Barejo – Federal Court of Appeal finds that the amount payable under a “debt” for s. 94.1(1)(a) purposes need not be crystallized until maturity

An offshore fund ("SLT"), in which the taxpayer had an interest, invested in instruments (labelled as "Notes") of non-resident subsidiaries of Canadian banks. The Notes did not bear interest and provided for a payment on maturity (15 years after their issuance, subject to earlier repayment after having given 367 days’ notice) that reflected the performance of a matching actively-managed portfolio of assets (the “Reference Assets”) held by affiliates of the bank-group obligors. If the Notes constituted "debts" for purposes of s. 94.1(1)(a) (the question posed under Rule 58), the taxpayer would be required to recognize its share of foreign accrual property income of SLT under Element C of the FAPI definition. The principal issue was whether they so constituted debts notwithstanding that the dollar amounts to be paid thereunder were unknown until the maturity date.

After stating that “subsection 94.1(1) … contemplates in express terms that an instrument that derives its value from fluctuating portfolio investments can be a debt” and that a narrow construction of “debt” would go contrary to the purpose of the above provisions of “annual imputation of income while … foreign investments are in place,” Noël CJ found that future crystallization of the amount due was sufficient, and concluded:

When regard is had to the text, context and purpose of paragraph 94.1(1)(a), a debt arises for purposes of this provision when an amount or credit is advanced by one party to another party; an amount is to be paid or repaid by that other party at some point in the future in satisfaction of the advance and this amount is fixed or determinable or will be ascertainable when payment is due. As these three conditions are present here … this suffices to dispose of the appeal … .

Neal Armstrong. Summaries of Barejo Holdings ULC v. Canada, 2020 FCA 47 under s. 94.1(1)(a) and Statutory Interpretation - Consistency.