Victory in Quebec Court of Appeal: Agence de revenu du Québec vs Laurentian Bank of Canada, 2020 QCCA 1434

On November 2, 2020, Cain Lamarre’s tax litigation team represented by lawyers Alain Ménard, Kathy Kupracz and Alexa Charbonneau, won their case before the Québec Court of Appeal in a dispute between their client, the Laurentian Bank of Canada (“Bank”), and the Agence de revenu du Québec (“ARQ”).

The Quebec Court of Appeal upheld the first instance judgment of the Court of Québec ruling in favor of the Bank regarding the tax on capital and the compensation tax on financial institutions.

The Bank was subject to a tax audit for the 2007 to 2013 taxation years. During these years, the Bank held preferred shares of its subsidiaries (“Shares”). For these years, the Shares were entered as assets to the Bank’s balance sheet.

As for the subsidiaries, they entered the Shares as liabilities in accordance with the generally accepted accounting principles (“GAAP”) which had been modified at the time. In doing so, the subsidiaries did not include the value of the Shares in their calculation of their paid-up capital. This position is approved by the Federal Court of Appeal and the Quebec Court of Appeal in their Ford Credit decisions (2007 CAF 225 and 2012 QCCA 7010).

In this case, the ARQ does not question the presentation of the Shares in the financial statements of the subsidiaries and the Bank.

For each of the years in dispute, the Bank claimed the “investment allowance” in respect of the Shares. As per the Taxation Act (“TA”), with regards to the tax on capital, the value of an asset when it’s « a share of the capital stock or the long-term debt of another corporation referred to in Title II of the Taxation Act and to which the corporation is related » is deductible by a corporation in computing its paid-up capital for a taxation year. The ARQ denied the investment allowance considering that the subsidiaries did not include the Share value in there computing of the paid-up capital. According to the ARQ, the subsidiaries must be taken into consideration. The subsidiaries entered the Shares as liabilities therefore the Shares are not « shares of the capital stock ».

The judge of the Court of Québec ruled in favor of the Bank. The judge noted that the Shares are “shares of the capital stock” of the subsidiaries under the GAAP applicable to the Bank. In fact, the legislature expressly made use of accounting principles to determine paid-up capital for the purposes of the tax on capital. In addition, the ARQ admitted, in a Partial Factual Agreement, that the accounting presentation was in accordance with GAAP.

Furthermore, the Ford Credit decisions cannot be interpreted to mean that the Shares are not capital stock. Shares are capital stock in the legal and accounting sense. The change to GAAP did not modify the legal and corporate characteristics of the Shares, but only changed their accounting presentation in the balance sheet. Textual, contextual and teleological analysis confirms this conclusion. Finally, the judge noted that unless there are express legislative provisions, the “mirror effect” is not automatic, and that symmetry of treatment is not a rule in tax law. The ARQ appealed this decision.

The opinion of the Quebec Court of Appeal is that the trial judge properly considered the case and that the trial judgment was well founded. The Quebec Court of Appeal therefore dismissed the ARQ’s appeal. In doing so, the investment allowance claimed by the Bank is granted.