REASONS
FOR JUDGMENT
Hogan J.
[1]
After an ill-fated drilling program in the
Arctic, Dome Petroleum Limited (“Dome Petroleum”) found itself in financial
difficulty. By the mid-1980s it was clear that the reserves it had discovered
were not commercially viable. By 1987 it had become
obvious to all that Dome Petroleum and its subsidiaries required debt relief,
otherwise they could not survive as going concerns.
[2]
Amoco Canada Petroleum Company Ltd. (“Amoco”),
the predecessor to Plains Midstream Canada ULC (the “Appellant”), which had resource
properties in similar locations to those held by Dome Petroleum, felt that this
was an opportune time to acquire Dome Petroleum provided Dome Petroleum could
settle its existing debts on favourable terms.
[3]
Amoco identified one specific debt that was
particularly problematic. Dome Petroleum and Dome Canada Limited (“Dome Canada”),
a public company in which Dome Petroleum had a significant interest, were
parties to an agreement with the Arctic Petroleum Corporation of Japan (“APCJ”)
that provided for exploration and development in the Beaufort Sea (the “Formal
Contract”). A key part of the Formal Contract was a $400 million exploration loan
that was advanced to Dome Petroleum and Dome Canada in 1981 and was repayable
in 2030. Both Dome companies were jointly and severally liable for the entire
$400 million exploration loan and for the performance of all obligations
contracted under the Formal Contract.
[4]
After reaching an agreement with APCJ, Dome
Petroleum and Dome Canada entered into a joint venture agreement whereby they
stipulated, as between themselves, that Dome Petroleum was liable for an amount
of $175 million of the exploration loan, while Dome Canada was liable for an
amount of $225 million. Through a series of transactions described in the Partial
Agreed Statement of Facts (“PASOF”), reproduced in its entirety in Appendix A
to these reasons, Dome Canada became an entity wholly independent from Dome
Petroleum save for its joint and several obligations under the Formal Contract.
Following the transactions Dome Canada was renamed Encor Energy Corporation
(“Encor”).
[5]
Amoco viewed certain features of the Formal
Contract as significant obstacles to a successful takeover of Dome Petroleum.
After completion of the transactions, Dome Petroleum and Encor would be
independent entities. However, unless this situation was addressed with APCJ,
they would remain joint and several obligors under the Formal Agreement. In
that case, if either party became insolvent, the exploration loan would become
fully repayable. APCJ could look to either party for payment. This risk of
default also extended to Dome Petroleum’s other credit facilities. The evidence
shows that Amoco was unwilling to acquire Dome Petroleum without the adoption
of a multi-step plan (“Plan”) to initially mitigate and eventually eliminate
the risk of cross-defaults imposed by the terms of the Formal Contract and under
Dome Petroleum’s other credit agreements.
[6]
The Plan was executed in stages over a period of
time stretching from 1988 to 1992. The first steps of the Plan involved Amoco
agreeing to assume Encor’s obligations under the Formal Contract, including, as
between Encor and Dome Petroleum, Encor’s obligation to repay $225 million out
of the $400 million payable to APCJ under the exploration loan in 2030 at the
latest. Encor paid Amoco $17.5 million to assume Encor’s obligations under the
Formal Contract and provided Amoco with additional consideration. As a
condition of that transaction, Encor was to agree to vote in favour of Dome
Petroleum’s Plan of Arrangement. Encor’s consent to certain key transactions
(defined below) was essential to the completion by the Appellant of the
subscription for, or acquisition of, the shares of Dome Petroleum. For example,
in addition to agreeing to vote in favour of the Plan of Arrangement, Encor
agreed to cooperate with Amoco in the renegotiation of the terms of the Formal
Contract with APCJ, which included cooperation in connection with the long
negotiations that ultimately led to the release of Encor as a joint and several
debtor under the Formal Contract.
It was only in 1992 that the risk of cross-default was eliminated as a result
of APCJ releasing Encor as a joint and several obligor under the Formal
Contract.
[7]
The Settlement Agreement, the Encor Indemnity
and Subrogation Agreement, the Accommodation Agreement and the Release
Agreement together with the obligations imposed on the parties by the Formal
Contract are collectively hereinafter referred to as the (“Key Transactions” or
“Key Agreements”).
All of the other defined terms in these reasons for judgment have the meaning
ascribed to them in the PASOF unless otherwise indicated.
[8]
Initially, for tax purposes the Appellant
attempted to deduct as interest on a straight-line basis the difference between
the amount owed by it under the exploration loan ($225 million) and what it
viewed as the consideration received by it from Encor ($17.5 million) calculated
over 43 years.
[9]
In 1995 and 1996, the taxation years at issue, the
Appellant was in a loss position. As a result, the only way that the Appellant
could compel the Minister to address the validity of its interest deductions
was to request loss determinations.
[10]
The Minister, in issuing loss determinations for
each of those years, denied the Appellant a deduction for the interest that it
had claimed.
[11]
Although the Appellant had initially claimed an
interest deduction on a straight-line basis, shortly
before trial, the Appellant reduced its interest deduction claim to $1,043,700.
This amount was determined by applying a simple interest rate of 5.964% to the
$17.5 million that Amoco received from Encor.
[12]
The central question to resolve in this appeal
is whether the Appellant is entitled to deduct the amount it now claims under
the combined operation of subsection 16(1) and paragraph 20(1)(c) of the Income
Tax Act
(the “ITA”).
[13]
For the reasons that follow, I am of the opinion
that the amounts claimed by the Appellant as interest deductions in 1995 and
1996 in connection with the Key Transactions are not deductible under the
provisions that it has relied upon.
A. Appellant’s
position
[14]
The Appellant argues that it is entitled to
deduct the difference between its $17.5 million receipt and its $225 million
liability under the exploration loan (the “Difference”) because that amount
reflects the time value of money, and paragraph 16(1)(a) of the ITA
allows the Key Transactions to be recast by reference to their economic
substance. As regards economic substance, I infer that the Appellant is
referring to the purpose and economic impact or consequences of the Key
Transactions as contrasted with their form and legal characterization.
[15]
The Appellant acknowledges that it can deduct
only the amount that can reasonably be regarded as simple interest paid in the
years in dispute. Under paragraph 20(1)(d) of the ITA, compound interest
can only be deducted if and when paid in 2030.
[16]
The Appellant argued that the net present value
of $225 million was determined by the parties to the Settlement Agreement to be
equivalent to the $17.5 million it received from Encor. The Appellant alleged
that the latter amount was recorded on its financial statement as the initial
liability assumed by it under the Formal Contract which treatment was based on
the economic substance of the Key Transactions.
[17]
The Appellant argues that the case law confirms
that it can apply subsection 16(1) of the ITA strictly by reference to
the impact of the transactions from the Appellant’s perspective. In other
words, the transactions can result in an amount that can be deemed to be
interest to the Appellant but can also be a repayment of principal to APCJ. In
essence, subsection 16(1) of the ITA does not require symmetry for the payer
and payee. According to the Appellant, once an amount is deemed to be interest
through the operation of subsection 16(1) of the ITA, the amount is then
deductible under subsection 20(1)(c) of the ITA if the conditions of
that provision are satisfied.
[18]
The Appellant in its pleadings presented an
alternative argument. Initially it claimed that, on the basis of the legal
concept of interest, the amount it deducted as interest was deductible solely
under paragraph 20(1)(c) of the ITA. However, at the outset of the trial,
the Appellant conceded that, to succeed in its appeal, it needed to fit that
amount within subsection 16(1) of the ITA before subsection 20(1)(c) of
the ITA could be applied.
B. Respondent’s
position
[19]
Unsurprisingly, the Respondent advanced a
contrary view. The Respondent argues that the Appellant’s interpretation of
subsection 16(1) of the ITA is too broad; this provision cannot be used
to recast transactions solely by reference to what might be viewed as their
economic substance considered in the abstract. According to the Respondent, the
Appellant’s interpretation of subsection 16(1) of the ITA does not align
with the wording, context or purpose of the provision, as outlined below. All
of the relevant facts and circumstances surrounding the agreements that give
rise to the alleged blended payments must be considered.
[20]
The Respondent argues that subsection 16(1) of
the ITA dictates symmetrical tax treatment for both the payer and payee.
If this provision applies, it deems an amount to be interest for both parties
to the transaction. The wording of the provision and the scheme of the ITA
lead to this conclusion. The Respondent submits that all of the relevant facts
and circumstances demonstrate that there are no blended payments to be made by
the Appellant to APCJ. Furthermore, the Appellant is not bound to make blended
payments to Encor.
[21]
Lastly, even if subsection 16(1) of the ITA
applies, the Respondent submits that the amount deemed to be interest under
subsection 16(1) of the ITA is not deductible under paragraph 20(1)(c)
of the ITA because the conditions outlined in that provision are not
satisfied.
[22]
In the late 1970s Dome Petroleum, reached out to
strategic parties to fund its planned oil exploration and development
activities in the Beaufort Sea and share the risks and rewards of those
activities. During the same period, the Japanese government was willing to
invest in oil exploration and development activities in order to secure a
long-term supply of petroleum for Japan. It agreed to advance $400 million,
subject to performance of the obligations and duties contracted by Dome Canada
and Dome Petroleum under the Formal Agreement. The exploration loan was only
one of the features of the Formal Contract.
[23]
The exploration loan was to be spent on a
five-year exploration program in the Beaufort Sea that began in 1980 and would
cost a total of $1 billion to $1.5 billion. The Formal Contract imposed
significant obligations on Dome Petroleum and Dome Canada with respect to their
drilling, development and oil production activities in that area. The exploration
loan was to be repaid at the latest on December 31, 2030, subject to the triggering
of early repayment conditions. Interest was payable contingent on the
production of oil, of which there has been none to date.
[24]
The evidence shows that Dome Petroleum had to
establish a unique corporate structure to carry out its oil exploration and development
activities in the Beaufort Sea because of regulatory constraints imposed under
the ill-conceived National Energy Program. To satisfy foreign ownership
restrictions, Dome Canada became a public Canadian corporation. Dome
Petroleum’s interest could not exceed 47%. Drilling and development activities
would be carried out by both entities to ensure compliance with the law. APCJ
was not indisposed toward this arrangement because it had required both Dome
Petroleum and Dome Canada to be joint and several obligors under the Formal
Contract. I surmise that Dome Petroleum viewed the joint and several credit
risk to be acceptable because it enjoyed effective control over Dome Canada’s
operations.
