Intercompany debt dispute in Canada

Intercompany debt dispute in Canada

Alan Friedman, Elahd Toam
Financial Services

CRA consultants assisted counsel from Alberta Ministry of Justice in its successful defense of a dispute regarding “reasonable” interest rates on intercompany debt. The legal action was brought by ENMAX Energy Corporation (“Energy”) and ENMAX PSA Corporation (“PSA”), both subsidiaries of ENMAX Corporation, an electricity company owned by the City of Calgary.

At issue in the dispute were reassessments of payments in lieu of tax (PILOT) made by Energy and PSA to the Balancing Pool under the Electric Utilities Act and the Payments in Lieu of Tax Regulation. The parties disputed the amount of interest expense on intercompany debt that was deductible against income used to calculate PILOT. The Court of Appeal of Alberta found that the amount of interest deducted by Energy and PSA was unreasonable and upheld the PILOT reassessments. 

In its decision, the Court of Appeal of Alberta recognized that “…a court must take into account the interest rate a third party lender would have charged…” It also recognized that implicit support, normally evaluated by credit rating agencies to recognize assistance that may be provided by a parent to a subsidiary, “… ought to have been taken into account…” as CRA’s experts did.

CRA’s consulting team, led by Alan Friedman and Elahd Toam, supported five experts who prepared reports and provided oral testimony on issues related to the determination of arm’s-length interest rates on the intercompany debt, including analyzing the financial position and creditworthiness of the borrowing subsidiaries, estimating applicable credit ratings, and estimating arm’s-length interest rates for the debt that had been issued.

Among the experts that CRA consultants supported were David Levey, a former executive with Moody’s Investors Service; David Goldreich, the Director of the Rotman Commerce Program and Professor of Finance at the University of Toronto; Bradley Wendt, Senior Consultant to CRA, Eric A. Powers, Associate Professor of Finance at the Darla Moore School of Business at the University of South Carolina; and Joshua Ronen, Professor of Accounting at the New York University Leonard N. Stern School of Business.