Docket: 2011-1404(IT)G
BETWEEN:
DEVON CANADA CORPORATION,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
____________________________________________________________________
Motion
heard on November 29, 2012, at Toronto, Ontario.
Before: The Honourable
Justice Robert J. Hogan
Appearances:
|
Counsel for the appellant:
|
Al
Meghji
Pooja Samtani
|
|
Counsel for the respondent:
|
Josée Tremblay
Marie-France Camiré
Ryan Gellings
|
____________________________________________________________________
ORDER
UPON the appellant bringing a motion for the
determination, before hearing, of the following question of law pursuant to
paragraph 58(1)(a) of the Tax Court of Canada Rules (General
Procedure) (the “Rules”):
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).
AND UPON having heard the submissions of
counsel and having read the materials filed;
IT IS ORDERED:
1.
The question is set
down for determination by a motion judge.
2.
The parties shall
communicate with the hearing’s coordinator on or before January 31, 2013, to
fix the date for the determination.
3.
The order dated April
24, 2012, is vacated and the parties shall communicate with the hearings coordinator
on or before May 31, 2013, to establish a new timetable for completion of
examinations for discovery, for answers to undertakings and for further
communications with the hearings coordinator.
Costs shall be in the cause.
Signed at Ottawa, Canada, this 8th day
of January 2013.
Citation: 2013 TCC 4
Date: 20130108
Docket: 2011-1404(IT)G
BETWEEN:
DEVON CANADA CORPORATION,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR ORDER
Hogan J.
[1]
In this motion, the appellant,
Devon Canada, seeks an order under section 58 of the Tax Court of Canada Rules
(General Procedure) (the “Rules”) for a determination, before the
hearing of its appeal, of a question of law that the appellant claims is raised
by the pleadings.
Background
[2]
The appeal instituted
by the appellant concerns the application of the “successor rules” found in
section 66.7 of the Income Tax Act (the “ITA”). These rules
provide that a subsequent owner of resource properties may in prescribed
circumstances deduct the resource expenses incurred by the transferor of the
properties.
[3]
In general terms, where
an original owner transfers all or substantially all of its resource properties
to a successor, the successor may claim the unused resource expenses of the
transferor against the income that may reasonably be regarded as attributable to
the production from the properties. In other words, the unused deductions can
only be used to shelter the income from the transferred resource properties.
[4]
Where control of a
corporation is acquired, the corporation is made subject to the successor rules
by virtue of subsection 66.7(10). This provision deems the corporation to be a
successor to itself such that in the future its resource deductions can only be
used to shelter the income reasonably attributable to the resource properties that
it owned prior to the acquisition of control.
[5]
A similar streaming
rule applies where the corporation is a member of a partnership that owns
resource properties. Under that rule, the corporation is deemed to have
acquired its proportionate share of the partnership’s resource properties
immediately prior to the acquisition of control. A “look- through rule” found in subparagraph
66.7(10)(j)(ii) permits the deduction of the resource expenses incurred
with respect to the partnership resource properties against the corporation’s
proportionate share of the income of the partnership. As can be seen in the
pleadings, the Minister of National Revenue (the “Minister”) takes the view
that the look-through rule operates only where the corporation is a direct
member of a partnership that owns resource properties. According to the
Minister, the look-through rule does not apply when the properties are owned by
a lower-tier partnership. In such a case, it would appear the Minister’s view
is that the resource deductions become stranded.
[6]
The pleadings reveal
that the above rules are relevant to the matter at issue. The application of
the successor rules was triggered as a result of the acquisition of control of
Anderson Exploration Ltd., the parent corporation of Home Oil Company of Canada, now Devon Canada, by the Devon group of companies (the “Acquisition of Control”). Prior to
the Acquisition of Control, Home Oil owned its resource properties (the “Anderson
Properties”) through a partnership of which it was a direct member (the “Anderson
Partnership”). Following the acquisition of control, the Anderson Partnership
transferred all of its properties to a subsidiary partnership (the “Devon Partnership”).
The pleadings reveal that the Minister reassessed Devon Canada, denying its
claim for the successor deductions attributable to the Anderson Properties on
the grounds that the “look-through rule” enunciated in paragraph 66.7(10)(j)
ceased to apply following the transfer of the Anderson Properties to the Anderson
Partnership. According to the respondent’s Reply, the appellant cannot benefit
from the successor deductions in the taxation year at issue in the appeal because
it does not have income reasonably attributable to the Anderson Properties. The
appellant disagrees with the Minister’s interpretation and submits that the
“look- through rule” found in paragraph 66.7(10)(j) of the ITA continues
to operate notwithstanding the fact that the Anderson Properties are owned
through a lower-tier partnership. This issue is referred to as the “Successor Issue”.