[25]
As noted above, this credit risk was
unacceptable to Amoco because Dome Petroleum planned to sell its interest in
Encor to satisfy the demand of its creditors affected by the Plan of Arrangement.
Dome Canada would become an independent entity pursuing its own business plan
without the influence of Dome Petroleum. The risk of cross-default was equally
unacceptable to Encor for the same reasons.
[26]
Encor was a creditor of Dome Petroleum. Its consent
to the Plan of Arrangement was required. Dome Petroleum was in default under
the Formal Contract; it required APCJ to relieve it of its prior defaults. More
importantly, the Appellant required APCJ’s consent under the Plan of Arrangement.
It required Encor’s cooperation in order to present to APCJ a transaction
acceptable to it in order to gain its approval.
[27]
It was against this backdrop that Dome Petroleum
agreed to assume Encor’s obligations under the Formal Contract and hold it
harmless as regards any damage resulting from the breach of any of its
performance obligations thereunder. This was done through the execution of the
Settlement Agreement and the Encor Indemnity and Subrogation Agreement.
[28]
Amoco, Dome Petroleum and Encor reached an
agreement with APCJ to be relieved of all defaults under the Formal Contract
prior to the date of execution of the Plan of Arrangement. This is reflected in
the Accommodation Agreement. Upon the execution of that agreement, Amoco became
jointly and severally liable for the performance of all obligations and duties
imposed under the Formal Contract.
[29]
While the combination of the above agreements
mitigated the risk of cross-default for Amoco, Encor and Dome Petroleum, it did
not eliminate it altogether. If any of the parties became insolvent, the reimbursement
of the exploration loan would be accelerated. This could extend to each of the
parties’ other credit facilities, thus increasing the cost of financing. The
risk of cross-default was only entirely eliminated in 1992 when APCJ was
persuaded to release Encor. At that time, the Settlement Agreement and the
Encor Indemnity and Subrogation Agreement were terminated because they had
served their purpose.
[30]
At trial, the Appellant presented what can best be
described colloquially as a Hail Mary argument. It alleged that the amounts in
issue were deductible as income expenses under section 9 of the ITA. My
questions to counsel during oral argument appear to have caused the Appellant
to experience a change of heart. Approximately two weeks after the end of the
trial, the Appellant’s counsel advised the Court that it had withdrawn this
argument from my consideration. While this is the case, I believe a few observations
are nonetheless warranted with respect to this theory.
[31]
The overwhelming evidence establishes that the
Settlement Agreement, the Encor Indemnity and Subrogation Agreement and the
Release Agreement were entered into on account of capital. The parties, in the PASOF,
agree that the ultimate objective of Amoco in entering into these agreements
was to complete the Plan of Arrangement. In other words, the purpose of those
transactions was to allow Amoco to complete the acquisition of all of the
issued and outstanding shares of Dome Petroleum, which are undisputedly capital
assets in the hands of Amoco.
Therefore, in this context, the expenses incurred by Amoco with respect to the implementation
and execution of those agreements were not running expenses. This is
particularly true with respect to the Appellant’s undertaking to Encor to repay
$225 million owed to APCJ under the exploration loan instead of Encor.
[32]
The read-ins from the discovery transcript
confirm the Respondent’s allegation that the Appellant engaged in a time-consuming
game of cat and mouse with respect to questions posed on the accounting treatment
adopted by it to reflect the impact of the Key Transactions on its financial
statements. The Appellant engaged in a clear strategy of obfuscation by
refusing to answer most questions on the grounds of irrelevance. When answers
were reluctantly given, they were models of obscurity.
[33]
The Appellant argued that the economic impact or
consequences of the Key Transactions, considered together, were akin to those
produced under a so-called “defeasance transaction”. In financial circles, it
is common knowledge that there are two types of defeasance transactions: legal
defeasance transactions and “in substance” defeasance transactions. Legal
defeasance refers to transaction steps that can be carried out to free the
debtor of its obligation to repay a debt. The terms and conditions of the
transaction steps to be taken to achieve that result are spelled out in the
trust indenture by which the debt is governed. Typically the mechanics of the
transaction call for the debtor to place high-quality marketable government
securities irrevocably in a special-purpose trust. The trust receives the
securities in consideration of its assumption of the debt. If the terms and
conditions of the transaction are carried out in compliance with the indenture,
the debtor is relieved of its debt.
[34]
A defeasance transaction is attractive to a
debtor when interest rates have increased substantially. The debtor can purchase
marketable securities that generate more interest than that paid on the debt. Because
the debt is settled for a lesser amount than its face value, a gain can be
recorded on the debtor’s balance sheet. Often, a debtor will enter into this
type of transaction to improve its debt-to-equity ratio.
[35]
An “in substance” defeasance refers to a
transaction that is carried out in a similar manner to a legal defeasance. The
key distinction is that the debtor is not released from its obligation to repay
the debt because the steps of the transaction and the legal effects thereof are
not provided for under the indenture. Generally speaking, under the accounting
principles applicable to the periods at issue in this matter, an “in substance”
defeasance could be accounted for in a similar manner to a legal defeasance
because the ultimate economic consequence to the debtor was viewed to be the
same. The placing of marketable securities irrevocably in a special purpose
trust provides a high degree of certainty that the original debtor will not be
called upon to pay the debt. The trust has no other activities than the
performance of its debt service obligations. The cash flow from the marketable
securities is earmarked specifically to service the debt assumed by the trust.
[36]
Considering the above, I speculate that Encor
was seeking to record an accounting gain in connection with the transactions,
although, as can be seen from what is stated below, the economic consequence, impact
or substance of the transactions was quite different than that of a legal or
“in substance” defeasance. I further speculate that Amoco may have recorded the
transactions for accounting purposes as it claims to have done to facilitate
Encor’s desired tax and accounting outcome.
[37]
The problem is that the Appellant produced no
reliable evidence to establish how the Key Transactions were accounted for on
its financial statements and to demonstrate that its alleged accounting
treatment was in accordance with generally accepted accounting principles
(“GAAP”). The chief financial officer or controller of the Appellant was not
called to explain how the transactions were recorded for financial statement
purposes. The scant documentary evidence produced by the Appellant was
unreliable. No expert evidence was led by the Appellant to justify the
accounting treatment that it alleged that it had adopted. In light of all of
this, I draw a negative inference as to the correctness of the accounting
treatment that the Appellant alleged it had adopted to account for its
assumption of Encor’s duties and obligations under the Formal Contract.
[38]
While the $17.5 million played a role in Amoco’s
decision to enter into the Settlement Agreement and the Encor Indemnity and
Subrogation Agreement, the evidence shows that Amoco received additional
consideration from Encor. Encor was a creditor of Dome Petroleum that was affected
by the Plan of Arrangement. By entering into the Settlement Agreement and the
Encor Indemnity and Subrogation Agreement, Amoco gained Encor’s approval of the
Plan of Arrangement. Encor also agreed to cooperate in the negotiations that
led to the execution of the Accommodation Agreement on terms and conditions
satisfactory to the Appellant. The Appellant offered no explanation as to how
the value of this approval affected the alleged accounting treatment of the Key
Transactions.
[39]
The Appellant also received, indirectly,
additional consideration. The shares of Encor were sold by Dome Petroleum to raise
funds to pay Dome Petroleum’s creditors. They were sold on December 8, 1987 for
approximately $398 million. Amoco and Encor entered into the Settlement
Agreement on November 28, 1987. I surmise that the purchasers of the Encor shares
were well aware of the impact of the Settlement Agreement and the Encor
Indemnity and Subrogation Agreement when they closed that transaction.
[40]
In a memorandum dated September 3, 1987, N.J. Rubash, Executive Vice-president
(Int’l.) Amoco Production Company who was charged with oversight of the negotiation
and implementation of the Key Transactions wrote:
. . . Amoco’s
plan for acquiring Dome assumed that the Encor shares will be sold to raise
cash and pay off some of the debt which will arise as part of the acquisition.
It was anticipated that, before they were sold , the value of Encor’s share[s]
would be increased by a couple of dollars per share by a negotiation which
would do away with Encor’s joint and [several] obligations regarding Dome’s C$175
million share portion of the Arctic Loan. Further enhancement in the share
price should arrive if Encor was freed of its obligation to repay its own C$225
million share of principal under the Arctic Loan Agreement . . .
[41]
While the Encor shares were sold prior to the
completion of the Plan of Arrangement, I believe it is reasonable to infer that
the above agreements had a favourable impact on the price negotiated by Dome
Petroleum for the Encor shares. I surmise that Amoco was comfortable with this
transaction. The result was that Amoco likely had to take on less debt to fund
its purchase of Dome Petroleum. The Appellant’s assessment of the economic
substance of the Key Transactions as being a so-called defeasance transaction
does not account for all of the above. The impact, consequences and economic
substance of the Key Transactions are far removed from the characteristics,
impact and consequences of a defeasance transaction.
[42]
In addition, as noted earlier, the risks of
cross-default also loomed large in Amoco’s consideration of why to enter into
and how to structure the Key Transactions. The execution and coming into force
of the Settlement Agreement, the Encor Indemnity and Subrogation Agreement and
the Accommodation Agreement were carefully choreographed under the Plan of
Arrangement to occur immediately prior to, but to be conditional upon, the successful
completion of the Plan of Arrangement. The execution of the Settlement
Agreement and the Encor Indemnity and Subrogation Agreement facilitated the
execution of the Accommodation Agreement by relieving the parties of all past
defaults under the Formal Agreement and led to the adoption of more favourable
terms. All of this protected the value of Amoco’s investment in Dome Petroleum
and paved the way for the execution of the Release Agreement eliminating the
risk of cross-defaults.
[43]
I surmise from the evidence that the elimination
of the risk of cross-defaults was of paramount importance because it would make
the financing of the Appellant’s and Dome Petroleum’s activities less
expensive. Undoubtedly, this constituted real value or consideration for the
Appellant.
