Date:
20091112
Docket: A-520-08
Citation: 2009 FCA 325
CORAM: SHARLOW
J.A.
LAYDEN-STEVENSON
J.A.
RYER
J.A.
BETWEEN:
THE ATTORNEY GENERAL OF CANADA
Appellant
and
IMPERIAL OIL RESOURCES LIMITED AND
IMPERIAL OIL RESOURCES
VENTURES LIMITED
Respondents
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
On May 6, 1976, the Governor in Council enacted the Syncrude
Remission Order, C.R.C., c. 794. The respondents, Imperial Oil Resources
Limited and Imperial Oil Resources Ventures Limited (collectively, “Imperial”)
disagree with the Crown on the manner in which the Syncrude Remission Order
should be taken into account in determining Imperial’s rights and obligations
under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), for
the 1997 taxation year. Their dispute was the subject of a trial in the Federal
Court heard by Justice O’Reilly. He resolved the dispute in favour of Imperial, for reasons
reported as Imperial Oil Resources Ltd. v. Canada (Attorney General),
2008 FC 1037), and granted judgment in the amount he determined to be the
shortfall in the amount of tax remitted to Imperial. The Crown is appealing that
judgment. Imperial is cross-appealing on a question relating to interest on the
remitted tax.
Standard of Review
[2]
There is no factual dispute. The disagreement between the
parties relates essentially to the correct interpretation of a regulation, the Syncrude
Remission Order. That is a question of law that must be reviewed on the
standard of correctness.
Background
[3]
Generally, a provincial royalty on the production of a non-renewable
resource represents the share of the resource that is reserved or payable to
the province pursuant to a provincial law or a contract between the province
and the producer. Prior to the events that gave rise to this case, a royalty reserved
to a province was excluded from the producer’s income as determined for income
tax purposes, and a royalty payable to a province was deductible in computing
the producer’s income.
[4]
In the early 1970s, the provinces made significant changes to
the structure and quantum of provincial resource royalties, to the extent that the
federal government perceived a threat of serious erosion to the federal income
tax base. The federal government responded with amendments to the Income Tax
Act. The amendments were intended to ensure that federal tax relief for
royalties would be limited to an amount the federal government considered
appropriate. The amendments were enacted on March 13, 1975, effective after May
6, 1974.
[5]
It is not necessary to review in detail all of the amendments
made to the Income Tax Act on March 13, 1975 relating to resource
royalties. It is enough to say that the amendments included the enactment of
paragraphs 12(1)(o) and 18(1)(m) of the Income Tax Act. By
the combined operation of those provisions, a resource producer, in computing
its income for income tax purposes, was required to include and could not
deduct any resource royalty payable to a province.
[6]
As a counterbalance, resource producers became entitled to a
federal abatement, replaced in 1976 by a new statutory deduction called the “resource
allowance”. These measures provided tax relief as a surrogate for what the
federal government considered to be a reasonable royalty on resource profits.
[7]
During the period when the resource royalty amendments were
being made to the Income Tax Act, the development of the oil sands in
northern Alberta was in its
beginning stages. In 1975, the oil companies involved in that development (including
the corporate predecessors of Imperial) worked out a contractual royalty
arrangement with Alberta called the “Alberta Crown Agreement”.
[8]
The Alberta Crown Agreement deals with production from the
“Syncrude Project”, defined in the Agreement as follows:
|
“Syncrude Project” means the scheme for the
recovery of oil sands, crude bitumen or products derived therefrom approved
in Approval No. 1920 of the Energy Resources Conservation Board of Alberta,
as such scheme may be amended from time to time by any Approval issued in
substitution therefor or amendment thereof under The Oil and Gas Conservation
Act with the approval of the Lieutenant Governor in Council of Alberta, the
Leases, the Leased Substances, the Facilities, and all other property that is
owned, acquired or developed by the Lessees for the purpose of the said
scheme, but (except for the inclusion of costs thereof in accordance with
Schedule “A”) does not include the Utilities Plant, the Synthetic Crude
Pipeline or the properties owned, managed or developed by [Northward
Developments Ltd.].
|
[9]
The word “Leases” referred to in this definition is defined
as Government of Alberta Bituminous Sands Leases No. 17 and 22 (subject to some
exclusions and extensions that are not relevant to this appeal). Leases 17 and
22, located north of Fort McMurray, Alberta, are the location of the first production from the Alberta oil sands.