[7]
The pleadings also
reveal that the assessment raises a computational issue which would be relevant,
inter alia, if the Court were to find that the successor deductions
attributable to the Anderson Properties are not stranded, as claimed by the
Minister. This secondary issue concerns three deductions which, the Minister
claims, reduce the appellant’s proportionate share of income attributable to
the Anderson Properties (the “Computational Issue”).
[8]
The appellant submits
that the Successor Issue gives rise to the following question of law
susceptible of being determined under paragraph 58(1)(a) of the Rules:
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).
[9]
At the motion hearing,
the appellant, in response to a question from the bench, sought to broaden the
proposed question by adding the words “or any other provisions of the Act”
immediately after the reference to paragraph 66.7(10)(j) of the ITA.
Analysis
[10]
Paragraph 58(1)(a)
of the Rules reads as follows:
(1)
A party may apply to the Court,
(a)
for the determination, before hearing, of a question of law, a question of fact
or a question of mixed law and fact raised by a pleading in a proceeding where
the determination of the question may dispose of all or part of the proceeding,
substantially shorten the hearing or result in a substantial saving of costs.
[11]
Paragraph 58(1)(a)
of the Rules calls for a two-step process. At the first stage, before setting
down the question for determination, I must be satisfied:
(a)
That the question posed
by the appellant is a question of law or a mixed question of fact and law;
(b)
(b) That the
question is raised by the pleadings; and
(c) That the determination of the question may
dispose of all or part of the appeal, may substantially shorten the hearing or
may result in a substantial saving of costs.
[12]
If the answer to all of
the above is affirmative, the Court may set down the question for determination
by a motion judge.
[13]
It is incontrovertible that
the proposed question encapsulates the Successor Issue which is identified in
the pleadings of the parties.
[14]
The respondent submits
that the question should not be the subject of a determination by a motion
judge because there are material facts still in dispute. I acknowledge that
there are still facts in dispute, but these are not germane to the Successor Issue.
They concern the Computational Issue raised in the pleadings. In my opinion,
the test is not whether there are facts in dispute but whether there are facts
which are in dispute that are material to a determination of the proposed
question.
[15]
As correctly pointed
out by the appellant in its written representations, the pleadings show that
there is no dispute as to the facts underpinning the proposed question:
(i)
the sole shareholder of Home Oil (Anderson
Exploration Ltd.) was acquired by Devon Acquisition Corporation. This resulted
in an acquisition of control of Home Oil. (paragraphs 14(d) and (e) of the
Reply);
(ii)
prior to the Acquisition, Home Oil held an
interest in Canadian resource property (i.e., the Anderson Property) which it
transferred to the Anderson Partnership such that at the time of the
Acquisition it held an interest in the Anderson Partnership that held the
Anderson Property (paragraphs 14(b) and (c) of the Reply);
(iii)
as a result of the Acquisition, the Anderson
Property was subject to the successor rules, including paragraph 66.7(10)(j)
(paragraph 14(f) of the Reply); and
(iv)
following the Acquisition, the Anderson
Partnership transferred all of its assets, including the Anderson Property, to
the Devon Partnership (paragraph 14(dd) of the Reply).
[16]
The proposed question
requires the motion judge to decide a discrete legal issue, namely, whether the
“look-through rule” in paragraph 66.7(10)(j) is applicable if the
resource properties are held by a second-tier partnership.
[17]
The Crown contends that
a determination of the proposed question may not shorten the hearing or dispose
of the appeal in its entirety because the Computational Issue will still be
outstanding. I agree that a hearing may still be required if the parties are
unable to resolve the Computational Issue before trial. However, I am of the
view that the appeal hearing will be considerably shortened if the proposed
question is answered in the affirmative. In the instant case, the Computational
Issue is of lesser importance because it affects only the timing of the
deduction of the resource expenses. If the appellant succeeds on the Successor
Issue, the resource expenses can be used if and when income is generated from
the Anderson Properties. In that context, the Computational Issue may lend
itself to settlement by the parties. On the other hand, the Successor Issue is
an all or nothing matter. If the Minister’s position is correct, the successor’s
deductions attributable to the Anderson Properties may be forfeited.
[18]
I am not inclined to
accede to the appellant’s request to amend the question as posed in its motion
record because I am not satisfied that all of the material facts necessary to
address the question as reformulated by the appellant are agreed upon by the
parties.
[19]
For all of these
reasons, I am satisfied that the determination of the question as originally
formulated in the appellant’s written motion record may dispose of a significant
part of the appellant’s appeal, resulting in cost savings to the parties.
Therefore, the question should be set down for determination by a motion judge.
Signed at Ottawa, Canada, this 8th day of January 2013.
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