[44]
The terms of the Formal Contract stipulated that
the $400 million exploration loan was to be repaid on December 31, 2030,
subject to the applicability of any early repayment conditions, which were
contingent on the production of oil. It is clear that to date there has been no
commercial production of oil in the Beaufort Sea. As a result, the conditions
of the exploration loan contingent on production (early repayment and
remuneration) never came to fruition.
[45]
Beyond the repayment of the exploration loan,
the Formal Contract also set out obligations with regard to the continued
exploration for oil in the Beaufort Sea. By agreeing to assume Encor’s
obligations under the Formal Contract, the Appellant became liable for the
performance of all of the duties and obligations under the Formal Contract. In
summary, it agreed to do much more than repay $225 million in 2030. The
evidence also shows that it received from Encor more things of value than $17.5
million for its agreement to assume all of Encor’s liabilities and duties under
the Formal Contract.
[46]
The evidence clearly establishes that APCJ had
advanced $400 million, and that its joint and several debtors were obliged to
repay this amount in 2030. The entire $400 million constituted capital, or the
principal owed to APCJ, in accordance with the definition of “principal amount”
under the ITA. The Appellant does not dispute this factual finding. As
noted earlier, the Appellant’s position is that the application of subsection
16(1) of the ITA allows for an amount to be treated as interest for the debtor
and principal or capital for the creditor.
[47]
Is the amount claimed by the Appellant in
connection with the Key Transactions deemed to be interest under subsection
16(1) of the ITA? If the answer is yes, is the amount then deductible as
interest under paragraph 20(1)(c) of the ITA?
[48]
This matter involves addressing the issue of
whether it is possible to have an asymmetrical application of subsection
16(1)(a) of the ITA which would allow an amount to be classified as
deemed interest for the debtor and capital for the creditor.
[49]
At trial, the parties advanced conflicting
positions on how to properly apply subsection 16(1) of the ITA. For ease
of reference I have reproduced the relevant parts of subsection 16(1) of the ITA,
which states:
16 (1) Where,
under a contract or other arrangement, an amount can reasonably be regarded as
being in part interest or other amount of an income nature and in part an
amount of a capital nature, the following rules apply:
(a)
the part of the amount that can reasonably be regarded as interest shall, irrespective
of when the contract or arrangement was made or the form or legal effect
thereof, be deemed to be interest on a debt obligation held by the person to
whom the amount is paid or payable.
[50]
I will now outline my view on the proper scope
of the application of subsection 16(1) of the ITA. Before I do so, a
brief overview of the principles of statutory construction that I will apply to
determine the proper meaning of paragraph 16(1)(a) of the ITA is useful.
[51]
The modern approach to statutory construction,
which involves a textual, contextual and purposive analysis or, more precisely,
which looks at the grammatical and ordinary sense of a provision with reference
to its entire context, its purpose and the intention of Parliament, was
described in the Supreme Court of Canada decision Canada Trustco
Mortgage Co. v. Canada. The unanimous court provided an overview of the
history of the approaches to statutory interpretation and added that the ITA must be interpreted in such
a way as to achieve consistency, predictability and fairness.[13]
[52]
In Canada Trustco, the Supreme Court
also stated that, where a provision contains words with unequivocal meaning,
the ordinary meaning of those words plays a dominant role and that, where on
the other hand the words may support more than one reasonable meaning, the
ordinary meaning of the words plays a lesser role and the focus shifts towards
the ITA’s harmonious
whole.
(1)
Text of Subsection 16(1) of the ITA
[53]
The wording of subsection 16(1) of the ITA
sheds light on the intent of that provision.
[54]
The preamble to subsection 16(1) of the ITA
begins with the phrase “where, under a contract or other arrangement”. This
phrase requires the Court to identify and examine the “contract or other
arrangement” that provides for what can reasonably be considered to be blended
payments of capital and interest.
[55]
The phrase “can reasonably be regarded” requires
the Court to take into account all of the relevant circumstances, including, in
the instance case, the terms and conditions of the Key Agreements.
[56]
The phrase “irrespective of when the contract or arrangement was
made or the form or legal effect thereof” requires the
Court to take into account the economic impact or consequences of all of the
above. This latter factor is what the Appellant relies upon in arguing that the
economic substance of the arrangement is that the Appellant received $17.5
million in consideration of its agreeing to pay $225 million to APCJ in 2030.
The Difference represents compensation for the use of the $17.5 million over
the period, or in other words, compensation for the time value of money, which
is the key reason why interest is paid.
[57]
While I agree with the Appellant that the
economic substance of the Key Transactions must be considered, all of the other
relevant factors and circumstances must also be taken into account. The proper
weight to be accorded to the various factors is to be determined on a case-by-case
basis. In summary, the economic substance of the Key Transactions cannot be
considered in the abstract.
[58]
More importantly, for the reasons that follow, I
am of the view that both the creditor’s and debtor’s perspectives must be
considered, contrary to the position advanced by the Appellant. The language
used in subsection 16(1) of the ITA stating that the payment is “deemed
to be interest on a debt obligation held by the person to whom the
amount is paid or payable” reflects Parliament’s intention that both parties
receive symmetrical treatment. In other words, the amount is deemed to be
interest for both parties.
[59]
Finally the phrase “can reasonably be regarded”
signifies that the characterization of the payment as interest and principal
must simply be reasonable having regard to all of the relevant circumstances
that must be taken into account in coming to that determination.
[60]
A textual interpretation of subsection 16(1) of
the ITA, which provides for symmetrical treatment, does not favour the
Appellant’s position, as no part of the amount that is due by the Appellant can
reasonably be regarded as interest that is payable to APCJ under the terms and
conditions of the exploration loan. Nor, for that matter, was the Appellant
required to make blended payments to Encor under the Settlement Agreement or
the Encor Indemnity and Subrogation Agreement.
(2) Contextual
Analysis
[61]
A contextual analysis of subsection 16(1) of the
ITA includes looking at the history of the subsection, its stated
purpose and its interactions with other provisions of the ITA. The
notion of a harmonious whole includes an analysis of the underlying mechanics
of the ITA, as the interpretation of a deeming rule must be logically
consistent with the rest of the ITA. I will now embark on that analysis
(i)
Context of Subsection 16(1) Within the ITA
[62]
Subsection 16(1) is found in Part I of the ITA.
When paragraph 16(1)(a) of the ITA applies, a portion of the blended
payment that can reasonably be regarded as interest is taxable to the creditor
under paragraph 12(1)(c) of the ITA and is deductible by the debtor under
paragraph 20(1)(c) of the ITA provided that the other conditions stated
in paragraph 20(1)(c) of the ITA are satisfied.
[63]
Subsection 214(2) of the ITA provides
that, where a payment would have resulted in an inclusion of an amount in
income deemed interest under Part I of the ITA if Part I applied to a
non-resident creditor, the amount is deemed to have been paid or credited as
interest to the non-resident person. The above reinforces the view that Parliament
intended symmetrical treatment of the amount as interest.
[64]
Other provisions found in Part I of the ITA
support this view. For example, subsection 12(9) of the ITA specifically
provides for asymmetrical treatment by deeming amounts determined in respect of
certain “prescribed debt obligation[s]” to be interest deemed to accrue in the
year for the holder of the debt obligation. Subsection 12(9) of the ITA
applies to the holder of the debt obligation; it does not affect the
characterization of the payment for the debtor.
[65]
That provision covers debt obligations issued at
a discount and interest coupons and debt obligations purchased at a discount. This
may occur, for example, in a transaction where interest coupons are stripped
from and sold separately from the bond by a financial intermediary. If, as
suggested by the Appellant, subsection 16(1) of the ITA was intended to
apply differently when considered from the perspective of the creditor and
debtor, subsection 12(9) of the ITA would, to a large extent, be
unnecessary. I also observe that the outcome may not be the same under both
provisions. Subsection 16(1) of the ITA deems a reasonable amount to be
interest. Subsection 12(9) of the ITA mandates the inclusion of interest
determined in a prescribed manner.
[66]
The broad interpretation proposed by the
Appellant would also cause conflict with other provisions of the ITA.
For example, lease payments under a so-called capital lease could be construed
as payments of interest and principal under the Appellant’s theory on the basis
that, from an economic substance standpoint, the transaction could be construed
as a sale of equipment for a balance of sale. In such a case the lease payments
could be regarded as blended payments of interest and principal.
[67]
Compare this result to the elective tax
treatment provided for under section 16.1 of the ITA, a more specific
provision that allows rental payments to be recharacterized as blended payments
of principal and interest only for the lessee. When an election is made under
that provision, the rental payments are no longer deductible for the lessee.
Instead the lessee is entitled to claim capital cost allowance with respect to
the leased property, which is deemed to have been acquired at cost equal to its
fair market value at the commencement of the lease. The rental payments are
deemed to be blended payments of principal and of interest calculated at a
prescribed rate. From a lessee’s perspective, the ability to make or not make
the election would become somewhat meaningless if subsection 16(1)(a) of the ITA
applied automatically to recharacterize the rental payments made by the lessee
as blended payments of interest and capital. Would a lessee be able to use a
“reasonable rate” to calculate the interest payment or would he be bound to use
a prescribed rate if the parties agreed to make the election? If the lessee
could use a “reasonable rate”, this could be reason enough not to make the
election. As a last point, I observe that subsection 16(1) of ITA does
not state how the debtor’s cost of property acquired in consideration of the
assumption of a liability by the purchaser should be determined. Should the cost
be limited to the net present value of the property acquired assuming the
liability is interest-free or provides for contingent interest?
[68]
Finally, as noted earlier, it is unthinkable
that Parliament would have intended the asymmetrical treatment proposed by the
Appellant as this would open the door to transactions in which one party
receives a tax benefit and the other party receives a non-taxable payment,
resulting in a one-sided tax expenditure. Explicit language would have been
expected in this regard, as is the case with subsection 12(9) of the ITA
and section 16.1 of the ITA.
(ii)
Historical Context of Subsection 16(1) of the ITA
[69]
Part of the exercise of statutory interpretation
involves looking at the history of the statute in question in order to see if
anything can be gleaned from it with the respect to the intention of
Parliament.
