Subsection 12(2.1) - Receipt of inducement, reimbursement, etc.

Administrative Policy

12 October 2012 External T.I. 2012-0448351E5 - treatment of trailer fee rebates

no s. 12(2.1) inclusion if MFT fee rebate paid directly to large investor as trust distribution

A mutual fund trust funds commissions to the dealer through whom its units were purchased and also funds an annual trailer fee. However, the dealer proposes to provide an investor with a rebate (the "Rebate") of a portion of such commission and trailer fees. This is accomplished by the Rebate being paid in cash directly to the investor (or, alternatively, being paid in cash to the dealer which, in turn, provides it to the investor). CRA stated:

Where the Rebate is paid to the Investor through the Mutual Fund, subsection 12(2.1) may be applicable, particularly where the agreements entered into by all three parties so dictate. Where however transactions are structured and legally effective so as to make the amount paid to the Investor a distribution from trust income, subsection 12(2.1) would not be applicable. In such a case, subsection 104(6) would generally be applicable to allow the Mutual Fund a deduction for the payment to the Investor while 104(13) would bring the amount into the Investors' income. The DCS Commissions and Trailer Fees paid (net of the rebate) by the Mutual Fund to the Dealer would be business income to the Dealer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) MFT fee rebate 195
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.1) MFT fee rebate paid directly to large investor as trust distribution 263

4 July 2007 Internal T.I. 2007-0238391I7 F - Crédit pour stage en milieu de travail

inclusion under s. 12(2.1) where Quebec job credit received by partnership members

The Quebec tax credit for an on-the-job training period was includible in income under s. 12(1)(x) to the extent that it did not reduce the employer’s wage expense and was not included under s. 9(1). However, in the case of a partnership, where the credit was received by members of the partnership, the credit would instead be included in the partnership’s income under s. 12(2.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) Quebec job tax credit included under s. 12(1)(x) if not a wage expense reduction 58

1 February 1994 External T.I. 9332265 F - Inducement

MFT management fees rebated by manager to large unitholders produce s. 12(2.1) inclusion

A fund manager rebates a portion of management fees charged to a mutual fund trust directly to investors in the trust who have substantial amounts invested, based on the amount of the particular investor's investment in the trust. CRA stated:

Although the rebate is paid to a particular investor, it pertains to the management of the assets of the trust. Accordingly, by virtue of subsection 12(2.1), paragraph 12(1)(x) of the Act applies to include the rebate in the income of the trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) investor rebate inclusion under s. 12(2.1) 42

Subsection 12(2.2) - Deemed outlay or expense

Administrative Policy

7 October 2020 APFF Roundtable Q. 18, 2020-0862931C6 F - 12(1)(x) and CEBA

s. 12(2.2) can be applied to non-deductible expenses/consequences of CEBA loan not being forgiven

CRA provided more detailed comments on the consequences of a corporation receiving a $40,000 loan under the Canada Emergency Business Account (“CEBA”) program than those provided recently in 2020-0861461E5. Comments included:

  • The financial institution making the loan would reasonably be viewed as a person described in s. 12(1)(x)(i), and the forgivable portion of the loan would be included in income for the corporation’s taxation year ended December 31, 2020 under s. 12(1)(z)(iv) as assistance in the form of a forgivable loan in respect of an outlay or expense (the expenses funded by the loan).
  • The corporation, to avoid the s. 12(1)(x) income inclusion, could file the s. 12(2.2) election with its income tax return for its 2020 taxation year to reduce the amount of non-deferrable operating expenses (“whether deductible or not”) incurred in that year, the subsequent year or a prior year.
  • If the loan was not repaid as to at least 75% by December 31, 2022, so that the conditions for a forgiveness of $10,000 of the loan were not satisfied, there would be deductions under s. 20(1)(hh) as the forgivable (now, no longer forgivable) portion of the loan was repaid. In this regard, the corporation and the financial institution could agree that any amount repaid by the corporation would be applied first to repayment of the forgivable portion of the loan, so that immediate s. 20(1)(hh) deductions could be generated.
  • If there was no such agreement, repayments would be considered to be made pro rata as between the forgivable and non-forgivable portion of the loan, thereby stretching out the s. 20(1)(hh) deductions.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(hh) the parties can agree to allocate late CEBA loan repayments between the forgivable and non-forgivable loan components 374
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) bank lending under CEBA loan program is described in s. 12(1)(x)(i) and forgivable loan included on receipt 88

10 November 2020 External T.I. 2020-0861461E5 - TI – Tax Treatment of Loan Forgiveness under CEBA

s.12(2.2) election can be made re s. 12(1)(x)(iv) inclusion for forgivable CEBA loan

The Canada Emergency Business Account (“CEBA”) program provides interest-free loans of up to $40,000 to small businesses and not-for-profit organizations to fund their expenses. Repaying the balance of the loan on or before December 31, 2022 results in loan forgiveness of 25%. CRA indicated that:

  • The forgivable portion of the loan is recognized as an income inclusion under s. 12(1)(x)(iv) as a “forgivable loan …in respect of...an outlay or expense”.
  • That amount may effectively offset under s. 12(2.2) against the amount of the related expenses.
  • In the year of repayment of 75% of the loan, there are no further tax consequences.
  • A taxpayer not qualifying for the 25% forgiveness who settles the loan for 100% of the principal may generally claim a deduction under s. 20(1)(hh) equalling the previous s. 12(1)(x) inclusion – even where the taxpayer made the s. 12(2.2) election.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) the forgivable loan portion of a CEBA loan is a s. 12(1)(x)(iv) receipt 373

20 May 2014 External T.I. 2013-0516121E5 F - Debt forgiveness

s. 12(1)(x)(iv) inclusion from BIA settlement of GST interest and penalties could be offset against related expense

A compromise by Aco under Division I of Part III of the Bankruptcy and Insolvency Act resulted in reassessments owing by Aco for unremitted GST and QST including interest and penalties being compromised for the payment of a stipulated sum over a stipulated number of years. After finding that the forgiveness "gain" was not income under s. 9, CRA stated (TaxInterpretations translation) that:

Specifically, we are of the view that portion of the amount of the gain arising from the settlement of interest and penalties could be an amount coming within subparagraph 12(1)(x)(iv). To the extent that subparagraph 12(1)(x)(iv) were determined to apply so as to include in the computation of the income of Corporation A the amount of a gain arising from the settlement, an election under subsection 12(2.2) could be made to reduce the amount of the expense incurred, rather than including such amount in computing income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iv) BIA settlement of GST interest and penalties included under s. 12(1)(x)(iv) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(26) unremitted GST and QST were not obligation "issued" by debtor 102
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Commercial Debt Obligation BIA settlement of unremitted GST interest 127
Tax Topics - Income Tax Act - Section 9 - Forgiveness of Debt BIA settlement of unremitted GST on sales was on capital account 82

7 October 2011 Roundtable, 2011-0412021C6 F - Financing Expenses

s. 12(2.2) might apply to on-charge, to ultimate group recipient of financing, of the financing expenses

As part of the restructuring of the financing of its corporate group, Corporation A borrowed from a financial institution in order to make a capital contribution to the ABC Partnership, which used that amount to repay a debt to another financial institution. Corporation A on-charged its borrowing expenses to the ABC Partnership.

