BAREJO HOLDINGS ULC, Appellant, v. HER MAJESTY THE QUEEN,, 2018 TCC 200

Docket : 2014-4290(IT)G BETWEEN: BAREJO HOLDINGS ULC, Appellant, and HER MAJESTY THE QUEEN, Respondent . Motions dealt with by way of written submissions. By: The Honourable Justice Patrick Boyle ORDER Upon application by the parties pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for the determination of a question of mixed fact and law; And upon hearing from counsel for the parties; IT IS ORDERED THAT: 1. The Court determines that, for purposes of the Appellant’s two appeals, the two Notes held by SLT constitute debt for purposes of paragraph 94.1(1)(

a) of the Act . 2. Costs are left to the trial judge, subject to the Court exer cising its discretion if written submissions requesting otherwise are received from the parties within 30 days from the date of this Order. Signed at Vancouver, British Columbia this 4th day of October 2018. “Patrick Boyle” Boyle J.

Citation: 2018 TCC 200 Date: 20181004 Docket: 2014-4290(IT)G BETWEEN: BAREJO HOLDINGS ULC, Appellant, and HER MAJESTY THE QUEEN, Respondent, REASONS FOR ORDER Boyle J. [ 1 ] The parties have jointly referred a further question to the Court pursuant to Rule 58, which question is a follow-up question to the Rule 58 question determined in Barejo Holdings ULC v. Her Majesty the Queen 2015 TCC 274 ( " “Barejo 2015” " ). The Initial 2015 Question [ 2 ] The Appellant instituted its appeals in 2014.

In 2014 the parties jointly referred the following question ( " the “Initial Question” " ) to the Court: Whether the two Contracts held by SLT, a non-resident entity, constitute debt for purposes of the Income Tax Act . [ 3 ] The Court answered the Initial Question in Barejo 2015 as follows: The Court has determined that for purposes of [these two appeals], the two Notes held by SLT constituted debt for purposes of the Income Tax Act . " The reasons for that answer are set out in Barejo 2015. " " " [ 4 ] The Appellant appealed the decision in Barejo 2015 to the Federal Court of Appeal.

That Court dismissed the appeal on procedural grounds without addressing the substantive merits of Barejo 2015 – see Barejo Holdings ULC v. Her Majesty the Queen 2016 FCA 304 ( " “Barejo FCA” " ) [ 5 ] The Appellant’s leave application to the Supreme Court of Canada from the decision of the Federal Court of Appeal was dismissed without reasons in June 2017.

The 2018 Follow-Up Question [ 6 ] In 2018 the parties jointly referred the following question (the " “Follow-Up Question” " ) to the Court for determination: " As a follow-up to the Rule 58 determination in [Barejo 2015], do the two Contracts held by SLT, a non-resident entity, constitute debt for purposes of paragraph 94.1(1)(

a) of the Income Tax Act ? " " " " The only difference between the Initial Question and the Follow-Up Question is that the Follow-Up Question specifies that it is to be answered with respect to paragraph 94.1(1)(

a) of the Act , whereas the Initial Question did not include the words “of paragraph 94.1(1)( a ).” " " " " [ " " 7 " " ] " " The parties jointly asked that the Follow-Up Question be determined on the basis of the Court record in Barejo 2015. In the first stage of the 2018

section 58 reference, the Court allowed the Follow-Up Question to proceed to be considered and answered. In the second stage of this reference, the parties chose not to file any additional agreed facts or other evidence for the Court to consider in answering the Follow-Up Question. Neither party suggested that Barejo 2015 was decided upon any misunderstanding of the facts, relationships and the provisions of the Notes or any related documents, nor that reconsideration for any other reason was warranted now.

The parties did not wish to make any oral argument, and did not file any further written submissions nor supplement their 2015 written arguments. " [1] " The parties did not refer to any court decisions since Barejo 2015 was decided. " " " " [ " " 8 " " ] " " Neither party’s position in his Court has changed in the intervening three years. " " Had the parties wanted to ask a Follow-Up Question focusing on paragraph 94.1(1)( a ), they could have returned to this Court directly following Barejo 2015.