[70]
Section 7 originally existed as section 3(2) of the Income War Tax Act (first added in 1942),
which read as follows:
3(2) Where under any existing or future
contract or arrangement for the payment of money, the Minister is of opinion
that
(a) payments of
principal money and interest are blended, or
(b)
payment is made pursuant to a plan which involves an allowance of interest
whether or not there
is any provision for payment of interest at a nominal rate or at all, the
Minister shall have the power to determine what part of any such payment is
interest and the part so determined to be interest shall be deemed to be income
for the purposes of this Act.
[71]
The above shows that the provision was intended
as an anti-avoidance provision, targeting situations where taxpayers
reclassified interest payments as capital payments in order to avoid tax.
Specifically, it is stated in the 1942 budget speech (at page 15):
Legislation will
be introduced to prevent tax avoidance in certain directions. For example, it
is proposed that income received from oil or gas wells organized on the
so-called royalty basis shall be deemed to be income received by the person or
persons actually operating the oil or gas wells on behalf of the royalty
holders and taxed at that point. Also, when property is sold on an instalment
basis the capital payments shall be deemed to include interest at a reasonable
rate in cases where there is no interest provided for or where the interest
provided for is unduly low.
[72]
The purpose of the provision was expanded on
during the 1942 parliamentary debates concerning the provision:
Mr. GIBSON: The
object of this section is to close the door to tax avoidance, which is possible
when arrangements are entered into whereby payments of capital are made without
interest being paid at all. Cases of the kind have come to light, and it is to
provide that a fair rate of interest will be deemed to be included in those payments,
so that a man may not buy a property and over a period of ten, fifteen or
twenty years pay so much in the way of capital payments, without interest.
Mr. HANSON
(York-Sunbury): We will say in the case of a family arrangement, or a business?
Mr. GIBSON: Well,
when a purchaser is buying property and possibly paying a slightly lower price,
paying it all in capital payments, because the vendor will not have to pay
income tax on the mortgage interest. In that case he might be willing to accept
a slightly lower sum, in order to avoid the payment of income tax.
. . .
Mr. BENCE: Does
the Minister mean to say that he will arbitrarily fix a certain proportion of
the capital payments, which will be taken to be interest, even though there is
no actual calculation of interest at all?
Mr. GIBSON: Yes
[73]
It is clear from the parliamentary debates and
the budget speech that, from its inception, the provision was intended to apply
as an anti-avoidance provision in order to prevent the recipients of interest
income from reclassifying the interest payments as being on capital account in
order to avoid the payment of tax (capital gains not being taxable at the
time). This would appear to be a narrower interpretation than what is suggested
by the Appellant.
[74]
This provision was amended in 1948, so that it then
read:
S. 7 of the 1948 Income
Tax Act
7. Where a payment under a contract or other arrangement can reasonably
be regarded as being in part a payment of interest or other payment of an
income nature and in part a payment of a capital nature, the part of the
payment that can reasonably be regarded as a payment of interest or
other payment of an income nature shall, irrespective of when the contract or
arrangement was made or the form or legal effect thereof, be included in
computing the recipient's income.
[75]
The provision as then drafted addressed the tax
consequences for the recipient of the payment. It was silent as to the
consequences for the payer. I observe that, after the change was enacted,
taxpayers were granted the ability to deduct the deemed inclusion in income
under section 7. This took the form of paragraph 11(1)(ca). Added in 1951, paragraph 11(1)(ca) read as
follows:
Deductions
allowed.
(ca) such part of
a payment
(i) repaying borrowed money used for the purpose of earning income
from a business or property (other than property the income from which would be
exempt), or
(ii) for property acquired for the purpose of gaining or producing income
therefrom or for the purpose of gaining or producing income from a business
(other than property the income from which would be exempt),
made by the
taxpayer in the year as is by section 7 required to be included in computing
the recipient’s income for a taxation year.
This provision
allowed a deduction by the payer of the amount deemed by section 7 to be
included in income, if the payment was made in connection with an income-earning
purpose (as anything on capital account was generally not taxable at the time).
The intent in enacting this new provision was discussed in the parliamentary
debates that year:
Mr. Johnston: I
should like to ask a question with respect to section 3 on page 2 concerning
the repaying of borrowed money. It seems to me that the only deduction that
would be allowed from income tax would be the interest on that borrowed money.
Mr. Abbott: This
is a relieving section. There was a little lack in the law. In certain types of
contracts there is an attributed interest content, and that is required to be
included as income by the person who receives it.
Mr. Johnston: What it refers to is the
attributed interest content.
Mr. Abbott: That
is correct. Taking the reverse situation, if I as a lender under these
circumstances am required to include it in my income, the man who is paying it
to me can include it as an expense. That is the effect of the section. It is a
relieving section. It seemed the sensible thing to do.
[76]
The above indicates that symmetrical tax
treatment was intended when the deemed income was received on income account
and payment was made by the debtor in connection with an income-earning
process.
[77]
Section 7, is a slightly amended form, became in
1971 subsection 16(1) of the ITA, which in turn was replaced in 1983 by
the following version of subsection 16(1):
Income and capital combined
Where a payment
under a contract or other arrangement can reasonably be regarded as being in
part a payment of interest or other payment of an income nature and in part a
payment of a capital nature, the part of the payment that can reasonably be
regarded as a payment of interest or other payment of an income nature shall,
irrespective of when the contract or arrangement was made or the form or legal
effect thereof, be included in computing the recipient's income [from property]
[for the taxation year in which it was received to the extent that it was not
otherwise included in
computing the recipient's income].
[78]
The principal change was to the last part of the
provision, which stipulates that the inclusion in income from property will
only occur where no other provision of the ITA requires the interest to
be included in income. The 1982 technical notes specifically provide the example of subsections 12(3) and (4) of
the ITA, where accrued interest income on a debt
obligation that is included in income under one of those subsections will not
also be required to be included in income under subsection 16(1) when the
interest is actually paid. The provision was again silent as to its impact for
the payer.
[79]
The treatment of the payer was instead dealt
with by the (then) contemporary iteration of paragraph 11(1)(ca), paragraph
20(1)(k). Paragraph 20(1)(k) worked similarly to the previous version of the
provision by stipulating that the portion of a blended payment that was
included in the recipient’s income from property pursuant to subsection 16(1)
of the ITA would be deductible in computing the payer’s income from
business or property where the payment was with respect to borrowed money used
for the purpose of earning income or for property acquired for the same
purpose.
[80]
That iteration of subsection 16(1) of the ITA
was in turn replaced in 1988, which was in essence nearly identical to the
current version of that provision, the main change being that part of the
blended payment became explicitly characterized as being interest on a debt
obligation, rather than just income from property. Looking at the Department of
Finance technical notes, it would appear that the catalyst for the change was a desire to
have income from property caught under section 16 of the ITA classified
specifically as interest for both parties.
[81]
The 1988 Department of Finance technical notes
give the example of subsection 12(3) of the ITA,
which requires corporations, partnerships and certain trusts to include
interest in their income on an accrual basis, and which, it is stated is
applicable to the interest portion of a blended payment. Because categorizing
something as interest triggers interactions with all of the provisions of the
ITA that pertain to interest (unless they are explicitly excluded), and since
this was a conscious choice by Parliament, this is a strong indication that the
intended effect of these interactions is that the same amount of the blended
payments is to be deemed to be interest for both parties. When subsection 16(1)
of the ITA was amended in 1988, paragraph 20(1)(k) was repealed. As
pointed out by the Appellant in its written submissions, the technical notes relating
to the repeal of paragraph 20(1)(k) stated:
paragraph 20(1)(k)
is repealed as a consequence of the amendment to subsection 16(1). By reason of
this amendment, subsection 16(1) deems the interest portion of a blended
payment to be interest on a debt obligation. Therefore, the general rules
applicable to the deduction of interest will apply to that part of the payment
and paragraph 20(1)(k) is no longer necessary.
[Emphasis added]
[82]
Paragraph 20(1)(k) was repealed because symmetry as
to the character of the payment was preserved for both parties by the new rule.
If the payment is made in the circumstances described in paragraph 20(1)(c),
the debtor can deduct it. The creditor, unless tax-exempt, must include the
deemed interest in income.
[83]
To promote an interpretation of subsection 16(1)
that would allow interest to be recognized by one party but not the other seems
antithetical to the inherently symmetrical nature of interest and to the intent
of the provision. Absent an explicit indication from Parliament that symmetry
was intended to be deviated from, the interpretation of subsection 16(1)
suggested by the Appellant runs counter to the statement made by Justice
Rothstein that “an interpretation of the Act that promotes symmetry and
fairness through a harmonious taxation scheme is to be preferred over an
interpretation which promotes neither value”.
From the foregoing review of the history of subsection 16(1) and paragraph
20(1)(k), there appears to be no indication that Parliament intended that
symmetry was to be deviated from as suggested by the Appellant.
(3) Purpose
of Subsection 16(1) of the ITA
[84]
In summary, considering all of the above,
subsection 16(1) of the ITA is an anti-avoidance provision that is intended
to apply where a contract or agreement does not explicitly identify an amount
owed by one person to another as being interest and that amount can reasonably
be regarded, considering all the relevant circumstances, to be interest for
both parties. The classic example of a situation where the provision applies is
a purchase and sale of property financed by a balance of sale payable to the
seller in equal instalments over the term of the agreement, without explicit
recognition of the interest and principal components of the instalment payments.
(4) Consideration
of the Case Law Cited by the Parties
[85]
In their oral and written submissions both
parties referred me to the Tax Court’s decision in Lehigh Cement Limited. Unsurprisingly, the parties
draw different conclusions from that case.
[86]
The facts of the case are relatively
straightforward. Lehigh Cement Limited (“Lehigh”), a Canadian corporation,
borrowed funds from a consortium of Canadian banks to finance its operations.
Through a series of transactions the loan was acquired by a related
non-resident corporation. As a result, interest paid or credited on the loan
gave rise to the payment of Part XIII tax by the non-arm’s length recipient of
the interest.
[87]
In a bid to qualify for the withholding tax
exemption provided for, at the time, under subparagraph 212(1)(b)(vii) of the ITA,
the terms and conditions of the loan were modified and the right to interest coupons
totalling approximately $49.5 million was sold to a foreign bank (the “Foreign
Bank”) for approximately $42.7 million.
