Section 94.1

Subsection 94.1(1) - Offshore investment fund property


Ludmer v. Attorney General of Canada, 2018 QCCS 3381, aff'd 2020 QCCA 697

equity-linked notes held in BVI company were portfolio investments held with a tax avoidance purpose, but were not subject to 7000(2)(d) interest accrual

The Canadian-resident taxpayers were shareholders of a BVI company (“SLT”) which, in turn, held notes issued by two foreign subsidiaries of two Canadian banks (“BNSIL” and “TDII”). The notes were payable in 15 years' time and the amount payable was calculated by reference to the performance of a reference portfolio of equities or bonds.

CRA considered that there was a requirement to recognize deemed interest income on the notes under Reg. 7000(2)(d) given that, in contrast to the usual equity-linked notes that were available to investors at the time, these notes had “internal puts,” i.e., SLT had the right to terminate the notes at any time, on 367 days’ notice, at the market value of the reference assets. On this basis, it considered that the “the maximum amount of interest thereon that could be payable thereunder in respect of that year” was the difference between the maximum value of the reference assets at the end of the year and the maximum value in the prior years, and assessed accordingly, to treat such annual increase as foreign accrual property income of SLT under element C of the s. 95(1) FAPI definition.

Hamilton JCS rejected the taxpayers’ submissions that it was unreasonable of CRA to assess on the basis that the notes were “portfolio investments” within the meaning of s. 94.1, stating (at paras. 364-366):

[T]he term “portfolio investments” describes the nature of the investments as opposed to the number of investments (that would be “portfolio of investments”) or the number of trades. …

[T]he Notes… are investments by SLT in debt instruments of BNSIL and TDII, which are non-resident entities. SLT does not exercise any influence or control over the Notes or the issuers of the Notes. Rather, SLT wishes to passively benefit from the appreciation in value of the Notes.

In any event, the SLT shares are OIF caught by Section 94.1 ITA if they may “reasonably be considered to derive [their] value, directly or indirectly, primarily from portfolio investments of that or any other non-resident entity”. It is clear that the shares of SLT derive their value indirectly from the Reference Assets.

In also considering that it was reasonable for CRA to consider that the tax motive referenced in s. 94.1 was present, he noted that the shareholders of SLT, a BVI company, were Canadian residents, and that they had participated in a 2001 reorganization to avoid adverse Canadian tax consequences of proposed “FIE” rules, and stated (at para. 382):

It is difficult to understand what exactly the Plaintiffs would argue to say that tax consequences were not one of the reasons for the original incorporation in the British Virgin Islands or the 2001 reorganization. They have had ample opportunity to present any relevant evidence and they have not done so.

However, in nonetheless going on to find that these assessments were unreasonable, Hamilton JCS found that, in its previous published positions, CRA had “never suggested that the [mere] possibility of locking-in the bonus means that an amount can be accrued based on the highest value of the index in the year” (para. 439). It was also unreasonable for CRA to assess all of the increase in value of the Note in the taxation years prior to 2005 (which were statute-barred) in its reassessments for the 2005 taxation year.

Words and Phrases
portfolio investment
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) recurring fee reduction amounts received for no work were income and taxable under s. 56(2) when directed to controlled company 289
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) nature of the legal advice relied upon was unclear 417
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) improper advancing of “settlement” elements that were not sustainable 45
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d) mere possibility of locking in value accretion each year did not crystallize the maximum amount of interest respecting the year 484
Tax Topics - General Concepts - Negligence, Fiduciary Duty and Fault damages awarded against CRA for inter alia making unreasonable reassessments 260
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit recurring fee reduction amounts received for no work were income from a source 313

Barejo Holdings ULC v. Canada, 2016 FCA 304

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”

Boyle J made a pre-hearing determination, pursuant to Rule 58, that two Notes held by St. Lawrence Trading, a non-resident entity, constituted debt for the purposes of the Income Tax Act. Four weeks prior to the hearing of the appeal to the Federal Court of Appeal, the Court issued a direction to counsel requesting submission on the following point (quoted at para. 3):

[I]t does 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 of the Act. A related difficulty is that there would appear to be no statutory criteria against which the correctness of the opinion expressed by the Tax Court judge can be assessed as no legal consequence attaches under the Act to an instrument found to be a debt "for the purpose of the Act as a whole"…

[T]he Tax Court judge has expressly provided that his opinion cannot be read as applying to the word "debt" as it appears in section 94.1…