[10]
The Alberta Crown Agreement obliges the participating oil
companies to proceed with the Syncrude Project through a joint venture with
Alberta in its capacity as the lessor of Leases 17 and 22 (Alberta as lessor is
referred to in the Agreement as “Alberta Royalty”). The joint venture is
governed by a separate agreement called the Syncrude Joint Venture and
Management Agreement. The Syncrude Project assets are owned and operated by a
corporation called Syncrude Canada Ltd. as agent for the participants.
[11]
Under the Alberta Crown Agreement, Alberta is entitled to an amount equal
to 50% of “Deemed Net Profit”, determined on the basis of a formula in which value
of the production (determined in a specified manner) is reduced by certain
operating costs and allowances for development and capital costs. It is
undisputed that amounts receivable by Alberta under the Alberta Crown Agreement are within the scope of
paragraphs 12(1)(o) and 18(1)(m) of the Income Tax Act as
amended on March 13, 1975.
[12]
While the Alberta Crown Agreement was being negotiated, the
oil companies were working on an arrangement with the federal government to
ensure that the Income Tax Act amendments referred to above, including
paragraphs 12(1)(o) and 18(1)(m), would not apply to production from
Leases 17 and 22. To that end, on May 6, 1976 the Governor in Council enacted
the Syncrude Remission Order (reproduced in the Appendix to these
reasons).
[13]
The Syncrude Remission Order was enacted under section
17(1) of the Financial Administration Act, R.S.C. 1970, c. F-10, as it
read in 1976. For the purposes of this appeal, it is undisputed that subsection
17(1) as it then read is substantially the same as subsection 23(2) of the Financial
Administration Act, R.S.C. 1985, c. F-11, as it read in 1997:
|
23. (2) The Governor in
Council may, on the recommendation of the Treasury Board and when he
considers it in the public interest, remit any tax, fee or penalty.
|
23.
(2) Sur recommandation du Conseil du Trésor, le gouverneur en conseil peut,
s’il le juge d’intérêt public, faire remise de tous droits, taxes ou
pénalités.
|
[14]
Subsection 3(1) of the Syncrude Remission Order grants
a remission of tax payable under Part I of the Income Tax Act as a
result of the application of the “Royalty Provisions” (defined to include
paragraphs 12(1)(o) and 18(1)(m) of the Income Tax Act) to
the royalty receivable by Alberta with respect to production from the “Syncrude
Project”. The Syncrude Remission Order defines “Syncrude Project” as follows:
|
“Syncrude Project” means the scheme of the
participant for the recovery of leased substances from Leases 17 and 22;
|
« projet Syncrude » désigne le plan du
participant en vue de la récupération des matières louées des concessions 17
et 22.
|
[15]
In this appeal, it has not been suggested that anything turns
on the differences between the definitions of “Syncrude Project” in the Alberta
Crown Agreement and the Syncrude Remission Order. Similarly, the
definition of the term “Leases 17 and 22” in the Syncrude Remission Order
has been treated as substantially the same as the definition of “Leases” in the
Alberta Crown Agreement.
[16]
The Syncrude Remission Order by its terms applied from
the first year of production from the Syncrude Project. By virtue of section
3(2) of the Syncrude Remission Order, it would cease to apply upon the
occurrence of certain events, or on December 31, 2003, whichever occurred first.
