Notes were debt during taxation year in issue, although amounts to be paid weren’t yet ascertained

Tax – General principles – Interpretation of taxing statutes

Taxpayer was Canadian-controlled private corporation that held shares in SLD, open-ended investment company incorporated under laws of British Virgin Islands. SLT sold one-half undivided co-ownership in remaining assets to non-resident affiliates of Canadian banks and using proceeds of sale, SLT acquired Notes from two non-resident subsidiaries of Canadian banks, BNSI and TDII. BNSI and TDII Notes were purchased by SLT for price of $498 million representing Reference Asset Net Asset value at time, which were governed by laws of United Kingdom. Minister reassessed taxpayer for its 2004 through 2010 taxation years to include computation of its income distinct amounts, two of which were related to taxpayer's interest in SLT, and because SLT was controlled foreign affiliate, taxpayer had to pay tax on its foreign accrual property income. Taxpayer appealed and by time this case was presented, only 2010 taxation year remained in play, and of sole relevance was whether amount was supposed to be included in income of SLT pursuant to s. 94(1) of Income Tax Act. It was found that amount to be paid need only be ascertainable when payment is due, and it was held that Notes were debt for purposes of Act. Taxpayer unsuccessfully appealed, and it was found that no attempt was made to show that there was any reason to give term “debt” any different meaning, when used in paragraph 94.1(1)(a), than its meaning for purposes of Act as whole as determined in previous decision. Taxpayer appealed. Appeal dismissed. Word “debt” was capable of variety of meanings and textual, contextual and purposive analysis of s. 94.1(1)(a) of Act supported conclusion that Notes were debt under this provision during taxation year in issue, even though amounts to be paid remained to be ascertained. Under s. 94.1(1)(a) of Act, three conditions had to be present to find debt arose, which were present in this case; there was $498 million advance made to each of issuing banks, resulting obligation on part of banks to repay amount equal to value of Reference Assets at maturity or upon early termination, and this amount was ascertainable with precision at due date. Construing word “debt” so as to exclude instrument because it derived its value from assets that fluctuated in circumstances where shares and interests qualified precisely because they derived their value from same fluctuating assets defeated objective and provided absurd result.

Barejo Holdings ULC v. Canada (2020), 2020 CarswellNat 387, 2020 CarswellNat 388, 2020 FCA 47, 2020 CAF 47, Noël C.J., Rennie J.A., and Rivoalen J.A. (F.C.A.); affirmed (2018), 2018 CarswellNat 5674, 2018 TCC 200, Patrick Boyle J. (T.C.C. [General Procedure]).

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