26 September 1989 Income Tax Severed Letter 5-8302 - Application of Part IV of the Income Tax Act in particular circumstances

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Dear Mr. Kennedy:

We are writing in reply to your letter of June 27, 1989, requesting our opinion concerning the application of Part IV of the Income Tax Regulations (the "Regulations") to certain circumstances described therein related to the XXX.

On receiving your June 27 letter we requested the views of Mr. XXX as to the tax effects of the matters you had raised. A copy of Mr. XXX July 24, reply is enclosed for your convenience. XXX having earlier sent a copy to your Mr. XXX

We met with XXX on August 31 to discuss two significant concerns of ours regarding the tax effects which XXX considered would obtain in the situations you raised. XXX concedes that one of these concerns is legitimate. XXX We had great difficulty with this conclusion, as it seems to us that the essence of a barter arrangement is the exchange of non-monetary properties of a approximately equal value, and, in this case, XXX, hardly an exchange of properties having equal value. XXX has agreed to write to us on this matter, explaining to us how his view of the matter ought to prevail.

XXX

Our comments are as follows:

• 1. Where a project owner takes a share of its production from the project for delivery and sale to customer f.o.b. a foreign port in a jurisdiction in which the project owner does not have a permanent establishment, the gross revenue from the sale would be allocated to the eleventh province pursuant to subparagraph 402(4)(c)(i) of the Regulations.
• 2. Where a project owner does as in item 1 above, but has a permanent establishment in rule in paragraph 402(4)(a) the foreign jurisdiction, the of the Regulations would apply to allocate the gross revenue from the sale to the permanent establishment in the foreign jurisdiction.
• 3. Where a project owner takes a share of its production from the project for delivery and sale to a customer f.o.b. Province of Canada in which the project owner does not have a permanent establishment the sale would be allowcated to the Province of Newfoundland by virtue of the provisions of paragraph 402(4)(b) of the Regulations.
• 4. &5.In situations identical to item 3 except that the project owner has a permanent extablishment in the Province of destination, pursuant to paragraph 402(4)(a) of the Regulations, the gross revenue would be allocated to the Province of destination.
• 6. XXX
• 7. The seventh matter concerns the effect of a sale and repurchase of oil in the eleventh province by a project owner. We would consider this arrangement a sham within the meaining of sham set out in Snook v. London & West Riding Investments Ltd. (1967) 1 All E.R. 518 (CA) and cited with approval by the Supreme Court Chief Justice Estey in Stubart Investments Ltd. v. The Queen [[1984] C.T.C. 294] 84 DTC 6305, and disregard the sale for all purposes, including the Regulations.
• 8. The eighth matter deals with the effect of a member of a partnership taking the partnership's share of production for sale. As the partnership seems to exist solely for the purpose of attempting to attribut gross revenue to the offshore area, we would disregard any allocation of gross revenue to the offshore area which its existence purported to create.

While we have made every effort to ensure that our reply is as accurate as possible, it should be noted that the above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We are available should you need any additional explanations or clarifications of the foregoing.