Section 16

As part of a complex set of transactions, a predecessor of the taxpayer agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was non-interest-bearing (except in the remote event of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. The predecessor treated the $207.5M difference between these two amounts as an amount which, although conceded not to be interest in form, was interest in substance and therefore could be treated as being recharacterized as interest under s. 16(1): the economic substance of the situation was that it received $17.5 million as the present value of $225 million.

Key points for Hogan J below in rejecting this position were that the taxpayer received significant benefits for assuming the loan in addition to being paid the $17.5M and that none of the amounts to be paid to the Japanese creditor (APCJ ) were interest in economic substance (or, of course, legal form) to it, Nadon JA stated (at paras. 84, 90):

Subsection 16(1) provides that where, under a contract or other arrangement, an amount can be reasonably regarded as part interest and part capital, the part that can reasonably be regarded as interest, shall “be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable…”. This can only mean, with respect to the contrary view, that the amount which can reasonably be regarded as interest must necessarily be regarded as interest by the recipient of the amount, that is the person to “whom the amount is paid or payable…”. It is implicit, if not express, in the words of the provision that the amount which can reasonably be regarded as being interest is an amount that is paid or payable to a person. …

[I]t is because interest is, by its nature, symmetrical that the Judge was correct in interpreting subsection 16(1) in the way that he did. In other words, an amount is not interest if it does not have the character of interest to both the recipient and the payor.

He went on to also find (at para. 97) that there was no reversible error below in considering that, in any event, the $207.5M amount did not qualify in economic substance as interest to the taxpayer.

The farm lands of the taxpayer were expropriated pursuant to the Expropriation Act (Alberta) in 1977. Following the settlement in 1986 of an action against the Province of Alberta, the taxpayer received the sum of $1,020,368 which was calculated as a replacement of interest income which the plaintiff would have earned if he had been paid the full value of his land at the time of the expropriation.

Before concluding that this sum constituted interest for purposes of the Act rather than proceeds of disposition, Linden J.A. referred to s. 16 and stated (p. 5123) that "therefore, the interest paid to James Shaw should be distinguished from the capital sum paid to him as proceeds of disposition of his expropriated property".

The taxpayer, which was a real estate developer, received mortgages from the purchasers of its condominiums which had a fair market value lower than their face amount due to their below-market rates of interest. In finding that subsection 16(1) was not applicable, Cullen J. stated (p. 5434):

"In my opinion, the principal amount of the mortgages is a payment in the nature of income to the plaintiff, in that it is the proceeds of the sale of the property by the plaintiff in the course of business. I do not see it as a blended payment of income and capital combined, which is the situation with which subsection 16(1) is designed to deal. I find it difficult to accept the plaintiff's characterization of the difference between the face value of the mortgage principal and the fair market value of the mortgage as interest within the meaning of subsection 16(1)."

The taxpayer was paid $1,000,000 of the sale price of land which previously had been sold by it, at a time when the purchaser was in arrears in respect of interest on an hypothec securing payment of the sale price. Since there was no agreement between the taxpayer and the purchaser that the whole of the $1,000,000 should be paid as a payment of principal, and since the Civil Code indicated that payments prima facie should be applied to any overdue interest, it was found that $93,702 of the $1,000,000 was correctly treated as interest.

An owner of Canadian land mortgaged his land on a non-interest bearing basis and then sold the land to the taxpayer, a non-resident, which assumed the mortgage. Decary, J. stated that in determining whether interest should be imputed on the payments to the taxpayer "the prime factor to be considered is whether or not the fair market value has been paid" and accepted the taxpayer's evidence that the purchase price for the property was equal to its fair market value. "There is a difference between a loan without interest granted someone and a loan without interest assumed by a third party."

The taxpayer sold some of its timber limits for $7.5 million: $1.5 million payable up front; and the balance in five equal annual instalments, with no provision being made for interest on the unpaid balance except in the event of default.

Walsh J. noted that, unlike the Groulx decision, there was no evidence of any discussion respecting interest (rather than paying a higher price), there was no provision of a discount for prepayment of the instalments and there was no evidence that it was the almost invariable practice in the industry to charge interest on instalment sales. After indicating (at p. 5134) that he "would not necessarily reach a different conclusion on these factors alone", he went on to note (see pp. 5134, 5136) that, on the "decisive element" of the question of price there was no "evidence justifying a conclusion of fact that the price was excessive and could only be justified by not charging interest on the deferred instalments" and concluded (at p. 5136):

"I do not consider that section 7(1) can be applied by the Minister in all cases where no interest is claimed on deferred payments, but rather that it should only be used when something in the evidence indicates that it was the intention of the vendor to avoid taxation on interest by including it as part of a larger capital payment that would otherwise have been made."

A farmer, after initially being offered $350,000 for his farm, negotiated its sale for $395,000, of which $310,000 was payable in non-interest bearing instalments payable over an extended period of time from the date of sale. The instalments received by him were found to include an element of interest given that: under normal business practice such instalments would have borne interest at 5% or 6%; the selling price was higher than the market value of the farm; the taxpayer himself proposed the non-payment of interest; and his purported reasons for making this proposal were weak.

The taxpayers, who were shareholders of a company that was being pressured by its bank to dispose of non-interest bearing conditional sales contracts and mortgage receivables owing to it, purchased those agreements and mortgages for a lump sum purchase price equal to 65% of the amounts owing. Before going on to find that the full amount of the gain subsequently realized by the taxpayers when the mortgages and agreements matured was income from business, Thorson P. rejected (at p. 1097) an argument that s. 7 of the 1952 Act applied to deem a portion of the amounts received by them to be interest income:

"As between the Respondents and Sunnibilt there is nothing of a capital nature in any of the payments under the mortgages and agreements and I am unable to see how any of the profit realized by the respondents from their purchase of the mortgages and agreements could possibly be regarded as an accretion of their capital."