify the Minister of Industry Canada of any other government financial assistance requested or received in connection with the project. If such aid were to be received, the contributions receivable could be reduced [24]. In addition, to be eligible to receive funds under the SADI Program, CAE had to establish a plan to work with accredited post-secondary institutions in Canada and allocate at least 1.0% of the total eligible SR&ED of the project to these institutions [25]. 

[22] The SADI Agreement may be terminated by CAE in the event of early repayment of all contributions received and the payment of an amount representing a return on investment of 2.75% on an annual basis with respect to the amounts repaid in advance [31]. 

[23] Mr. Malatesta has been with CAE since 2006. He was appointed Vice President of Finance and Controller in 2016. During the negotiations leading to the conclusion of the SADI Agreement, Mr. Malatesta was responsible for the “Complex Accounting Group” of CAE [32]. He first pointed out that since CAE is a public company listed on the Toronto Stock Exchange and the New York Stock Exchange, its financial statements are audited by independent auditors on a quarterly basis and an audit report is produced annually [33]. 

[24] According to Mr. Malatesta, the SADI Program was a means for CAE to finance its SR&ED projects [34]. Mr. Malatesta’s role was to give opinions on the financing and the accounting aspect of such projects, including when concluding an agreement such as the SADI Agreement [35]. 

[26] In October 2008, CAE was considering a reimbursement option under which it could repay contributions made by the government based on a percentage of earned income based on sales growth (“conditional reimbursement”) [38]. This option was ultimately not chosen. CAE chose a financing option with repayment independent of sales growth, i.e., a program of payments made in the form of fixed installments (“unconditional repayment“) because it concluded that it had more liquidity and that the effective interest rate incurred would be lower [39]. This aspect of the agreement was the subject of negotiations between the parties  

[28] As for the accounting treatment of the contributions received from the Minister of Industry of Canada, they have been qualified in their entirety as a long-term obligation in CAE’s consolidated financial statements [44]. In order to comply with generally accepted accounting principles (“GAAP”) [45], certain accounting adjustments had to be made. According to Mr. Malatesta, given the repayment conditions, the contributions received did not really reflect CAE’s financial obligation to them. Therefore, the amounts received have been adjusted to reflect their actual values [47]. The amount of contributions received was reduced according to the prevailing market interest rate for financing of this type [48]. These reductions take into account the duration of the agreement, including the repayment period. 

[30] In the end, the total interest that would have been payable on a loan made at its fair market value, namely $210,475,399, was deducted as a financing expense in the financial statements [53]. The amount of $122,975,399 constituting the accretionary component was presented as income, constituting a reduction in operating costs or a reduction in capitalized expenditures. The financing cost of $210,475,399 was effectively reduced by the accretion component, reducing the interest expense in the financial statements to $87,500,000, being the amount of interest actually paid by CAE under the agreement [55]. 

[32] According to Mr. Malatesta, the difference between the total amount of interest payable on contributions received under the SADI Agreement and the total amount of interest that would have been payable by CAE if it had to pay interest on these contributions at the market interest rate of $122,975,399 ($210,475,399 -$87,500,000) were described as “government benefit” in CAE’s financial statements. 

[34] According to Ms. Brossard’s testimony, CAE did not include in its revenues the amounts received as contributions under the SADI Agreement, because CAE considered them to be amounts received under a loan agreement and not received as “government assistance “. For the same reason, these amounts were not used by CAE to reduce its eligible SR&ED expenditures [62]. 

[35] CAE included in its 2012 income statements a fictitious profit generated by this loan obtained at a preferential rate. CAE has also included in these same statements a fictitious interest expense corresponding to the difference between the sums paid as interest under the SADI Agreement and the sums which would have been paid as such if the loan had been granted at the market interest rate. This sum was “offset” by the addition of a non-deductible expense, thus cancelling out the fictitious profit generated by the preferential interest rate in CAE’s financial statements [63]. 