[88]
With respect to the years at issue, the Minister
relying on subsection 16(1) of the ITA disallowed substantially all of
the interest deducted by Lehigh on the theory that $42.7 million represented
the payment of capital to the Foreign Bank. Inconsistently, the Minister also
assessed Lehigh for having failed to withhold Part XIII tax on the full amount
that it had paid to the Foreign Bank, including the portion of the payments
that the Minister considered to be capital under Part I of the ITA.
[89]
The Part XIII tax was assessed on the theory
that Parliament intended the withholding tax exemption to apply only when the
principal amount of the loan was also payable to a non-resident arm’s length
lender.
[90]
The Tax Court of Canada (“TCC”) allowed the
appellant’s appeal on the first issue, ruling that subsection 16(1) of the ITA
did not apply so as to allow all or part of the payments made to the Foreign
Bank to be recharacterized as non-deductible capital payments for Lehigh. The
TCC ruled against the appellant on the second issue, holding that the GAAR
applied to deny the Foreign Bank the benefit of the exemption provided for in
subparagraph 212(1)(b)(vii) of the ITA.
[91]
The appellant appealed the TCC’s ruling on the
GAAR. The FCA allowed the appeal, concluding that the exemption applied to the
full amount of the payments received by the Foreign Bank. As a result, Lehigh
could not be assessed a penalty of 10% of the withholding tax that the Minister
assumed Lehigh failed to withhold on the interest it paid or credited to the
foreign bank.
[92]
The Appellant in its written submission draws
the following conclusions from the TCC’s decision in Lehigh Cement:
32. This Court
rejected the Crown’s paragraph 16(1)(a) argument in Lehigh Cement
because “[i]n the corporate mind of [Lehigh], the whole of each quarterly
amount . . . was interest”
and not capital. The Court explained that:
the Minister was looking at the 20 quarterly amounts through the
eyes of BBL. The Minister chose the wrong point of view because BBL is not
before the Court. Only [Lehigh] is challenging the reassessments and it views
the quarterly amounts as exclusively interest.
33. It is clear
from Lehigh Cement that in determining whether paragraph 16(1)(a)
applies to a particular taxpayer, the determination of whether an amount can
reasonably be regarded as being in part interest and in part capital must be
made from the perspective of the particular taxpayer and not from the
perspective of the counterparty to the relevant debt.
34. It is also
evident that, had BBL been before the Court, the Court would have found
that section 16 deemed the amounts it received to be partly interest and partly
principal for the purpose of determining BBL’s taxes.
35. The reason it
mattered which “point of view” was employed is that the result would have been
different if BBL had been the party before the Court. It would not matter which
“point of view” was applied if the nature of the amount for the purpose of
section 16 was fixed with the original contract for debt, and applied to new
parties to the debt regardless of whether the amounts that they paid or
received to become party to the debt reflected the time value of money.
However, as the case demonstrates, the nature of an amount does not fix the
nature to taxpayers later becoming party to the contract; BBL had become party
to the debt through assignment, and treatment from its “point of view” would
not have been the same as Lehigh’s.
[Emphasis added]
[93]
With respect, I do not agree with the
Appellant’s analysis of Lehigh Cement, particularly its speculation on
the outcome of the case
had the Foreign Bank been before the Court.
[94]
As is often the case under Part XIII of the ITA,
the Minister assessed Lehigh, the interest payer, for its failure to withhold
Part XIII tax rather than the interest recipient, the Foreign Bank, for the
Part XIII tax it owed under paragraph 212(1)(b) of the ITA. Interest
payers incur a penalty under Part XIII only if they fail to deduct or withhold
the tax owed by the non-resident recipient of the interest payment. In short,
the payment must be interest or deemed interest to the payee for it to attract
Part XIII tax. Section 215 of the ITA is clear on this matter. The
relevant parts of that provision read as follows:
215(1) When a
person pays, credits or provides, or is deemed to have paid, credited or
provided, an amount on which an income tax is payable under this
Part, or would be so payable if this Act were read without reference to
subparagraph 94(3)(a)(viii) and to subsection 216.1(1), the person shall,
notwithstanding any agreement or law to the contrary, deduct or withhold from
it the amount of the tax and forthwith remit that amount to the Receiver
General on behalf of the non-resident person on account of the tax and shall
submit with the remittance a statement in prescribed form.
. . .
(6) Where a
person has failed to deduct or withhold any amount as required by
this section from an amount paid or credited or deemed to have been paid or
credited to a non-resident person, that person is liable to pay as tax under
this Part on behalf of the non-resident person the whole of the amount
that should have been deducted or withheld, and is entitled to deduct
or withhold from any amount paid or credited by that person to the non-resident
person or otherwise recover from the non-resident person any amount
paid by that person as tax under this Part on behalf thereof.
[Emphasis added]
[95]
Paragraph 212(1)(b) of the ITA clearly
imposes the Part XIII tax on the non-resident recipient of the interest payments.
The relevant part of that provision reads as follows:
212(1) Every non-resident
person shall pay an income tax of 25% on every amount that a person
resident in Canada pays or credits, or is deemed by Part I to pay or credit, to
the non-resident person as, on account or in lieu of payment of, or in
satisfaction of,
. . .
(b) interest that . . .
[Emphasis added]
[96]
The Appellant’s submission that the outcome in Lehigh
Cement would have been different had the Foreign Bank been before the Court
is incorrect. It is implicit in the TCC’s decision, that the full amount paid
to the Foreign Bank was interest, otherwise its finding that section 215 of the
ITA applied to the full payment made by Lehigh is incorrect. Under the
Appellant’s theory, at most, the calculation of Lehigh’s liability under
subsection 215(6) of the ITA should have been based on interest payments
of only $5.8 million had the Court’s finding that the GAAR applied been
correct.
[97]
The Appellant’s conclusion is also inconsistent
with the FCA’s decision. In Lehigh Cement, the FCA concluded that the
TCC was wrong in applying the GAAR and that all the payments received by the
Foreign Bank were interest that was exempt from Part XIII tax by virtue of
paragraph 212(1)(b)(vii) of the ITA. In summary, both the TCC and the
FCA found that subsection 16(1) of the ITA did not operate to
recharacterize the payments received by the Foreign Bank as blended payments of
principal and interest.
The payments remained interest for both parties.
[98]
As a final note on the Appellant’s analysis of Lehigh
Cement, I observe that its theory would place an unfair burden on Canadian
resident taxpayers under section 215 of the Act. Pursuant to that section,
Canadian taxpayers are authorized to withhold Part XIII tax on interest that is
paid or credited to non-residents where no exemption applies. How would a
Canadian taxpayer be able to accurately determine the amount of Part XIII tax
due by a non-resident payee where the payee purchased interest coupons from a
non-resident lender? The outcome or result of the latter transaction would only
be known with certainty by the parties to the transaction. This in my view serves
as further confirmation that Parliament intended that the deeming rule in
subsection 16(1) of the ITA apply symmetrically to both parties.
[99]
I have carefully considered the other cases
cited by both parties. As is often the case, the outcomes in those cases are
largely fact-dependent. Those cases are not of particular relevance to the
determination of the outcome of this matter.
B. Consideration of the Relevant
Circumstances and Factors
[100]
As noted earlier, the Appellant says that the
impact or consequences for the Appellant are similar to those of a so-called
defeasance transaction. In short it received $17.5 million as consideration for
its repaying a much larger sum in 2030. The difference between the two amounts
represents the time value for the use by the Appellant of the $17.5 million
received from Encor. I do not agree with the Appellant’s interpretation of the
economic impact or consequences of the Key Transactions. The facts of the case
show that the economic impact, consequences and substance of the Key
Transactions are far removed from the characteristics and consequences of a
defeasance transaction.
[101]
First, the Appellant gained Encor’s consent to
the Plan of Arrangement, which was required in order for the Appellant to
complete the acquisition of Dome Petroleum on terms and conditions that it
considered to be favourable.
[102]
Secondly, the Settlement Agreement allowed the
Appellant to mitigate the risk of cross-default, which if triggered, could lead
to an acceleration of all of the debt securities issued by the Appellant and/or
Dome Petroleum under the Plan of Arrangement. Encor’s cooperation, which was
secured under the Settlement Agreement, paved the way for successful
negotiations between the Appellant and Encor on the one hand and APCJ on the
other. These ongoing negotiations culminated in APCJ agreeing to release Encor
from all of its obligations under the Formal Contract. This was of significant
value to the Appellant because it eliminated the risks associated with the
prospect of cross-default. Encor’s cooperation in engaging in negotiations with
APCJ also allowed the Appellant to secure APCJ’s waiver of Dome Petroleum’s past
defaults under the Formal Contract and to secure more favourable terms and
conditions on an ongoing basis. The evidence shows that all of the above was
necessary in order to gain APCJ’s approval of the Plan of Arrangement. The
evidence shows that the Appellant would not have proceeded with the transaction
unless the latter outcome was secured.
[103]
The Settlement Agreement does not create
obligations on the Appellant to make payments to Encor. There are no blended
payments to be considered under that agreement. The Appellant simply commits to
performing Encor’s obligations under the Formal Contract and to indemnifying and
holding Encor harmless as regards any damage that it suffers from the
Appellant’s failure to do so.
[104]
The Encor Indemnity and Subrogation Agreement
simply spells out in greater detail what happens if the Appellant fails to meet
the performance duties and obligations imposed on it under the Formal Contract.
By becoming a party to the Formal Contract, the Appellant undertook to do more
than repay APCJ the amount owed to it under the Exploration Agreement. The
Accommodation Agreement adds the Appellant to the Formal Contract as a party
having joint and several obligations thereunder.
[105]
Finally, when the Appellant became a party to
the Formal Contract, it became obligated jointly and severally to pay $400
million to APCJ in 2030. This is an immediate obligation in the sense that the
amount is due by the Appellant immediately upon the execution of the
Accommodation Agreement. There is no contingency as to that payment. The
Appellant simply benefits from a term for repayment. The amount does not become
due as a result of the passage of time. APCJ advanced $400 million and, unless
a condition for early repayment is triggered or the obligation is otherwise
settled by consent between the parties, APCJ will receive in 2030 the principal
of $400 million that it advanced. No part of that payment can be regarded as
compensation for the use of money. That entire amount is the payment of capital
owed to APCJ.
