Docket: T-1382-06
Citation:
2014 FC 838
Ottawa, Ontario, September 2, 2014
PRESENT: The
Honourable Madam Justice Gagné
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BETWEEN:
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IMPERIAL OIL RESOURCES LIMITED
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Applicant
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and
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THE ATTORNEY GENERAL OF CANADA
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Respondent
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JUDGMENT AND REASONS
Overview
[1]
This is an
application for judicial review brought by Imperial Oil Resources Limited
[Imperial Oil] against the Attorney General of Canada, representing the Minister
of National Revenue [Minister] relating to the Syncrude Remission Order,
CRC, c 794 [SRO], an initiative undertaken in 1976 by the federal government to
provide some federal tax relief to participants in the Syncrude (oil sands)
project in northern Alberta. This tax relief, in the form of a remission paid pursuant
to the Financial Administration Act, RSC, 1985, c F-11, served to
counterbalance increased royalty charges enacted by the
Albertan government that, as of 1994, had to be included in the participants’
taxable income. In essence, until the end of 2003, participants in the Syncrude
project were entitled to a remission of federal tax for the amount they paid Alberta in royalty charges.
[2]
This application
was heard concurrently with files T-1-05 and T-2155-10, which deal with unpaid
refund interest allegedly accrued on previously granted remission for the 1996
and 1999 taxation years. In essence, the respondent argues that no interest is
owed on remission and that the application relating to the 1996 taxation year
is time-barred. Reasons for those files will be addressed in a companion
decision.
[3]
The present file
concerns the computation of the remission entitlement itself, for the 2001
taxation year. While in its Notice of Application, the applicant had also
sought the corresponding claim for refund interest allegedly accrued, it desisted
from that argument at the hearing.
[4]
Imperial Oil
submits that its remission entitlement must be imputed with reference to the
actual amount of royalties payable to the Province of Alberta. The Syncrude
participants (including Imperial Oil) had sought a downward adjustment to their
royalties by submitting proposed financial statements to Alberta, which
included deductions pertaining to certain pension costs from the 2000 and 2001
taxation years. These proposed financial statements were rejected by Alberta and ultimately by a binding arbitration decision rendered in 2004, as being
inconsistent with the royalty agreement governing the computation of royalties.
As such, the royalty payable was never actually reduced by Alberta. The
respondent limited Imperial Oil’s remission entitlement to an amount of
remission computed on the basis of the proposed lower royalties, stating that it
was the amount of royalty eligible for remission.
[5]
The respondent argues that the quarrel does not concern the
amount of remission owed, but rather the year during which it was liable to be
paid. Considering the SRO expired at the end of 2003, the respondent submits
that this adjusted royalty was receivable by Alberta in 2004 following the
arbitration panel’s decision, so that the applicant is not entitled to the
difference in remission on the amount it alleges to have actually paid in
royalties and included in its 2001 taxable income. In reply, the applicant
argues that the remission amount relating to the pension costs was payable in
2001, when the oil sands subjected to the royalties in question were extracted,
and that it is in fact entitled to remission notwithstanding the final amount
being confirmed in 2004.
[6]
For the reasons discussed below, I will grant
this judicial review and set aside the respondent’s decision that remission is
owed based on reduced royalties paid to Alberta for Imperial Oil’s 2001
taxation year.
Background
[7]
The relevant facts detailing Imperial Oil’s business operations,
participation in the Syncrude Joint Venture and the Alberta Crown Agreement,
along with the historical background giving rise to the enactment of the SRO
are detailed in the companion judgment. Terms used in the present reasons are,
if not defined herein, as defined in the companion judgment.
[8]
Through the years, the Alberta Crown Agreement was amended a
number of times. The relevant amendment for this application is Amendment #6,
dated January 1, 1997. Pursuant to section 2.11 (which substituted a new Clause
305 into the Alberta Crown Agreement), Alberta was entitled to a royalty equal
to “Alberta’s royalty’s share of Deemed Net Profit” from the Syncrude Joint
Venture, as calculated in accordance with Schedule A-1. As a result, Syncrude Canada was required to produce financial statements detailing the calculation of Deemed Net Profit
or loss for the project and of Alberta’s Deemed Net Profit or loss, including
an auditor’s opinion as to the reasonableness of such calculations. The annual
financial statements were to be prepared in accordance with the terms and
conditions set out in Schedule A-1 of Amendment #6.
[9]
In December 2001, Syncrude Canada advised Alberta that the
December 2000 financial statements for the determination of Alberta’s share of
Deemed Net Profit, previously submitted to the province, would be restated to
increase allowed operating costs to recognize pension plan increased costs.
Similarly, Syncrude Canada advised that the December 2001 financial statements
would also be restated to recognize pension performance results. The changes in
the financial statements resulted from a change in accounting treatment of
future employment benefits stemming from changes to the CICA Handbook,
effective January 1, 2000 [Disputed Costs].