Can Corporation A fully deduct the re-invoiced expenses from the income from that re-invoicing, so that there is a nil effect on its taxable income? After noting that there were insufficient facts, CRA stated:

Depending on the facts, it is possible that paragraph 20(1)(e) is applicable in respect of financing expenses incurred by Corporation A. However, financing expenses would not be deductible under paragraph 20(1)(e) if the amount received by Corporation A from ABC Partnership would but for subsection 12(2.2) be included in computing Corporation A's income, and Corporation A made an election under subsection 12(2.2) respecting the financing expenses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(ii.2) CRA will evaluate whether the transactions are "restructuring" 146

19 January 2005 External T.I. 2004-0091601E5 F - Incitatif versé - taux d'intérêt réduit

s. 12(2.2) election available to reduce mortgage interest, re cashback received from mortgage lender, to reduce extra interest incurred in two initial years

In order to finance $400,000 of the $500,000 purchase price of a rental property, the taxpayer receives a 5-year mortgage loan from a financial institution, and also receives 5% cash back, or $20,000, which the taxpayer uses for, inter alia, the down payment. This cashback reflects that the mortgage bears the institution’s “posted” interest rate, rather than its most favourable rate. CRA stated:

Provided the taxpayer has not already taken the amount of the rebate into account in computing income under section 9, subsection 12(2.2) may apply in respect of this additional interest amount if an election is made to that effect. This election will result in the additional interest expense incurred or made in the year of receipt of the cashback or the following year being reduced. The cashback received from the financial institution that does not reduce the amount of interest expense pursuant to subsection 12(2.2) will therefore be required to be included in the taxpayer's income in the year it is received pursuant to paragraph 12(1)(x).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2.1) ss. 13(7.4) and 53(2.1) elections unavailable re acquired rental property for cashback received from mortgage lender to offset high interest rate 198
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(v) s. 12(1)(x) applies (subject to s. 12(2.2) election) to lump-sum mortgage interest rebate except to the extent the amount was reported as s. 9 income 116

14 January 2004 Internal T.I. 2004-0054711I7 F - Choix en vertu du paragraphe 12(2.2)

s. 12(1)(x) assistance included in Year 1 income, then reversed by reassessment when s. 12(2.2) election is made in Year 2 return respecting the related Year 2 expenditure

A taxpayer received assistance in the 2000 taxation year in respect of an expenditure made in the 2001 taxation year, as to which it made the election under s. 12(2.2) on June 30, 2002, upon filing its 2001 return. The Directorate stated:

[P]aragraph 12(1)(x) requires the taxpayer to include in computing income for the 2000 taxation year the amount of assistance received in that taxation year. When the election pursuant to subsection 12(2.2) is filed in respect of the 2001 taxation year, the Canada Revenue Agency will issue a reassessment for the 2000 taxation year to reflect the election.

90 C.P.T.J. - Q.14

An election pursuant to s. 12(2.2) will eliminate any income inclusion assuming that the election is filed on time and the reimbursement relates to outlays or expenses incurred within the time frame set out in s. 12(2.2).

IT-273R2, "Government Assistance - General Comments," para. 15

the election should be made by means of a signed letter accompanying the applicable tax return.

Subsection 12(3) - Interest income

See Also

Tael One Partners Limited v. Morgan Stanley & Co International PLC, [2015] UKSC 12

"accrue" describes the coming into being of a right or obligation

Lord Reed stated (at para. 41):

The word "accrue" is generally used to describe the coming into being of a right or an obligation (as, for example, in Aitken v South Hams District Council [1995] 1 AC 262), so that the person in question then has an accrued right, or is subject to an accrued liability, as the case may be. That is the meaning which accrual usually bears, in particular, in relation to interest and other payments. The amount to which there is an entitlement may not be payable until a future date, but an entitlement may nevertheless have accrued. For example, under section 2 of the Apportionment Act 1870, rents, annuities, dividends and other periodical payments may be considered as accruing from day to day, although they may be payable at longer intervals (In re Howell [1895] 1 QB 844); and a bequest of an "accruing dividend" carried the dividend for the period during which the death occurred, although the dividend was not declared until a later date (In re Lysaght [1898] 1 Ch 115). Situations can readily be envisaged in which interest or fees might accrue, in that sense, by reference to the lapse of time: indeed, interest invariably accrues by reference to the lapse of time, as do recurring fees such as commitment fees. This is not however such a situation. An entitlement to a payment premium under the facility agreement accrues on a defined event.

Words and Phrases

Elm Ridge Country Club Inc. v. The Queen, 95 DTC 715 (TCC)

The interest accrual rule in s. 12(3) did not apply to interest income deemed to be earned by a non-profit club pursuant to s. 149(5).

Administrative Policy

11 June 2004 External T.I. 2004-0076291E5 F - Renonciation aux intérêts à recevoir

renunciation of accrued interest during the year means that there is no inclusion of such interest during the year under s. 12(3) or 12(1)(c)

During the second year (2000-B) of a loan accruing interest at 5% per annum (which had been treated by the parties as requiring the interest to be paid annually, although the terms were silent on this point), the corporate lender renounced the interest that had accrued during that second year to the date of the renunciation. In finding that there was no inclusion, in the creditor’s income for that year, of such accrued interest (so that it was unnecessary of address s. 20(1)(p)(i) or 50(1)), CRA stated:

[A]n instrument for the renunciation of interest which is legally binding on the parties involved has the effect of extinguishing the creditor's right to interest. In the situation presented to us here, since the effect of the instrument for the renunciation of interest was to extinguish the Lender's right to any interest accrued on the Note for the year 2000-B that was not due at the time the instrument of renunciation was executed, then we are of the view that the provisions of subsection 12(3) and subparagraph 12(1)(c) do not apply.

92 C.R. - Q.4

The inclusion of accrued interest on a convertible debenture is required even, if as a result of a subsequent conversion of the debenture into shares, the entitlement to the accrued interest is lost.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) no ACB increase for foregone interest 34

17 August 1992, T.I. 921353 (April 1993 Access Letter, p. 135, ¶C20-1141)

In order for the forgiveness of accrued interest owing by a non-arm's length person to be effective, there must be an amendment to the original agreement. A unilateral forgiveness in a non-arm's length situation will not suffice. Where the forgiveness has legal effect, it is effective only from the date of the amendment.

1 August 1990 External T.I. 5-900756

"The term 'debt obligation', as used in subsection 12(3), is not defined in the Act and accordingly must be interpreted in its ordinary meaning. In Beament Estate v. MNR, 69 DTC 5016 (Ex Ct), Jackett, J., interpreted the word 'debt' to mean 'a sum payable in respect of a liquidated money demand, recoverable by action'.

86 C.R. - Q.57

In the year of foreclosure or repossession, the creditor is required to include interest income that accrued up to the due date immediately prior to the date of foreclosure or repossession.


Subsection 12(4) - Interest from investment contract

See Also

Peracha v. Miley, [1989] BTC 85 (Ch.D.), aff'd [1990] BTC 406 (C.A.)

An amount deposited by the taxpayer with a London bank was the security for a loan to the taxpayer's company which had been expropriated by the taxation years in question. Interest which had been credited by the bank to the taxpayer benefited him to the extent that his continuing liability to repay the loans was reduced. The taxpayer therefore was the person entitled to the interest although he did not receive it.

Administrative Policy

20 November 2012 External T.I. 2012-0449671E5 - Accrued Interest Income Reported on T5 Slips

suspension of debenture interest payments

A corporation issued debentures on which, due to cash flow issues, interest was paid for the first half of the year, but not paid for the second half of the year. T5 slips were issued that included all amounts due and payable in the year including unpaid interest. CRA stated:

Individuals who report their income on the receivable basis would include the full amount of interest shown on the T5 slip.

CRA went on to note that where

a deduction is claimed under paragraph 20(1)(1) or 20(1)(p), the onus of proof rests on the taxpayer to establish that the debt is either doubtful for collection or a bad debt.

30 November 1996 Ruling 9719753 - CONTINGENT RATE OF RETURN

Notes of the issuer had a term of five years, were not redeemable prior to the maturity date, did not bear any stipulated fixed interest, but at maturity the holder was entitled to receive an amount (no greater that 90% of the principal) based on any increase in an index level. RC, in the decision summary, indicated that "the method described in paragraph 7000(2)(d) when applied to the note does not result in any interest being included in income under subsection 12(4)".

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d) 90% cap does not engage accrual 66

21 March 1994 External T.I. 9328405 - DISCOUNT ON ISSUE

Where an investor purchases at the time of issue a 10-year bond from a securities dealer having a coupon of 1% at the time that the market rate of interest for similar terms is 5%, the investor will be required to accrue the resulting discount.

Halifax Round Table, February 1994, Q. 6

Where an individual investor purchases a 10-year bond with a stipulated interest rate of 1% from an arm's length securities dealer at a time the market rate of interest for such an issue is 5%, in RC's view the original issue discount will probably represent interest, with the result that the accrual rules in ss.12(4), 12(9) and Regulation 7000 will apply to require recognition of a portion of the discount in income on an annual basis.

28 February 1992 T.I. (Tax Window, No. 17, p. 20, ¶1771)

Ss.12(4) and 78(1)(a) do not result in the same interest being taxed twice.

