Citation: 2013 TCC 415
Date: 20131218
Docket: 2011-1404(IT)G
BETWEEN:
DEVON CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Hogan J.
I.
Introduction
[1]
The Appellant has brought this motion pursuant to paragraph 58(1)(a)
of the Tax Court of Canada Rules (General Procedure). Following an earlier
hearing, the following question of law (the “Question”) was set down for
determination by a motion judge:
whether, by
operation of paragraphs 66.7(10)(j) and 66.7(10)(c) of the Income
Tax Act, following the acquisition of control of Home Oil . . . and
the transfer of the [Anderson Properties] by the [Anderson Partnership] to
the [Devon Partnership], the proportionate share of income earned from the
[Anderson Properties] owned through the Devon Partnership, allocated to
the Anderson Partnership and further allocated to Home Oil, may reasonably be
regarded as having been attributable to production from a particular resource
property owned before the acquisition time by an original owner for purposes of
subsections 66.7(1) to (5).
II.
Factual Background
[2]
The facts are not in
dispute. Anderson Exploration Ltd., the parent corporation of Home Oil Company
of Canada (“Home Oil”), was acquired by Devon Acquisition Corporation on
October 15, 2001 (the “Acquisition of Control”). Home Oil was continued by
amalgamation as the Appellant, Devon Canada Corporation (“Devon Canada”).
[3]
Prior to the
Acquisition of Control, Home Oil owned its resources properties (the “Anderson
Properties”) through a partnership of which it was a direct member, the
Anderson Exploration Partnership (the “Anderson Partnership”).
[4]
Following the
Acquisition of Control, the Anderson Partnership transferred all of its
resource properties (the “Transfer”) to a subsidiary partnership, the Devon
Canada Partnership (“Devon Partnership”). The Transfer did not alter Home Oil’s
proportionate interest in the Anderson Partnership.
[5]
The Minister of
National Revenue (the “Minister”) reassessed Home Oil, denying its claim for
successor deductions in respect of the Anderson Properties, which claim was
made after the Transfer. The claim was denied on the basis that paragraph
66.7(10)(j) ceased to apply on the transfer of the property to the
second level partnership.
III. Issue
[6]
The Question concerns
the interpretation and application of section 66.7 of the Income Tax Act
(the “Act”), commonly referred to as the successor rules. More specifically,
the Question addresses the matter of whether a corporate partner can continue
to deduct “successored” resource expenses against income from resource
properties that have been transferred from a partnership of which that partner
is a direct member to a subsidiary partnership following an acquisition of
control.
IV. Overview of the Provisions at Issue
[7]
Generally, the
successor rules permit a subsequent owner of resource properties to deduct against
income from the transferred properties the unused resource expenses incurred by
the transferor.
[8]
Section 66.7 permits a
corporation (a “successor”) which acquires all or substantially all of the
resource properties of a vendor (an “original owner”) to claim the unused
resource expenses of the original owner (“‘successored’ expenses”) against
income from the production from the properties and income in the form of proceeds
from the disposition of the properties acquired from the original owner. The
specific rules allowing different types of resource deductions are set out in
subsections 66.7(1) to (5).
“Successored” expenses may be deducted to the extent of a successor’s income
that “may reasonably be regarded as attributable” to production from the
properties that are acquired.
[9]
The successor rules in
the context of the acquisition of a resource property are optional, as a joint
election by the successor and original owner must be made in order for the
rules to apply.
If assets are sold to an unrelated person and an election is not made, the
vendor retains its resource expense pools and may deduct them freely.
[10]
The successor rules
automatically come into play when a corporation is the subject of an acquisition
of control. The successor rules in the context of an acquisition of control are
found in subsection 66.7(10) of the Act, which provides:
(10) Where
at any time after November 12, 1981
(a) control
of a corporation has been acquired by a person or group of persons, or
(b) a
corporation ceased on or before April 26, 1995 to be exempt from tax under
this Part on its taxable income,
for the
purposes of the provisions of the Income Tax Application Rules and
this Act (other than subsections 66(12.6), (12.601), (12.602), (12.62)
and (12.71)) relating to deductions in respect of drilling and exploration
expenses, prospecting, exploration and development expenses, Canadian
exploration and development expenses, foreign resource pool
expenses, Canadian exploration expenses, Canadian development expenses and
Canadian oil and gas property expenses (in this subsection referred
to as “resource expenses”) incurred by the corporation before that time,
the following rules apply:
(c) the
corporation shall be deemed after that time to be a successor (within the
meaning assigned by subsection 29(25) of the Income Tax Application Rules or any
of subsections (1) to (5) that had, at that time, acquired all the
properties owned by the corporation immediately before that time from an
original owner thereof,
.
