The question referred by the parties pursuant to Rule 58 was whether two contracts, entitled Notes and issued for US $998 million by affiliates of two Canadian banks and guaranteed by those banks, which were held by St. Lawrence Trading Inc. ("SLT"), an open-ended investment fund incorporated under the laws of the British Virgin Islands, constituted debt for purposes of the Act. If the Notes constituted "debt obligations" under s. 95(1) or "debt" under s. 94.1, the taxpayer (a unitholder of SLT) would be required to recognize its share of resulting foreign accrual property income of SLT.
The two Notes, which were governed by English law, were respective obligations of non-resident subsidiaries of two Canadian banks (which guaranteed the Notes). The amount payable thereunder on maturity 15 years after issuance (or on early maturity, occurring 367 days after any termination notice given by SLT or upon the occurrence of specified adverse changes) tracked the value of portfolios of assets held by two other non-resident bank subsidiaries (which had previously purchased portfolios managed by SLT prior to the proposed expansion of the s. 94.1 rules) and actively managed by a third-party manager ("GAM"). The Notes specified that the value of the "Reference Assets" would be calculated by GAM each Monday throughout the term of the Notes and on any maturity date.
Boyle J noted (at paras. 48, 51) that the taxpayer's position "that a debt cannot exist unless and until the amount to be paid is certain or can be made certain from facts which are known or knowable… would mean that the Notes are not debt prior to maturity even though they would clearly be debt for purposes of this test upon maturity," and stated (at para. 125):
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. … A debt can be a derivative as can many other securities and obligations, including hybrid financial instruments.
And at paras. 129, 131):
The core essential characteristics of debt generally for purposes of the Act are:
- an amount or credit is advanced by one party to another party;
- an amount is to be paid or repaid by that other party upon demand or at some point in the future set out in the agreement in satisfaction of the other party's obligation in respect of the advance [f.n. ..."That there is the possibility that the amount once ascertained may be a nil amount need not disqualify the obligation."];
- the amount described in (ii) is fixed or determinable or will be ascertainable when payment is due; and
- there is an implicit, stipulated, or calculable interest rate (which can include zero).
...Other evidence such as supportive or contradictory wording or intention is very much part of the overall weighing process when considering hybrid or special purpose financial instruments.
In finding that the Notes constituted debt for purposes of the Act, Boyle J noted (at para. 133) that they were entitled Notes, they had a maturity which could be triggered early in the event of default or at the Note holder's option, "upon maturity there is a payment obligation that relates clearly, though in a complex fashion, to the amount for which the Notes were issued, and this payment satisfies the obligation in respect of the issue price," the related term sheet described the amount for which they were issued as a "Principal Amount," "at maturity, however and whenever triggered, that is whenever payment is required to be made, the amount payable by the issuer under the Notes to the Note holder is readily ascertainable with exact precision," an interest rate was stipulated in the Notes (and it was "reasonable to consider zero to be an amount for these purposes…this was presumably set out to make it clear to the parties that there would be no current returns earned or payable"), the Notes ranked pari passu with other debt (being "evidence that the parties' intention was that this be treated like other debt" – and with this ranking not described as "apply[ing] only upon maturity of the Notes"), and the Guarantees provided that the Guarantors would be liable as if they were the primary debtors.