After reviewing counsel’s submissions and before dismissing the taxpayer’s appeal, Noël C.J. stated (at paras. 8, 15):

As indicated in the above direction, it does not appear as though the general answer given by the Tax Court judge will resolve anything in the context of the underlying appeal…

It follows 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 12 - Subsection 12(11) - Investment Contract pointless to determine whether an instrument is debt for purposes of whole Act 117

See Also

Gerbro Holdings Company v. Canada, 2016 TCC 173, briefly aff'd 2018 FCA 197

offshore hedge fund investments were chosen in the main for commercial reasons (e.g., manager reputation), so that s. 94.1 did not apply

The taxpayer (“Gerbro”) was a Canadian investment corporation (owned by a family trust but with an elderly income beneficiary, so that Gerbro was required to have liquid investments) whose board-established investment guidelines specified that between 0% and 30% of its holdings be of directional hedge funds and 0% to 30% be of non-directional hedge funds (i.e., uncorrelated with the equity markets). Gerbro invested in both types of hedge funds, which typically were offshore feeder funds (in a low-tax rate jurisdiction) in a master-feeder structure and with most or all returns reinvested rather than distributed.

In finding that the hedge funds derived their value “primarily” (i.e., “more than 50% of their value” (para. 120)) from portfolio investments, Lamarre ACJ stated (at paras. 101-103):

[T]he ordinary commercial meaning of portfolio investment in the international investment context is an investment in which the investor … is not able to exercise significant control or influence over the property invested in.

... [T]he definition suggests thresholds ranging from 10% to 25% ownership … [although] a small group of well-organized investors could have a controlling interest while having less than 10% ownership… .

[P]ortfolio investments are passive investments that do not entail active management of, or control over, the operations of the underlying investment… .

Turning to the “main reason” test, Lamarre ACJ found (at para. 158) that “while tax deferral was an ancillary reason prompting Gerbro to invest in the Funds, none of its main reasons was tax deferral.” In this regard, she stated (at para. 165) that “the more important a reason for investing is, the harder it will be to elevate another reason, such as obtaining a tax deferral benefit, to the same level” before referring (at para. 167) to “overarching commercial reason[s] for investing" in these Funds,” (at para. 170) that “Gerbro was very concerned with the reputation of the mangers it invested with” and (at para. 172) that “access to the mangers of the Funds was only possible for Gerbro through offshore hedge funds, and these types of alternative investments only made up a part of Gerbro’s investment portfolio.” Furthermore, the Funds satisfied Gerbro’s liquidity criteria (para. 173).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus no taxpayer burden to displace assumptions of mixed fact and law 71
Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. Minister's statement was false 130
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 145 - Subsection 145(3) expert's report did not include all the underlying data 115

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" and "indebtedness"

An offshore fund ("SLT"), in which the taxpayer had an interest, invested in instruments (styled as "Notes") of non-resident subsidiaries of Canadian banks. The Notes did not bear interest and provided for a payment on maturity that reflected the performance of a matching actively-managed portfolio of assets held by affiliates of the obligors. 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.

Boyle J found that the Notes were debt for ITA purposes notwithstanding that the offshore fund could not ascertain what it would receive on maturity until that day arrived, as it was sufficient that there be a "liquidated amount" only on such maturity. The Notes satisfied his basic criteria for what is debt: an amount is advanced or "credited" to acquire the investment; a liquidated amount is payable when it matures (which could be a nil amount); and there is interest (albeit of nil). See summary under s. 12(11) – investment contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract "notes" which tracked actively-managed reference pool of assets were "debt" 732
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

Administrative Policy

23 May 2013 IFA Round Table, Q. 1

Will s. 94.1 apply where a taxpayer invests in and earns income from a widely held offshore mutual fund in a country that does not levy an income, profit or withholding tax in respect of income earned by the fund - where it wishes to take advantage of the fund managers' expertise?


After indicating that "it is our view that tax reduction or deferral does not have to be the only reason, or even the main reason for the investment; it merely has to be one of the main reasons," and noting (citing Walton v. The Queen, 98 DTC 1780) that regard should be had to "objective manifestations of purpose," CRA stated:

We generally would expect that a Canadian taxpayer investing in a mutual fund resident in a tax haven country would be subject to section 94.