. .
(d) a
joint election shall be deemed to have been filed in accordance with subsections
(7) and (8) in respect of the acquisition,
(e) the
resource expenses incurred by the corporation before that time shall be
deemed to have been incurred by an original owner of the properties and
not by the corporation.
[11]
Upon an acquisition of control,
paragraph 66.7(10)(c) deems the corporation to be a successor to itself
for the purposes of claiming deductions provided for by subsections 66.7(1) to
(5), as it is considered to have acquired all of the resource properties it
owned immediately before that time from an original owner thereof. Under
paragraph 66.7(10)(e), the resource expenses incurred by the corporation
are deemed to have been incurred by an original owner of the property.
[12]
By deeming the
corporation to be a successor to itself, subsection 66.7(10) effectively places
the corporation in the same position as that which it would have been in had it
acquired all of its resource properties from another corporation which had incurred
the resource expenses and which owned the resource properties. The primary
implication is that any unused resource expenses become deductible solely
against income that “may reasonably be regarded as attributable” to the
resource properties owned by the corporation immediately prior to the
acquisition of control.
By streaming expenses to particular properties, the change-of-control successor
rules prevent trading in unused resource expenses.
[13]
Following the
introduction of the acquisition of control provisions in 1983, it was unclear
whether unused resource expenses were deductible following an acquisition of control
in circumstances where the resource properties were owned through a
partnership.
[14]
In 1987, Parliament
adopted relieving legislation to address this uncertainty.
Paragraph 66.7(10)(j) is a “look-through rule” which enables a corporate
partner to deduct against its proportionate share of the income and proceeds
from the partnership resource expenses it incurred with respect to the
partnership resource properties. Paragraph 66.7(10)(j) provides as
follows:
(j) where
that time is after January 15, 1987 and at that time the corporation was a
member of a partnership that owned a Canadian resource property or a foreign
resource property at that time
(i) for
the purpose of paragraph (c), the corporation shall be deemed to have owned
immediately before that time that portion of the property owned by the
partnership at that time that is equal to its percentage share of the total of
amounts that would be paid to all members of the partnership if it were wound
up at that time, and
(ii) for
the purposes of clause 29(25)(d)(i)(B) of the Income Tax Application Rules,
clauses (1)(b)(i)(C) and (2)(b)(i)(B), subparagraph (2.3)(b)(i)
and clauses (3)(b)(i)(C), (4)(b)(i)(B) and (5)(b)(i)(B)
for a taxation year ending after that time, the lesser of
(A) its
share of the part of the income of the partnership for the fiscal period
of the partnership ending in the year that may reasonably be regarded
as being attributable to the production from the property, and
(B) an
amount that would be determined under clause (A) for the year if its share
of the income of the partnership for the fiscal period of the partnership
ending in the year were determined on the basis of the percentage
share referred to in subparagraph (i),
shall be deemed to
be income of the corporation for the year that may reasonably be attributable
to production from the property.
[15]
Where a corporation is
a member of a partnership that owns resource properties at the time of an acquisition
of control, subparagraph 66.7(10)(j)(i) deems that corporate partner to have
owned its proportionate share of the partnership’s resource properties
immediately prior to the acquisition of control. This deemed ownership places
the corporate partner within the ambit of paragraph 66.7(10)(c), and
this, in turn, enables the successor to avail itself of the deductions provided
for in subsections 66.7(1) to (5).
[16]
Subparagraph 66.7(10)(j)(ii)
prescribes a limit on the amount “that may reasonably be attributable to
production” from the “successored” property for purposes of the streaming
restrictions provided for in subsections 66.7(3), 66.7 (4) and 66.7 (5) of the
Act. Specifically, where the resource properties in question were held in a
partnership at the time of the acquisition of control of the corporate partner,
the corporation’s “share of the partnership income” . . . “that may reasonably
be regarded as attributable to the production from the property” is equal to
the lesser of: (i) the corporation’s share of the partnership income in the
year that “may reasonably be regarded as attributable to the production from
the property”; and (ii) the amount that would be determined under (i) if it was
determined by reference to the corporation’s proportionate share of the
partnership income at the time of the acquisition of control.