" " [ " " 9 " " ] " " The parties are content to have me answer the Follow-Up Question in the same manner and for the same reasons as the Initial Question, and to specify in my answer and my reasons that it is for

purposes of paragraph 94.1(1)( a ), as this will allow them to have the reasons for my decision reviewed by the Federal Court of Appeal. I am prepared to oblige them. " " " " Jurisdiction/Res Judicata/Issue Estoppel/Abuse of Process " " " [ 10 ] This Court’s answer to the Initial Question was that, for purposes of the Appellant’s two particular appeals, the Notes in issue were debt for purposes of the Income Tax Act . Questions thus arise whether it is now open to, or appropriate for, this Court to decide otherwise with respect to any particular provision in that statute.

It is not at all clear to me that I can or should decide that something that has been determined by this Court to be debt for purposes of the Act , is not debt for the purposes of a particular provision of that Act . This concern is only increased by the fact that paragraph 94.1(1)(

a) actually uses the word " “debt” " and neither party has provided any additional evidence, law or argument to support a different answer to the Follow-Up Question than the Initial Question. There is no specific argument before me from the Appellant that addresses the particular text, context or purpose of paragraph 94.1(1)( a ). [ 11 ] This concern was raised with the parties during the first stage of this reference, before deciding to allow the Follow-Up Question to proceed. The parties’ shared position was that " “it is open for this Court to decide whether the word “debt” for purposes of paragraph 94.1(1)(

a) has the same meaning as that ascribed to the word “debt” for purposes of the Act as a whole.” " [ 12 ] The parties’ position is a possible

interpretation of the combined effects of the decisions and reasons of this Court and the Federal Court of Appeal. Without considering much less deciding this question, I am prepared to proceed to answer the Follow-Up Question on the assumption that the parties shared position prevails. Analysis [ 13 ] Since this is a follow-up question to Barejo 2015, the reasons therein necessarily form an integral part of the analysis and reasons herein, and are incorporated herein by reference in their entirety.

The defined terms in Barejo 2015 are also used herein with the same meanings. [ 14 ] The analysis of the Follow-Up Question starts with my complete adoption of this Court’s reasons, analysis, conclusion and answer in Barejo 2015, that the Notes constitute debt for purposes of the Act , and are Appendix A hereto. I confirm that my answer to the issue of the meaning of the term debt for purposes of the Act remains my complete answer for the reasons given in Barejo 2015. [ 15 ] Paragraphs 94.1(1)(

a) and (

b) of the Act read as follows: Offshore investment fund property 94.1

(1) If in a taxation year a taxpayer holds or has an interest in property (referred to in this

section as an “offshore investment fund property”) (

a) that is a share of the capital stock of, an interest in, or a debt of, a non-resident entity (other than a controlled foreign affiliate of the taxpayer or a prescribed non-resident entity) or an interest in or a right or option to acquire such a share, interest or debt, and (

b) that may reasonably be considered to derive its value, directly or indirectly, primarily from portfolio investments of that or any other non-resident entity in (

i) shares of the capital stock of one or more corporations, (ii) indebtedness or annuities, (iii) interests in one or more corporations, trusts, partnerships, organizations, funds or entities, (iv) commodities, (

v) real estate, (vi) Canadian or foreign resource properties, (vii) currency of a country other than Canada, (viii) rights or options to acquire or dispose of any of the foregoing, or (ix) any combination of the foregoing, … " " Bien d’un fonds de placement non-résident 94.1