84 C.R. - Q.12

S.12(4) will apply where an employee's interest in a deferred compensation arrangement constitutes a debt obligation and there is a formula for increasing the amount of the debt obligation over the period that payment is deferred. [C.R.: Regulation 7000(1)(a)]


Subsection 12(9.1)

Administrative Policy

6 October 2006 Roundtable, 2006-0197031C6 F - Obligation achetée à prime

purchase of bond at a premium does not engage s. 12(9.1)

An individual acquired a bond, bearing interest at 7% and with a face value of $100, for investment purposes in the secondary market for $124. What is the treatment of the $24 premium? CRA stated:

Subsection 12(9.1) provides that where a taxpayer disposes of an interest in a debt obligation in respect of which the taxpayer's share of the principal payments is unequal to the taxpayer's share of the interest payments on that obligation, the portion of the proceeds of disposition that can reasonably be considered to represent a recovery of the cost to the taxpayer of the interest in the debt obligation will not be included in computing the income of the taxpayer. …

The CRA is of the view that an obligation such as the one described in the above example is not an obligation described in paragraph 7000(1)(b) and therefore the provisions of subsection 12(9.1) do not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base premium paid on secondary purchase of bond is part of bond ACB 182
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(1) - Paragraph 7000(1)(b) bond that was purchased at a premium is not a Reg. 7000(1)(b) obligation 57


Sabrina Wong, Sania Ilahi, "Tax Implications of Asset Securitizations", 2015 CTF Annual Conference Report

Carve-out re interest coupons received (or reversal of PDO overaccrual) in a mortgage securitization structure (p. 12:17)

The application of subsection 12(9.1) of the Act is important in relation to the treatment of amounts received by the certificate holders. Because the proportion of interest and principal amounts in any distribution paid to a certificate holder is not determinable from the outset, a certificate holder may receive interest payments that exceed the amounts designated in the deemed accrual rules under the prescribed debt obligation regime, and may even receive payments that are made up entirely of interest. …

Subsection 12(9.1)…exclud[es] from the certificate holder's income the portion of the proceeds of disposition received by the certificate holder from the disposition of an interest in the mortgage loan that can reasonably be considered to represent a recovery by the certificate holder of the cost of acquiring the interest [see 9206645]. …

Conversely… subsection 20(21)…should allow a deduction of the overaccrual on the disposition of the certificate for fair market value.

Subsection 12(10.2) - NISA receipts

Administrative Policy

26 June 2014 External T.I. 2014-0523871E5 F - Revenu d'entreprise agricole

government contributions and accrued interest in AgriInvest and Agri-Québec accounts are taxable when withdrawn

Is AgriInvest and AgriStability income support, received by a farmer, farming income or other income to that individual? CRA stated:

The AgriInvest and AgriStability programs are programs established under the Farm Income Protection Act. In the province of Quebec, these programs were established in agreement with the province and are administered by La Financière agricole du Québec. The Agri-Québec program of La Financière agricole du Québec is a provincial program complementary to the AgriInvest program.

The AgriInvest and Agri-Québec accounts include two funds: producer deposits, which are paid into Fund 1, are not taxable at the time of withdrawal. Government contributions and accrued interest on both accounts which are deposited in Fund 2, are taxable at the time of withdrawal as investment income under subsection 12(10.2).

All withdrawals from the AgriStability account are taxable as farming business income under paragraph 12(1)(p).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Farming legume germination production as farming 38
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(p) withdrawals from the AgriStability account are taxable as farm business income 175

27 May 2010 External T.I. 2010-0359491E5 F - Programme Agri-investissement

withdrawal from second AgriInvest Fund is property income except for s. 125 purposes

Is the taxpayer’s income respecting a withdrawal from the taxpayer’s second AgriInvest Fund income from a business or property? CRA responded:

A farmer's AgriInvest savings account is a net income stabilization account under the Farm Income Protection Act. The second fund is … a "NISA Fund No. 2 " … .

Generally, a taxpayer must include in computing income for a taxation year from property by virtue of subsection 12(10.2) the total of all amounts paid to the taxpayer from the taxpayer's NISA Fund No. 2.

Furthermore, for the purposes of section 125, amounts included under subsection 12(10.2) are "income of the corporation for the year from an active business" by virtue of paragraph (b) of the definition of that expression in subsection 125(7).


Holland, "NISA in a Nutshell", Canadian Current Tax, July 1992, p. A17.

Subsection 12(11) - Definitions

Anniversary Day

Administrative Policy

31 May 2005 External T.I. 2005-0122641E5 F - Intérêts courus

anniversary day for an investment contract issued on January 1 is December 31

A $1,000 escalating-rate investment certificate (that is an "investment contract") with a three-year term was issued to an individual on January 1 of a particular year. It bears interest, payable annually, at a rate of 6% in the first year (Year 1), 8% in the second year (Year 2) and 10% in the third year (Year 3). CRA stated:

[T]he "anniversary day" would be December 31 since that day is one year after the day before the date the contract was issued (the date of issue). Since the individual would hold an interest in the investment certificate on December 31 of Year 1, the individual would be required by subsection 12(4) to include in computing income for that year the interest accrued to the individual on the investment certificate to the end of that day to the extent that such interest was not otherwise included in computing the individual's income for the year or a preceding taxation year. The same logic would apply for Year 2 and/or Year 3.

Other locations for this summary
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(c.1) Reg. 7000(2)(c.1) applied on December 31 of each year to investment contract issued on January 1

29 August 1991 T.I. (Tax Window, No. 8, p. 2, ¶1425)

Discussion of the determination of "anniversary day" in various contexts respecting shareholder loans or advances.

Investment Contract


Barejo Holdings ULC v. Canada, 2016 FCA 304

pointless to determine whether an instrument is debt for purposes of whole Act

The Federal Court of Appeal dismissed the Barejo appeal – but on the grounds that the Rule 58 question posed to the Tax Court was whether the “notes” in question were debts for purposes of the Act rather than for purposes of s. 94.1 thereof. As it did “not appear as though the answer to the question asked will resolve anything in the context of the underlying appeal which turns on the meaning of the word ‘debt’ in section 94.1,” it followed in the view of Noël C.J. “that endeavouring to dispose [of] the appeals on the merits would serve no useful purpose and give rise to an improper use of judicial resources.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1) determining whether the notes in Barejo were debt for purposes of the ITA rather than s. 94.1 would be “an improper use of judicial resources” 274

See Also

CAE Inc. v. The Queen, 2021 CCI 57

advance labelled by government as a "contribution" but unconditionally repayable was a loan

CAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.

Ouimet J agreed (at para. 123) with CAE that the arrangement was a loan, before going on to find that it was government assistance.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 127 - Subsection 127(9) - Government Assistance an unconditionally repayable loan with a 2.5% yield was government assistance 312
Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(d) loan with non-commercial terms was government assistance when advanced 283

Barejo Holdings ULC v. Canada, 2020 FCA 47

3 tests for what constituted debt under s. 94.1(1)(a)

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 (at para. 61) 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 (at para. 87) 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 (at para. 91):

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 … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1) - Paragraph 94.1(1)(a) the amount payable under a “debt” for s. 94.1(1)(a) purposes need not be crystallized until maturity 692
Tax Topics - Statutory Interpretation - Consistency presumption of consistent expression is not absolute 252

Moose Factory Restaurant Properties Ltd. v. The Queen, 2019 TCC 156

debt is obligation to pay a sum certain or amount reducible to sum certain

After quoting (at para.55) the statement in Sattva that “While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement,” Owen J found that, contrary to the taxpayer’s understanding of the arrangements as reflected in its financial statements, the arrangements at issue had not in fact been structured so as to give rise to a debt owing to the taxpayer by a corporation that subsequently became bankrupt – so that the taxpayer’s claim for a business investment loss was properly denied. Before, so concluding, he stated (at para. 66):

For a debt to be incurred, there must be an obligation to pay the amount of the debt. This is consistent with the most common definition of the word “debt”, which is “an obligation to pay a sum certain or a sum readily reducible to a certainty” [citing R.B. Dunlop, Creditor-Debtor Law in Canada, 2nd ed. (Toronto: Carswell, 1995) at page 16. Halsbury’s Laws of Canada].

