Author: Jenny P. Mboutsiadis

Alberta Court rules on what is a “reasonable amount” of interest under s. 20(1)(c)


Test for reasonableness of interest amount is whether no business would have contracted to pay that amount:  Alberta Court of Queen’s Bench

This summer saw the first case in which a court articulated the test for determining whether an interest amount is reasonable for purposes of paragraph 20(1)(c) of the Income Tax Act (Canada) (“ITA”).  No other Canadian federal or provincial court has ruled on this question.

In ENMAX PSA Corp. v. Alberta (2016 ABQB 334), the two taxpayers were subsidiaries of ENMAX Corp., which was owned by the City of Calgary.  Government-owned businesses in Alberta are usually exempt from provincial and federal tax statutes, unlike privately-owned and publicly-traded corporations.  To even things out, government-owned businesses are required to make payments in lieu of tax (“PILOT”) to a “balancing pool”.  PILOT payments are calculated in accordance with tax statutes.  A taxpayer may deduct a “reasonable amount” of interest on borrowed money used for the purpose of earning income to the extent permitted under paragraph 20(1)(c).

The taxpayers in this case paid interest to ENMAX Corp. on funds borrowed from it and deducted the interest under paragraph 20(1)(c) in calculating their PILOT payments.  Alberta’s Minister of Finance took the position that the interest rates on the loans were unreasonable and only allowed deductions for amounts computed at about half of the actual interest rates.  The taxpayers appealed to the provincial court.

The issue before the Alberta Court of Queen’s Bench was whether interest paid by each taxpayer was reasonable pursuant to paragraph 20(1)(c).  The Court identified three broad considerations that govern the determination of what is reasonable:

  1. Reasonableness must be measured with reference to the legal transaction to which the borrower was a party, not other contracts it might have made.
  2. The interest that would have been paid in an arm’s length transaction may be a relevant factor, but it does not define what is reasonable.
  3. The standard of reasonableness does not require that a taxpayer’s deduction be ascertainable as a precise, correct amount. Rather, it allows for a range of amounts to be considered reasonable.

Justice Poelman concluded that the question to ask when determining whether the interest deducted by a taxpayer is a reasonable amount is:  Whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred?  Also noteworthy are his statements that the reasonableness standard in paragraph 20(1)(c) is not an arm’s length standard and that an interest rate higher than an arm’s length rate may be reasonable in the circumstances.

After extensively canvassing the evidence tendered by fact and expert witnesses, Justice Poelman found that the interest deducted by the taxpayers (and hence the interest rates) were reasonable.


[UPDATE] No need to delay rectification applications:  Ontario Superior Court

[The original post was published on July 25th, 2016 – This is an updated version.]


The Ontario Superior Court of Justice’s recent decision in Slate Management Corporation v. Attorney General of Canada[1] indicates that applicants do not have to wait for the Supreme Court of Canada’s pending judgments in two high profile rectification cases before seeking rectification orders.  However, appeals to the Ontario Court of Appeal concerning rectification matters will be held in abeyance until the Supreme Court renders the awaited decisions.

On May 19, 2016, the SCC heard arguments in Jean Coutu Group (PJC) Inc. v. Attorney General of Canada[2] and Attorney General of Canada v. Fairmont Hotels Inc., et al.[3] It is anticipated that the SCC will take the opportunity made available by these cases, the former being from Quebec and the latter being from Ontario, to provide national clarity and direction on the law of rectification.  The case law has been wildly inconsistent across the country since the Ontario Court of Appeal’s landmark decision in Juliar v. Canada (Attorney General)[4], the case that paved the way for rectification to be used to alter completed transactions in order to avoid unintended tax results.  Many in the tax community thought that there would be a moratorium on rectification applications and that those in progress would be held in abeyance until the SCC had spoken.

Addressing this issue directly, Justice Hainey in Slate Management did not accept the SCC’s pending decisions as justification for adjourning the application and proceeded to hear the matter.  He even went so far as to rely on the Ontario Court of Appeal’s decision in Fairmont[5], which is the exact case in which the SCC has reserved judgment.

The issue in Slate Management was straightforward.  The applicant argued that it had intended that its amalgamation of three corporations would achieve a specific tax outcome by using the “tax bump rules” under paragraph 88(1)(d) of the Income Tax Act (Canada).  However, it failed to attain the sought after tax outcome because it undertook the amalgamation in one step instead of sequential amalgamations in two steps.  The question before the Court was whether the applicant had a continuing intention to achieve the tax outcome by using the tax bump rules.  The Court found that, on a balance of probabilities, there was a continuing intention.  The application was allowed and the applicant was awarded $20,000 in costs.

The Attorney General of Canada appealed Justice Hainey’s decision to the Ontario Court of Appeal and immediately made a motion to have the matter held in abeyance until after the Supreme Court delivers the Fairmont and Jean Coutu judgments.  The Court of Appeal agreed and ordered that the appeal be held in abeyance until 30 days following the release of the Supreme Court decisions.[i]

[1] 2016 ONSC 4216 (Commercial List).

[2] Docket number 36505.  Summary of the case.

[3] Docket number 36606.  Summary of the case.

[4] [2001] 4 CTC 45 (Ont. C.A.).

[5] 2015 ONCA 441.

[i] Attorney General of Canada v. Slate Management Corporation (August 30, 2016), Toronto C62491 (Ont. CA).


Imperial Oil Resources Limited: FCA rules that there is no refund interest on amounts subject to remission

The Federal Court of Appeal’s decision in Imperial Oil Resources Limited  v. Canada (Attorney General)[i] concerns refund interest on amounts relating to remission orders.  The specific issue before the Court was whether, in computing the amount required to be paid by Imperial Oil Resources on account of its tax liability pursuant to the Income Tax Act (Canada) (the “ITA”), the Minister of National Revenue was required to credit the amount of a tax debt remitted to it pursuant to the Financial Administration Act[ii] (the FAA) and pay refund interest on the resulting overpayment.

As a bit of background, the ITA requires a taxpayer to include in its income resource royalties receivable by a province and prohibits the deduction of resource royalties payable to a province.  The Federal government passed the Syncrude Remission Order[iii] (the SRO), which granted to each participant of the Alberta Syncrude Project remission of any tax payable with respect to related royalties.

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No need to delay rectification applications: Ontario Superior Court

The recent decision of the Ontario Superior Court of Justice in Slate Management Corporation v. Attorney General of Canada[1] indicates that applicants do not have to wait for the Supreme Court of Canada’s (“SCC”) pending judgments in two high profile rectification cases before seeking rectification orders. Continue reading »


The CRA Assesses 1,000 Pharmacists for $58 million for Incentives Received from Generic Drug Companies

After a four year investigation, the Canada Revenue Agency (CRA) has assessed more than 1,000 pharmacists for what it says are unreported benefits they received from generic drug companies, such as gift cards, travel vouchers, and pre-paid credit cards. These benefits were incentives given to pharmacists by generic drug companies to entice them to substitute their product for brand-name products when filling prescriptions.

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