(1) Lorsque, au cours d’une année d’imposition, un contribuable détient un bien ou a un droit sur un bien (appelé « bien d’un fonds de placement non-résident » au présent article) qui répond aux conditions suivantes :

a) il est une action du capital-actions d’une entité non-résidente (autre qu’une société étrangère affiliée contrôlée du contribuable ou une entité non-résidente visée par règlement) ou une participation dans une tell entité, ou une créance sur elle, ou un droit sur une telle action, participation ou créance ou un droit ou une option d’achat d’une telle action, participation ou créance;

b) sa valeur peut raisonnablement être considérée comme découlant principalement, directement ou indirectement, de placements de portefeuille de cette même entité ou de toute autre entité non-résidente : (

i) en actions du capital-actions d’une ou de plusieurs sociétés, (ii) en créances ou en rentes, (iii) en participations dans un ou plusieurs fonds ou organismes ou dans une ou plusieurs sociétés, fiducies, sociétés de personnes ou entités, (iv) en marchandises, (

v) en biens immeubles, (vi) en avoirs miniers canadiens ou étrangers, (vii) en monnaie autre que la monnaie canadienne, (viii) en droits ou options d’achat ou de disposition de l’une des valeurs qui précèdent, (ix) en toute combinaison de ce qui précède, … " " " " The full text of subsection 94.1(1) is Appendix B hereto. [ 16 ] Lastly, I turn specifically to whether or not the Notes should be characterized differently for purposes of paragraph 94.1(1)(

a) than for the Act as a whole. [ 17 ] As noted in paragraph 125 of Barejo 2015: Paragraphs 94.1(1)(

a) and (

b) expressly contemplate that a “debt” may derive its value primarily from investments of the issuer or another person in other securities, commodities, real estate or currency. This is consistent with the concept of derivatives. A debt can be a derivative as can many other securities and obligations, including hybrid financial instruments.

The concepts of debt and derivatives are not mutually exclusive. [ 18 ] Paragraphs 126, 127 and 128 go on to address other provisions of the Act that recognize a derivative investment, being a financial asset the value of which is derived from the value of other property, can be debt for purposes of the Act . [ 19 ] It is hard to read the offshore investment fund provision in subsection 94.1(1) otherwise. [2] [ 20 ] The Appellant has not made any submissions in this reference, nor in the 2015 reference, that are specific to why the use of the term debt in paragraph 94.1(1)(

a) should be different from the meaning of debt for purposes of the Act as a whole as set out in Barejo 2015. They have not argued that the text of

section 94.1 even suggests otherwise. They have not argued that the relevant context of 94.1(1)(

a) might be different than the Act as a whole. By adopting and solely relying on the record of Barejo 2015 in this second reference, both parties are treating the whole Act as potentially relevant context. The Appellant has not put forward any purpose of

section 94.1 or the offshore investment fund rules which might warrant a different analysis. If there is any such argument to be made relating to the text, context or purpose of

section 94.1 the offshore investment fund rules or the FAPI régime, it is not obvious to me from reading that

section within the OIF rules and the FAPI régime. [ 21 ] The Appellant has not provided any evidence of its intention at the time of acquiring the Notes, nor the intentions of the issuers or SLT’s intention, even though the parties’ intentions can be relevant to a proper characterization analysis. [ 22 ] Had the Court been informed which iteration(

s) of the draft offshore investment fund legislation were current when the transactions involving the Notes were being structured and when the Notes were issued and acquired, an inference might be made as to the intended characterization of the Notes as either debt or not debt by the persons issuing them or acquiring them. [ 23 ] The Court is tempted to draw an adverse inference against the Appellant given the absence of evidence of intention of the issuers of the Notes, the noteholder SLT, or the Appellant.

The potential relevance of the parties’ intentions when issuing and acquiring the Notes and of the then " “applicable” " draft legislation were highlighted in Barejo 2015, as well as in the first stage of the motion for this Follow-Up Question.

Presumably, if the intentions were helpful to the Appellant, it would be content to succeed on the basis those intentions were considered. [ 24 ] However, while the Respondent may not be able to provide evidence of the subjective intentions of SLT, the Appellant or the issuers of the Notes, it could have informed the Court which was the current iteration of the draft legislation those parties were dancing around when the Notes were issued. As noted above, this might well make it clear whether SLT and/or the Appellant intended debt or non-debt characterization for the Notes.