[38] The objective of the SADI Program was not to generate a return on contributions made and the program does not have a target rate of return. However, an agreement entered into under the program could not be limited to providing for the reimbursement of contributions paid to a company. The agreement had to provide for a reasonable rate of return on “investment” in order to comply with the rules of the World Trade Organization. 

[40] The SADI Program is a so-called “contribution” program, and it is for this reason, according to Mr. Lemieux, that the SADI Agreement does not qualify as a loan. In addition, the relevant government documents do not provide that a loan can be obtained under the program. 

[45] Negotiations focused on the total amount of contributions to be paid as well as the period over which repayments would be staggered. The reimbursement ratio was set at 1.35 and the total amount of contributions to be paid was increased to an amount equivalent to 35% of the research and development expenses incurred [71]. In return, the Department of Industry Canada has given up some of the research activities deemed riskier. As for refunds, the ministry offered two options. In both cases, a grace period of five years was provided. The first repayment option offered was conditional and based on CAE’s sales growth. Repayment of contributions was to be made over a period of eight years. As for the second option, the reimbursement of contributions was unconditional and provided for fixed sums to be reimbursed over a period of fifteen years. CAE chose the second option [74]. According to Mr. Lemieux, no guarantee or security was required from CAE because it is not usually required by the SADI Program. 

[48] According to Mr. Lemieux, in the event that CAE had financial difficulties, a new risk analysis would have been carried out and the conditions of the SADI Agreement would have been renegotiated [80]. It was only as a last resort that CAE would have been put in default by the Minister of Industry of Canada [81]. In some cases, the debt can be written off. If renegotiations had taken place, they would have aimed at ensuring that Canada still benefits from the agreement. During his cross-examination, Mr. Lemieux said that the government was doing this in order to protect his rights. 

[49] Mr. de Gray is Director of Disputes and Investigations at Duff & Phelps. Since 2010, his practice has specialized in business and title valuation, quantification of damages and corporate finance advisory services. The Respondent retained his services as an expert in corporate finance and in the valuation of debt instruments and securities. The services of Mr. de Gray have been retained to assist the Court; Mr. de Gray was asked whether, in his view, the SADI Agreement has the attributes of a “trade” and constitutes an “ordinary trade agreement”. Specifically, the Respondent asked him whether, in his view, payments made pursuant to the SADI Agreement were made “in exactly the same manner and for exactly the same reasons as payments made by private companies, that is, in order to promote the interests of the payer” [86]. Mr. de Gray was aware that the parties were in disagreement as to whether the agreement constituted a loan agreement or some other type of agreement. He was not asked his opinion on this [87].  

2. M. de Gray’s analysis

[50] When assessing the “nature” of the SADI Agreement and seeking to determine whether this agreement possesses the attributes of a “commercial enterprise” and constitutes an “ordinary commercial agreement”, Mr. de Gray reviewed the key terms of the deal, which he said are as follows: 

• (a) reimbursement;
• b) SADI Agreement internal rate of return;
• (c) clauses and restrictions;
• (d) other conditions [88].

[53] Regarding the deferral of interest and principal payments during the first five years of the SADI Agreement and the fifteen-year repayment period, Mr. de Gray believes that these two factors increase the risk of the lender relating to the agreement. According to Mr. de Gray, it is unusual for a commercial loan agreement to provide for a five-year payment deferral of interest and principal. Mr. de Gray stated that a commercial loan agreement usually requires repayment in some form over the term of the agreement, and deferral periods are usually less than five years. 

[55] To determine whether the SADI Agreement possesses the attributes of a “commercial enterprise” and constitutes an “ordinary commercial agreement”, Mr. de Gray considered whether the “implied” rate of return of the agreement corresponded to a fair market rate of return given the risk profile of the “investment”. This is an “implied” rate of return because there is no reference in the agreement to any rate of return. 

