Executive Summary: Key Legal and Evidentiary Issues

• The Tax Court dismissed Traductions Sematos Inc.'s appeal of Minister determinations that reduced its wage subsidy entitlement under section 125.7 of the Income Tax Act.
   
• Justice Ezri found the appellant had not established that including unbilled work-in-progress in revenue was part of its normal accounting practices.
   
• Evidence showed the appellant added roughly $70,000 in unbilled WIP to its January and February 2020 revenues only after COVID-19 relief measures were announced.
   
• Testimony from the CRA appeals officer pointed to inconsistencies in how the appellant treated WIP across different periods since 2016.
   
• Procedural rulings allowed the appellant's pleadings amendment while denying the respondent's request to limit evidence under Rule 98(3).
   
• Costs were awarded to the respondent, with the exact amount to be fixed through a later submissions process rather than in the judgment itself.
   

Facts of the case

Traductions Sematos Inc. is a translation business serving clients, including governments and large companies, doing business in Quebec. The company is 95% owned by Manuel Fresnais, a certified translator with an MBA, and employs about 25 translators. It bills clients by the word and pays staff on a biweekly basis. The business uses two software systems: Plunet, which manages project workflow and generates invoices, and Quickbooks, its accounting system. The two do not always align — for example, client credits are entered in Quickbooks but not in Plunet.

When the COVID-19 pandemic began in March 2020, the appellant applied for government relief under section 125.7 of the Income Tax Act on the basis that its revenues had declined. To calculate that decline, the appellant used its average revenue for January and February 2020 as a baseline. In computing that baseline, it added roughly $70,000 in unbilled work-in-progress (WIP) to its revenue figures — a total of $20,625 in January (which included $2,400 carried over from December 2019, against an actual January WIP of $18,124) and close to $50,000 in February. When the underlying contracts were eventually billed in March 2020, the appellant removed the same $70,000 from its March revenue to avoid double-counting. The effect was to inflate the January/February baseline while depressing the March comparison figure, making the appellant's revenue decline appear larger than it otherwise would have. The Minister determined that this WIP inclusion was not part of the appellant's normal accounting practices and adjusted the appellant's benefit entitlement accordingly, prompting this appeal.

Before reaching the merits, the Court dealt with two procedural disputes: a motion by the appellant to amend its notice of appeal, which the respondent opposed as an improper withdrawal of a formal admission, and a request by the respondent to restrict the appellant's evidence under Rule 98(3) of the Tax Court of Canada Rules over an allegedly incomplete discovery response. Justice Ezri allowed the amendment, finding it did not withdraw a formal admission and satisfied the flexible test for pleadings amendments, and declined to limit the evidence, noting the respondent could have sought clarification at discovery but did not.

Policy and legislative provisions at issue

The case turned on section 125.7 of the Income Tax Act, the provision establishing the wage subsidy program. Eligibility depended on comparing an eligible entity's revenue in a "Current Reference Period" (CRP) against a baseline "Prior Reference Period" (PRP) — here, the average of January and February 2020. A qualifying decline of 15% was required for the first period and 30% for the second.

Central to the dispute was subsection 125.7(4), which requires that "qualifying revenue" be determined in accordance with the eligible entity's normal accounting practices. The appellant argued this meant it was entitled to use whatever accounting approach it had genuinely and consistently followed, including treating WIP as revenue, and that the Minister could not substitute a different method simply because it might be more accurate. The respondent maintained that the appellant's WIP treatment did not reflect a genuine, consistent practice and was inconsistent with accounting principles applicable to private corporations.

Reasoning and analysis

Justice Ezri undertook a detailed, period-by-period review of the appellant's WIP history going back to 2016. He found that WIP had been tracked as a balance sheet asset between April 2016 and November 2017, but there was no evidence it was ever included as revenue during that period — the annual financial statements were silent on the point, and the appellant called no accountant or bookkeeper to explain how WIP had actually been treated. Routine WIP tracking then appeared to lapse after November 2017, resuming only sporadically, including a single month in July 2018 where WIP was tracked but still not added to revenue.

The Court gave weight to testimony from Vincent Laquerre, the CRA appeals officer, that the appellant's approach — adding WIP to revenue only when it exceeded $20,000 — lacked the consistency expected of a genuine accounting practice. Justice Ezri also found the appellant's own evidence undermined its position: no WIP report was produced for February 2020 despite an alleged $50,000 in WIP that month, and the appellant's explanation for the gap, tied to accountant transitions, did not hold up since WIP was generated from Plunet rather than the accounting firm. The judge concluded that the appellant had not reviewed its WIP at all until April 2020, after the COVID relief program was announced, and that the WIP was added to the January and February baseline specifically to inflate it.

Applying the Federal Court of Appeal's guidance in Canderel, the Court held that even if the appellant's WIP treatment reflected an actual practice, it would still be unreasonable because it produced an inconsistent picture of revenue from month to month — sometimes including WIP, sometimes not, based on an arbitrary and inconsistently applied $20,000 threshold. The stated business justifications for tracking WIP, cash-flow management and monitoring employee productivity, did not explain why WIP would be added to revenue rather than merely tracked.

Ruling and overall outcome

The Court dismissed Traductions Sematos Inc.'s appeal, upholding the Minister's determinations reducing its wage subsidy entitlement for the qualifying periods from March 15, 2020 to October 23, 2021, apart from Period 5 (July 5 to August 1, 2020), which was not in dispute. Justice Ezri found the appellant had not shown that including unbilled work-in-progress in revenue reflected its normal accounting practices, and that even if it had, the practice was unreasonably inconsistent. His Majesty the King, as respondent, was the successful party and was awarded costs; the judgment does not fix a specific dollar amount for those costs, instead setting out a schedule for the parties to file costs submissions if they cannot agree on quantum. No other monetary award or damages figure was ordered in the decision.