If the Respondent does not want to succeed on the basis of the other parties’ intentions being considered, I will not force them to by making an adverse inference against the Appellant. [3] [ 25 ] In conclusion, no attempt has been made to show the Court that there is any reason to give the term " “debt” " when used in paragraph 94.1(1)(

a) of the Act any different meaning than its meaning for purposes of the Act as a whole as determined in Barejo 2015. Answer to the Follow-Up Question [ 26 ] The Court determines that, for purposes of the Appellant’s two appeals, the two Notes held by SLT constitute debt for purposes of paragraph 94.1(1)(

a) of the Act . Costs

[ 27 ] Costs are left to the trial judge, subject to the Court exercising its discretion if written submissions requesting otherwise are received from the parties within 30 days. Signed at Vancouver, British Columbia, this 4th day of October 2018. “Patrick Boyle” Boyle J. Appendix A

" " " Appendix B " Offshore investment fund property 94.1

(1) If in a taxation year a taxpayer holds or has an interest in property (referred to in this

section as an “offshore investment fund property”) (

a) that is a share of the capital stock of, an interest in, or a debt of, a non-resident entity (other than a controlled foreign affiliate of the taxpayer or a prescribed non- resident entity) or an interest in or a right or option to acquire such a share, interest or debt, and (

b) that may reasonably be considered to derive its value, directly or indirectly, primarily from portfolio investments of that or any other non-resident entity in (

i) shares of the capital stock of one or more corporations, (ii) indebtedness or annuities, (iii) interests in one or more corporations, trusts, partnerships, organizations, funds or entities, (iv) commodities, (

v) real estate, (vi) Canadian or foreign resource properties, (vii) currency of a country other than Canada, (viii) rights or options to acquire or dispose of any of the foregoing, or (ix) any combination of the foregoing, and it may reasonably be concluded, having regard to all the circumstances, including (

c) the nature, organization and operation of any non-resident entity and the form of, and the terms and conditions governing, the taxpayer’s interest in, or connection with, any non-resident entity, (

d) the extent to which any income, profits and gains that may reasonably be considered to be earned or accrued, whether directly or indirectly, for the benefit of any non-resident entity are subject to an income or profits tax that is significantly less than the income tax that would be applicable to such income, profits and gains if they were earned directly by the taxpayer, and (

e) the extent to which the income, profits and gains of any non-resident entity for any fiscal period are distributed in that or the immediately following fiscal period, that one of the main reasons for the taxpayer acquiring, holding or having the interest in such property was to derive a benefit from portfolio investments in assets described in any of subparagraphs 94.1(1)(b)(

i) to 94.1(1)(b)(ix) in such a manner that the taxes, if any, on the income, profits and gains from such assets for any particular year are significantly less than the tax that would have been applicable under this

Part if the income, profits and gains had been earned directly by the taxpayer, there shall be included in computing the taxpayer’s income for the year the amount, if any, by which (

f) the total of all amounts each of which is the product obtained when (

i) the designated cost to the taxpayer of the offshore investment fund property at the end of a month in the year is multiplied by (ii) 1/12 of the total of (

A) the prescribed rate of interest for the period that includes that month, and (

B) two per cent exceeds (

g) the taxpayer’s income for the year (other than a capital gain) from the offshore investment fund property determined without reference to this subsection. " " Bien d’un fonds de placement non-résident 94.1