10 January 2011 Internal T.I. 2009-0342861I7 - Meaning of "portfolio investment" in 94.1(1)(b)

Canco owns XX% of the voting membership interests in BCO, which is a CFA and an LLC. BCo owns XX% of the voting membership interests in CCo, also an LLC, with an arm's length non-resident investor owning XX% of the voting Class A membership interests of CCo. CCo owns xx% of Partnership1 (a non-resident partnership) with the balance held by unrelated non-resident investors, and Partnership1 holds xx% of Partnership2 (also non-resident). Partnership2 holds XX% of the beneficial ownership interest in Opco, which carries on an active business.

After noting that s. 94.1 will apply in computing the FAPI of BCo if its shares of CCo may reasonably be considered to derive their value, directly or indirectly primarily from portfolio investments of CCo or any other non-resident entity, CRA stated:

The test is not whether the shares of CCo are "portfolio investments" to BCo, but whether the shares of CCo (i.e. the "non-resident entity" that we are testing) derive their value primarily from portfolio investments of "that entity" (i.e. CCo), or "any other non-resident entity".

After implying that Opco likely would not be considered to be a non-portfolio investment ("in its 1984 federal Budget, the government stated that the rules in section 94.1 will not apply to investments in non-resident entities whose principal business is a bona fide active business"), CRA commented on the application of the tax avoidance test in s. 94.1(1)(d):

If Canco held the Opco shares directly, and Opco were a foreign affiliate of Canco earning active business income, dividends paid to Canco by Opco would be deductible by Canco under paragraph 113(1)(a). On the sale of the Opco shares, Canco could make a subsection 93(1) election....Accordingly, even if it can be said that the shares of CCo derive their value from portfolio investments, it appears that the provisions of section 94.1 would not apply to BCo, since the earnings of Opco could be paid to Canco without tax.

After noting that BCo's equity percentage in Opco is greater that 10%, CRA stated:

If Canco's economic investment in Opco were substantially less than 10%, then we suggest that the CRA might consider the application of subsection 95(6) or the General Anti-Avoidance Rule to say that the Class B shares were issued only to take advantage of the foreign affiliate status.

90 C.R. - Q46

"Portfolio investments" are not confined to interests in non-resident entities which derive their value from passive investments or from those investments defined as portfolio investments in the CICA Handbook.

25 April 1990 Memorandum (September 1990 Access Letter, ¶1424)

RC has not yet determined whether a beneficiary under discretionary trust, who receives income or capital completely at the discretion of the trustee, has an "interest" in the specific assets of the trust.

86 C.R. - Q.19

"Portfolio investment" generally has its meaning in commercial practice (e.g., investors, investment managers and investment promoters).


Morrie Hotter, "Foreign Investment Entity Update", Corporate Finance, Vol. XI No. 4, 2004, p. 1118.

Paragraph 94.1(1)(a)


Barejo Holdings ULC v. Canada, 2020 FCA 47

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 that had been issued for US $998 million and guaranteed by those banks. They 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 obligors. If the Notes constituted "debts" for purposes of s. 94.1(1)(a) (the question posed under Rule 58), the taxpayer (a unitholder of SLT) would be required to recognize its share of foreign accrual property income (“FAPI”) of SLT arising under Element C of the FAPI definition.

Noël CJ indicated (at para. 43) that the central issue was whether “the Notes can be labelled as debt for the purposes of paragraph 94.1(1)(a) during the appellant’s 2010 taxation year even though the amounts to be paid thereunder were unknown at that time and could not be known until a later year when payment becomes due.” After rejecting the taxpayer’s argument that there was no obligation to pay any amount under the Notes as “a market downturn could realistically have wiped out the total value of the Reference Assets” (para. 46) (noting inter alia the protections accorded by professional management and an early termination right), he then stated (at para 55):

…[T]here is no single meaning of the word debt; it is capable of various definitions and the one which best reflects Parliament’s intent can only be made apparent by a textual, contextual and purposive analysis of paragraph 94.1(1)(a)… .

Respecting the text and context, he noted inter alia (at paras. 57, 61)

[A] simple reading [of s. 94.1(1)(a)] shows that a debt of a non-resident entity, may derive its value from portfolio investments that fluctuate over time. It follows that excluding an instrument from the ambit of the word debt simply because the amount which can ultimately be claimed will only be known when the term expires would effectively mean that Parliament has spoken in vain in providing for a “debt […] that may reasonably be considered to derive its value […] from portfolio investments”.

