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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
February 15, 1994
Provincial and International Rulings Directorate
Relations Division Resource Industries
E. E. Campbell Section
A/Director Peter Lee
957-8953
Attention: Bruno Fioravanti
7-933546
Oil Product Swaps
This is in reply to your memorandum of December 1, 1993, wherein you requested our opinion on whether oil product swaps described below would give rise to "gross revenue" within the meaning of the expression assigned by subsection 248(1) of the Income Tax Act (the "Act") and for the purpose of section 402 of the Income Tax Regulations (the "Regulations").
Fact
Our understanding of the fact in respect of oil product swaps described by the Alberta Treasury, Tax and Revenue Administration, in its position paper on this matter dated October 20, 1993, is as follows:
An oil and gas company may need a specific product at a specific location but does not have inventory readily available. In order to save transportation costs and for convenience, the product is borrowed from the nearby refinery of another company as part of an exchange agreement. As consideration for such loan, the borrower agrees to deliver its product of the same sort, the same in quantity and quality with what is borrowed, to the lender at a specific location and time. The swaps are generally recorded in the inventory accounts of the corporations at standard cost. The exchange agreement provides quantities, descriptions of product, delivery points and delivery methods but does not affix a monetary value to the swaps.
Our Views
In the Law of Bailments by Isaac Edwards, one reads, at page 137,
A loan of articles to be returned in kind, as money, wine, corn and other things that may be valued by number, weight or measure, is a contract of another species; in which, as the specific things are not to be returned, the absolute property in them is transferred to the borrower, who must bear the loss of them if destroyed in any manner. The loan for consumption, under the Roman as well as the common law, constitutes a sale;
at page 186,
The loan for consumption, or mutuum of the civil law, in which one person delivers to another a certain quantity of things which are consumed by the use, under an agreement by the borrower to return to him as much of the same kind and quality, is regarded at common law as a sale.
In the case of South Australian Ins. Co. v. Randell, (1869) L.R. 3 P.C. 101, the Privy Council adopted at page 108 the following principle with respect to the difference between sale versus bailment:
Wherever there is a delivery of property on a contract for an equivalent in money or some other valuable commodity, and not for the return of his identical subject matter in its original or an altered form, this is a transfer of property for value - it is a sale and not a bailment.
This principle has been cited with approval by both of the British and Canadian courts (e.g., see the cases of Crawford v. Kingston, (1952) O.R. 714 (CA), and MacPherson v. G.J. Graphics Holdings Co. (1981) 14 Alta. L.R. (2d) 252 (Alta. Q.B., Master)).
Based upon the above-noted jurisprudence, it is our view that the above-noted oil product swaps give rise to sales for the purposes of subsections 402(3) and (4) of the Regulations and the definition of the expression "gross revenue" under subsection 248(1) of the Act. (By analogy, see the Department's position in respect of loans of gold and other commodities as stated in the 1988 Canadian Tax Foundation Conference (page 53:18).)
If you have any questions or wish to discuss this matter further, please contact the writer.
A/Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
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