(1) Lorsque, au cours d’une année d’imposition, un contribuable détient un bien ou a un droit sur un bien (appelé « bien d’un fonds de placement non-résident » au présent article) qui répond aux conditions suivantes :

a) il est une action du capital-actions d’une entité non-résidente (autre qu’une société étrangère affiliée contrôlée du contribuable ou une entité non-résidente visée par règlement) ou une participation dans une tell entité, ou une créance sur elle, ou un droit sur une telle action, participation ou créance ou un droit ou une option d’achat d’une telle action, participation ou créance;

b) sa valeur peut raisonnablement être considérée comme découlant principalement, directement ou indirectement, de placements de portefeuille de cette même entité ou de toute autre entité non-résidente : (

i) en actions du capital-actions d’une ou de plusieurs sociétés, (ii) en créances ou en rentes, (iii) en participations dans un ou plusieurs fonds ou organismes ou dans une ou plusieurs sociétés, fiducies, sociétés de personnes ou entités, (iv) en marchandises, (

v) en biens immeubles, (vi) en avoirs miniers canadiens ou étrangers, (vii) en monnaie autre que la monnaie canadienne, (viii) en droits ou options d’achat ou de disposition de l’une des valeurs qui précèdent, (ix) en toute combinaison de ce qui précède, et que l’on peut raisonnablement conclure, compte tenu des circonstances, y compris :

c) la nature, l’organisation et les activités de toute entité non-résidente, ainsi que les formalités et les conditions régissant la participation du contribuable dans toute entité non-résidente ou les liens qu’il a avec une telle entité;

d) la mesure dans laquelle les revenus, bénéfices et gains qu’il est raisonnable de considérer comme ayant été gagnés ou accumulés, directement ou indirectement, au profit de toute entité non-résidente sont assujettis à un impôt sur le revenu ou sur les bénéfices qui est considérablement moins élevé que l’impôt sur le revenu dont ces revenus, bénéfices et gains seraient frappés s’ils étaient gagnés directement par le contribuable;

e) la mesure dans laquelle les revenus, bénéfices et gains de toute entité non-résidente pour un exercice donné sont distribués au cours de ce même exercice ou de celui qui le suit, que l’une des raisons principales pour le contribuable d’acquérir, de détenir ou de posséder un droit sur un tel bien était de tirer un bénéfice de placements de portefeuille dans des biens visés à l’un des sous-alinéas b) (

i) à (ix) de façon que les impôts sur les revenus, bénéfices et gains provenant de ces biens pour une année donnée soient considérablement moins élevés que l’impôt dont ces revenus, bénéfices et gains auraient été frappés en vertu de la présente

partie s’ils avaient été gagnés directement par le contribuable, celui-ci doit inclure dans le calcul de son revenu pour l’année l’excédent éventuel du total visé à l’alinéa f) sur le montant visé à l’alinéa g):

f) le total des montants dont chacun est le produit de la multiplication du montant visé au sous-alinéa (

i) par le quotient visé au sous-alinéa (ii): (

i) le coût désigné, pour le contribuable, du bien d’un fonds de placement non-résident à la fin d’un mois donné de l’année, (ii) 1/12 du total des pourcentages suivants : (

A) le taux d’intérêt prescrit pour la période comprenant ce mois, (

B) deux pour cent;

g) le revenu du contribuable pour l’année (autre qu’un gain en capital) tiré d’un bien d’un fonds de placement non-résident et déterminé compte non tenu du présent paragraphe. " " " "

CITATION: 2018 TCC 200 COURT FILE NO.: 2014-4290(IT)G STYLE OF CAUSE: BAREJO HOLDINGS ULC v. THE QUEEN REASONS FOR ORDER BY: The Honourable Justice Patrick Boyle DATE OF ORDER: October 4, 2018 REPRESENTATIVES: Counsel for the Appellant: Guy Dupont, Anne Sophie Villeneuve and Brandon D. Wiener Counsel for the Respondent: Simon Petit, Philippe Dupuis and Julian Hohlhuter COUNSEL OF RECORD: For the Appellant: Guy Dupont & Anne Sophie Villeneuve Firm: For the Appellant: Firm: Davies Ward Phillips and Vineberg Brandon D. Wiener Thorsteinssons LLP For the Respondent: Nathalie G. Drouin Deputy Attorney General of Canada Ottawa, Canada