[56] Based on the total contributions received by CAE ($250,000,000) and the total repayments to be made ($337,500,000), Mr. de Gray concluded that the SADI Agreement provided a return of $87,500,000. ($337,500,000-$250,000,000) [94]. Mr. de Gray established what this dollar return meant from an annual rate of return perspective. He calculated the implied rate of return based on the cash flow projections in the agreement and subsequent amendments to the agreement. He concluded that the internal rate of return implied by the agreement is approximately 2.5% [95]. 

[57] In order to determine whether this rate was a fair market rate for such an “investment”, Mr. de Gray considered the following: 

1. The terms of the agreement and their impact on a fair market rate of return;
2. The risk-free benchmark rates of return prevailing in the market on the date the parties entered into the agreement;
3. The yield of corporate bonds in Canada and the United States for bonds of the so-called “investment grade” category during the period in question;
4. The implied rates of return associated with the issuance of corporate bonds in the aerospace and defence industries during the relevant period;
5. Implied rates of return associated with CAE’s existing commercial claims to arm’s length third parties;
6. The market rate of return implied by the SADI Agreement as determined by CAE and found in its financial reports [96].

[58] Mr. de Gray has reviewed the conditions that he believes impact the risk profile of the SADI Agreement. These conditions are as follows: 

(a) average term to maturity; 

(b) security; 

(c) clauses and restrictions; 

(d) classification; 

(e) repayment terms; 

(f) early repayment; 

(g) fixed rate of return and interest rate. 

The terms of the agreement and their impact on a fair market rate of return

[59] Mr. de Gray considered that the SADI Agreement was for a period of twenty years, that is to say, a contribution period of five years followed by a repayment period of fifteen years. He stated that the longer the term, the greater the risk inherent in an agreement and, therefore, the higher the rate of return. 

[60] There is no security attached to the “contributions” under the SADI Agreement. Since unsecured instruments present a higher inherent risk to the contribution provider, the rate of return applicable to these instruments is higher. 

[61] The clauses are intended to provide protection to the lender; the risk for the lender is therefore increased if an agreement contains minimum clauses. After reviewing the SADI Agreement, Mr. de Gray concluded that the protections provided were minimal. Consequently, the required return and the risk profile of the agreement are higher. 

[62] According to Mr. de Gray, the SADI Agreement does not expressly address the classification of the “instrument” relative to CAE’s other issued and outstanding debt “instruments”. Mr. de Gray stated that the classification of a debt “instrument” corresponds to the order of eligibility of the “instrument” or its priority over the assets of the borrowing company compared to other lenders of the company. A highly ranked debt “instrument” has a lower risk profile since the lender is more likely to receive the funds due, compared to a lender holding a lower-ranked debt instrument. Mr. de Gray concluded that since the agreement is silent on the question of classification, this increases the exposure to risk for the Minister of Industry of Canada [99]. 

[63] Mr. de Gray testified that the Minister of Industry Canada’s exposure to risk is increased because the SADI Agreement provides for no reimbursement during the first five years of contribution payments and the reimbursement increases gradually over the fifteen years following this period. He stated that usually, lenders require at least the payment of interest. Thus, the rate of return on the agreement should be higher. 

[64] The SADI Agreement allows CAE to prematurely terminate the agreement and prepay all amounts due, in addition to a premium of 2.75%. According to Mr. de Gray, this option is generally advantageous for the beneficiary of the capital. Furthermore, the option is disadvantageous for the funder because it reduces its ability to predict the level of its future liquidity. Therefore, financial instruments with prepayment options show higher rates of return [101]. 

[65] The rate of return provided for in the SADI Agreement is fixed. It remains the same for the duration of the agreement, regardless of the market interest rate. Therefore, fixed rates are superior to variable or floating rates since the lender, under a fixed agreement, is exposed to fluctuations in market rates during the term of the agreement. 

