Following assessments of withholding tax on interest on notes owing by the taxpayer, the notes were amended to decrease the principal owing (by the amount of withholding tax paid by the taxpayer on behalf of the non-resident holder), increase the interest rate (by grossing-up the interest rate for the applicable withholding tax), extend the maturity date by one year and change the identity of the payee (to reflect the notes' assignment) were found to give rise to new obligations, with the result that their maturity date occurred within five years of the date of (new) issue. (The new non-resident holder of the notes was considered to deal with the taxpayer at arm's length.)
Sexton JA stated (at para. 10) that "I ... do not think that a novation is required before there can be a new obligation" and (at para. 12) "because novation is an issue of fact, whether or not a new obligation has been created is also, by analogy, a question of fact," and noted (at para. 13) that in Wiebe "this Court held that fundamental changes to a stock option agreement which substantially affected the basic elements of the agreement were inconsistent with the continued existence of that agreement." He concluded (at paras. 14-16):
The fundamental terms of the promissory notes in question were
- ...the identity of the debtor;
- ...the principal amount of the note;
- ...the amount of interest under the note; and
- ...the maturity date of the note.
….In the present case, all but one of these fundamental terms were changed.
….When it can be said that substantial changes have been made to the fundamental terms of an obligation which materially alter the terms of that obligation, then a new obligation is created ... .