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) arrangements were not structured to give rise to a debt 358

Barejo Holdings ULC v. The Queen, 2015 DTC 1216 [at 1405], 2015 TCC 274, aff'd on other grounds 2016 FCA 304

"notes" which tracked actively-managed reference pool of assets were "debt"

The question referred by the parties pursuant to Rule 58 was whether two contracts, entitled Notes and issued for US $998 million by affiliates of two Canadian banks and guaranteed by those banks, which were held by St. Lawrence Trading Inc. ("SLT"), an open-ended investment fund incorporated under the laws of the British Virgin Islands, constituted debt for purposes of the Act. If the Notes constituted "debt obligations" under s. 95(1) or "debt" under s. 94.1, the taxpayer (a unitholder of SLT) would be required to recognize its share of resulting foreign accrual property income of SLT.

The two Notes, which were governed by English law, were respective obligations of non-resident subsidiaries of two Canadian banks (which guaranteed the Notes). The amount payable thereunder on maturity 15 years after issuance (or on early maturity, occurring 367 days after any termination notice given by SLT or upon the occurrence of specified adverse changes) tracked the value of portfolios of assets held by two other non-resident bank subsidiaries (which had previously purchased portfolios managed by SLT prior to the proposed expansion of the s. 94.1 rules) and actively managed by a third-party manager ("GAM"). The Notes specified that the value of the "Reference Assets" would be calculated by GAM each Monday throughout the term of the Notes and on any maturity date.

Boyle J noted (at paras. 48, 51) that the taxpayer's position "that a debt cannot exist unless and until the amount to be paid is certain or can be made certain from facts which are known or knowable… would mean that the Notes are not debt prior to maturity even though they would clearly be debt for purposes of this test upon maturity," and stated (at para. 125):

Paragraphs 94.1(1)(a) and (b) expressly contemplate that a "debt" may derive its value primarily from investments of the issuer or another person in other securities, commodities, real estate or currency. … A debt can be a derivative as can many other securities and obligations, including hybrid financial instruments.

And at paras. 129, 131):

The core essential characteristics of debt generally for purposes of the Act are:

  1. an amount or credit is advanced by one party to another party;
  2. an amount is to be paid or repaid by that other party upon demand or at some point in the future set out in the agreement in satisfaction of the other party's obligation in respect of the advance [f.n. ..."That there is the possibility that the amount once ascertained may be a nil amount need not disqualify the obligation."];
  3. the amount described in (ii) is fixed or determinable or will be ascertainable when payment is due; and
  4. there is an implicit, stipulated, or calculable interest rate (which can include zero).

...Other evidence such as supportive or contradictory wording or intention is very much part of the overall weighing process when considering hybrid or special purpose financial instruments.

In finding that the Notes constituted debt for purposes of the Act, Boyle J noted (at para. 133) that they were entitled Notes, they had a maturity which could be triggered early in the event of default or at the Note holder's option, "upon maturity there is a payment obligation that relates clearly, though in a complex fashion, to the amount for which the Notes were issued, and this payment satisfies the obligation in respect of the issue price," the related term sheet described the amount for which they were issued as a "Principal Amount," "at maturity, however and whenever triggered, that is whenever payment is required to be made, the amount payable by the issuer under the Notes to the Note holder is readily ascertainable with exact precision," an interest rate was stipulated in the Notes (and it was "reasonable to consider zero to be an amount for these purposes…this was presumably set out to make it clear to the parties that there would be no current returns earned or payable"), the Notes ranked pari passu with other debt (being "evidence that the parties' intention was that this be treated like other debt" – and with this ranking not described as "apply[ing] only upon maturity of the Notes"), and the Guarantees provided that the Guarantors would be liable as if they were the primary debtors.

Words and Phrases
debt indebtedness
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1) "notes" which tracked actively-managed reference pool of assets were "debt" and "indebtedness" 184
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Investment Property "notes" which tracked actively-managed reference pool of assets were "debt" and "indebtedness" 184
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 quaere whether there is a federal law of "debt" or "charity" 334

Delle Donne v. The Queen, 2015 TCC 150

"debt" exists irrespective of demand

In rejecting a submission that the taxpayer was not entitled to deduct a doubtful debt reserve for unpaid interest because no written demand to pay the interest was made by the taxpayer, Owen J stated (at para. 60):

Although the precise meaning of the word "debt" may be the subject of some debate, it certainly encompasses a contractual obligation to pay an ascertainable sum such as the Interest, regardless of whether or not a demand for payment had been made by the Appellant.

See summary under s. 20(1)(l).

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) reserve could be claimed on appeal 90
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(l) doubtful debt reserve claimed implicitly as at the year end in light of subsequently revealed information 542
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i) bad debt deduction taken as at Dec. 31 in light of information available at April 30, and could be claimed implicitly or on appeal 478

Cloutier-Hunt v. The Queen, 2007 DTC 947, 2007 TCC 345 (Informal Procedure)

no obligation until pay award

Interest awarded on a retroactive award of back pay by the Canadian Human Rights Tribunal did not represent interest on a "debt obligation" as the debt was not acknowledged by the employer (the government) until the time of the award. Webb J noted (at para. 11):

In Blacks Law Dictionary, 8th ed. a "debt" is defined as a "liability on a claim; a specific sum of money due by agreement or otherwise" and "obligation" is defined as "A formal, binding agreement or acknowledgment of a liability to pay a certain sum or do a certain thing for a particular person or set of persons".

Words and Phrases
obligation debt

Re Central Capital Corporation (1996), 27 OR (3d) 494 (C.A.)

Retractable preferred shares whose holders gave notice of retraction after the corporation had become insolvent did not qualify as claims provable against the Corporation given that the Corporation's obligation to redeem its shares was not absolute but was dependent upon the Corporation being solvent. In addition, the share conditions provided that even after exercise of the retraction rights, the holders continued to be entitled to dividends and to vote until their shares were redeemed, and the share conditions did not provide for interest if the corporation failed to honour its retraction obligations. The circumstances surrounding the issue to them of their shares did not indicate that they were extending credit to the Corporation rather than investing in it, and it would have been contrary to the policy of the Canada Business Corporations Act to let the holders rank equally with creditors of the Corporation.

Weiler J.A. stated (at p. 523) that "risk-taking, profit-sharing, transferability of investment, and the right to participate in a share of the assets on a liquidation after the creditors have been paid are the hallmarks of a shareholder".

Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558

A syndicate including the Canadian Deposit Insurance Corportion and six major Canadian banks agreed to provide financial support to Canadian Commercial Bank ("CCB") by advancing $255 million to CCB for undivided interests by way of participation in a portion of a portfolio of assets held by CCB, with the right to receive from CCB on a proportionate basis the money recovered on those assets as well as a specified percentage of CCB's pre-tax income, until such time as the money advanced had been repaid, and with the further right in certain circumstances to receive warrants to acquire treasury shares of CCB representing approximately three-times the number of common shares currently outstanding.

The full amount advanced qualified as a loan (with the warrants as an equity sweetener), rather than as an equity investment. Accordingly, the syndicate's claim under the loan ranked equally with the claims of CCB's other unsecured creditors. Although the participation agreements had some aspects of equity, of particular relevance to their debt character was that CCB was legally obligated to repay $255 million and no more to the syndicate members.

Words and Phrases

Fingold v. MNR, 92 DTC 2011, [1992] 2 CTC 2393 (TCC)

Before finding that payments made by a corporation to its shareholder-employees constituted debts of the employees rather than representing advance distributions of share capital, and therefore were subject to s. 80.4(1), Rip J. stated (p. 2017):

"A debt is a sum payable in respect of a liquidated money demand. It does not include an unliquidated claim for damages. A debt is a sum of money owed in respect of which a plaintiff has a right to bring and maintain an action."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.4 - Subsection 80.4(1) 69

Acmetrack Ltd. v. Bank Canadian National (1984), 4 PPSAC 199 (Ont CA)

The debtor ("Chateauvert") executed a floating charge and assignment of book debts in favour of the plaintiff ("Acmetrack"), and acknowledged therein a varying amount of trade indebtedness not exceeding $125,000 and covenanted to repay such indebtedness. A preliminary issue addressed in determining the relative priority of Acmetrack, and the defendant (the "bank") in respect of a chattel mortgage subsequently executed by Chateauvert in favour of the bank, was whether the the instrument of Acmetrack was properly registrable under the Corporation Securities Registration Act (Ontario), which turned on whether the instrument qualified as a debenture. In so finding, Zuber J.A. quoted the above passage in Levy, and stated (at p. 206):

The plaintiff's security is a document in which a debt is acknowledged and in which the debtor covenants to repay. In my view, this is sufficient for it to qualify as a debenture. The fact that the debt is not stated as a sum certain does not destroy the character of the document. I conclude, therefore, that the plaintiff's security was properly registered pursuant to the C.S.R.A.