The risk-free benchmark rates of return prevailing in the market on the date the parties entered into the agreement

[67] Since the approximate duration of the SADI Agreement was 20 years, Mr. de Gray examined the risk-free rate of return on 20-year bonds measured by the Canadian government and the United States Treasury [104]. Mr. de Gray compared the rate of return implied by the SADI Agreement to the risk-free rates of return for the period from March 31, 2007, to March 31, 2014; he concluded that the rate of return implied by the agreement (2.50%) was approximately 1.15% lower than the risk-free rate of return (3.65%) in Canada as of March 30, 2009. Based on this observation, he concluded that given the higher risk profile of the SADI Agreement compared to risk-free government bonds, the SADI Arrangement should have resulted in a higher rate of return than the risk-free rate[105]. 

The yield of corporate bonds accessible in Canada and the United States for investment-grade premium bonds 

[69] On March 30, 2009, he concluded that the rate of return on Canadian corporate bonds with a level of risk comparable to that of CAE and with a maturity of 20 years was approximately 8.54%. Given CAE’s risk profile, this led Mr. de Gray to conclude that he expected the rate of return on the SADI Agreement to exceed 8.54% [106]. 

Implied rates of return associated with the issuance of corporate bonds in the aerospace and defence industries during the period in question 

[71] Looking in particular at CAE’s internal credit benchmarking analysis, Mr. de Gray concluded that the rate of return on the SADI Agreement is lower than the market rate of return on the bonds of the aerospace and defence. He concluded that the agreement’s rate of return is significantly lower than the market rate of return [107]. 

Implied rates of return associated with CAE’s existing arm’s length third party trade receivable 

[73] According to Mr. de Gray, the rate of return on the SADI Agreement should have been higher than the rate of 7.15% on the private placement, given the following elements: 

1. The agreement had a longer term than the private placement, ie fifteen to twenty years instead of eight years;
2. The private placement benefited from a preferential ranking (priority claim);
3. The agreement was accompanied by minimal clauses compared to the private placement;
4. The agreement included deferred repayment conditions.

The implied market rate of return associated with CAE’s financial reports regarding the SADI Agreement 

[74] According to Mr. de Gray, CAE’s audited annual consolidated financial statements, together with the information presented in the appendix, provide a better understanding of CAE’s management’s assessment of a fair rate of return of the market for the SADI Agreement. 

[75] For financial statement purposes, CAE has adjusted the face value of contributions received under the SADI Agreement to their fair market value. CAE has retained, for the obligations of the SADI agreement, a fair market rate of return ranging from 6% for contributions received in 2014 to 13% for contributions received in 2010. The calculated implicit weighted cumulative market rate of return by Mr. de Gray was 10.1% at the end of the 2014 financial year [108]. According to CAE’s documents, the obligations of the agreement (contributions to be repaid) aligned with the upper range of market benchmarks. 

[76] For example, contributions received by CAE, totalling $33,805,358 for the fiscal year of 2010, have been discounted to represent an obligation of $9,125,957 on CAE’s financial statements. CAE then assumed a fair market rate of return of 13% for contributions made in the fiscal year of 2010. Throughout the period in which contributions were made, CAE discounted the total amount of its obligation, thereby increasing it from $250,000,000 to $139,095,006. 

[79] According to Mr. de Gray, the SADI Agreement contains a number of restrictions limiting CAE’s ability to dispose of any intellectual property or equipment developed using funds obtained under the agreement. The agreement also limits the amount of work and costs that can be incurred outside of Canada. According to Mr. de Gray, these restrictions illustrate the political and national objectives of the Government of Canada and are unusual in an ordinary trade agreement. [114]. Mr. de Gray added that there are also political reasons for the responsibilities for communicating with the public which are set out in Annex 4 of the agreement, and which cover the publication of information and marketing materials. These liabilities are not common in ordinary business arrangements. Finally, Mr. de Gray stated that it was also unusual in ordinary business arrangements for the recipient (in this case, CAE) to be required to enter into partnerships with certain arm’s length parties and not-for-profit organizations in order to qualify for funding under an agreement. 