Position of
the Parties
A. Appellant’s
Position
[17]
The Appellant takes the
position that paragraph 66.7(10)(j) continues to apply so as to allow
Home Oil to deduct “successored” resource expenses notwithstanding the transfer
of the Anderson Properties from the Devon Partnership to the Anderson
Partnership. To support its position, the Appellant relies on the following
grounds:
(i)
Home Oil continued to receive its share of production income from the Anderson
Properties after the [Transfer] as it had received prior to the [Transfer], as
computed under subparagraph 66.7(10)(j)(ii);
(ii)
although the Anderson Partnership earned income through the Devon Partnership
after the [Transfer], it remained income that “may reasonably be regarded as
being attributable to the production from” the Anderson Properties for purposes
of subparagraph 66.7(10)(j)(ii); and
(iii)
subsection 96(1) of the Act, which preserves the source and location of the income
from each partnership activity (including the ownership of property),
conclusively confirms the foregoing.
[18]
In response to the
argument raised in the Respondent’s Memorandum of Fact and Law, the Appellant
argued orally that the successor rules did not cease to apply following the
Transfer. More specifically, the Appellant noted that subparagraph 66.7(10)(j)(i)
deemed Home Oil to have been the owner of its proportionate share of the
Anderson Properties immediately before the Acquisition of Control and that nothing
occurred subsequently to terminate this deemed ownership. The deemed ownership brought
Home Oil within the ambit of paragraph 66.7(10)(c) and enabled it to
become a deemed successor to itself, having acquired its proportionate share of
the Anderson Properties and the associated resource expenses from an original owner
thereof.
[19]
The Appellant argued
that there was nothing in the Act that subsequently terminated this deemed
successorship with regard to the Anderson Properties. The Appellant
acknowledged that, following the Acquisition of Control, Home Oil’s deduction
was limited by the requirement of having income that may “reasonably be regarded
as attributable to” production from the Anderson Properties.
B. Respondent’s
Position
[20]
In her written
submissions and in her oral submissions at the hearing, the Respondent reframed
the issue, asking whether the acquisition by a partnership of Canadian resource
properties of another partnership triggers the application of the successor
rules. The successor rules, argued the Respondent, come into play only upon the
occurrence of one of two triggering events: (i) an acquisition of control of
the corporation; and (ii) an acquisition of all or substantially all of the
resource properties by a corporation. Since a transfer of resource properties
from a partnership to a subsidiary partnership does not trigger the successor
rules, the Respondent reasoned that any unused resource expenses of the
Appellant must expire.
[21]
It is significant to
note that the Respondent articulated a different position in its Reply filed
with this Court on July 11, 2011 (the “Original Reply”). There, the Respondent
argued that the “look-through rule” in paragraph 66.7(10)(j) operates
only where a corporation is a direct member of a partnership that owns resource
property, and not where the property is owned by a subsidiary partnership. More
specifically, the Respondent stated that as a result of the Transfer, the
Anderson Partnership had “divested itself of its assets used for the purpose of
producing oil and gas and, therefore, was not generating income attributable in
any manner to production from Canadian resource property”. Without
income reasonably attributable to production from the Anderson Properties, the
Respondent argued, the Appellant’s deduction was limited under subparagraph
66.7(10)(j)(ii) to nil.
V. Analysis
[22]
The analysis is complicated by the
fact that the Respondent has framed the issue raised by the Question as being
“whether the acquisition by a partnership of Canadian resource properties from
another partnership triggers the application of the successor rule provided for
by subsection 66.7(10) of the Act.”
I find that this constitutes a mischaracterization of the Question. It is also
a departure from the basis of the Minister’s reassessment and from the position
put forward in the Respondent’s Original Reply.
[23]
In my opinion, the
Question is more appropriately framed as being whether a corporate partner can
continue to deduct “successored” resource expenses against income from a resource
property that has been transferred from a partnership of which it is a direct
member to a subsidiary partnership following an acquisition of control. The
answer turns on whether income earned
through the subsidiary partnership remains income that “may reasonably be
regarded as being attributable to the production from” the resource property
for the purposes of subparagraph 66.7(10)(j)(ii).
