Words and Phrases - "released"

a
88
b
44
c
79
d
52
e
38
f
31
g
19
h
14
i
74
j
2
k
2
l
32
m
56
n
25
o
38
p
81
q
3
r
76
s
90
t
47
u
16
v
9
w
23
y
2

Gaz Métro inc. c. Agence du revenu du Québec, 2017 QCCQ 3664

Summary Under
Tax Topics - Income Tax Act - Section 181 - Subsection 181(3)
“mirror debt” arrangement did not result in a legal release of debt for GAAP and capital tax purposes

The plaintiff (“GMi”) borrowed in the capital markets and on-lent on identical terms to a limited partnership (“SCGM”) in which it had a 70% limited partner interest. GMi, whose business was carried on through SCGM, took the position that, under Canadian generally-accepted accounting principles, its borrowings should not be recognized as a liability, so that under GAAP it was only required to recognize as a liability the 70% share of its debt that, in economic substance, had been assumed by SCGM by virtue of SCGM servicing the GMi debt through the “mirror debt” issued by it.

It was accepted that whether the paid-up capital of GMi for Quebec capital tax purposes included 70% or 100% of the debt turned on whether under Canadian GAAP, GMi was permitted to “derecognize” its debt in this manner. GMi referenced SFAS 140, para. 16(b) of the Financial Accounting Standards Board in the U.S., which stated (as quoted at para. 94 of the judgment):

16. A debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if…

  1. The debtor is legally released from being the primary obligor under the liability… by the creditor.

Fournier JCQ noted (at para. 140) that Chapter 3855, para. 46 of the CICA Handbook, which was adopted close to the beginning of the taxation years in issue, and was released in exposure draft form before then, was “essentially the same.”

In finding that GMi’s treatment did not accord with GAAP, and rejecting GMi’s submission that the concept of “legally released” was sufficiently ambiguous and controverted to leave scope for deference to the exercise of professional judgment by GMi’s accountants, he stated (at paras. 135-136, 191, TaxInterpretations translation):

[A]lthough SCGM assumed responsibility for the Obligations, the commitments taken on by it respecting the creditors did not result in a novation, and in that sense, did not release GMi from its obligations to them.

The creditors thus did not legally release GMi of its primary obligation respecting the Obligations.

It cannot be concluded…that the derecognition of the Obligations conformed with GAAP by virtue only of the choice exercised by GMi to take into account the substance of the transactions more than their legal form.

Words and Phrases
released