[10]
Notwithstanding the revised financial statements, the Syncrude
Joint Venture participants, including Imperial Oil, remitted to Alberta, in respect of their 2001 taxation year, royalties in accordance with the original
December 2001 financial statements.
[11]
As a result, the Syncrude participants claimed that the royalty
payments they had made to the Province of Alberta exceeded their obligations
pursuant to Schedule A-1 to Amendment #6.
[12]
The Province of Alberta objected to the restated financial
statements, which led to the province and Syncrude Canada entering into an
arbitration agreement whereby an arbitration panel [Panel] was asked to rule on
whether the change in accounting treatment for future employee benefits
resulting in the restated financial statements complied with the requirements of
Amendment #6.
[13]
On October 21, 2004, the Panel held that the restated financial
statements did not comply with the requirements of Amendment #6 and, as a
result, the amount of the royalty paid to Alberta was never adjusted to reflect
the restated financial statements.
[14]
When the Minister calculated Imperial Oil’s entitlement to
remission under the SRO for its 2001 taxation year, the Minister did so with
reference to an amount of royalties that were reduced to Imperial Oil’s share
of the Disputed Costs, even though the amount of royalties paid to Alberta, and
ultimately upheld as the correct amount by the Panel, was not similarly
reduced.
Issues and Standard of Review
[15]
This application for judicial review raises the following issue:
−
Whether Imperial Oil is entitled to remission under the SRO in
respect of the actual royalty paid to the Province of Alberta for its 2001
taxation year rather than the notional amount of royalty that would have arisen
had the restated financial statements been accepted by Alberta and the Panel.
[16]
The parties agree that the applicable standard of review
concerning the proper interpretation of the SRO and the Income Tax Act
(R.S.C., 1985, c. 1 (5th Supp.)) [ITA] is correctness, as it is a question of
law (Canada (Attorney
General) v Imperial Oil Resources Limited, 2009 FCA
325 [Imperial Oil] at para 2).
Analysis
[17]
I agree with the applicant that Amendment #6 imposed an absolute
liability on it to pay to Alberta its proportionate share of Alberta’s share of
Deemed Net Profit.
[18]
The SRO grants remission of “any tax payable” as a result of the
royalty provisions of the ITA being applicable to amounts receivable by Alberta as a royalty. The generally accepted definition of “receivable” is that for an
amount to be considered receivable, “it
is not enough that the so-called recipient have a precarious right to receive
the amount in question, […] he must have a clearly legal, though not
necessarily immediate, right to receive it” (Minister
of National Revenue v Colford Contracting Company Limited, 60 DTC 1131).
[19]
Amendment #6 sets out the clear and unconditional right of Alberta to receive its share of Deemed Net Profit. Imperial Oil has a corresponding
obligation to pay its proportionate share of that Alberta royalty.
[20]
The amount receivable by Alberta, and indeed
paid by Imperial Oil, was based on the royalties paid by Imperial Oil to Alberta without any reduction in respect of the Disputed Costs.
[21]
Syncrude Canada, as the operator of the Syncrude
project, was required to prepare financial statements calculating the Alberta royalty. Syncrude Canada filed such financial statements for the 2000 and 2001
taxation years.
[22]
The Province of Alberta accepted the original
2000 financial statements as being correctly filed. Consequently, prior to
submitting the revised financial statements, both the Province of Alberta and the Syncrude Joint Venture participants agreed that the Alberta royalty, as
initially calculated by Syncrude Canada, reflected the amount of the Syncrude participants’
obligation to Alberta for 2000.
[23]
As for 2001, although Imperial Oil filed the
restated financial statements, it paid royalty without deduction of the
Disputed Costs. The right to deduct those costs was subsequently submitted to
arbitration.
[24]
Paragraph 12(1) (o) of the ITA requires
that any amount receivable by a province that is a royalty paid by a taxpayer
must be included in income. As the amount of the Alberta royalty (without
reduction for the Disputed Costs) paid by Imperial Oil is an amount receivable
by Alberta as a royalty, it is required to be included in Imperial Oil’s income
for the taxation year during which the oil is extracted.
[25]
The SRO grants remission to Imperial Oil with
respect to the amount included in Imperial Oil’s income pursuant to paragraph
12(1) (o) of the ITA. Consequently, Imperial Oil is entitled to
remission on its full share of the Alberta royalty paid without reduction in
respect of the Disputed Costs.
[26]
The respondent suggests that such portion was a
contingent liability that did not crystallize as a liability of Imperial Oil until
2004, when the Panel released its decision concluding that Alberta’s share of
Deemed Net Profit could not be reduced by the Disputed Costs.
[27]
The Supreme Court of Canada in Her Majesty
the Queen v McLarty, [2008] 2 S.C.R. 79, stated, in determining whether a
liability is a contingent liability, that “[t]he test is simply whether a legal obligation comes into
existence at a point in time or whether it will not come into existence until
the occurrence of an event which may never occur.”