He declined to follow a statement in Rollies' Sport that a debenture must state a specific debt.

Words and Phrases

Re Rollies' Sport and Marine (1974) Limited (1984), 14 BLR 41 (Ont HCJ)

At issue was whether a bank had a perfected security interest in a bankrupt corporation's property. The bank had registered its security interest under Ontario's Personal Property Security Act but not the Corporate Securities Registration Act. Registration under the latter act was required if there was a mortgage, charge or assignment of book debts made by the corporation contained within a debenture, secure bonds, or debenture stock. The bank's security interest in the corporation's assets included all of the corporation's equipment, inventory, and all its "present and future intangibles," including "all its book debts and other accounts receivable, chattel paper, contract rights and other choses in action of every kind or nature now or hereafter to become due... ."

Steele J. stated (at p. 45):

While the agreement contains words often found in a debenture ... nowhere does the security agreement refer to or create or is it stated to be deemed to secure bonds, debentures or debenture stock. Notwithstanding the broad and sometimes vague meaning of the word "debenture", the document itself is not a debenture because it contains no basic promise to pay, or an acknowledgement of, a specific debt.

The bank was therefore found to have a perfected interest.

Walsh Estate v. Minister of Finance (B.C.), [1979] CTC 251, at 257 (BCSC)

The deceased had gone through the form of a marriage in Las Vegas while he had not yet completed his divorce with his first wife, and he soon had the Vegas marriage annulled. The estate of the deceased paid out a $45,000 to his "wife" from Vegas in satisfaction of her claim for maintenance and damages. Anderson J. found that the $45,000 was not a "debt" because (i) it was not a "sum payable in respect of a liquidated money demand recoverable by action" (p. 257), and (ii), as found in McFadzean, a right to claim maintenance pursuant to a statute is not a claim in debt.

Words and Phrases

Canadian Imperial Bank v. McFadzean (1978), 5 WWR 751

Wright J. stated (at p. 753):

A [family law] maintenance order does not create a property right. It is something that the court may alter or take away when it pleases. It is not a legal debt.

Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36

In finding that an agreement, under which in consideration for a payment of $4 million the taxpayer obtained certain rights and privileges to produce and take petroleum from lands, did not represent a loan, Cattanach J. stated (at p. 6368):

The essence of a loan is that the advance shall be repaid. The agreements provided that nothing there shall be construed as creating a personal liability on Amoco to repay the principal sum advanced and interest thereon but that the plaintiff for its reimbursement shall look exclusively to the petroleum substances to the extent of Amoco's share therein which was assigned the plaintiff.

Words and Phrases

Guay Estate v. The Queen, 75 DTC 5090 (FCTD)

At the time of death of the deceased, a director of his family business corporation, he was under investigation by the Department of National Revenue for having misappropriated sums from the company (namely, proceeds of sales made by the company to customers). Three years later, the Department determined that the misappropriated sums amounted to $183,507.99. The matter was settled on the basis that the corporation would be assessed to include this sums in its income, and the estate would not be assessed for a shareholder benefit provided that it repaid this sum to the corporation.

Lacroix J. found that this sum could be deducted in determining the net assets of the estate for estate tax purposes on the basis that it was a debt owing by him to the corporation at the time of his death, i.e., (quoting Beament Estate v. MNR) it was "a sum payable in respect of [a] liquidated money demand, recoverable by action" by the corporation at that time. He stated (at p. 5093) that "the assessments made by the Department of National Revenue established that there were amounts owing to the company" and (at p. 5094) that there was "a 'money demand' that the company was entitled to require from Joseph Lorenzo Guay, or his estate," and "the amount of this money demand was liquidated by the Department itself and set at $183,507.99."

Words and Phrases

Law v. Cobourn (Inspector of Taxes), [1972] 1 WLR 1238 (Ch D)

The taxpayer applied to the issuer ("Yeoman") for a loan of 4,000l under the company's "share investment plan" for the purpose of purchasing investments through his stockbroker. The application was approved and the taxpayer purchased investments on March 27, 1969. On April 14, 1969, the taxpayer executed the Yeoman security documentation. However, this documentation was not executed by Yeoman until May 7, 1969, when it also arranged for the loan funds to be transferred to the taxpayer's stock brokerage account.the issuer executed a mortgage and thereafter instructed his bankers to settle the taxpayer's account with his stockbroker. The taxpayer claimed that he was entitled to interest relief on the loan interest pursuant to s. 62(1) of the Income and Corporation Taxes Act 1970 (UK), which provided such relief for "interest falling due before April 6, 1975 on a debt incurred on or before April 15, 1969."

Foster J. held that the debt was incurred on the date when Yeoman advanced the loan funds and not on the prior date when the contract when there arose a contract to make the loan. As indicated in Webb v. Stenton, a debt is not incurred unless there is a present liability to pay either in the present or in the future.

Pizzolati & Chittaro Manufacturing Co. Ltd. v. May et al., [1971] 3 OR 768 (Ont HCJ)

One defendant sold his business to the other. As required under Ontario's Bulk Sales Act, they filed an affadavit which listed all of the business's trade creditors - which the affadavit claimed was "nil." The plaintiff, who had a potential claim against the seller for a prior breach of contract for the shipment of some corned beef, alleged that his claim for damages was "indebtedness" and a "debt," which would bring him within the definition of an "unsecured trade creditor" in the Bulk Sales Act.

Houlden J. found (at p. 770) that the claim of the plaintiff was not for debt:

The word "debt" has a well-defined judicial meaning as a sum payable in respect of a liquidated money demand. It does not include an unliquidated claim for damages: Diewold v. Diewold.

Beament Estate v. MNR., 69 DTC 5016 (Ex Ct), rev'd [1970] S.C.R. 680

rev'd on other grounds [1970] S.C.R. 680

The deceased died owning Class B shares of an investment company which entitled their holder to receive dividends out of all the earnings of the company with the exception of the payment of a relatively nominal fixed dividend on the Class A shares held by his children. However, he had entered into a contract with his children that in his will the would direct his executors to wind-up the company upon his death, which would result in the holder of the Class B shares (his estate) receiving only a relatively modest amount equal to the amount which he had originally subscribed for the Class B shares plus most of the current earnings. In the absence of this contractual obligation, the Class B shares of the deceased had a value for estate tax purposes on his death of $110,000; whereas the amount which would be received on these shares on the winding-up of the company was approximately $11,000.

Jackett P. framed the issue before him as being the question as to whether a deduction, under s. 5(1)(a) of the Estate Tax Act, for "(i) any debts incurred by the deceased, and (ii) any encumbrances created by him," included a deduction from the unencumbered value of the shares in respect of the obligation of the executors and the deceased for those shares to be extinguished for their lower liquidation value of $11,000. In finding that this deduction could not be taken because this contractual obligation did not qualify as a "debt" or "encumbrance," Jackett P. stated (at 5022):

The word "encumbrance" in this context means, as I understand it, a claim, lien, or liability that is "attached to property" (cf. Shorter Oxford English Dictionary). The word "debt", in the absence of a special statutory definition, means "a sum payable in respect of liquidated money demand, recoverable by action" (cf. Diewold v. Diewold, [1941] S.C.R. 34 at page 39). Moreover, Parliament appears to have used the word "debt" in section 5(1)(a) in a sense that did not include obligations generally for, by section 5(2), it is provided that a statutory debt or "other obligation" imposed by a statute shall be deemed to be a "debt" that falls within section 5(1)(a). It follows...that no deduction is permitted for any liability in damages or other such obligation not based on a statute, no matter how substantial such liability may be.

Jamison v. United States (1968), 207 F. Supp. 221 (US Dist Ct (N.D. Calif))

California real estate developers were required to advance to the local water utilities the cost of extending new water mains to new subdivisions, but were entitled to be periodically reimbursed (e.g., semi-annually) on a non-interest bearing basis out of specified percentages of the revenues received by the utilities from the water consumers supplied through the new mains. The right to repayment ceased after a specified period (usually 10 or 20 years.) The taxpayer purchased various of these "Water Main Extension Contracts" at prices ranging from approximately 40% to 60% of the initial development cost. The taxpayer contended that the contract was a capital asset and its returns in excess of cost were capital gains - a position that was correct under the definition of "capital asset" in the U.S. Internal Revenue Code only if the water contract constituted "evidence of indebtedness."

