Plains Midstream – Federal Court of Appeal finds that s. 16(1) can only apply to a debtor if it equally applies to the creditor

As part of a complex set of transactions, a predecessor of the taxpayer agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was non-interest-bearing (except in the remote event of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. The predecessor treated the $207.5M difference between these two amounts as an amount which, although conceded not to be interest in form, was interest in substance and therefore could be treated as being recharacterized as interest under s. 16(1): the economic substance of the situation, was that it received $17.5 million as the present value of $225 million.

Nadon JA confirmed the rejection by Hogan J of this argument given that it was clear that the $207.5M difference could not be reasonably regarded as interest to the creditor, stating:

[I]it is because interest is, by its nature, symmetrical that the Judge was correct in interpreting subsection 16(1) in the way that he did. In other words, an amount is not interest if it does not have the character of interest to both the recipient and the payor.

Neal Armstrong. Summaries of Plains Midstream Canada ULC v. Canada, 2019 FCA 57 under s. 16(1) and s. 20(1)(c).