[S]ubsection 94.1(1) … contemplates in express terms that an instrument that derives its value from fluctuating portfolio investments can be a debt. It follows that the speculative nature of the Notes, and the resulting uncertainty as to the amount ultimately payable, cannot be an obstacle.

Respecting purpose, he stated (at para. 87):

The annual imputation of income while the foreign investments are in place has the effect of leveling the playing field. The appellant’s proposed definition of debt would effectively keep the deferral in place.

Noël CJ essentially 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—i.e. there was a USD 498 million advance made to each of the issuing banks, a resulting obligation on the part of the issuing banks to repay an amount equal to the value of the Reference Assets at maturity or upon early termination, and this amount was ascertainable with precision at the due date - this suffices to dispose of the appeal … .

He also noted that these were the three required characteristics of “debt” in s. 94.1(1)(a), and that there “is no requirement under the civil law or the common law, that there be an interest component in the amount to be paid or repaid in order for a debt to exist” (para. 92).

Words and Phrases
debt liability
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Consistency presumption of consistent expression is not absolute 252
Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract 3 tests for what constituted debt under s. 94.1(1)(a) 300

See Also

Barejo Holdings ULC v. The Queen, 2018 TCC 200

notes stated to be "debt" for purposes of s. 94.1(1)(a)

Barejo Holdings ULC v. The Queen, 2015 TCC 274 responded to a Rule 58 question by finding that notes held by an open-ended investment fund incorporated under the laws of the British Virgin Islands constituted debt for purposes of the Act. The appeal from this decision was dismissed at 2016 FCA 304 on the grounds that the Rule 58 question posed to the Tax Court was whether the notes were debts for purposes of the Act rather than for purposes of s. 94.1 thereof.

The parties now jointly referred a question to the Tax Court, which was the same as before except that it asked whether the notes constituted debt for purposes of s. 94.1(1)(a). Before noting some concerns respecting issues such as res judicata and issue estoppel, Boyle J nonetheless stated (at para. 9):

The parties are content to have me answer the Follow-Up Question in the same manner and for the same reasons as the Initial Question, and to specify in my answer and my reasons that it is for purposes of paragraph 94.1(1)(a), as this will allow them to have the reasons for my decision reviewed by the Federal Court of Appeal. I am prepared to oblige them.

Paragraph 94.1(1)(b)


Michael N. Kandev, Matias Milet, "Foreign Trusts", 2017 Annual CTF Conference draft paper

Main-reason test generally not met for foreign commercial trusts (pp. 19-20)

“[N]on-resident entity” is defined, at subsection 94.1(2), as including a trust that is an exempt foreign trust, other than one described in paragraphs (a) to (g) of the definition of “exempt foreign trust” in subsection 94(1). Accordingly, while section 94.1 does not have to be considered in the context of discretionary trusts (because they will not issue fixed interests and therefore will not be exempt foreign trusts under paragraph (h) of the definition of “exempt foreign trust”), it does have to be considered in the context of investments in foreign commercial trusts.

Assuming that an equity or debt interest in a foreign commercial trust derives its value primarily from portfolio investments in property of a kind enumerated in paragraph 94.1(1)(b), subsection 94.1(1) will apply if “one of the main reasons” for the taxpayer acquiring or holding the interest was to derive a benefit from portfolio investments in the relevant assets in such a manner that the taxes (whether imposed under Canadian or foreign law is not specified) on the profits, income or gains from such assets are significantly less than the tax that would have been applicable under Part I if the taxpayer had earned such profits, income or gains directly. Many if not all of the foreign commercial trusts that the authors have encountered in practice are ones that are managed by a foreign manager that does not offer a similar product in Canada, and indeed many of these trusts distribute all or substantially of all of their investment income currently. As a result, reduction of Part I tax will typically not be one of the main reasons for a Canadian taxpayer, or its controlled foreign affiliate, investing in such foreign commercial trust.

Subsection 94.1(2) - Definitions

non-resident entity

Administrative Policy

9 June 1991 Memorandum (Tax Window, No. 4, p. 21, ¶1286)

A non-resident trust may be a "non-resident entity" if the tests in ss.94(1)(a) and (b) are met, even if neither ss.94(1)(c) or (d) causes anyone to pay Canadian tax on the FAPI of the trust.

Subsection 94.1(5)


Patrick Marley, "Canada's FIE Rules - Round IV", International Taxation, July 2004, Vol 15, No. 7, p. 28.