Conclusion of M. de Gray 

[80] Mr. de Gray concludes that the SADI Agreement does not possess the attributes of a “commercial enterprise” and does not constitute an “ordinary commercial agreement”. Accordingly, he also concludes that the payments made to CAE pursuant to the agreement were not made in exactly the same way and for exactly the same reasons as the payments made by private companies, that is, in order to promote the interests of the payer. 

[81] Mr. de Gray came to this conclusion after establishing that a “financial instrument” such as the SADI Agreement, given its risk profile, offered a rate of return that was too low compared to what a “normal investor” would expect to get from this type of “investment”. More specifically, he drew the following three conclusions: 

1. The rate of return of approximately 2.5% assumed by the agreement is significantly lower than the fair market rate of return for a financial instrument whose risk profile is comparable to that of the agreement [119].
2. The agreement is subject to minimal positive and restrictive clauses and does not contain any of the financial clauses which would be characteristic of this type of ordinary commercial agreement.
3. The Agreement contains several other conditions that are not typical of an ordinary business agreement. These conditions are primarily motivated by political considerations or government action, rather than commercial reasons.

[84] The appellant submits that the amount that was “received” by CAE is the sum of $250,000,000. According to the appellant, in order to determine whether an amount of “government assistance” was “received”, it is necessary to characterize the agreement. The appellant maintained that the SADI Agreement constitutes a simple loan since, under it, the Department of Industry of Canada lent a sum of $250,000,000 to CAE over a period of five years and that CAE, for its part, undertook to reimburse this sum unconditionally [123]. 

[85] The appellant maintains that the definition of a simple loan is found in article 2314 CCQ and that, according to this definition, a loan is a contract by which the lender remits a certain amount of money or other goods that are consumed by use to a borrower. The borrower undertakes for his part to return the same, of the same species and quality, after a certain period of time. According to the appellant, the SADI Agreement clearly establishes a “lender-borrower” relationship between the Minister of Industry of Canada and CAE and the agreement was entered into in accordance with normal business practices for commercial loans. More specifically, the agreement contains clauses in the event of late repayments and in the event of default in repayment. 

[89] The Respondent submits that the sum of $250,000,000 received by CAE under the SADI Agreement was received as “government assistance” within the meaning of subsection 127(9) of the ITA. Consequently, CAE had to subtract in the calculation of its deductible SR&ED expenditures the amounts of $41,003,491 and $40,652,951 during its 2012 and 2013 taxation years respectively, pursuant to paragraph 37 (1)(d) of the ITA. 

[90] For the same reason, but according to subsection 127(18) of the ITA, CAE had to subtract in the calculation of its eligible SR&ED expenditures for the purposes of calculating the investment tax credit the sums of 57,084,395 $ and $59,148,888, as they were received or were to be received under the agreement during the said taxation years. 

[91] Finally, the Respondent argues that the amount of $14,806,945, being the difference between the amount received or receivable by CAE during its 2012 taxation year ($55,810,430) and the amount actually received in that year ($41,003,491) was required to be included in CAE’s income under subparagraph 12(1)(x)(iv) of the ITA. 

[93] With respect to the investment tax credit, according to subsection 127(18) of the ITA, government assistance received or receivable by the taxpayer relating to SR&ED activities must be deducted in the calculation of SR&ED expenditures eligible for the calculation of its investment tax credit. As for subsection 127(10.7) of the ITA, it specifies that the amount of assistance that is reimbursed may be added to the investment tax credit in the year in which it is reimbursed. Where the amount of assistance exceeds the amount of SR&ED expenditures relating to a particular project, the excess must be added to income in the tax year under paragraph 12(1)(x) of the ITA.

Link to Full Ruling 

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Related Ruling

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CAE Inc. v. The Queen (2021) – Unofficial translation