[24]
Both parties urged me
to adopt a textual, contextual, and purposive interpretation of the relevant provisions;
therefore, a review of the current law will be instructive. The modern approach
to statutory interpretation was articulated by the Supreme Court of Canada in Canada
Trustco Mortgage Co. v. Canada:
It
has been long established as a matter of statutory interpretation that “the
words of an Act are to be read in their entire context and in their grammatical
and ordinary sense harmoniously with the scheme of the Act, the object of the
Act, and the intention of Parliament”: see 65302 British Columbia Ltd. v.
Canada, [1999] 3 S.C.R. 804, at para. 50. The interpretation of a
statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a whole. . . .
[Emphasis added.]
[25]
In Canada Trustco Mortgage, the Supreme Court also stated that where the words
of a statute are precise and unequivocal, the ordinary meaning of those words
plays a dominant role. Conversely, where the words may support more than one
reasonable meaning, recourse must be had to a greater extent to the context and
purpose of the statute:
. . . When the words
of a provision are precise and unequivocal, the ordinary meaning of the words
plays a dominant role in the interpretive process. On the other hand, where the
words can support more than one reasonable meaning, the ordinary meaning of the
words plays a lesser role. The relative effects of ordinary meaning, context
and purpose on the interpretive process may vary, but in all cases the court
must seek to read the provisions of an Act as a harmonious whole.
[26]
In Canada Trustco Mortgage,
the unanimous Court further added that the Act must be interpreted in such a
way as to achieve consistency, predictability and fairness.
Did the Resource
Expenses Expire When the Anderson Properties Were Transferred to the Devon Partnership?
[27]
The Respondent argued
that when a property is transferred in a way that does not trigger the
application of the successor rules, “successored” resource expenses expire.
[28]
While I accept that a
transfer of property from a partnership to a subsidiary partnership following
an acquisition of control does not trigger the successor rules, I do not
believe that this results in the expiry of the “successored” resource expenses.
The Respondent did not point to anything in the Act that mandates such a result.
[29]
The Respondent’s
interpretation is also at odds with the Canada Revenue Agency’s (the “CRA”) administrative
position. The CRA has stated that resource expenses are deductible where a
corporation is the subject of an acquisition of control and subsequently
transfers the resource property to a partnership of which it is a member. A
transfer of a “successored” resource property to a partnership is not one of
the two triggering events; however, contrary to the Respondent’s position
herein, the resource expenses remain deductible according to the CRA.
[30]
Paragraph 66.7(10)(j)
applies to situations where a corporation “was a member of a partnership that
owned a Canadian resource property or a foreign resource property” at the time
of an acquisition of control. Subparagraph 66.7(10)(j)(i) deems the
corporate partner to have owned immediately before that time its proportionate
share of the partnership’s resource properties. Therefore, under paragraph
66.7(10)(j), Home Oil was deemed to own its proportionate share of the
Anderson Properties immediately prior to the Acquisition of Control.
[31]
This deemed ownership
operates for the purposes of paragraph 66.7(10)(c), which then deems the
corporate partner to be a successor to itself by virtue of its being deemed to
have acquired the resource properties from an original owner thereof. This in
turn allows the successor to avail itself of the deductions provided for in
subsections 66.7(1) to (5). Paragraph 66.7(10)(c) operates continuously
after the time of the acquisition of control, stating that “the
corporation shall be deemed after that time to be a successor . . . that
had, at that time [i.e., the time of the acquisition of control], acquired all
the properties owned by the corporation immediately before that time [i.e., the
same moment as that at which subparagraph 66.7(10)(j)(i) deems the
corporation to have owned its share of the partnership properties] from an
original owner thereof.” The Act says “acquired,” it does not say “acquired and
has not disposed of.”
[32]
Therefore, once the
corporate partner is deemed to own the partnership properties under
subparagraph 66.7(10)(j)(i), it is deemed continuously by paragraph
66.7(10)(c) to be a successor that acquired the partnership properties
from an original owner. Successor status is established immediately prior to
the acquisition of control. A subsequent event must occur to terminate this
successor status.
