Brookfield Renewable Power – Court of Quebec reduces the deductible interest on loss consolidation loans from 14% to 8.75%

In connection with a September 2009 loss consolidation transaction between a “Lossco” in the Brookfield group (“BRPI”) and its “Profitco” subsidiary (“BEMI”):

• Two Newcos with nominal share capital were lent $2.25 billion and $0.525 billion by BRPI pursuant to unsecured demand notes bearing interest at 14%;
• Each Newco used the loan proceeds to subscribe for non-cumulative preferred shares of BRPI;
• On the same day, BEMI acquired the Newcos for a nominal amount and they were wound up into BEMI, so that BRPI held $2.275 billion of loans in its subsidiary, and BEMI held $2.275 billion of preferred shares of its parent; and
• The loans were left outstanding for approximately five months, then: BRPI declared and paid a dividend on the preferred shares to fund the payment of all the accrued interest on the loans, and those shares and loans were redeemed and repaid by way of set-off.

The ARQ assessed on the basis that interest in excess of 6% was unreasonable.

Lareau JCQ reviewed various case on the meaning of “reasonable” under ITA ss. 67 and 20(1)(c) as well as the ENMAX and Gervais Auto decisions. He also referred to the evidence of the two ARQ experts indicating that BRPI had been borrowing from arm’s length lenders at around that time at rates ranging between 6.00% and 8.75%; and to a written concession of counsel for the ARQ that an interest rate as high as 8.75% could be justified as reasonable. He then referred the appeal back to the ARQ for reassessment on the basis of allowing the interest deduction at an 8.75% rate.

Neal Armstrong. Summary of Brookfield Renewable Power Inc. v. Agence du revenu du Québec, 2023 QCCQ 10239 under s. 20(1)(c).