The Court found that each water contract was evidence of indebtedness, even though it was contingent on the water payments from the subdivision's residents. Sweigert J. stated (at p. 227):

In Gilbert v. Comm'r of Internal Revenue, 248 F.2d 399 (2d Cir. 1957) the Court said that although for the purpose of federal tax statutes, debt in the classic sense is an unqualified obligation to pay a sum certain at a reasonably close fixed maturity date along with a fixed percentage in interest payable regardless of the debtor's income or lack of it, "some variation from this formula is not fatal to the taxpayer's effort to have the advance treated as a debt for tax purposes."

The statutory provision in question had a history of being construed broadly. Moreover, as "capital assets" included corporate shares along with debentures, bonds, and other evidence of indebtedness, it appeared that the provision was referring broadly to securities , whether equity securities (i.e. shares) or debt securities. Sweigert J. found that construing the provision in the taxpayer's favour in the circumstances was "well within a variation of the strict, classic definition of 'debt' as allowed in tax cases" (p. 231).

Standard Oil Company of British Columbia Limited v. Wood (1964), 47 W.W.R. 494 (B.C. County Ct.)

Schultz C.C.J. set aside a default judgment against the defendant applicant because it was not judgment for a "debt or liquidated money demand." He adopted a definition in the B.C. Annual Practice, 1964 ed at p. 55:

A liquidated demand is in the nature of a debt, i.e. a specific sum of money due and payable under or by virtue of a contract. Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a "debt or liquidated demand" but constitutes "damages."

On that basis he found that the plaintiff's claim for compensation was in the nature of damages - in addition to a number of items arrived at by a precise formula, there was an amount for "excess car rental while underload" without any further explanation.

International Power Co. v. McMaster University / In re Puerto Rico Power Co., [1946] S.C.R. 178, [1946] 2 DLR 81

Accrued but unpaid dividends were not a debt because there was no guarantee of payment.

Diewold v. Diewold, [1941] S.C.R. 35

The plaintiff had reclaimed the land he sold to the defendant, who had defaulted on their pay-by-instalment arrangement. The Court found that, by seizing the land, the plaintiff had extinguished any personal right to recover funds from the defendant. Consequently, the defendant was unable to make use of a debtor protection provision in the Farmers' Creditors Arrangement Act.

Before so concluding, Hudson J stated (at p. 39) that

"debt" is defined in Stroud's Judicial Dictionary as "a sum payable in respect of a liquidated money demand, recoverable by action," and I think this definition can be accepted as applicable here.

Noble v. Lashbrook, 40 DLR 93, [1918] 1 WWR 918 (Sask CA)

After the plaintiff discovered that his sale of a threshing machine to the defendant was legally ineffective, he received an award at trial for the estimated value of the defendant's use of the machine until it was returned to him, namely, $60, being $10 for each day the machine was used. He appealed on the matter of costs - either his claim sounded in damages, or he was restricted to costs determined by the "small debt scale."

The Court found that the plaintiff's claim sounded in damages. Lamont J.A. stated (at DLR p. 95):

In Corpus Juris, vol. 1, at p. 966, the distinction between the old action of assumpsit and that of debt is made as follows:

"As ordinarily stated, the distinction between assumpsit and debt is that the former is to recover damages for the breach of a simple or parol contract, and the latter for the recovery of a debt, eo nomine and in numero; that assumpsit will lie where the amount is uncertain or unliquidated, and debt only for a sum certain."


A sum is considered certain when it can be made certain. By this, I take it, is meant where it can be determined by computation. If, for instance, the contract of the parties furnishes a specific mode or rule of payment, or if its terms furnishes the means of ascertaining the exact amount due, an action for debt will lie. But where no specific sum is claimed, and neither the contract nor the averments furnish data from which the defendant can determine the amount he owes, the action, in my opinion, cannot be said to be for a "debt" ... .

Words and Phrases

The King v. Findlater, [1939] 1 KB 594 (CA)

The accused was found to have committed a securities trading offence by conspiring to sell shares (whose definition included debentures) door-to-door. The investment contracts in question represented investment in a mushroom farm, whereby the purchasers would be entitled after 21 years to a 50% share in the farm company's profits, and a guaranteed return of at least 10% per annum of the purchase price. The contracts included a statement that the company would buy (and pay the premiums) on an insurance policy to guarantee a return of the investor's purchase price at the end of the 21-year period. After acknowledging the lack of a precise definition of "debenture" in the common law, Charles J. nevertheless found (at p. 599) that the investment contracts:

...appear to contain that which is implicit in the widest definition of a debenture - namely, an acknowledgment of an existing debt. ... By undertaking to pay these premiums the company takes on itself a liability which is only consistent with the acknowledgment of an existing debt.

Sharpe v. First Nat. Bank of Antigo (1936), 220 Wis. 506, 264 N.W. 245 (Sup Ct of Wisc)

The plaintiff guaranteed a mortgage note given by two acquaintances ("Mr. and Mrs. Johns") to secure their guarantee of loans owing by the Antigo Canning Company to the defendant bank. Under his guarantee, the plaintiff agreed to pay "all loans, drafts, endorsements, accounts, checks, notes, interest, demands, liabilities of every kind and description now owing, or which may hereafter become due or owing by [Mr. and Mrs Johns] to [the defendant]."

On August 22, 1928, the plaintiff guaranteed a mortgage note for $6,750 which two acquaintances ("Mr. and Mrs. Johns") owed to the defendant bank apparently as a result of their guarantee of bank loans made to their company having been called by the bank. The plaintiff repaid the note with a $750 cash advance and a $6000 "collateral note" secured with collateral including shares of a listed company. Under the collateral note, the plaintiff deposited the collateral as "security to the payment [of the $6000 note], and for the further security and payment of any and all indebtedness which the undersigned may now or hereafter be owing to [the defendant]." When the plaintiff repaid the $6000 owing under his note, the bank initially refused to return the collateral on the basis that, under the terms of the collateral note, the collateral was also security for the August 22, 1928 guarantee of the taxpayer. The plaintiff claimed damages relating to the decline in the value of the share collateral between the time he repaid the $6,000 note and the time that the bank ultimately returned this collateral to him.

The Court found that it was improper for the bank to withhold the collateral, as the plaintiff had no "indebtedness" to the defendant after he repaid the $6000 collateral note (i.e., his obligation under his August 22, 1928 guarantee did not represent "indebtedness.") Rosenberry C.J. stated (at p. 247):

The term "debt" has a well-defined technical meaning in the law and means a sum of money due by certain and express agreement... and does not include liabilities which are contingent in that it is uncertain as to whether anything will ever be demandable under the contract.

Given that Mr. and Mrs. Jones' obligation to guarantee their company's liabilities (guaranteed, in turn, by the taxpayer) had not yet been triggered, the plaintiff's liability under his guarantee was contingent. Rosenberry J. stated (at p. 247):

This presents the case of a contingent liability which in turn is contingent upon a second liability.

The circumstances of this case indicate very strongly that a liability so highly contingent was never though of nor intended to be included by the parties as coming within the term "indebtedness" as used in the collateral note.

Passaic Nat. Bank & Trust Co. v. Eelman (1936), 183 Atlantic Reporter 677, 116 N.J. 279 (Sup Ct of NJ)

In satisfaction of a prior judgment against the defendant, the plaintiff sought an order for garnishment of the monthly pension of the defendant, who was a retired police officer. The legislation that would authorize such an order applied to "wages, debts, earnings, salary, income from trust funds or profits ... due and owing the the judgment debtor." Heher J. granted the order on the reasoning that pension payments were debts that the Pension Commission owed the defendant as they became payable, notwithstanding that pensions payable by a public authority were not payable pursuant to a contractual obligation. He stated (at Atlantic Reporter p. 678-79):

The ordinary legal sense of the term "debt" is an obligation for the payment of money founded upon a contract, express or implied. ... But it is also used in the larger sense of that which one person is bound to pay to another under any form of obligation....

In the main, the distinguishing characteristic of such an obligation is that it is for a sum certain, or a sum readily reducible to a certainty. ... It is an obligation to pay a sum certain, or a sum which may be ascertained by a simple mathematical calculation from known facts, regardless of whether the liability arises from contract or is implied or imposed by law.