[17]
The oil companies participating in the Syncrude Project
sought and obtained an advance income tax ruling setting out how the Syncrude
Remission Order would be administered by the Minister of National Revenue. On
April 28, 1976, a senior official with the Department of Finance wrote to the
rulings officials at their request to offer this clarification of the intent of
the Syncrude Remission Order:
|
At your request I am writing to confirm that it was the
government’s clear intention to have the attached remission order operate as
an amendment to the Income Tax Act for all purposes.
|
[18]
The advance income tax ruling issued to the corporate
predecessor of Imperial is dated April 29, 1976 and reads in relevant part as follows
(my emphasis):
|
A.
As long as the remission order is in effect, its results for each taxation
year will be that the tax remitted to Imperial will reduce the tax
otherwise payable under the Income Tax Act of Canada to the amount which
would be payable on the basis that: —
1.
The 50% share of the Deemed Net Profit of the Alberta Joint
Venture, and the leased substances taken in satisfaction thereof,
and the proceeds of the disposition thereof, held by Alberta Royalty under
the Alberta Crown Agreement, will not be taxable to Imperial or
Syncrude [Canada Ltd.] under the provisions of paragraph 12(1)(o) or
18(1)(m) of the Income Tax Act of Canada.
2.
The gross production royalty reserved to Alberta Royalty
under the Alberta Crown Agreement, and the proceeds of disposition thereof,
will not be taxable to Imperial or Syncrude [Canada Ltd.] under the
provisions of paragraph 12(1)(o) or 18(1)(m) of the Income Tax Act of Canada.
3.
The royalty prescribed to be paid to Alberta Royalty under
the leases pursuant to the provisions of The Mines and Minerals Act of the
Province of Alberta with respect to the Leased Substances and the proceeds of
disposition thereof, will not be taxable to Imperial or Syncrude [Canada
Ltd.] under the provisions of paragraph 12(1)(o) or 18(1)(m) of the Income
Tax Act of Canada.
[…]
C. The
instalments and other payments of tax, interest and penalties required under
the Income Tax Act of Canada for all relevant years will be computed in
accordance with the rulings above.
|
[19]
The administration of the Syncrude Remission Order
caused no controversy until 1997. In that year, the Alberta Crown Agreement was
amended for the sixth time in response to the announcement that Alberta intended to adopt a
generic royalty regime to replace its policy of separate agreements for each
resource project. The generic royalty regime is to come into effect for the
Syncrude Project in 2015. Amendment No. 6 to the Alberta Crown Agreement governs
the transition to the new regime.
[20]
Amendment No. 6 also recognizes an expansion of the Syncrude
Project to include additional leases. I will refer to this as the “Expanded
Syncrude Project”. It is common ground that the only additional leases included
in the Expanded Syncrude Project that are relevant to this appeal are the
“Aurora Leases”, located approximately 30 miles away from Leases 17 and 22.
[21]
Alberta wished to provide an
incentive to the original Syncrude Project participants to invest in the development
of the Aurora Leases. For that reason, Alberta agreed that the basis for the
royalty receivable to Alberta on production from the Expanded Syncrude Project would be
reduced by credits for capital costs incurred in respect of their development
(the “Aurora capital credits”).
[22]
The Aurora Leases did not come into production until 2000.
For 1997, the only production from the Expanded Syncrude Project was from
Leases 17 and 22.
[23]
In computing the amount of Part I tax to be remitted for 1997
under the Syncrude Remission Order, the Crown took the position that the
royalty receivable by Alberta in respect of production for Leases 17 and 22 was
the amount of the royalty receivable by Alberta under the Alberta Crown Agreement as amended by Amendment
No. 6. In other words, the amount of the income inclusion required by paragraph
12(1)(o) in respect of the Syncrude royalty receivable by Alberta took
into account the Aurora capital credits, and the amount of the remission was
reduced accordingly.
[24]
Imperial took the position that this resulted in Imperial not
receiving the full amount of remission and interest to which they were entitled.
They commenced an application for judicial review in the Federal Court to argue
that the amount of the remission should be computed on the basis of the royalty
that would have been receivable by Alberta if the Alberta Crown Agreement had not been amended to
provide the Aurora capital
credits. That application was converted to an action. The trial was heard by
Justice O’Reilly.
