Ticketnet Corp. v. Canada
T-2185-88
Evans J.
11/6/99
26 pp.
Appeal from disallowance of $2,000,000 claim for investment tax credit for research, development expenses-Plaintiff entering contract with Air Canada to obtain financing to develop software for automated ticketing for entertainment event anywhere in country-Contract providing for development of software for fixed fee of $2 million, and for regular invoicing-Air Canada also agreed to "advance credit" for $2 million fee invoiced, to be repaid in accordance with clause 3.1-Clause 3.1 providing amount advanced to be repaid at rate of $0.05 per ticket sold-Plaintiff would be owner of software-Ontario Court (General Division) (Ticketnet Corp. v. Air Canada, [1993] O.J. No. 289 (Gen. Div.) (QL)) determining contract valid, binding, and Air Canada committed repudiatory breach of software development agreement-In awarding damages, deducted $2 million in respect of plaintiff's contractual liability to pay Air Canada, although payment not yet due-Air Canada ordered to return software to plaintiff-Whether contract imposing unconditional obligation, thus qualifying expense incurred on research and development as investment tax credit-Claim dismissed-Plaintiff submitting two distinct, separate parts to software development agreement: contract for supply of services in connection with development of software for fee, and interest-free loan to enable it to pay Air Canada's fee for service to be repaid through royalty on ticket sales-But agreement nowhere using terms "loan", "amount lent"-Also essential feature of loan promise to repay amount lent-As of April 30, 1986, not clear plaintiff would ever be required to "repay" $2 million to Air Canada since "repayment" only to occur after acceptance of software by plaintiff, and if ticket sales generating minimum of $2 million-Contract silent about eventuality of plaintiff never accepting software, as was case-Obligation to this effect cannot be implied-Whatever reasons for plaintiff"s failure to make payments, agreement creating option for Air Canada to purchase software for $2 million against which plaintiff required to set off so much of $2 million advanced by Air Canada that had not repaid from ticket sales-Contract not providing Air Canada could sue plaintiff for amount of loan not "repaid"-Just as plaintiff in Alberta and Southern Gas Co. Ltd. v. The Queen (1976), 76 DTC 6362 (F.C.T.D.) looking to assigned petroleum substances for repayment, and Court holding transaction not loan, so Air Canada could ultimately resort to option to purchase software for reimbursement if not receiving agreed payments from ticket sales-If terms of contract unclear as to whether borrower/lender relationship created, then in absence of commercial rationale other than obtaining tax credit, Court should not strive to construe contract in way plaintiff urging-Plaintiff submitting weight should be attached to characterization of plaintiff's obligation in financial statements prepared by auditors in accordance with generally accepted accounting principles-Question of law depending on construction of contract whether plaintiff's liability to Air Canada arising from loan or supply of services, or unconditional or contingent-Not matter of general principles of accounting-Whether plaintiff's liability "contingent" or advance loan could not be conclusively determined by inclusion in financial statements under "long term debt"-Purpose of financial statement to give investors complete, accurate picture of company's financial position-Prudent to include debt, regardless of whether contingent or accrued-But for tax purposes distinction between contingent, unconditional critical-Apparently casual, inaccurate way in which some statements, invoices prepared may reflect fact that not matter of any commercial or accounting significance as far as Air Canada concerned-Argument unfair to deny plaintiff benefit of tax credit simply because Air Canada providing both service, financing for service, missing point-Problem not that service provider, lender same person, but that terms of contract not imposing unequivocal obligation to repay money lent, one of defining legal characteristics of loan-Legal obligations assumed by plaintiff under contract not those of borrower-Alternatively plaintiff submitting contract obliged plaintiff to pay for services rendered by Air Canada not conditional on its acceptance of software i.e. contract for provision of services, not for delivery of product-Ontario Court judgment deducting $2 million from damages awarded not deciding as of June 30, 1986 plaintiff's obligation to Air Canada unconditional, but based on estimate of net profits if contract had been performed, in which case plaintiff's profits reduced by $2 million paid to Air Canada from proceeds of sales of tickets through use of software-Nothing in judgment contradicting contract for development, delivery of product-Moreover, until finished product delivered, plaintiff's liability to pay contingent only-That plaintiff would not be liable to pay if Air Canada failed to deliver software, or software not accepted for good reason, sufficient to make debt contingent-Acceptance condition to "vesting"of liability-On face of contract plaintiff not assuming unconditional liability to pay until software accepted, tickets sold-If software accepted, but less than specified payments made, plaintiff would be liable to transfer title to software to Air Canada-Uncertainty as to liability different from uncertainty as to quantum.