Executive Summary: Key Legal and Evidentiary Issues

• Central issue was whether $1,322,170.12 in professional fees claimed by Hypertec Systèmes inc./Hypertec Systems Inc. (HSI) were deductible business expenses under the Loi sur les impôts du Québec (LIQ).

• The Agence du revenu du Québec (ARQ) denied the deduction, arguing the expenses were not related to HSI’s business or were capital in nature, and that supporting documentation was insufficient.

• HSI argued the expenses were necessary to resolve a board impasse and to comply with court orders in a shareholder oppression proceeding.

• The court examined whether ARQ could raise a new legal argument (capital nature of expenses) at the pleading stage without prior notice or factual basis in its defense.

• Determination was required as to whether the professional fees were incurred in the ordinary course of business or primarily to protect shareholder interests.

• The sufficiency of evidence regarding the purpose and nature of the expenses was a key point in the court’s analysis.

Background and facts

Hypertec Systèmes inc./Hypertec Systems Inc. (HSI) contested a tax assessment issued by the Agence du revenu du Québec (ARQ) for its fiscal year ending September 30, 2017. The ARQ refused a deduction of $1,322,170.12 claimed by HSI as professional fees expenses. The ARQ’s position was that these expenses did not meet the requirements of articles 128 and 129 of the Loi sur les impôts du Québec (LIQ), arguing that the expenses were not reasonably related to HSI’s business, were not incurred to earn business income, or were capital in nature, and that HSI had not provided sufficient supporting documentation.

The expenses at issue were paid to several professional firms: Price Waterhouse Cooper (PWC) ($964,115.52), Blake, Cassels & Graydon LLP ($150,136.41), Par7 Advisors ($100,000.00), Richter ($77,662.50), Alternative Capital Group Inc. ($29,032.25), McCarthy Tétrault ($12,164.50), and Stikeman Elliott ($9,504.88), totaling $1,322,170.12.

The majority of these expenses related to legal, accounting, and advisory services provided in the context of a shareholder dispute within the Hypertec group. This dispute led to a shareholder oppression action (recours en oppression) before the Quebec Superior Court, in which HSI was named as a party. The court in that action ordered the creation of a special committee, with HSI required to pay the associated professional fees.

The professional services were rendered between September 2016 and April 2017, and included mediation, preparation of financial forecasts, and compliance with court orders.

HSI maintained that the expenses were necessary for resolving an impasse within its board of directors, for responding to the shareholder oppression action, and for fulfilling obligations imposed by court orders, including the establishment and operation of the special committee.

Legal issues and arguments

The main legal issue was whether the professional fees were deductible as current business expenses under article 128 LIQ, or whether they were non-deductible capital expenditures under article 129 LIQ. The ARQ initially argued that the expenses were not incurred to earn business income and did not relate to HSI’s business operations. During oral pleadings, the ARQ attempted to introduce a new argument that the expenses were capital in nature, but this had not been previously pleaded or supported by factual allegations.

HSI argued that the expenses were incurred in the ordinary course of business, were necessary to resolve governance issues, and were imposed by court order. HSI also objected to the ARQ’s attempt to introduce a new legal argument at the pleading stage without proper notice or factual foundation.

Court’s analysis and decision

The court found that the ARQ could not rely on a new legal argument at the last stage without having properly pleaded it or provided supporting facts. The court determined that the professional fees were not capital expenditures but were current expenses incurred in the ordinary course of business. The court accepted that the fees were necessary for resolving board impasses, responding to the shareholder oppression action, and complying with court orders, all of which were linked to HSI’s business operations and income generation.

The court concluded that HSI had demonstrated the expenses were deductible under article 128 LIQ. The ARQ’s assessment was annulled.

Outcome

Hypertec Systèmes inc./Hypertec Systems Inc. was the successful party. The court annulled the ARQ’s tax assessment and recognized HSI’s right to deduct the full amount of $1,322,170.12 in professional fees. The court also awarded legal costs in favor of HSI; the specific amount of costs was not stated in the decision.