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Rajah Lehal

When is a loan not really a loan?

November 07, 2016

Discussion: In 1200757 Ontario Ltd. v. Ontario**(Minister of Finance) (2011, Ont SC), prepayments under a guaranteed power purchase agreement by Ontario Hydro were determined by the Court to be characterized as a loan and not income, because, as was structured in the agreement, the loan was to be repaid in 20 years through the provision of lower cost electricity.

The CRA argued unsuccessfully that the loan agreement was actually an payment scheme and should be characterized as revenue. In this case, Power Limited Partnership (the Partnership) entered into an agreement with Ontario Hydro to sell power to Ontario Hydro over a 50-year period. It constructed a hydro-electric power plant, financed in part through a loan from Canada Life which was secured by a first charge in favour of Canada Life.

For the first 20 years of the agreement, Ontario Hydro was obligated to make payments to Canada Life in an amount calculated to amortize and pay the Partnership’s indebtedness in full, including both principal and interest. The generating station became non-operational in 1995 because of flood damage. Under the terms of the Power Purchase Agreement, Ontario Hydro was required to and continued to make the required loan payments to Canada Life notwithstanding that no further power could be generated until the generating station was repaired.

In examining the terms of the Power Purchase Agreement respecting the guaranteed payments, those terms clearly describe a debt obligation of the Partnership to Ontario Hydro. (There are express provisions, including definitions, supporting a characterization of the guaranteed payments as a loan, such as provisions for repayment of the loan within a specified period of time with interest at Ontario Hydro’s commercial customer market rate; security over the plant and equipment of the facility ranking behind the prime lender, Canada Life; and for certain consequences of any default in repayment, including the operation of the facility if the Partnership could not carry on and the termination of the Power Purchase Agreement and the assumption by Ontario Hydro of Canada Life’s position).

The purpose of the Power Purchase Agreement was not simply for the purchase of power but also to facilitate its generation through the financing of the construction of a power plant, as part of Ontario Hydro’s mandate and commitment as a public utility to provide cost-efficient and plentiful power to its ratepayers.


Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.