[106]
All of the above demonstrates that the Appellant
received much more than $17.5 million from Encor and undertook to do much more
than repay $225 million in 2030.
[107]
In summary, the Appellant’s approach places too
much weight on its construction of the alleged economic substance of the
Settlement Agreement. The broad interpretation of the scope of the application
of subsection 16(1) of the ITA proposed by the Appellant is not consistent
with a textual, contextual and purposive interpretation of subsection 16(1) of
the ITA.
[108]
In closing, I observe that the Appellant’s
position appears to be aligned with the way in which it claims the Key Transactions
are to be characterized under generally accepted accounting principles. As
noted earlier, the accounting evidence presented at trial was insufficient and
unreliable. In any event, it is well recognized that GAAP serve different
purposes than that intended by Parliament in enacting provisions of the ITA.
Accounting principles are meant to ensure that companies report their earnings
on a consistent and reliable basis so that investors may make well informed
decisions when choosing to invest in companies in the same industry. In
contrast, the ITA contains a detailed set of rules that serve to define
how the federal tax burden is to be shared among taxpayers. These rules are
constantly changing to take into account, inter alia, Parliament’s
prevailing views of the concepts of fairness and progressivity and the need to
stimulate certain economic activities and certain well regarded social
activities.
[109]
The Appellant suggested that if I ruled against
it, it would mean that the payment of the Difference is a so-called “tax nothing”.
This argument is often made by taxpayers to gain the sympathy of the Court, but,
as is the case here, it is rarely proven to be an accurate assessment of the
situation.
[110]
In obiter, I observe that the Appellant may one
day argue, in the right circumstances, that the Difference is a capital expense
incurred by the Appellant in connection with and as a result of the acquisition
by it of the Dome Petroleum shares.
Because the full amount was due (although not due and payable or immediately exigible)
one could assert that the assumed liability forms part of the Appellant’s cost
of the shares of Dome Petroleum, for example, in much the same way that legal
expenses incurred but not yet paid in connection with the execution of a
purchase and sale agreement for shares are included in the cost of those shares. Having concluded that
subsection 16(1) of the ITA does not apply, I am unaware of any
provision in the ITA that requires a taxpayer to discount its obligation
to pay a future principal amount when the liability to pay entails full recourse
to the taxpayer.
[111]
As a result of the above, it is certainly open to
the Appellant to argue that the full amount of the Difference forms part of its
cost of the shares of Dome Petroleum.
I can readily understand, however, why the Appellant chose not to go down that path
as the tax treatment claimed by it and denied by the Minister was much more
favourable to it.
[112]
For all of the above reasons, the Appellant’s
appeal is dismissed. The parties will have until October 20, 2017 to arrive at
an agreement on costs, failing which they must file their written submissions
on costs no later than October 25, 2017. Such submissions are not to exceed
five pages.
Signed at Ottawa, Canada, this 6th
day of October 2017.
“Robert J. Hogan”
APPENDIX A
2012-4907(IT)G
2013-1522(IT)G
TAX
COURT OF CANADA
BETWEEN:
Plains Midstream Canada ULC
(successor by amalgamation to BP Canada Energy
Company)
Appellant
- and –
HER MAJESTY THE QUEEN
Respondent
Partial Agreed Statement of Facts
For the purposes
of this trial, the appellant and respondent (the “Parties”) admit the
following facts and agree that their admission of facts shall have the same
effect as if the facts had been proved formally and accepted by the court as
true, with the following caveats:
1.
If a party has admitted a fact in response to a
request to admit served on it by the adverse party, the adverse party has the
right to rely on the admitted fact in the response to the request to admit.
The parties do not believe there is any inconsistency between the facts in the
Partial Agreed Statement of Facts and those admitted in responses to request to
admit, and agree that both the facts as stated in the Partial Agreed Statement
of Facts and those admitted in responses to a request to admit should be treated
as true. To any extent there may be inconsistency between a response to a
request to admit and this agreed statement of facts, the party who served the
request to admit has the right to insist that the response to the request to
admit prevails.
2.
The Parties acknowledge that certain facts in
the agreed statement of facts are summaries of the terms of contractual
agreements. The Parties acknowledge that these facts are more properly
summaries of contractual interpretation. The Parties are not intending to
usurp the role of the Court in respect of questions of law or mixed fact in
law. The Parties have included these agreed facts for the Court’s
convenience. The Parties acknowledge that the Court is
not bound by the parties’ interpretation of contracts, as the Court must draw
its own legal
conclusions
based upon its interpretation of the contracts.
The parties each
reserve the right to adduce additional evidence that is relevant and probative
of any issue before the Court and not inconsistent with the facts admitted
herein.
The parties agree that, if an opposing party has made a statement of
position at examinations for discovery, the other party can refer the Court to
that statement of position in oral argument without the necessity of a formal
read-in.
The following definitions will
be used:
“Amoco” means individually and
collectively as the context requires Amoco Canada Petroleum Company Ltd. and
its successors named Amoco Canada Petroleum Ltd. and Amoco Canada Petroleum
Company
“APCJ” means the Artic Petroleum
Corporation of Japan
“Dome Canada” means Dome Canada Limited
“Dome Petroleum” means Dome Petroleum
Limited
“Encor” means Encor Energy Corporation
Inc.
1980
to 1982
1.
In
the late 1970s and early 1980s, Dome Petroleum and the Japanese government had
a mutual desire to explore,
discover and produce petroleum in
the Beaufort Sea. The Japanese were seeking to obtain a long term supply of
petroleum from stable markets. At around this time, Dome Petroleum had
interests in the Beaufort Sea and was looking for capital to support petroleum
exploration in this area.
2.
The
Japan Nation Oil Corporation (“JNOC”) and Dome Petroleum entered into a
Letter of Intent, dated August 22, 1980 (“Letter of Intent”), regarding
the exploration and development of petroleum in the Beaufort Sea. The Letter
of Intent is Document 1 of the Agreed Book of Documents.
3.
The
Letter of Intent was amended by a Side Letter of Amendment dated December 23,
1980 between JNOC and Dome Petroleum, which letter is referred to as Document
2 of the Agreed Book of Documents.
4.
In
October of 1980, the Government of Canada introduced the National Energy Policy
(“NEP”).
5.
As
a result of the NEP, it was obvious to Dome Petroleum that it would need to
increase its Canadian content to qualify for and take advantage of the
government incentives being offered under the NEP and also in order to obtain
future production licenses.
6.
Dome
Petroleum determined that Dome Canada could be used to realize the benefits
under the NEP as Dome Canada was a qualifying company under the NEP that could
conduct the exploration programs in the Beaufort Sea.
7.
In
or around December of 1980, Dome Petroleum proposed to JNOC that Dome Canada
become a party to the formal contract that was being negotiated, and JNOC
agreed.
8.
APCJ
was formed to administer the formal contract contemplated by the Letter of
Intent.
9.
APCJ
was a Japanese company incorporated under the laws of Japan. It was owned 80%
by JNOC and its subsidiaries and 20% by several Japanese private sector
corporations.
10.
The
formal contract contemplated by the Letter of Intent was finalized effective
February 16, 1981 between APCJ, Dome Petroleum and Dome Canada (the “Formal
Contract”). The Formal Contract is Document 3 of the Agreed Book of
Documents.
11.
The
Formal Contract contains the rights and obligations of the parties by which
APCJ, Dome Petroleum and Dome Canada were to participate in the exploration and
development of the Beaufort Sea.
12.
Among
other things, the Formal Contract provided that APCJ would advance $400,000,000
which was to be used by Dome Petroleum and Dome Canada to fund exploration of
petroleum in the Beaufort Sea (the “$400,000,000 Amount”). The
$400,000,000 Amount is also referred to in the Formal Contract as the “Exploration
Loan”.
13.
The
$400,000,000 Amount was advanced by APCJ to Dome Petroleum and Dome Canada in
accordance with the Schedule in Article 4.01 of the Formal Contract.
14.
Pursuant
to the Formal Contract, among other things,
a.
Dome
Petroleum and Dome Canada were jointly and severally liable for all
representations, warranties, duties and obligations owing to APCJ under the
Formal Contract;
b.
Dome
Petroleum and Dome Canada were jointly and severally liable for all duties and
obligations owing to APCJ in respect of the $400,000,000 Amount;
c.
APCJ
was entitled to look to Dome Petroleum in the first instance for the
performance of all terms and conditions under the Formal Contract; and
d.
APCJ
was entitled to demand from Dome Petroleum full payment of the $400,000,000
Amount.
15.
Pursuant
to the Formal Contract, the $400,000,000 Amount was to be repaid by Dome Canada
and Dome Petroleum by December 31, 2030. The Formal Contract provided for
earlier repayment of the $400,000,000 Amount if there was commencement of
commercial production, as those terms were defined by the Formal Contract (“Commencement
of Production”), in the Beaufort Sea or an Event of Default within the
meaning of the term “Event of Default” in the Formal Contract occurred.
16.
If
there was Commencement of Production, Dome Petroleum and Dome Canada were
required to repay the $400,000,000 Amount out of 20% of their net proceeds of
production from Exploration Fields, as that term was defined in the Formal
Contract.
17.
If
there was no Commencement of Production or a specified event of default under
the Formal Contract, then the $400,000,000 Amount would have to be repaid
December 30, 2030.
18.
Pursuant
to the Formal Contract, as full and complete consideration to APCJ
making the Exploration Loan, APCJ was entitled to “remuneration” as defined by
the Formal Contract (“Remuneration”), if there was Commencement of
Production in the Beaufort Sea.
19.
Remuneration
was only payable if and when there was Commencement of Production in the
Beaufort Sea.
20.
The
deduction that the appellant is seeking in the within appeals does not relate
to any amount payable as Remuneration under the Formal Contract.
21.
If
there was no Commencement of Production, then no Remuneration would have to be
paid.
22.
There
has been no Commencement of Production in the Beaufort Sea.
23.
