Words and Phrases - "debt"

In 2001 (before the three annual fiscal periods in issue) the appellant (CIBC) outsourced part of its Visa-card transaction processing and payment services to an arm’s length non-resident (“GPDI”) so that, in a typical transaction in which a Canadian cardholder presented their CIBC Visa card to a Canadian merchant, GPDI would process the point-of-sale information received from the merchant and transmit it to CIBC for credit authorization, transmit the authorization (assuming no “decline”) back to the merchant and send this and the other day’s transactions to VISA for clearing, following which there was a process involving CIBC, GPDI and VISA by which the settlement funds were paid to the merchant. GPDI would charge the merchant a merchant discount fee of, say, 2%, and pay CIBC an interchange fee of, say, 1.5% in consideration for CIBC’s authorization and payment services.

Before concluding that the interchange fees were not zero-rated on the basis of the exclusion in VI‑IX‑1(a)(ii) for a service that “relates to (a) a debt that arises from … (ii) the lending of money that is primarily for use in Canada”, Sommerfeldt J found that:

• Regarding the “relates to” test, “there only needs to be ‘some connection’ between the interchange services and the debt described in the carve‑out, and the interchange services do not need to be ancillary or incidental to the debt” and the “Slattery, Stantec and Miedzi Copper cases indicate that the phrases relating to, in relationship to, and, by extension, relates to, are to be given a wide or broad interpretation, and that a narrow view is to be avoided” (para. 54).
• In this context the verb “lend” should have “a broad meaning (recognizing that a loan arises when the lender, at the request of the borrower, pays money to a third party in satisfaction of an obligation owed by the borrower to the third party)” (para. 74), so that “when a Cardholder used a CIBC Visa Card in respect of a transaction, CIBC loaned to the Cardholder, and the Cardholder borrowed from CIBC, the monetary amount of the transaction” (para. 80).
• “in a tax context, the word primarily generally means (among other things) principally, mainly, most importantly, or more than 50%” (para. 107).
• “the loaned money was used to pay merchants located in Canada” (para. 104) so that “the money paid by CIBC indirectly to the merchants (i.e., through the Visa Payment System), in satisfaction of the Cardholders’ obligations to the merchants, was loaned money that was primarily for use in Canada” (para. 107).

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).

Partly as a delayed consequence of CRA’s seizure of computers and dental equipment of a dental practice and the misplacing of records when his practice subsequently was closed, the dentist was only able to collect a portion of the revenues that he had included in his 2005 to 2008 returns. However, the Tax Court found that he was not entitled to a bad debt deduction on the basis inter alia that he was unable to identify which specific debts had gone bad. In agreeing with this finding, and before going on to find that there was no reversible error, Boivin JA stated (at para. 5):

[T]he Appellant did not provide particulars regarding who his debtors were or how much they owed. … [I]n order to have a “liquidated money demand, recoverable by action” one must know the identity of the debtor and the amount owed … .

Respecting the taxpayer’s argument that “he could not accurately calculate his deduction for bad debts because the CRA did not keep records of which debts were satisfied as a result of garnishment,” Boivin JA stated (at para. 6):

Had the Appellant produced reliable records of services rendered and fees owing, he would have been able to provide a reliable estimate of bad debts. The onus would have then shifted to the CRA to show that it collected some of the debts through garnishment.

After a venture carried on through a U.S. subsidiary which was owned by the taxpayer and its Netherlands parent proved to be unsuccessful, the Netherlands parent advised the taxpayer's auditors that it had agreed to reimburse the taxpayer for 89% of the total loss, as a result of which the taxpayer's balance sheet showed an asset equal to the amount of the proposed reimbursement. Mogan TCJ. found that this "agreement" was "gratuitous and not enforceable" (p. 522), with the result that the promise to reimburse did not give rise to indebtedness of the Netherlands parent owing to the taxpayer for purposes of ss.15(2) and 214(3)(a).

Mogan TCJ. also stated (p. 523):

"In the absence of a special statutory definition, 'debt' means a sum payable in respect of a liquidated money demand, recoverable by action ..."

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."

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.

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".