[33]
In summary, the
Respondent’s position in this case is based on the misconstruction that the
deemed ownership concept applicable to property owned by a first-tier
partnership as set out in paragraph 66(10)(j) ceases to operate if the property
is transferred to a second-tier partnership. This is manifestly incorrect. For
the change of control provisions to operate properly, the streaming
restrictions must continue to operate from year to year. The impact is that if
the corporation fails to earn income from those properties because the resource
is depleted or the income is earned by another taxpayer that is subject to tax,
then the corporation will be unable to deduct its resource expenses existing at
the time of the change of control. As a result, while the corporate partner
will remain a successor indefinitely, if it loses its connection with the
resource property it will no longer have income “that may reasonably be
regarded as attributable” to property, and its maximum deduction under subparagraph
66.7(10)(j)(ii) would be nil.
[34]
While Home Oil remained
at all times a successor with respect to the Anderson Properties and was
therefore entitled to deduct resource expenses in accordance with subsections
66.7(1) to (5), its deduction will be limited according to the extent to which
its income “may reasonably be regarded as attributable to . . .
production from” the Anderson Properties.
[35]
There is no specific
requirement that the partnership continue to directly own the property at the
time the “successored” resource expenses are deducted. I agree with the
Appellant that the Respondent’s position requires me to read into subparagraph
66.7(10)(j)(ii) after the phrase “for a taxation year ending after that
time” additional words such as these: “but only where the party continues to
hold such properties throughout the taxation year.” The Supreme Court of Canada
has admonished against reading words into the Act in this way.
Can Income Derived From Property Held in a Subsidiary
Partnership Be Reasonably Regarded as Attributable to the Resource Property?
[36]
A textual, contextual
and purposive interpretation of paragraph 66.7(10)(j) supports the
conclusion that income attributable to property transferred by a corporate
partner from a partnership of which it was a direct member to a subsidiary
partnership following an acquisition of control remains income that “may
reasonably be regarded as being attributable to the production from” the
resource property for the purposes of subparagraph 66.7(10)(j)(ii).
[37]
The phrase “may
reasonably be regarded as attributable to” is not defined in the Act, and the
successor provisions are only now, for the first time, being judicially
considered. The Respondent did not provide any arguments on the wording. The
Appellant, for its part, submitted that the wording chosen by Parliament is
broad enough to include income derived from properties owned by a subsidiary
partnership. To support its argument, the Appellant pointed to case law which
considered comparable wording.
[38]
In 729658 Alberta
Ltd. v. The Queen,
this Court considered the wording “reasonably be attributed” then contained in
subsection 55(2). Justice Woods held that the term suggested a fair and
moderate allocation of the amount:
.
. . The Canadian Oxford
Dictionary defines the words “reasonable” and “attribute” as follows:
reasonable 1 having sound judgment; moderate; ready to listen to
reason. 2 in accordance with reason; not absurd. 3a within the
limits of reason; fair moderate (a reasonable request). b
inexpensive; not extortionate. c fairly good, average (the food here
is reasonable).
attribute 1 regard as belonging or appropriate to (a poem
attributed to Shakespeare). 2 ascribe to; regard as the effect of a
stated cause (the delays were attributed to heavy traffic). 1a a
quality ascribed to a person or thing. b a characteristic quality. 2
a material object recognized as appropriate to a person, office or status (a
sceptre is an attribute of majesty). 3 Grammar an attributive
adjective or noun.
These definitions suggest that the
allocation should be fair and moderate. They do not require that there be an
averaging or proration.
[39]
The Appellant also
referred to a document in which the Minister considered the meaning of the
phrase “can reasonably be considered to relate” in the context of subsection
152(4.3). This subsection permits the Minister to reassess outside of the
normal reassessment period in circumstances in which the reassessment “can
reasonably be considered to relate to” the matter specified in the subsection.
With regard to this, the Minister has stated:
. .
. the term used in the provision, “can reasonably be considered to relate”, is
not specifically defined in the Act so its interpretation relies on its
“ordinary” meaning. We note, first of all, that the term is not one that
suggests mathematical precision. Both the words “reasonably” and “relate”
provide a broad scope for interpretation. The Oxford Dictionary includes the
following relevant definitions:
. .
.
Traditionally,
the use of the word “reasonable” in the context of the administration of the
Act allows for some considerable latitude. It is our view that as long as the
connection between two things or actions is easily discernible then the two
things or actions could reasonably be considered to be related.
[40]
In the absence of
arguments from the Respondent on the language at issue, I find that the previous
interpretations of comparable phrases support the Appellant’s position and
that the phrase “reasonably be regarded as attributable to . . . production”
can be interpreted so as to include income allocated to Home Oil by the Devon
Partnership.
