Plains Midstream – Tax Court of Canada finds that s. 16(1) operates symmetrically (no creditor interest – no debtor interest deduction)

To over-simplify somewhat, Amoco agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was effectively non-interest-bearing (or more precisely, only bore interest to the extent of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. Amoco treated the $207.5M difference between these two amounts as simple interest (no compound interest), which it deducted over the term of the loan on a straight-line basis. Someone then figured out that this worked out to a 29% p.a. interest rate on the $17.5M, and at trial it reduced its claim to a 6% rate. Its position was that under s. 16(1), regard should be had to the economic substance of the situation, which was that it received $17.5 million as the present value of $225 million.

One of the key points for Hogan J was that the Japanese creditor (APCJ ) was not entitled to any interest on the assumed loan. In denying any interest deduction, he stated:

The language used in subsection 16(1) of the ITA stating that the payment is “deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable” reflects Parliament’s intention that both parties receive symmetrical treatment. …

[N]o part of the amount that is due by the Appellant can reasonably be regarded as interest that is payable to APCJ under the terms and conditions of the … loan. …

[I]t is unthinkable that Parliament would have intended the asymmetrical treatment proposed by the Appellant as this would open the door to transactions in which one party receives a tax benefit and the other party receives a non-taxable payment, resulting in a one-sided tax expenditure. Explicit language would have been expected in this regard, as is the case with subsection 12(9) of the ITA and section 16.1 of the ITA.

Amoco assumed the loan as part of intricate arrangements for its acquisition of Dome Petroleum for $5.2B under a Plan of Arrangement. Hogan J stated obiter that the $207.5M difference might instead be an addition to the cost to Amoco of its Dome Petroleum shares.

Neal Armstrong. Summary of Plains Midstream Canada ULC v. The Queen, 2017 TCC 207 under s. 16(1) and s. 54 – adjusted cost base.