The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. Did this constitute a payment by novation?
After quoting from Quebec commentary that “[a]s a general rule, the mere delivery of a promissory note does not entail novation of the pre-existing obligation” and the “promissory bill is then considered as a simple means of acknowledging the debt,” CRA stated:
[T]he issuance of the note … did not constitute a payment and that there was no novation of the original debt by reason of the issuance of this second note.”
After quoting from Québec Cartier, CRA concluded that “the Taxpayer did not pay the increased and annually capitalized interest and did not credit the Vendor with such interest when the [new] note … was issued.”