Tax Court rejects retroactive revenue shift in translation firm’s pandemic-subsidy appeal

The Tax Court of Canada has dismissed a translation company’s challenge to reduced pandemic subsidies after finding that it retroactively shifted about $70,000 in unbilled work into its January and February 2020 revenues, increasing the baseline against which its later revenue decline was measured.

Justice Michael U. Ezri’s August 31 decision in Traductions Sematos inc. v. The King, 2026 TCC 162, turned on evidence of the company’s actual accounting practices. The company said including work in progress was a longstanding practice. The judge found that claim unproved and concluded that the disputed treatment was adopted only after the pandemic-relief measures were announced.

The ruling also drew a legal boundary: section 125.7 of the Income Tax Act generally uses the eligible entity’s normal accounting practices, rather than allowing the Minister of National Revenue to substitute whichever method produces a more accurate picture. But the taxpayer must prove those practices, and they cannot be wholly unreasonable.

Why the timing of revenue mattered

Sematos provided translation and related services to government and business clients and employed about 25 translators. It generally billed by the word when a project was complete, while paying employees every two weeks according to their hours. Some projects extended over several months.

For its subsidy calculations, the company elected to compare current monthly revenues with the average of January and February 2020. The first reference month required a 15 per cent decline, and the second required 30 per cent. That baseline also affected eligibility and compensation in later qualifying periods.

The dispute concerned work in progress: services not yet billed. The company used Plunet to manage projects and generate invoices, and Quickbooks for its accounting. It manually added approximately $70,000 of unbilled work to the January-February accounting revenues. When the projects were completed and invoiced in March, it removed that amount from March’s accounting revenues to avoid counting it twice.

The judge’s table illustrates the effect. With the adjustments, January revenue was $183,308, February revenue $213,612 and March revenue $126,109. Without them, the corresponding figures were $162,774, $163,548 and $196,707. The dispute was therefore not simply about when an invoice was printed: the adjustments changed the revenue-decline comparison underlying the claim.

Tracking unfinished work did not prove it was revenue

The company relied on a history of monitoring unfinished projects, including a claimed practice introduced around mid-2018 of reporting work in progress when it exceeded $20,000. The court examined the records in successive periods rather than accepting that explanation as proof of a consistent accounting method.

Records from 2016 and 2017 showed that work in progress had been tracked and appeared as an asset on balance sheets. But an asset entry did not establish that the same amount had been included in revenue. The company’s principal did not know how its accountants had treated the earlier reports, and no current or former accountant or bookkeeper testified to establish the revenue treatment.

There were further gaps after November 2017. The judge accepted that the company had encountered accounting-service problems, but did not accept that those problems explained the missing project reports, which the company itself generated. A July 2018 report did exist, but its work-in-progress amount had not been added to that month’s revenue.

The absence of a contemporaneous February 2020 report was particularly important. If the company really reviewed unfinished work monthly and retained a report whenever the threshold was reached, the unusually large balance of roughly $50,000 should have produced one. Instead, the January-to-March review occurred in April, after relief had been announced, and the company reconstructed earlier balances.

Ezri found that the company had retrospectively included the unfinished work to raise its January-February baseline and lower March revenue, producing an apparent decline where revenues had actually increased. Explanations involving cash management and employee productivity did not establish that work in progress had normally been included in revenue.

Normal practices matter, but consistency still counts

The company argued that the statute did not require it to use generally accepted accounting principles, or GAAP, and did not authorize the minister to replace its normal method simply because another approach was more accurate. The judge agreed that the statutory focus on normal practices modified the ordinary income-computation principles discussed in Canderel.

He nevertheless concluded that the legislation could not reasonably permit wholly unreasonable methods. Even if he had accepted the company’s description of its practice, intermittently treating unfinished work as revenue only when an inconsistently applied financial threshold was met would not produce a consistent comparison. He left open that a better evidentiary record might have answered some of those concerns.

The reasons did not hold that every form of work in progress is categorically excluded from qualifying revenue. Ezri noted a separate question about whether unbilled work could qualify as an inflow of cash, receivables or other consideration. Because the parties had not addressed that requirement, he did not decide the case on it and expressly declined to endorse the company’s position on that point.

The evidentiary discussion also cautioned against treating detailed accounting standards like statutes or judicial authorities. The judge declined to take judicial notice of a particular accounting chapter supplied in the Crown’s authorities. He said such principles should usually be introduced by agreement or through an appropriate witness, rather than assumed from the existence of GAAP.

Procedural rulings and the result

Sematos succeeded on two procedural issues. The court allowed amendments correcting its description of documents, despite criticizing the lack of clarity in how the change was presented. It found that the amendments did not withdraw a substantial admission or change the basis of the case, and that the Crown suffered little, if any, prejudice.

The judge also refused the Crown’s request under Rule 98(3) to restrict explanations about a document supplied during discovery. The Crown could have sought a fuller explanation through a follow-up discovery question and had not done so. Those procedural successes did not resolve the evidentiary shortcomings on the subsidy claim.

The appeal from the reduced-benefit determinations was dismissed for qualifying periods from March 15, 2020 to October 23, 2021, except Period 5—July 5 to August 1, 2020—which was not disputed. The Crown was awarded costs, with a written-submissions process if the parties could not agree on the amount. The judgment did not quantify a single subsidy repayment or fixed costs award.

Read the full judgment: Traductions Sematos inc. v. The King, 2026 TCC 162.