Background
Traductions Sematos inc., a translation-services company, sought federal COVID-19 relief under section 125.7 of the Income Tax Act. It elected to use its average gross revenue for January and February 2020 as the baseline against which revenue declines in subsequent periods would be measured.
After the relief program was announced, the company added approximately $70,000 of unbilled work in progress to its January and February revenue and removed the same amount from March revenue when the work was billed. It argued that including work in progress was consistent with a longstanding accounting practice under which it recognized such amounts when they exceeded $20,000. The Minister rejected that treatment and reduced the company’s benefits for the disputed qualifying periods.
The Court’s Holding
The Tax Court dismissed the appeal, except as to Period 5, which was not disputed. It found that the company had not established a normal accounting practice of systematically tracking or recognizing unbilled work in progress as revenue. The evidence instead showed that work in progress had historically appeared as a balance-sheet asset, while no accountant or bookkeeper testified that it was ordinarily included in revenue.
The Court found that the company retroactively included the amounts after the COVID-19 relief measures were announced, thereby increasing its January-February baseline and decreasing its March revenue even though revenue without those adjustments had risen in March. It further held that, even if intermittent recognition of work in progress had been the company’s normal practice, that method was wholly unreasonable because it did not produce a consistent picture of revenue. The Minister’s determinations were therefore upheld, and costs were awarded to the Crown.
On procedural matters, the Court allowed the company to amend its pleading and accepted the Crown’s responsive amendment, finding no uncompensable prejudice. It also denied the Crown’s request under Rule 98(3) to restrict the company’s explanations concerning a document disclosed during discovery.
Key Takeaways
- An applicant under section 125.7 must prove the accounting practices it normally used to calculate qualifying revenue; a method adopted after relief was announced does not qualify merely because the applicant labels it longstanding.
- The Court found no evidence that Traductions Sematos ordinarily treated unbilled work in progress as revenue, and it expressly declined to decide whether such work could satisfy the statutory definition requiring an inflow of cash, receivables, or other consideration.
- Section 125.7 generally adopts an eligible entity’s normal accounting practices, but it does not permit a wholly unreasonable or inconsistently applied method that distorts revenue comparisons.
Why It Matters
The decision illustrates the evidentiary burden facing businesses that challenge COVID-19 subsidy determinations based on their own accounting practices. Contemporaneous records and testimony from people who actually applied those practices may be critical, particularly when the claimed method differs from the treatment shown in historical financial statements.
It also clarifies that the Minister cannot simply replace an eligible entity’s normal method with a more accurate one under section 125.7, but the entity’s chosen practice must still be genuine, consistently applied, and not wholly unreasonable.