State ex rel. City of Hannibal v. Smith (1934), 74 S.W. (2d) (Sup Ct of Missouri)

The City of Hannibal, Missouri, sold bonds, which were to be payable solely from tolls collected from traffic using the bridges. The Court found that this did not violate the city's constitutional requirement that no indebtedness exceeding the current year's revenue could be incurred without being approved by a two-thirds majority of city voters. The bonds constituted liabilities whose payment was contingent on the collection of tolls from the bridge - and a contingent liability is not a debt.

Lyall & Sons Construction Co. v. Baker, [1933] 2 DLR 264 (Ont CA)

The appellant demolition company had a contractual obligation to pay the respondent construction company for a demolitions project (in exchange for the right to salvage the wreckage), but the obligation only triggered when the respondent gave the appellant possession of the building to be demolished. The Court found that this obligation did not constitute a debt until possession was transferred, because until that time the respondent could not "have maintained an effective action against the appellants" for the amount in question (p. 268).

Masten J.A. quoted with approval (at p. 269), the statement of Moss J.A. in Mail Ptg. Co. v. Clarkson (1898), 25 A.R. (Ont.) 1, at 9:

A debt is defined to be a sum of money which is certainly, and at all events, payable without regard to the fact whether it be payable now or at a future time. And an accruing debt is a debt not yet actually payable, but a debt which is represented by an existing obligation.

Words and Phrases

Dupuis Frères Ltd. v. Minister of Customs and Excise (1927), 1 DTC 104 (Ex Ct)

A holder of preferred shares of the taxpayer was entitled to fixed dividends and to have the shares redeemed 15 years after the date of their issuance if they had not previously been redeemed by the taxpayer out of a sinking fund that was protected from the taxpayer and its creditors. Before finding that the dividend paid by the taxpayer on the preferred shares did not qualify as interest on "borrowed capital" for purposes of s. 3(4) of the Income War Tax Act, Audette J. noted that the preferred shares were part of the authorized capital of the company, the dividends were payable out of profits only and could be passed (whereas a bond holder always had the privilege to receive the interest), in the case of the taxpayer making default in paying dividends, the preferred shareholders could not wind-up the company without the common shareholders joining in such resolution, and on a winding-up the preferred shareholders would be liable to pay the balance of any unsubscribed capital.

Lemon v. Austin Friars Investment Trust Ltd., [1926] 1 Ch 1 (CA)

The appellant and others subscribed cash for "income stock certificates" of the respondent corporation, and successfully submitted that the certificates were "debentures" for purposes of s. 108 of the Companies (Consolidation) Act, 1908 (UK), which therefor meant that he had the right to inspect the register of holders of the company debentures. The income certificates were non-interest bearing, were evidenced by certificates and were repayable only out of 3/4 of the annual profits of the corporation.

The Court found that as the "root meaning" of debenture is "a record of indebtedness" (Pollock M.R., at p. 13) or "an acknowledgement of indebtedness" (per Sargant L.J. at p. 19) and the certificates has some of the other characteristics often associated with debentures, they so qualified.

Sargant L.J. stated (at p. 19) regarding the words "this is to certify that the above-named company is indebted to" the applicant, which indebtedness is "payable only out of profits hereinafter mentioned":

I should find it difficult to frame clearer words for the purpose of expressing that there is an immediate debt, but that that debt is only to be payable in the future and on a contingency....

Furthermore, there was provision for the company to pay off the principal at any time after giving three months' notice, which indicated that notwithstanding the provision for repayment out of profits, the corporation considered there to be an immediate debt. This undercut an argument (p.20) that the company "could by passing a resolution to wind up absolutely and entirely deprive the holders of this document of any right whatever to receive any payment...."

Words and Phrases

In re Touquoy Gold Mining Co. (1906), 1 E.L.R. 142 (Nova Scotia)

In finding that securities issued by a corporation that were referred to in various corporate documents as "preferred shares" and were evidenced by share certificates nonetheless represented secured loans made to the corporation for purposes of the Winding-up Act of Canada, Graham E. J. noted that a lien was placed on the assets of the corporation to secure the payment of the amounts advanced and the interest or "dividends" thereon, with a power of sale in case of default and the right to redeem on the part of the corporation within a fixed time. With respect to statements in the deed that the interest or dividends were to be paid out of profits, Graham E.J. stated (at p. 145) that "practically the interest due upon a mortgage is only paid out of profits" and (at p. 145) he referred to the following statement in Kent v. Quicksilver Mining Co., 78 N.Y. 178:

"The idea of a borrowing is not filled out unless there is in the agreement therefor a promise or understanding that what is borrowed will be repaid or returned, the thing itself or something like it of equal value, with or without compensation for the use of it in the meantime. To borrow is the reciprocal action of to lend, and to lend or loan, say the dictionaries, is the parting with a thing of value to another for a time fixed or indefinite, yet to have some time an ending, to be used or enjoyed by the other, the thing itself or the equivalent of it to be given back at the time fixed or when lawfully asked for, with or without compensation for the use, as may be agreed upon."

Words and Phrases
loan borrowing

Mail Printing Company v. Clarkson (1898), 25 OAR 1 (Ont CA)

An advertiser purchased the right to use certain advertising space in a newspaper over a twelve-month period. In consideration, the advertiser was to pay the newspaper's advertising fees in each month that those fees arose, and at the end of the twelve-month period to pay $1000 minus all the advertising fees spent in that period (or nothing at all if the fees exceeded $1000). The advertiser went into receivership without having bought any advertising yet. The trial judge found that the advertiser was indebted to the newspaper for $1000 on the reasoning that it was certain that at least $1000 would be payable from the advertiser to the newspaper when the period expired.

The Court of Appeal found that there was no debt, on the grounds that the $1000 would not necessarily become payable. Burton C.J.O. stated (at p. 5):

The $1000 would not become due necessarily by the mere effluxion of time; ... it would have been necessary to aver and prove that the [newspaper] had always been able and willing to afford the space stipulated for, and, in any event, the non-ability or refusal to supply the space when properly required would have afforded a complete answer to the claim.

Levy v. Abercorris Slate & Slabe Co. (1887), 37 Ch. D. 260, [1886-90] All ER 509

Chitty J. stated (at Ch.D. p. 264):

In my opinion a debenture means a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a "debenture." I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art.

Webb v. Stenton (1883), 11 QBD 518 (CA)

The defendant was a judgment debtor, who was entitled for his life to income from a trust fund, which was payable to him half-yearly, and who had assigned his interest in the trust to the plaintiff as security for a loan. The plaintiff unsuccessfully sought to attach this interest in the trust on the basis that the future income distributions were each a "debt due or accruing due."

Brett M.R. stated (at pp. 525-26):

There is a sum of money which is to be payable out of the proceeds of property when it comes to the hands of the trustees. Nobody can say that until then it is in any legal or equitable sense a debt which is debitum in presenti. The money may never come to these trustees without any fault of their own, for they may die or cease to be trustees before anything can become due. Therefore there are contingencies upon which no debt may ever arise... .

Concurring, Fry L.J. stated (at p. 530):

There is clearly no debt payable at the present time. Is there any debt payable in futuro? A trustee is not, in my opinion, an equitable debtor to the cestui que trust until there is money in his hands which he ought to pay to his cestui que trust, or until he has made himself personally liable to pay money to his cestui que trust by reason of some breach of the trust or default in the performance of his duties as trustee.

Pickering v Ilfracombe Rv Co (1868), LR 3 CP 235, 37 LJCP 118, 16 LT 650, 10 WR 458 (Ct of Common Pleas)

The defendant company had made a capital call on its shareholders of 5l a share, and assigned that call to the plaintiff as security for an amount which was found in the reasons for judgment to be owing. At issue was the validity of the plaintiff's claim for 1,000l from Lord Poltimore, being the call due upon his 200 shares.

This sum was attachable if it represented a debt due or accruing due from him - even though "the time for payment had not yet arrived" (at p. 247 LR).

Administrative Policy

4 February 2015 External T.I. 2015-0565741E5 - Canadian-controlled private corporation

indemnity agreement was not "indebtedness"

Before finding that an indemnity agreement was not "indebtedness," CRA discussed authorities on "indebtedness" including Fingold, Beament and Tonolli. See summary under s. 256(6).