Dome
Petroleum, Dome Canada and APCJ entered into a letter agreement dated February
16, 1981, which letter is referred to as Document 4 of the Agreed Book
of Documents. In this letter, APCJ confirmed that an event of default as
defined in Article 29.01(d) of the Formal Contract would need to be with
respect to a substantial obligation under the Formal Contract or would have to
materially adversely affect the rights of APCJ before it would be considered a
breach of contract.
24.
Dome
Petroleum and Dome Canada entered into an agreement called the Joint Venture
Agreement, dated March 2, 1981, whereby Dome Petroleum and Dome Canada agreed
to allocate the $400,000,000 Amount for exploration as follows: $225,000,000
to Dome Canada and $175,000,000 to Dome Petroleum. The Joint Venture Agreement
is referred to as Document 12 of the Agreed Book of Documents.
25.
APCJ
was not a party to the Joint Venture Agreement between Dome Petroleum and Dome
Canada.
1987 and 1988
26.
Immediately
prior to December 8, 1987, Dome Petroleum held a 42.1 per cent interest in Dome
Canada.
27.
As
a result of name changes in 1986 and 1987, Dome Canada was renamed Encor.
28.
Amoco
Corporation was the U.S. parent of Amoco.
29.
In
or around April of 1987, Amoco Corporation announced its intention to have its
Canadian subsidiary, Amoco, acquire Dome Petroleum.
30.
Amoco
had its own interests in the Beaufort Sea, saw great potential for hydrocarbon
development in the Beaufort Sea, wanted to capitalize on Dome Petroleum’s
holdings in the Beaufort Sea and wanted to be a major player in the future
development in the Beaufort Sea.
31.
Amoco
decided to acquire Dome Petroleum by way of a plan of arrangement pursuant to
the Canada Business Corporations Act.
32.
On
May 12, 1987, Amoco and Dome Petroleum established an Arrangement Agreement for
the purchase of Dome Petroleum by way of a plan of arrangement. This
Arrangement Agreement is referred to as Document 13 of the Agreed Book
of Documents.
33.
Pursuant
to the Arrangement Agreement, certain creditors of Dome Petroleum had to
approve the plan of arrangement contemplated by the Arrangement Agreement. (The
plan of arrangement contemplated by the Arrangement Agreement will be referred
to as the “Plan of Arrangement”.)
34.
If
APCJ would not have given its approval, the Plan of Arrangement may not have
been completed.
35.
Amoco
believed the Formal Contract required accommodation to enhance the commercial
viability of future projects in the Beaufort Sea, and it was a condition of the
Arrangement Agreement that Amoco had to reach an accommodation with APCJ concerning
the Formal Contract.
36.
Amoco
needed to negotiate terms with APCJ to obtain APCJ’s approval for the Plan of
Arrangement.
37.
If
Amoco could not have reached an accommodation with APCJ, Amoco may not have
completed the purchase of Dome Petroleum.
38.
Amoco
began negotiating with APCJ in July of 1987 for APCJ’s approval of the Plan of
Arrangement.
39.
APCJ
was reluctant to change the Formal Contract. APCJ wished to keep as close an alignment
with the terms and
conditions of the original
Formal Contract as possible and without the need for
Japanese political action or intervention.
APCJ demanded that the original terms of the Exploration Loan be observed.
40.
APCJ
would not agree to enter into a new agreement between Amoco and APCJ.
41.
In
1988, APCJ also would not agree to release Encor from its obligations under the
Formal Contract.
42.
Dome
Petroleum sent out a “Notice of Special Meeting, Notice Concerning Application
and Information Circular Application and Proxy Statement pertaining to a
proposed Plan of Arrangement involving Dome Petroleum and Amoco” dated April
26, 1988. Pages 56 and 57 of this Notice are referred to as Document 14
of the Agreed Book of Documents.
43.
The
statements made by Dome Petroleum in Document 14 of the Agreed Book of
Documents are true and accurate. (Subject to the caveat that the
document is a summary and, to the extent it is reporting the terms of
contractual agreements, the terms of the legal contracts should be preferred,
and to the caveat that the document is not complete.)
44.
Encor
was also a creditor of Dome Petroleum pursuant to the Encor Credit Ship
Facility.
45.
Pursuant
to the Arrangement Agreement, Encor also had to approve the Plan of
Arrangement.
46.
Encor
played a pivotal role in various aspects of the Amoco’s acquisition of Dome
Petroleum and Amoco wished to negotiate with Encor on several fronts. Amoco
desired to make an agreement with Encor to meet several of its objectives in
its acquisition of Dome Petroleum.
47.
Encor
had joint liability with Dome Petroleum and Encor also had a separate loan to
Dome Petroleum so Encor had to approve the Arrangement Agreement. Dome
Petroleum was also a shareholder of Encor.
48.
Encor was also seeking to move their business away from
exploration in the Beaufort Sea and concentrate in building businesses in Western Canada.
Encor was looking to sell its interests in the Beaufort Sea, and Amoco was
looking to acquire those interests.
49.
Amoco
and Encor entered into an Amoco Canada/Encor Agreement dated November 28, 1987
(the “Settlement Agreement”), which agreement is referred to as Document
15 of the Agreed Book of Documents.
50.
Pursuant
to the Settlement Agreement, Amoco and Encor agreed, among other things, that:
1.
Amoco
would assume all of Encor’s liabilities and obligations under the Formal
Contract and indemnify and save harmless Encor from and against such
liabilities and obligations;
2.
Encor
would:
a.
transfer
certain properties to Amoco (or its designee) in return for a $1,400,000
payment from Amoco; and
b.
Encor would pay Amoco $17,500,000 for the
assumption in 50(1.) above (the “17.5 Million Payment”);
3.
The
performance of the obligations in subparagraphs 50(1.) and 50(2.) above were
interdependent and were to occur at the closing of the Plan of Arrangement and
were to occur as part of the closing of the Plan of Arrangement.
4.
The
performance of the obligations in subparagraph 50(2.) above were to occur after
the completion of the exchange of Dome Petroleum’s indebtedness to Encor under
the Encor Credit Ship Facility for cash and junior notes of Amoco.
51.
The
Settlement Agreement was entered into by Amoco as a step necessary to reach
accommodation with APCJ and to obtain APCJ’s approval for the Plan of
Arrangement.
52.
The
ultimate objective of Amoco in entering into the Settlement Agreement was to
complete the Plan of Arrangement.
53.
The
obligations in subparagraphs 50(1.) and 50(2.) above were interdependent
as one without the other would not have reached Amoco’s
objectives to reach accommodation with APCJ and to obtain APCJ’s approval for
the Plan of Arrangement and to enable the conclusion of the Plan of Arrangement.
54.
Encor
agreed to sell all of its interests in the Beaufort Sea because Encor was seeking to move its business away from exploration in the Beaufort Sea and concentrate in building businesses in
Western Canada. Encor, Dome Petroleum and Amoco
had overlapping property interests in Western Canada and the
rationalization/exchange of some of those properties would help both Amoco and Encor reach their
respective objectives. Encor was a willing seller as they no longer
wanted to be in that (Beaufort) business, and Amoco was a willing buyer,
but the purchase and sale of the Encor lands was also part of bigger rationalization
of mutual properties.
55.
The
Settlement Agreement was part of the more
comprehensive arrangement Amoco was making
to acquire Dome Petroleum (of which Encor also had
a vested interest in the
outcome). Therefore Amoco and Encor
agreed that the Settlement Agreement needed to be completed for the Dome Petroleum acquisition by Amoco which was
ultimately completed through
the Plan of Arrangement. The Settlement Agreement was conditional on Amoco’s acquisition of Dome Petroleum.
56.
The
Settlement Agreement was dependant on the overall purchase of Dome
Petroleum through a successful execution
of the Arrangement Agreement for it
to make any sense for Amoco to take on obligations that would not be beneficial to them without the purchase
of Dome. Amoco was an oil company
looking for hydrocarbons, not a financing
vehicle looking to refinance
debt.
57.
Amoco
and Encor arrived at the $17.5 Million Payment as a negotiated sum between a
buyer and seller targeted on what would be regarded as an agreed fair market
value.
58.
From
Amoco’s perspective, the $17.5 Million Payment was arrived at as an amount
enough to cover the cost of defeasing $225,000,000.
59.
On
December 8, 1987, Dome Petroleum sold its common shares in Encor to TransCanada
Pipelines Ltd. or to TCPL Energy Limited for approximately $398,000,000.
60.
Amoco
and Encor entered into a Collateral Agreement, dated December 31, 1987, which
is referred to as Document 16 of the Agreed Book of Documents.
The parties entered into this Collateral Agreement to confirm and clarify the
parties’ agreement with respect to their respective positions for Canadian
income tax purposes regarding the Settlement Agreement and reporting thereon.
61.
After
13 months of negotiation, Amoco obtained APCJ’s approval for the Plan of
Arrangement in August of 1988.
62.
Dome
Petroleum, Encor, APCJ, Provo and Amoco entered into an agreement dated August
29, 1988 which addressed the accommodation that Amoco sought with APCJ and to
obtain the approval of APCJ for the Plan of Arrangement (the “Accommodation
Agreement”). The Accommodation Agreement is referred to as Document 17
of the Agreed Book of Documents.
63.
The
Arrangement Agreement required that accommodation with ACPJ be reached and, as
part of the accommodation, ACPJ required that Amoco became jointly and
severally liable with Dome Petroleum and Encor under the Formal Contract.
64.
The Accommodation Agreement was entered
into by the parties with the understanding that
a Plan of Arrangement was being
executed, and it was necessary to fulfil the condition
of Amoco in the Arrangement Agreement that an accommodation be reached with APCJ.
65.
Pursuant
to the Accommodation Agreement, among other things:
1.
Amoco
became a party to the Formal Contract and became jointly and severally liable
with Dome Petroleum and Dome Canada (Encor) for their obligations under the
Formal Contract;
2.
Amoco
and Dome Petroleum agreed to jointly and severally perform active exploration
and development of Beaufort Sea Lands, as Lands was defined in the Formal
Contract;
3.
The parties confirmed that Dome Petroleum would
acquire all of Encor’s interest in the Lands (the “Encor Lands”);
4.
Dome Petroleum would carry out active
exploration and development of the Encor Lands, and the Encor Lands remained
subject to the full obligations of
the Formal Contract;
5.