[41]
Paragraph 66.7(10)(j)
applies to partnerships and their members. Thus, the Act’s tax treatment of
partnerships and their members is part of the context within which paragraph
66.7(10)(j) should be interpreted.
[42]
The scheme of the Act,
like Canadian common law, recognizes that a partnership is not a separate legal
person; rather, it is a relationship between two or more persons carrying on
business in common with a view to profit. Since the Act imposes taxes on
“persons”, a partnership is not subject to an entity-level tax. Instead, a
partnership is treated as a conduit or flow-through for income tax purposes, and
its income or losses are calculated in the aggregate and then allocated to its
members.
[43]
Section 96 in Part I, Division
B, Subdivision j (Partnerships and Their Members) of the Act sets out
the general rules governing the computation and taxation of partnership income.
Although a partnership is not a person for the purposes of the Act generally,
section 96 requires that income of the partnership be computed “as if” the
partnership were a separate person
and “as if” each partnership activity, including ownership of property, were
carried on by the partnership as a separate person. Income
is therefore calculated in the aggregate at the partnership level and then
allocated to the partners in accordance with each member’s interest in the
partnership. The original source of income from each partnership activity is
preserved in the hands of the partners.
[44]
The CRA has accepted section
96 as applying to preserve the source of income in the hands of the corporate
partner where resource property is owned by a corporation at the time of an
acquisition of control and there is a subsequent transfer to a partnership.
[45]
In a tiered partnership,
the source and location of income is preserved through each level of
partnerships until the income is ultimately recognized by, and taxed in the
hands of, the corporate or individual partners. This is supported by subsection
102(2) which provides that, in the context of computing the income of
partnerships, “a reference to . . . a taxpayer who is a member of a particular
partnership shall include a reference to another partnership that is a member
of the particular partnership.”
[46]
In Fredette v. The
Queen,
this Court confirmed that income retains its source and its character in a
tiered partnership structure. Since an interest in a partnership is not itself
a source of income, the source and characterization of the income from each
partnership activity must be preserved through all of the tiers, each
partnership acting as a flow through, until the income is ultimately taxed in
the hands of the corporate or individual partner. In this regard, Justice
Archambault of this Court noted:
. .
. In other words, the partner’s source of income is the same as the
partnership’s. In addition, elsewhere in the Act there is no provision creating
the fiction that the income of a partner is earned from an “interest in a
partnership”. It must therefore be concluded that the partner derives his
income from the activities of the partnership itself, not from the property
(the interest in the partnership) and that the interest expenses incurred by
that partner to finance his contribution were incurred to obtain that business
income . . . .
[47]
Section 96 preserves
the source of partnership income in the hands of the partners. Subsection
102(2) preserves the source in cases where the income is earned through tiered
partnerships. Accordingly, I find that the provisions of the Act governing
partnerships and their members support the Appellant’s contention that income
derived from properties held by a subsidiary partnership retains its source up
through the first-tier partnership and ultimately to the corporate partner.
[48]
At trial, the
Respondent took the position that section 96 does not apply to paragraph
66.7(10)(j). More specifically, the Respondent argued that section 96
operates only for the limited purpose of computing a partnership’s income and
therefore does not apply to the determination of income that can “reasonably be
regarded as being attributable” under paragraph 66.7(10)(j), as this is
a notional calculation used simply to establish a ceiling for the deduction.
[49]
Several times during
argument, I asked counsel for the Respondent to explain how income “reasonably .
. . regarded as being attributable” was to be calculated under her
interpretation; however, no clear answer was provided. During the hearing of
the motion, the Respondent recognized that, prior to an acquisition of control,
income of a partnership retains its character when flowing up to the partners,
under subsection 96(1), and that subsection 102(2) preserves this state of
affairs in a tiered partnership structure. The Respondent did not explain why
subsections 96(1) and 102(2) should cease to operate entirely following an
acquisition of control.
[50]
Common law principles
similarly do not support the Respondent’s position as, under the common law,
the individual and corporate partners collectively own the property used in the
partnership and would thus clearly have income reasonably attributable to that
property.
[51]
Only the members of a
partnership that are legal persons are ultimately taxed on the income produced
by the partnership activities. Home Oil is taxed on income from the Anderson
Properties by virtue of section 96, but under the Respondent’s interpretation
it does not have income reasonably attributable to the properties.
