Words and Phrases - "liability"

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).