Barejo Holdings ULC v. R. - FCA: Appeal on meaning of “debt” an “improper use of judicial resources”

Barejo Holdings ULC v. R. - FCA:  Appeal on meaning of “debt” an “improper use of judicial resources”

Barejo Holdings ULC v. Canada November 29, 2016 – 2016 FCA 304, Nöel C.J. (author), Trudel, Boivin JJ. A.).

Précis:   This is a decision on appeal from a case that had unusual beginnings in the Tax Court.  That decision involved one of the oddest procedures seen in the Tax Court in many years:

[1]             The question referred to the Court by the parties pursuant to Rule 58 is whether two contracts, entitled Notes and issued for US $998 million by affiliates of two Canadian banks and guaranteed by those banks, which are held by St. Lawrence Trading Inc. (“SLT”), an open-ended investment fund incorporated under the laws of the British Virgin Islands, constitute debt for purposes of the Income Tax Act (the Act).

The background to this question is a dispute about the application of the foreign affiliate rules or the offshore investment fund rules to the taxpayer:

[4]             The Appellant’s appeals are in respect of its 2004 through 2010 taxation years. By way of broader background context only, the issue raised by the Notices of Appeal that are relevant to this reference concern whether Barejo is required to include its share of SLT’s foreign accrual property income or FAPI pursuant to the section 94.1 offshore investment fund or OIF rules or the subsection 95(1) deemed interest accrual rules for “prescribed debt obligations” by virtue of SLT being a “controlled foreign affiliate” of Barejo. These provisions can apply only if the Notes in question constitute “debt obligations” in the case of subsection 95(1) or “debt” in the case of section 94.1. The French version of the Act uses the word “créance” for both of these terms. Prior to the hearing of this reference motion, the Crown abandoned its subsection 95(1)/12(3)/12(9)/Regulation 7000 prescribed debt obligation argument. It is understood that there are also a number of other Canadian shareholders in SLT with significant ongoing tax disputes which are proceeding separately from the Appellant’s tax appeals.

The parties did not however ask for a ruling whether the Notes were debt for the purposes of section 95 or 94.1 or the applicable Regulations.  Moreover the Court cautioned that with a question framed so broadly there was no guarantee that a different result might apply to specific provisions of the Act:

[13]        In short, the Court in this case is answering the particular question referred to it as best it can. However, the general meaning ascribed to the term debt herein will not necessarily apply in all cases. In the hearing of any other particular case, this Court may give a somewhat different or more nuanced meaning to the term debt depending upon the text and context of a particular provision or régime in the Act, specific provincial or other applicable laws that are relevant to the interpretation of a contract or the characterization of a relationship, or the possible relevance of purpose, objective or intention to the application of the provision or the interpretation or characterization of the contract or relationship, among other things.

In the Tax Court Justice Boyle ruled that the Notes were debt.  The taxpayer didn’t like the answer and appealed.  The Federal Court of Appeal didn’t like the question and dismissed the appeal from the bench as an “improper use of judicial resources”, with the parties assuming their own costs.

Decision:  Prior to the hearing before the Federal Court of Appeal the Court issued a rather exceptional direction to the parties:

[3]               Four weeks prior to the hearing of the appeal, the Court issued the following direction:


The parties are asked to provide written submissions as to why these consolidated appeals should not be dismissed on the basis that disposing of them would resolve nothing and give rise to an improper use of judicial resources.

The underlying issue in the appeal before the Tax Court turns on the meaning of the word “debt” as it appears in section 94.1 of the Act. In response to the broad question submitted to him jointly by the parties, − i.e.: whether the two [Notes] in issue at trial “constitute debt for the purposes of the Income Tax Act” − the Tax Court judge identified “the core essential characteristics of debt generally for purposes of the Act” (Reasons, para. 129) and determined that the two [Notes] were debt within that description. This affirmative answer is the subject matter of the appeal before this Court, the appellant challenging it and the respondent supporting it.

Subject to the submissions of the parties on this point, it does not appear as though the answer to the question asked will resolve anything in the context of the underlying appeal which turns on the meaning of the word “debt” in section 94.1 of the Act. A related difficulty is that there would appear to be no statutory criteria against which the correctness of the opinion expressed by the Tax Court judge can be assessed as no legal consequence attaches under the Act to an instrument found to be a debt “for the purpose of the act as a whole” (Reasons, para. 132).

The parties have attempted to overcome this difficulty by asserting that “[i]t is common ground that…there is no special meaning to the word ‘debt’ in section 94.1” (Memorandum of the appellant, para. 25), thereby suggesting that the general meaning ascribed by the Tax Court judge to the word “debt” coincides with the meaning of that word in subsection 94.1. Again, subject to the parties’ submissions, this reading seems problematic as the Tax Court judge has expressly provided that his opinion cannot be read as applying to the word “debt” as it appears in section 94.1 or for that matter in any other section of the Act (Reasons, paras. 5 to 13 and 132).

The parties are asked to provide written submissions not exceeding five (5) pages in each case on or before November 15, 2016 and to address the issue orally at the beginning of the hearing, on November [29], 2016.

To many observers that Direction appeared to indicate that the writing was on the wall for the fate of this appeal.  They were correct.  The appeal was dismissed from the bench.  The Chief Justice essentially admonished the parties to stop playing games:

[11]           The issue in an appeal from an order answering a Rule 58 question is whether the answer can withstand appellate scrutiny. In making this determination, this Court must consider the answer that was given to the question asked as it is the answer that is under appeal. In the present case, the answer given by the Tax Court judge, whether read on its own or with the reasons given in support of it, leave no doubt about the fact that he makes no pronouncement on the meaning of the word “debt” in section 94.1. It is therefore not possible to review his opinion as if he had, as the parties invite us to do (Joint Submissions, para. 20).

[12]           The parties insist that they did not intend the Tax Court judge to give an academic opinion (Joint Submissions, para. 19). No doubt that is so. However, they do not confront the fact that the broad answer which he gave was responsive to the question asked. In this respect, the reasons make it clear that the Tax Court judge assumed that the question had been drafted as it was for a reason and that some usefulness could be derived from the general answer which it called for (Reasons, para. 2):

This question was referred to the Court by joint application of the parties. The parties were each of the view that the determination of this question prior to a full hearing and trial could dispose of all or part of their dispute, or result in a substantially shorter hearing or in a substantial savings of costs.

[13]           As it turns out however, the parties have been unable to identify what that usefulness might be.

[14]           The end result is that nothing in the underlying appeals turns on whether the Tax Court judge was right or wrong in holding that the two Notes in issue were debt for the purposes of the Act as a whole.

[15]           It follows that endeavouring to dispose the appeals on the merits would serve no useful purpose and give rise to an improper use of judicial resources.

[16]           At the end of his oral submissions, counsel for the appellant asked that we amend the question so as to refer to section 94.1, and provide the appropriate answer.

[17]           As indicated in open court, only the Tax Court has the jurisdiction to answer a Rule 58 question at first instance, the jurisdiction of this Court being limited to the appellate review of the answer given by the Tax Court.

As a result the appeal was dismissed with the parties to bear their own costs.