[25]
Justice O’Reilly agreed with Imperial and, on September 17,
2008, granted judgment for the amount of the alleged underpayment of remission,
with interest under subsection 31(2) of the Crown Liability and Proceedings
Act, R.S.C. 1985, c. C-50. His conclusion is summarized in paragraph 46 of
his reasons, which reads in relevant part as follows:
|
[…] The [Income
Tax] Act contains a general provision [referring to paragraph
12(1)(o)] requiring royalties to be included in income. The [Syncrude
Remission Order] contains specific relief against the tax payable on
royalties for the Syncrude Project as originally conceived. So, the [Income
Tax] Act requires inclusion of a “royalty” “receivable” by
Alberta, while the [Syncrude Remission Order] allows remission of the
tax payable on the “royalty” “receivable” by Alberta “with respect to the Syncrude Project”. In my view,
Imperial’s claim for remission flows from the intersection of the general
requirement of the [Income Tax] Act and the specific remedy of
the [Syncrude Remission Order]. Its claim is consistent with the
purpose for which the royalty provisions were enacted – to uncouple federal
tax liability from provincial royalty arrangements. According to Imperial’s
approach, its federal tax situation remained the same notwithstanding the
changes in Alberta’s
royalty regime. The federal government was no worse off as a result. It seems
to me that, just as the royalties attributable to profits at Aurora are not eligible for
remission under the [Syncrude Remission Order], nor should the Aurora credits be used to
reduce the eligible royalty.
|
[26]
The Crown has appealed the judgment. Imperial has cross-appealed
on the basis that its entitlement to interest should be determined as though a
remission under the Syncrude Remission Order is the same as a refund of
a tax overpayment under the Income Tax Act, with the result that
interest would accrue on the entire amount of the remission for 1997, not just
on the amount of the alleged shortfall.
Appeal
[27]
There is very little jurisprudence on the legal effect of a
remission order. The leading case is Perley v. Canada (1999), 240 N.R.
183, [1999] 3 C.T.C. 180, 99 D.T.C. 5176 (F.C.A.). The issue in that case was
whether a dispute as to the correct application of a tax remission order could
be resolved by the Tax Court of Canada on a statutory appeal from an income tax
assessment. In such an appeal, the Tax Court is required to determine whether the
assessment is correct in fact and in law. The remission order in issue in that
case essentially was intended to remit Part I tax payable by an Indian on
employment income paid by an employer residing on an Indian reserve. Justice
Létourneau, speaking for the Court, explained that as a matter of law, a tax
remission order cannot affect the correctness of an income tax assessment,
which must be determined solely on the basis of the Income Tax Act and
the Income Tax Regulations. A tax remission order applies at the
collection stage. It can do no more than relieve a person from a tax debt or
oblige the Crown to refund a tax debt that has been paid.
[28]
For that reason, the April 28, 1976 letter from the senior
Finance official to the tax officials considering Imperial’s request for an
advance income tax ruling cannot be taken to mean literally what it appears to
say. It is legally impossible for a remission order to “operate as an amendment
to the Income Tax Act for all purposes.”
[29]
However, it is legally possible for a remission order to
grant a remission of tax that is intended to reverse the effect of the application
of a particular provision of the Income Tax Act to a particular person
for a particular year. Perhaps that is all the April 28, 1976 letter was
intended to mean. In any event, that is the kind of remission order that was
granted in this case.
[30]
Where a remission order of this kind is granted, it may be convenient
to compute the amount of the remission on the basis of a hypothetical income
tax return in which the particular provision is assumed not to exist. That
apparently is the analytical technique employed in this case. However, that
analytical exercise should not be confused with the actual determination of the
person’s tax liability under the Income Tax Act.
