Brookfield Renewable Power – Quebec Court of Appeal confirms the reduction of the deductible interest on loss consolidation loans from 14% to 8.75% based on parent’s borrowing costs

Loss consolidation transactions between a “Lossco” in the Brookfield group (“BRPI”) and “Profitcos” resulted, for instance, in BRPI holding $2.3 billion of loans in its Profitco subsidiary, and the Profitco holding $2.3 billion of preferred shares of its parent until this reciprocal arrangement was reversed five months’ later. The ARQ assessed to deny the deduction of the interest in excess of 6%.

The Court of Quebec reviewed inter alia the Gervais Auto decision, and 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 the ARQ counsel that an interest rate as high as 8.75% could be justified as reasonable. It then referred the appeal back to the ARQ for reassessment on the basis of allowing the interest deduction at an 8.75% rate.

In finding that no reversible error had been made, the Court of Appeal stated:

In short, in accepting the expert reports produced by the respondent, the judge did not limit himself to applying an arm’s length test to the detriment of that of reasonableness. Instead, he favoured an approach based on the correct criterion, taking into account the particular nature of the transactions carried out … in the context of the consolidation of losses … and retaining, as an objective element … the financing costs incurred by the parent company and BRPI at the relevant time. This approach, which does not depart from the teachings of Gervais Auto, is not tainted by any error of law.

Neal Armstrong. Summary of Brookfield Renewable Power Inc. (Corporation Énergie éolienne Brookfield inc.) v. Agence du revenu du Québec, 2025 QCCA 234 under s. 20(1)(c)(i).