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) s. 256(5)(b) applied to acquisition right upon default under indemnity 167
Tax Topics - Income Tax Act - Section 256 - Subsection 256(6) s. 256(6) does not protect a company's CCPC status where its shares are pledged to a pubco to secure an indemnity, not debt 235

19 June 2014 External T.I. 2014-0519881E5 - T5 reporting requirements

debenture with interest payable on 1-year maturity not an investment contract

In Year 1, Canco issued unsecured convertible Debentures bearing interest that is payable only on maturity one year later in Year 2. In finding that the Debentures are "investment contracts" so that a T5 only needs to be issued for Year 2, CRA stated:

[A] debt obligation will not be an investment contract… if the taxpayer has (otherwise than because of the interest accrual rules in subsection 12(4) of the Act), at periodic intervals of not more than one year, included in computing the taxpayer's income throughout the period in which the taxpayer held an interest…in the obligation the income accrued on it for those intervals. If a Debenture matures exactly in one year or less after issuance and the interest on the Debenture is payable on maturity, then the taxpayer will include in income all the interest accrued on the Debenture within the requisite one year period, and therefore the Debenture will not be an investment contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 201 - Subsection 201(4) debenture with interest payable on 1-year maturity not an investment contract 161

29 August 2011 Internal T.I. 2009-0336671I7 - Derivative

interest rate swap not a debt obligation

Interest rate swap transactions between a controlled foreign affiliate of the taxpayer ("BCo") and a foreign financial institution specializing in derivative contracts ("FCo") under which there was a fixed coupon swap of FCo computed and paid every six months at a fixed notional interest rate on a US-dollar notional principal and a second arm payable by BCo on (presumably the same) US dollar notional principal at the prevailing US six-month LIBOR rate but payable every X years, did not represent loans as "the legal form of the transactions must be respected."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 193

23 March 2004 External T.I. 2003-0049031E5 F - Paragraphe 15(2) de la Loi et "montant remis"

loan that was anticipated to be forgiven was not in fact a loan

A loan was made to an adult child of the sole shareholder of the lender (Opco) in order to pay the tuition fees, where it was anticipated that Opco would forgive the loan a number of years later when the child completed his education. Before finding that “the loan made by Opco to the shareholder's adult child does not appear to be a bona fide loan” so that s. 15(2) did not apply (and s. 56(2) applied instead), CRA stated:

In a situation where it can be foreseen in advance that the lender will extinguish the debt, we question whether or not there is an obligation on the part of the borrower to return such sum.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2) loan that was anticipated to be forgiven was not a bona fide loan, so that s. 15(2) did not apply 190
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.21) inclusion under s. 56(2) avoided second inclusion under s. 15(1.21) 296
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Excluded Obligation loan included in income under s. 15(2) was excluded obligation re its subsequent forgiveness 209

24 March 2005 Internal T.I. 2005-0115921I7 - Specified debt obligations & loan originating cost

debt definition - includes conditional sales contracts

Conditional sales contracts purchased by a corporation likely would qualify as "debt obligations," so that the corporation would qualify as a restricted financial institution, i.e., a corporation whose principal business was the purchasing of debt obligations issued by arm's length persons. Before quoting Beament Estate v. MNR CRA stated:

According to Creditor-Debtor Law in Canada, Dunlop 2nd Ed. 1995, there is no all-encompassing definition of "debt" and defining this term or the term "debt obligation" is not an easy task. While the text states that the meaning of the word "debt" is changing over time, the most commonly accepted meaning of the word "debt" is to describe an obligation to pay a sum certain or readily reducible to certainty.

Words and Phrases

17 February 1993 Memorandum 93020

The taxpayer advanced a sum to purchase a shopping mall and subsequently sued to recover the amount. This sum was not a debt for purposes of claiming a loss under s. 50(1)(a) on the ground that (citing Beament Estate v. MNR) the taxpayer did not have an entitlement to a liquidated amount recoverable by action as there has not yet been a settlement of the action to determine the amount owing: "Unless the two parties agree or the court determine that a precise amount is owing to the taxpayer there can not be a debt owing to him...."

March 1991 T.I. (Tax Window, No. 1, p. 15, ¶1138)

Where on the termination of his employment, the employee enters into an arrangement with the employer whereby certain amounts are notionally allocated to him and interest is credited annually on the amount so allocated, this arrangement gives the employee an interest in a debt obligation, with the result that the interest credited is normally included in his income under s. 12(4).

1 August 1990 External T.I. 5-900756

"The term 'debt obligation', as used in subsection 12(3), is not defined in the Act and accordingly must be interpreted in its ordinary meaning. In Beament Estate v. MNR, 69 DTC 5016 (Ex Ct), Jackett, J., interpreted the word 'debt' to mean 'a sum payable in respect of a liquidated money demand, recoverable by action'."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(3) 60

26 April 1990 T.I. (September 1990 Access Letter, ¶1443)

The alteration of a note from a non-interest bearing note to an interest-bearing one would be considered material, and accordingly would result in the loss of the "grandfathered" status of the old note.

84 C.R. - Q.12

A debt obligation arises whenever a binding liability is created and the principal amount of the liability can be quantified.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(4) 40


C.R.B. Dunlop, Creditor-Debtor Law in Canada, Second Edition (1994).

Usual meaning of "debt" (pp. 12-13)

In most situations in which lawyers use the word "debt", however, their intention is to describe something more limited than obligations or demands. Osborn's Concise Law Dictionary defines "debt" as "a sum of money due from one person to another". The Oxford Companion to Law takes a similar approach:

Debt. That which is owed by one person to another, and particularly money payable arising from and by reason of a prior promise or contract, but also from and by reason of any other ground of obligation, e.g., statute or order of court. The moral and legal obligation is on the debtor to pay his creditor, but in many cases the existence or extent of the obligation to pay must be determined judicially.

Sum certain or ascertainable by simple calculation from known facts (p. 13)

[I]n Passaic Nat. Bank & Trust Co. v. Eelman [(1936), 183 A. 677 at 678-9)] the New Jersey court identifies as the essence of a debt the fact that a sum is owed [fn. 8 The New Jersey court apparently means "owed" in the sense that the sum can be successfully sued for. In support, see Ex parte Jones (1879), 12 Ch. D. 484 (C.A.)] which is either certain or ascertainable by a simple mathematical calculation from known facts. Such a definition would exclude any unliquidated claim arising out of contract or tort "which would only become a debt in the strict sense when the amount is fixed by the judgment of a court". However, it might well include claims sounding in restitution or equity and actions under statutes for benefits and penalties. [fn. 12 See also D.P.P. v. Turner, [1973] 3 All E.R. 124 (H.L.); Diewold v. Diewold, [1941] S.C.R. 35….]

Narrower view restricting to contract (pp. 13-14)

A narrower view of debt is to restrict it to money obligations arising out of express or implied contract, including quantum meruit. One form of this definition is found in the following passage from Burrows' Words and Phrases Judicially Defined….Some Canadian cases have seen this definition as meaning that a debt ...mus be based on a contract... .

…There are serious difficulties in accepting such a narrow view of debt. The Burrows definition would exclude a claim for a statutory penalty or for an equitable debt such as a claim against a trustee for a specific sum of money. It would also exclude those restitutionary causes of action which were not pleaded by use of the common counts. There is no obvious reason in principle or policy why such claims, if quantified, should not be regarded as debts where the context permits such an interpretation. For example, whether a claim for a sum of money is based on contract, restitution or an equitable cause of action should not affect the question whether garnishment before judgment is available. In all cases, the amount sued for is liquidated, and this is surely all that the formula "debt or liquidated demand" is seeking to require.

Conclusion (p. 16)

[O]ne can say that the most common use of the word "debt" is to describe an obligation to pay a sum certain or a sum readily reducible to a certainty. The obligation may or may not depend on an express or implied contract, depending on the context in which the word is used, but to this writer the essence of the term is that, if there is an obligation to pay a certain or ascertainable sum, the courts should tend not to concern themselves with the precise nature of the cause of action. Claims for unliquidated damages will generally not be describable as debts unless the context suggests or a statute provides otherwise.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt 582

Kevin Kelly, "Callable and Extendible Step-Up Notes", Corporate Finance, Vol. XI, No. 4, 2004, p. 1127

Callable step-up notes are not investment contracts.