Tax Court of Canada


Income Tax

Business and property income

Elimination of risk of cross-defaults constituting real value or consideration for taxpayer

Taxpayer’s predecessor wanted to acquire financially troubled D Ltd., which had obligations including joint and several liability with E Co. under contract for $400 million oil exploration loan from creditor. D Ltd. and E Co. agreed between themselves on respective liability of $175 million and $225 million of loan and so, to address risk of cross-default by E Co., predecessor entered into agreement with E Co. to assume contract obligations. Pursuant to agreement, E Co. paid predecessor $17.5 million and provided consent and cooperation to certain key transactions and agreements that mitigated and eventually eliminated risk of cross-default. In taxation years at issue for which it was at loss, taxpayer claimed deduction for interest on $17.5 million received from E Co.. Minister issued loss determinations under Income Tax Act, denying such interest deduction. Taxpayer appealed. Appeals dismissed. Predecessor received consideration from E Co. beyond $17.5 million, namely approval of plan of arrangement and cooperation in contract negotiations, and became liable for performance of oil exploration obligations under contract as well as repaying loan. Elimination of risk of cross-defaults, which would make financing of taxpayer’s and D Ltd.’s activities less expensive, constituted real value or consideration for taxpayer. While economic substance had to be considered in identifying contract or arrangement providing for what could “reasonably be regarded” as blended payments of capital and interest under s. 16(1) of Act, so did other factors including perspectives of both creditor and debtor. No part of amount that was due by taxpayer could reasonably be regarded as interest payable to creditor or to E Co.. Context, including historical context, reinforced view that Parliament intended symmetrical treatment of amount as interest. Section 16(1) of Act was anti-avoidance provision intended to apply where contract or agreement did not explicitly identify amount owed by one person to another as being interest and that amount could reasonably be regarded to be interest for both parties. Contrary to taxpayer’s claim, economic impact of key transactions were not similar to defeasance transaction by which it received $17.5 million as consideration for its eventual repayment of much larger sum. Taxpayer received much more than $17.5 million from E Co., gaining consent and cooperation for transactions required for completing acquisition of D Ltd. on favourable terms and with mitigated risk of cross-default, and undertook to do much more than repay $225 million.
Plains Midstream Canada ULC v. The Queen (2017), 2017 CarswellNat 5521, 2017 TCC 207, Robert J. Hogan J. (T.C.C. [General Procedure]).


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