[31]
As explained above, the parties do not agree on the amount of
Part I tax remitted for 1997 under the Syncrude Remission Order. The
dispute is whether the Crown was correct when, in computing the amount of the remission
for 1997, the amount of the income inclusion under paragraph 12(1)(o)
with respect to the Syncrude royalty receivable by Alberta was determined to be
the actual amount of the royalty receivable by Alberta under the Alberta Crown
Agreement as amended by Amendment No. 6. Imperial argues that the amount of the
income inclusion should have been determined as the amount of the royalties
that would have been receivable by Alberta if the Agreement had not permitted a
deduction for the Aurora capital credits.
[32]
The difference is well illustrated by the simplified hypothetical
example set out in paragraph 25 of Justice O’Reilly’s reasons, which I have
reproduced below with slight modifications to simplify it further:
|
|
Column
1
|
Column
2
|
Column
3
|
Column
4
|
|
|
No
royalty amendments
|
With
royalty amendments, without remission
|
With
remission (per Crown)
|
With
remission (per Imperial)
|
|
Gross revenue
|
$1,500
|
$1,500
|
$1,500
|
$1,500
|
|
Crown royalty payable
|
-$100
|
-$100
|
-$100
|
-$100
|
|
Other deductions
|
-$800
|
-$800
|
-$800
|
-$800
|
|
Net accounting income
|
$600
|
$600
|
$600
|
$600
|
|
Crown royalty added per p. 12(1)(o)
|
|
$100
|
$100
|
$100
|
|
Taxable income
|
$600
|
$700
|
$700
|
$700
|
|
Royalty eligible for remission
|
|
|
$100
|
$120
|
|
Revised income
|
$600
|
$700
|
$600
|
$580
|
|
Tax payable
|
$174.72
|
$203.84
|
$174.72
|
$168.90
|
[33]
This table illustrates that, before the enactment of
paragraph 12(1)(o) of the Income Tax Act, Imperial would have
been taxed on its income net of the Alberta royalty, which in this example is $100 (Column 1). Paragraph
12(1)(o) required Imperial to include the $100 royalty in its income for
income tax purposes (Column 2). Columns 3 and 4 illustrate the change
represented by the Syncrude Remission Order, as understood by the Crown
and Imperial respectively. The Crown takes the position that the amount of
royalty eligible for remission is $100, the amount of the royalty actually paid
to Alberta (Column 3). Imperial
takes the position that, if the royalty payable to Alberta would have been $120 but
for the Aurora capital credits, the amount of
royalty eligible for remission should be $120 (Column 4).
[34]
In my view, the error in Imperial’s position stems from a
flawed premise, which is that when the Alberta Crown Agreement was amended to
permit Imperial to deduct the Aurora capital credits in computing the royalty receivable
by Alberta in 1997, the amount of the remission was required to be determined
on the basis of an allocation of the resulting royalty between the Aurora
Leases and Leases 17 and 22. I disagree respectfully with Justice O’Reilly’s
analysis in paragraph 46 of his reasons, because it is based on the same flawed
premise.
[35]
The allocation proposed by Imperial cannot be accepted
because it is antithetical to the essential nature of a royalty, which
necessarily is linked to production from a particular property, to make an
allocation to a non-producing property. The result necessarily is a negative
royalty on the non-producing property and a higher positive royalty on the producing
property. That cannot be.
[36]
In my view, Justice O’Reilly was wrong to conclude, in
relation to 1997, that there was a difference between the Syncrude royalty
receivable by Alberta as determined for the purposes of paragraph 12(1)(o),
and the royalty receivable by Alberta as determined for the purposes of the Syncrude
Remission Order. All of the production for 1997 was from Leases 17 and 22.
Therefore, there is no basis for differentiating between the production from
the Syncrude Project as defined in the Syncrude Remission Order (i.e.,
the production from Leases 17 and 22), and the production from the Expanded
Syncrude Project contemplated by Amendment No. 6, which in 1997 was also the
production from Leases 17 and 22.
