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FEDERAL INCOME TAX - Foreign income - Offshore investment funds

Wednesday, April 15, 2020 @ 5:29 AM  


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Appeal by the taxpayer from a Tax Court order finding that two contracts styled as “Notes” were debt for purposes of s. 94.1(1)(a) of the Income Tax Act during the appellant’s 2010 taxation year, even though the amounts to be paid thereunder were unknown and would remain so until a later year when the Notes came to term. The Tax Court judge found that for a debt to exist under this provision, it sufficed that the amounts be ascertainable when payment became due. The appellant argued the Tax Court judge failed to have regard to the well-established legal meaning of the word debt, according to which a debt did not arise unless and until the amount to be paid was known or ascertainable. The appellant, a Canadian-controlled private corporation, held shares of SLT, a non-resident of Canada and a controlled foreign affiliate of the appellant. SLT acquired the Notes. After they were purchased, their value was derived from the value of the Reference Assets which was in constant flux. The value of the Reference Assets was calculated weekly so that the value of the Notes was known at all times. Reassessments were issued to the appellant pursuant to the Foreign Accrual Property Income regime as well as the Offshore Investment Foreign Property rules.

HELD: Appeal dismissed. The Notes in question were a debt for the purposes of s. 94.1(1)(a). The word debt was capable of a variety of meanings. A textual, contextual and purposive analysis of s. 94.1(1)(a) supported the conclusion that the Notes were debt under this provision during the taxation year in issue even though the amounts to be paid remained to be ascertained at the time. A simple reading of the provision showed that a debt of a non-resident entity could derive its value from portfolio investments that fluctuated over time. Section 94.1(1) was intended to prevent the deferral of income using foreign investments in low tax jurisdictions, the accumulation of the proceeds and their reinvestment offshore. Construing the word debt to exclude an instrument because it derived its value from assets that fluctuated in circumstances where shares and interests qualified precisely because they derived their value from the same fluctuating assets defeated that objective and provided for an absurd result. There was overwhelming jurisprudential support for the Tax Court judge’s conclusion that there was no all-encompassing definition of the term debt. Parliament could not have been any clearer in bringing within the meaning of debt in s. 94.1(1)(a) a right to claim an amount that derived its value from portfolio investments that fluctuated. The words used would have to be ignored if effect was to be given to the appellant’s interpretation. When considering the text, context and purpose of s. 94.1(1)(a), a debt arose for purposes of this provision when an amount or credit was advanced by one party to another party, an amount was to be paid or repaid by that other party at some point in the future in satisfaction of the advance, and this amount was fixed or determinable or would be ascertainable when payment was due. These three conditions were present in this case.

Barejo Holdings ULC v. Canada, [2020] F.C.J. No. 232, Federal Court of Appeal, M. Noël C.J. and D.J. Rennie and M. Rivoalen JJ.A., February 18, 2020. Digest No. TLD-April132020003