[28]
Imperial Oil’s obligation to pay its
proportionate share of the Alberta royalty came into existence pursuant to
Amendment #6 and was not dependent on the occurrence of an event which may
never have occurred. In particular, clause 305 of the Amendment #6 specifically
says that the Province of Alberta is entitled to its share of Deemed Net Profit
“for each period” (which is defined in Schedule A-1 to be a year). Therefore,
the liability arises in respect of each particular year. The simple fact that
its exact quantum be determined later does not impact the prior existence of
the obligation.
[29]
Moreover, a conclusion that the portion of the Alberta royalty relating to the Disputed Costs only became receivable in 2004 (when the
Panel made its decision) would be contrary to the very nature of the royalty
imposed by Amendment #6. As the Federal Court of Appeal noted in Imperial
Oil, the essential nature of a royalty is necessarily linked to the
production from a particular property. In this case, the royalty obligation
imposed by Amendment #6 is with respect to the particular property that was
produced in 2001.
[30]
Therefore, the Court’s finding would be the same
even if Imperial Oil would have deducted the Disputed Costs from the Alberta royalty paid in 2001 and would have subsequently been forced to pay the difference
in 2004, once the Panel decision was rendered.
[31]
In other words, the Panel’s decision simply
interprets Syncrude Canada and Alberta’s rights pursuant to Amendment #6; it is
not a constitutive-investitive or a divestive decision which, by its
nature, can create a new legal relationship between the parties.
*
* *
[32]
It is uncontested that the amount of royalty
paid to Alberta in 2001 included the Disputed Costs. However, the parties
vigorously disagree and, I would say, they both remained vague during the
hearing as to whether they were included in Imperial Oil’s income for its 2001
taxation year. As the SRO allows the Minister to grant remission on amounts included
in the producer’s income pursuant to paragraph 12(1) (o) of the ITA (not
only paid in royalty), this question is somewhat crucial.
[33]
The respondent initially claimed that only $41.9 million was
included in Imperial Oil’s income for 2001, and that the Disputed Costs were
not included in that amount, as $43 million were paid to Alberta. However, Mr.
Ladak from the Canada Revenue Agency [CRA], conceded during his
cross-examination that it was rather an amount of $54 million that was included
in Imperial Oil’s 2001 revenue for the Syncrude royalty pursuant to paragraph
12(1)(o) of the ITA. However, the respondent maintains that the Disputed
Costs are not included in the $54 million and that the excess of $54 million
over $41.9 million concerns other amounts disputed before the Appeals division
of the CRA.
[34]
Just as firmly, Imperial Oil argues that it is not relevant
whether or not the Disputed Costs were included in Imperial Oil’s revenue and
that the only question that should be of concern to the Court is whether or not
at least $43 million were included in Imperial Oil’s taxable income, as it is
only asking for remission of tax paid on $43 million.
[35]
Imperial Oil cites the Federal Court of Appeal’s decision in Imperial
Oil for the proposition that the Syncrude royalty can not be broken down or
“chip chopped”. Asking ourselves if the Disputed Costs were included or not in
its 2001 revenue under 12(1) (o) of the ITA, says Imperial Oil, would
only amount to breaking down the Syncrude royalty. This argument, which was
successfully made by the respondent in Imperial Oil, supports, as
indicated above, Imperial Oil’s position that the Syncrude royalty remains
intimately linked with the oil extracted in a given year, even if the exact
amount of the royalty is determined by an arbitration decision rendered during
a different year. However it does not support Imperial Oil’s argument that one
should not, without breaking down the royalty, ask oneself if the Disputed
Costs were included in Imperial Oil’s revenue for its 2001 taxation year.
[36]
Imperial Oil’s argument simply contradicts the terms of the SRO.
The SRO dictates that an amount has to be included in the producer’s taxable
revenue, and tax paid on that amount, in order for that amount of tax to be
remitted.
[37]
The Court is asked to review the decision of the
Minister concerning the Disputed Costs and is not asked to rule on any other
amount that would need to be reassessed by the CRA, so that the amount of
Syncrude royalty included in Imperial Oil’s taxable revenue for the 2001
taxation year ($54 million) equates the taxable amount used to calculate the
remission for the same year ($41.9 million).
[38]
Although the Court has been presented the above general figures,
it does not have the benefit of Imperial Oil’s entire tax file and of the
documentation supporting these figures. The evidence before the Court is
incomplete and contradictory as to whether or not the Disputed Costs were
included in Imperial Oil’s revenue.
[39]
In any event, I am of the opinion that this question is for the
CRA (who has the benefit of Imperial Oil’s tax file), and eventually the Tax
Court, to answer.
Conclusion
[40]
For these reasons, the Court will grant the application for
judicial review, set aside the Minister’s decision and declare that the
applicant’s entitlement to relief for the 2001 taxation year pursuant to the
SRO, without a deduction related to the Disputed Costs, is contingent upon the
Disputed Costs having been included in Imperial Oil’s 2001 taxable income.
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