Teranet - Tax Court of Canada orders E&Y to explain why it considered a 9.75% interest rate in the Teranet income fund structure to be reasonable

The conversion of Teranet to an income fund resulted in the operating corporation owing $1.23B of unsecured notes indirectly to the income fund. CRA reassessed to reduce the interest deduction on the notes from 9.75% to 5.45%.

On discovery, the Crown asked various questions - respecting how the interest rate was determined, and the rationale behind the structuring of the particular reorganization steps - of the Teranet CFO, who indicated he could not answer because no one remained at Teranet who had been involved in the reorganization.

V. Miller, J. found that, in these circumstances, it was appropriate to grant the Crown leave to examine a knowledgeable representative of the accounting firm (E&Y) that had prepared a study before the reorganization in support of the reasonableness of the interest rate chosen, and of a second accounting firm (Deloitte) which had been involved in structuring the transactions. She also ordered that “both EY and Deloitte will produce documents in its control which are relevant to the issues in this appeal.”

Neal Armstrong. Summary of Teranet Inc. v. The Queen, 2016 TCC 42 under Tax Court Rules, s. 99(2).