Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
When does a change in the terms of a debt obligation result in a "new" obligation
Position: Question of fact, based on the laws of contract in the relevant jurisdiction
Reasons: Case law
XXXXXXXXXX 2002-017845
Denise Dalphy, LL.B.
(613) 941-1722
June 17, 2003
Dear XXXXXXXXXX:
Re: "New" Obligations and Paragraph 212(1)(b)(vi)i of the Act
We are writing in reply to your letter dated December 10, 2002 wherein you requested our views on the case, a General Electric Capital Finance Inc. v. The Queen 2002 DTC 6734 (FCA) ("General Electric Capital"), and in particular, when a new obligation occurs for the purposes of, inter alia, subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act").
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
Whether the change in the terms of a debt obligation results in a "new" obligation for the purposes of subparagraph 212(1)(b)(vii) of the Act and/or for the purposes of other provisions of the Act is a question of fact to be determined on the basis of the law of contract in the relevant jurisdiction. In particular, the Canada Customs and Revenue Agency (the "CCRA") accepts the ratio of the Federal Court of Appeal in General Electric Capital : that the term "novation" is not included in subparagraph 212(1)(b)(vii) of the Act and that a novation is not required for there to be a new obligation for the purpose of subsection 212(1) of the Act. We do not agree that the application of this ratio should be limited to the facts of this particular case, that is, where there was an arm's length/non-arm's length issue for the purposes of subparagraph 212(1)(b)(vii) of the Act. Although the long line of case law that relates to novation/recission of contracts was not cited by the Federal Court of Appeal in this case, we are of the opinion that this decision is consistent with case law from at least the Morris v. Baron and Co. case in the House of Lords ((1918) AC 1) to, inter alia, Weibe et al v. The Queen (87 DTC 5068), Amirault v. MNR (90 DTC 1330), National Trust Co. v. Mead [1990] 2 S.C. R. 410] and Quincaillerie Laberge Inc. v. The Queen (95 DTC 47 and 155).
Where there has been a novation, recission, or accord and satisfaction at common law, it would usually mean that one contract/obligation has been replaced by a new contract/obligation. However, it many cases it is not easy for both income tax practitioners and the CCRA to determine whether changes made to a debt obligation result in the creation of a new obligation at law. Similar problems exist with respect to determinations as to whether an amount is on income or capital account, whether a person is a resident or a non-resident of Canada, whether a transaction is a sale or a lease, or whether there has been a disposition of property. However, as in all of these situations, the case law provides guidance; of course, the more extensive the case law, the more guidance that we are afforded. Although it might have been helpful if General Electric Capital had provided a more extensive analysis of the law of contract in the relevant jurisdiction, we do not consider this to be an obstacle, particularly since such an analysis would have been limited to the relevant province in Canada.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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