The parties acknowledged that the Accommodation
Agreement did not release or vary any of Encor’s obligations and liabilities to
APCJ under the Formal Contract;
6.
Remuneration under the Formal Contract was
amended to be a 5% gross overriding royalty to the extent of gross production
revenues from the Beaufort Sea exploration fields but only on Commencement of
Production; and
7.
With respect to the Exploration Loan, nothing in
the Accommodation Agreement constituted the making of a new loan or· the
effective repayment and readvance or the settlement or compromise of the
Exploration Loan, and the obligation to repay the Exploration Loan remained in
full force and effect and unamended in accordance with the terms of the Formal
Contract.
8.
If the Plan of Arrangement was not completed,
the Accommodation Agreement would be null and void.
66.
Amoco,
Dome Petroleum and Encor entered into an “Amending Agreement” dated
August 29, 1988, which agreement is referred to as Document 18 of the
Agreed Book of Documents. This Amending Agreement changed the date and time of the Accommodation Agreement to be
effective. The new time was a result of the sequence of events as
described/required by the Plan of Arrangement. The original time as indicated
in the original Accommodation Agreement (8:00 a.m.) did not align with the rest
of the finalized Plan of Arrangement steps, so the time needed to be adjusted
(to 10.55 a.m.) to meet the proper sequencing.
67.
Amoco
and APCJ signed a letter agreement dated August 29, 1998, which letter is
referred to as Document 19 of the Agreed Book of Documents. This letter
agreement specified in more detail the exploration activities that Amoco would
carry out to meet the obligations of Article 3.01 of the Accommodation
Agreement.
68.
Amoco
and Dome Petroleum entered into an Indemnity Agreement dated August 31, 1988
(the “Dome Indemnity Agreement”), which document is referred to as Document
20 of the Agreed Book of Documents.
69.
Amoco
and Dome Petroleum entered into the Dome Indemnity Agreement because, or partly
because, as part of the Accommodation Agreement, ACPJ required that Amoco
became jointly and severally liable with Dome Petroleum and Encor under the
Formal Contract.
70.
Pursuant
to the Dome Indemnity Agreement, as between Dome Petroleum and Amoco, Dome
Petroleum was to be liable for all obligations to pay the principal,
Remuneration or other amounts payable under the Formal Contract for which Dome
Petroleum was primarily liable. The Dome Indemnity Agreement further provided
that if Amoco became liable to pay any such amount to APCJ, Dome Petroleum was
required to indemnify Amoco.
71.
The
Dome Indemnity Agreement was to be effective when the Accommodation Agreement
became effective and would be null and void if and when the Accommodation
Agreement became null and void.
72.
The
Dome Indemnity Agreement and the Accommodation Agreement became effective at
10:55 a.m. on September 1, 1988.
73.
The
Plan of Arrangement was approved by the Alberta Court of Queen’s Bench and made
effective September 1, 1988. The Plan of Arrangement is referred to as Document
21 of the Agreed Book of Documents.
74.
Pursuant
to the Plan of Arrangement, Amoco acquired Dome Petroleum for $5.2 billion
CDN.
75.
As
part of the Plan of Arrangement, the following steps, amongst others, occurred:
a.
Pursuant
to Article 4.10 of the Plan of Arrangement, at 10:30 a.m., in accordance with
the Settlement Agreement, Encor paid to Amoco the 17.5 Million Payment;
b.
Pursuant
to Article 4.15, at 10:55 am., a number of corporations were amalgamated and
continued under the name Dome Petroleum;
c.
Pursuant
to Article 4.20 of the Plan of Arrangement, at 11:15 a.m., in accordance with
the Settlement Agreement, Amoco paid $1.4 million to Encor and Encor’s
properties were transferred from Encor to Dome Petroleum pursuant to a
Conveyance of Properties from Encor to Dome Petroleum, dated September 1, 1988,
which Conveyance is referred to as Document 22 of the Agreed Book of
Documents.
76.
As
a result of the acquisition, Dome Petroleum became a wholly owned subsidiary of
Amoco.
77.
Amoco and Dome Petroleum entered into a
reimbursement agreement made on 11:15 am of the effective date of the Plan of Arrangement,
being September 1, 1988 (“Reimbursement Agreement”). The Reimbursement
Agreement is referred to as Document 23 of the Agreed Book of
Documents.
78.
The Reimbursement Agreement was made to require
Dome Petroleum to reimburse Amoco for the $1.4 million that Amoco paid for
Encor’s interests in the Beaufort Sea (as required under 4.20(ii) of the Plan
of Arrangement) but Amoco directed that the properties be transferred from
Encor to Dome Petroleum.
79.
Amoco
and Encor entered into an agreement (the “Encor Indemnity and Subrogation
Agreement”) on the effective date of the Plan of Arrangement, being
September 1, 1988. The Encor Indemnity and Subrogation Agreement is referred to
as Document 24 of the Agreed Book of Documents.
80.
In
the Encor Indemnity and Subrogation Agreement, it was acknowledged that Amoco
and Encor were entering into this agreement to provide, pursuant to the Plan of
Arrangement, for, amongst other things:
a.
the
assumption by Amoco of all duties, liabilities and obligations of Encor
pursuant to the APCJ Documents (as that term was defined in the Encor Indemnity
and Subrogation Agreement);
b.
indemnification
of Encor by Amoco against any and all liability pursuant to or in connection
with the APCJ Documents; and
c.
the
subrogation of Amoco to all of Encor’s rights under the APCJ Documents.
81.
The
consideration for the Indemnity and Subrogation Agreement was the $17.5 Million
Payment from Encor to Amoco.
82.
Pursuant
to the Encor Indemnity and Subrogation Agreement, Amoco and Encor agreed that
the agreement would terminate once Encor was released from the APCJ Documents.
83.
Amoco,
for tax purposes, treated the receipt of the $17.5 Million Payment received
from Encor as a non-taxable capital receipt.
84.
In
1989, Dome Petroleum amalgamated with another corporation and became Amoco
Canada Resources (“ACR”). ACR was a wholly-owned subsidiary of Amoco.
1992 Agreements
85.
Amoco,
ACR (as successor to Dome Petroleum), Encor and APCJ entered into an
amendment agreement on February 28, 1992, and stated to be effective on September
1, 1988, (the “1992 Amendment Agreement”) which is referred to as
Document 25 of the Agreed Book of Documents. The 1992 Amendment
Agreement was made because the Accommodation Agreement, made August 29, 1988 was a side
agreement between the parties to amend the original Formal Contract. The
purpose of the 1992 Amendment Agreement was to set forth the amendments to the
Formal Contract that resulted from the Accommodation Agreement and to clarify
the intent of the Accommodation Agreement in relation to the Formal Contract.
86.
Amoco,
ACR, Encor and APCJ entered into a release agreement dated February 28, 1992 (“Release
Agreement”), which is referred to as Document 26 of the Agreed Book
of Documents.
87.
The
Release Agreement provided that Encor ceased to be a party to the APCJ
Contracts, as APCJ Contracts was defined in the Release Agreement; that APCJ
released Encor from its obligations, claims and liabilities under the APCJ
Contracts; and that Encor acknowledged that APCJ owed no obligations to Encor.
88.
Amoco,
ACR and Encor also entered into an agreement titled “Termination of Amoco
Indemnity” dated February 28, 1992, which agreement is referred to as Document
27 of the Agreed Book of Documents.
89.
Pursuant
to the Termination of Amoco Indemnity, the parties agreed that, amongst other
things,
1.
the
Encor Indemnity and Subrogation Agreement was terminated;
2.
Amoco
and Encor each released each other from their obligations and liabilities under
the Encor Indemnity Agreement; and
3.
Amoco
and ACR released Encor from any claims, obligations, duties and liabilities
arising out of the APCJ Contracts.
General
90.
Neither
party is aware of the whereabouts of any of the key persons directly involved
with: the negotiations in 1980 or 1981 of the Formal Contract; the signing of
the Formal Contract; the acquisition by Amoco of Dome Petroleum; the
negotiation and signing of the 1987/1988 Agreements referred to in this Partial
Agreed Statement of Facts; the negotiation and signing of agreements between
APCJ, Amoco, Encor and Dome Petroleum’s successor in 1992.
Subsequent Events
91.
There
has been no commercial production in the Beaufort Sea in accordance with the
Formal Contract to date.
92.
The
appellant, and its predecessors, have not paid any amount to APCJ to repay the
$400,000,000 Amount advanced under the Formal Contract or paid any amount to
APCJ as Remuneration or as interest.
93.
No
party to the Formal Contract or Accommodation Agreement has paid any of the
$400,000,000 Amount or paid Remuneration to APCJ as Remuneration is defined in
the Formal Contract or Accommodation Agreement and no interest has been paid to
APCJ by any of the parties to the Formal Contract or Accommodation Agreement.
Amoco’s Tax Treatment and the Minister’s Treatment
94.
In
each of the 1995 and 1996 taxation years, for the purpose of computing its
income tax, Amoco deducted $4,788,456, computed as follows:
a.
Amount
of Expense to Maturity = $207,500,00 ($225,000,000 minus $17,500,000)
b.
Number
of Years to Maturity = 43.33 (September 1, 1988 to December 31, 2030);
c.
Number
of Months to Maturity = 520 (43.33 years x 12 months/year);
d.
Expense
per Month = $399,038 ($207,500,000 divided by 520); and
e.
Expense
per Year = $4,788,456 ($399,038 x 12).
95.
The Minister did not allow
any deduction for the amount claimed by Amoco.
96.
BP
Canada Group ULC on behalf of the Appellant filed Notices of Objection to Loss
Determinations for 1995 and 1996, which Notices of Objection is referred to as Documents
28 and 29 respectively of the Agreed Book of Documents.
|
AGREED
as to form and content June ____, 2017
|
|
AGREED
as to form and content June ____, 2017
|
|
|
|
|
|
OSLER, HOSKIN &
HARCOURT LLP
|
|
ATTORNEY GENERAL OF CANADA
|
|
|
|
|
|
Per:
|
|
|
Per:
|
|
|
|
Counsel to Plains Midstream (successor to BP Canada
Energy Company)
|
|
|
Counsel for Her Majesty the Queen
|
|
|
|
|
Email this Content