A company is legally protected from its creditors and makes a payment that entitles it to claim sales tax credits. Can the taxman refuse to pay the credits to the company and, instead, use this sum to offset the company’s tax debt to him? Nearly $7.5M is at stake in this cause.

To remember in 30 seconds:

1. A company is legally protected from creditors, but is entitled to tax credits;

2. In this case, the court refused to allow the taxman to offset a debt owed by the company against a debt owed to him by the company.

It all began on January 27, 2015, when an initial order placed Cliffs Québec Iron Mining ULC (Cliffs) in creditor protection and named FTI Consulting Canada Inc. (FTI) as controller. At the time, Cliffs owed the tax authorities $13,391,896.

Between January 2015 and February 2016, Cliffs cancelled agreements with 4 of its suppliers, who subsequently sued for damages.

On June 29, 2018, the Superior Court of Quebec (SC) approves a plan of arrangement.

In August 2018, FTI is making interim distribution payments to unsecured creditors. Suppliers receive partial payment in connection with their claims for damages.

Payments made to suppliers enable Cliffs to claim income tax refunds and input tax credits (ITCs) from the tax authorities for a total of $7,459,258 (ITCs related to the payment of damages). Without contesting the latter amount, the taxman claims to be able to offset his debt, thereby reducing it from $13,391,896 to $5,932,638.

So FTI is asking the CS to prevent the compensation sought by the tax authorities. The SC ruled in favor of FTI. The tax authorities are appealing this decision.

On appeal, the Quebec Court of Appeal concluded that the first judge had not erred. According to the applicable legislation, “[w]here an amount is paid as a result of the termination of an agreement for a taxable supply, the person is deemed to have paid for the supply, while the registrant is deemed to have collected the tax at the time of such payment, which in this case took place after the initial order”.

Reference: Revenu Québec v. FTI Consulting Canada Inc. 2022 QCCA 1740