[37]
In my view, the provisions of Amendment No. 6 that permitted
the deduction of the Aurora capital credits resulted in a reduced royalty payable
to Alberta in respect of the
production from Leases 17 and 22. In other words, the royalty payable to Alberta with respect to the
Syncrude Project (as defined in the Syncrude Remission Order) was the
royalty payable to Alberta under the Alberta Crown Agreement as amended by Amendment
No. 6. I conclude that the Crown was correct in determining the amount of the
remission for 1997 as it did.
Cross-appeal
[38]
The Syncrude Remission Order by its terms remits tax
payable under Part I of the Income Tax Act. The Syncrude Remission
Order does not mention interest.
[39]
I note from item C of the advance income tax ruling quoted
above that the tax authorities determined in 1976 that the Syncrude
Remission Order should be administered on the basis that the determination
of Imperial’s liability to pay interest on unpaid Part I tax, or on late or
deficient instalments of Part I tax, must take the remitted Part I tax into
account. Neither party suggests that this is incorrect in law. The issue raised
in the cross-appeal is a different one, which is whether Imperial is entitled
to interest on the remitted tax pursuant to section 164 of the Income Tax
Act.
[40]
I agree with the Crown that there is no statute or regulation
providing any entitlement to interest on a payment made to a person pursuant to
a remission of tax, even if the remission order results in a refund of a tax debt
that has been paid. I also agree that there is no merit to the argument of
Imperial that it should be entitled to an award of interest on the basis that
if no interest is paid, the Crown is unjustly enriched.
[41]
It remains only to consider the argument of Imperial that,
because the Syncrude Remission Order reduces Imperial’s Part I tax
payable, the amount of the remission should be taken into account in
determining the entitlement of Imperial to refund interest pursuant to section
164 of the Income Tax Act. Justice O’Reilly did not address this point
in his reasons but ordered that interest would be payable on the amount of his
judgment according to subsection 31(2) of the Crown Liability and
Proceedings Act. The Crown had conceded, appropriately in my view, that if
Imperial was entitled to judgment for a shortfall in the remission for 1997,
subsection 31(2) of the Crown Liability and Proceedings Act would apply
to the judgment.
[42]
Refund interest is payable under section 164 of the Income
Tax Act only on an “overpayment” for a particular year. A taxpayer’s
“overpayment” for a year is defined in subsection 164(7) essentially as the
amount by which the total of all amounts paid on account of the taxpayer’s tax
liability for that year exceeds the amount of the liability. Imperial argues
that it is entitled to refund interest for 1997 because it paid more on account
of its 1997 tax liability than the amount of its 1997 tax liability as finally
determined, taking into account the amount of Part I tax remitted for 1997 by
the Syncrude Remission Order.
[43]
In my view, Imperial has not established its entitlement to
refund interest for 1997.
[44]
It is possible to discern from the record the amount of
Imperial’s 1997 tax liability as assessed under the Income Tax Act and Regulations,
and it is also possible to discern the amount of the Part I tax remission for
that year. However, it is not possible to discern what payments, if any,
Imperial made on account of its 1997 tax liability.
[45]
Therefore, even if I were to assume that Imperial’s argument
on the cross-appeal is correct in law, it is impossible to determine from the
record whether Imperial is entitled to refund interest. That is because the
record does not establish that the total of all payments made by Imperial on
account of its 1997 tax liability was greater than its 1997 tax liability after
taking the remission into account.
[46]
In these circumstances, Imperial’s cross-appeal must fail on
the facts. It is not necessary to express an opinion on Imperial’s legal
argument on the cross-appeal, and I decline to do so.
Conclusion
[47]
For the reasons stated above, I would allow the appeal,
dismiss the cross-appeal, and set aside the judgment of the Federal Court.
Making the order that should have been made, I would dismiss the action of the
respondents Imperial Oil Resources Limited and Imperial Oil Resources Ventures
Limited. The Crown is entitled to its costs of the appeal and the cross-appeal,
and its costs in the Federal Court.
“K. Sharlow”
“I
agree.
Carolyn Layden-Stevenson J.A.”
“I
agree.
C. Michael Ryer J.A.”
Email this Content