[52]
I conclude that the
Respondent’s position is inconsistent with the scheme of the Act since it ignores
section 96 and the iterative nature of the partnership income calculation, and
as it also fails to provide an alternative method for income calculation under
subparagraph 66.7(10)(j)(ii).
[53]
The Respondent further
argued that if section 96 is the basis of the calculation then subparagraph
66.7(10)(j)(ii) is rendered meaningless. However, I find that subparagraph
66.7(10)(j)(ii) still serves a purpose by ensuring that, should the corporation
subsequently increase its partnership interest, its maximum deductions under
the successor rules will be limited to the corporation’s percentage interest in
the partnership at the time of the acquisition of control.
[54]
A purposive analysis of
the provision in light of its legislative history also favours the Appellant’s
position. Paragraph 66.7(10)(j) was introduced to ensure that successor
deductions would be available to corporate members of partnerships that held
resource properties at the time of an acquisition of control. The successor
rules apply only to resource expenses and thereby recognize that in the
resource sector there is often a significant period between the time when expenses
are incurred and the time when income is generated from the resource
properties.
[55]
Until 1983, upon an
acquisition of control, undeducted resource expenses could be used provided the
acquired properties had active business income under subsection 66(11) of the
1971 Act.
To further guard against loss trading in “successored” expenses, more extensive
change-of-control provisions were enacted in 1983. The effect of these was
to treat the corporation as a successor to itself, and thenceforth unused
resource expenses became deductible only against income from the resource
properties the corporation held immediately prior to the acquisition of
control. In effect, the losses were streamed to the particular properties.
[56]
Following the
introduction of the acquisition-of-control rules, it was not clear that the
rules operated efficiently in circumstances where property was owned through a
partnership.
[57]
Parliament subsequently
adopted relieving legislation to address this issue:
As a result of this
new paragraph [66.7(10)(j)], the successor rules will permit the
resource expenses of a corporation that is a member of a partnership that were
incurred before a change of control or tax-exempt status of the corporation to
be deducted by it to the extent of its share of the partnership income from
resource properties owned at the time of change for a taxation year ending
after the change. This share is the lesser of
(a) the
corporation’s share of the income of the partnership for the fiscal period of
the partnership ending in the taxation year of the corporation that may
reasonably be regarded as attributable to the production from the resource
property of the partnership, and
(b) the
corporation’s share determined in (a) calculated on the basis of its share of
income at the time of the change of status of the corporation.
[58]
By treating the
corporate partners as the owners of the resource properties, paragraph
66.7(10)(j) ensures that the corporation that incurred the expenses through
a partnership structure can still use them following an acquisition of control.
I find that the Respondent’s interpretation is directly at odds with this purpose,
as it would deny the deduction of expenses by the very taxpayer that incurred
them and that continues to pay tax on the income from the properties.
[59]
Parliament’s intention
that resource expenses not become stranded when properties remain within a wholly
owned corporate group is similarly reflected in paragraphs 66.7(10)(g), (h)
and (i). These provisions permit a successor to designate in favour
another member of the wholly owned corporate group, for the purpose of
accessing the “successored” expenses, income from the “successored” properties
following an acquisition of control.
[60]
Parliament has
legislated to enable a form of tax consolidation within a wholly owned
corporate group so that “successored” expenses do not become stranded. Under
the Respondent’s interpretation, resource expenses cannot be used even though
the property has not left the wholly owned corporate group. In fact, no
taxpayer would ever be able to deduct the “successored” expenses. I find that
this is inconsistent with Parliament’s intent.
VI. Conclusion
[61]
In conclusion, I find
that following the transfer of the Anderson Properties to the Devon
Partnership, the proportionate share of income earned from the Anderson
Properties, determined in accordance with clauses 66.7(10)(j)(ii)(A) and
(B) and allocated to the Anderson Partnership, and further allocated to Home
Oil, may reasonably be regarded as having been attributable to production for
the purposes of subsections 66.7(1) to (5). The amount of such income is a
matter to be determined by the trial judge on the basis of his evidentiary
findings.
[62]
Costs on this motion
are left to the discretion of the trial judge.
Signed at Ottawa, Canada, this 18th day of December 2013.
“Robert J. Hogan”
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