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.
May 26, 1982
Mr. R.M. Beith Director General Corporate Rulings Directorate Revenue Canada, Taxation Ottawa, Ontario K1A OL8
Attention: Mr. M.A. Hiltz
Dear Mr. Beith:
XXXX
It is my understanding that the Department's decision to alter its position, as concluded from ruling (b) therein, is based on the finding in the Dome v. Hunt case (copy attached) which concluded that the semi - submersible rig in that case was not a ship or vessel but a "drilling system".
The attached article from the Alberta Law Review presents an exhaustive study of the status of oil rigs. The review of admiralty jurisprudence includes the Dome - Hunt case and concludes that it was a poor decision. The study is so comprehensive that I will not attempt to add to the arguments with the exception of saying that I do not believe that the author put sufficient emphasis on the fact that a drill ship or a drilling rig constantly uses a navigational system to dynamically position the vessel while drilling. Thus, Mr. Justice Dube's concluding remark:
"By no stretch of the imagination can it be conceived that a "drilling system" is navigating as it carries out its main function, drilling through land. Whatever be its configuration or position, above water or down below, it must be stationary."
represents a lack of knowledge of the operating attitude of a drilling system in an offshore environment.
The consequence of the subject ruling and others like it is that non-resident owners are insisting on a gross up of day rates to accommodate the potential tax liability occasioned by the ruling. Considering that day rates for semi - submersibles are in the $100,000 per day range and that contract periods are often for three years, the added cost to the Canadian contracting companies is tremendous.
When a bilateral tax treaty contains a shipping clause (such as Article VI of the Canada - Netherlands Convention) which so obviously exempts profits derived from the operation of ships from taxation in Canada, I urge you to reconsider your position.
As a practical matter, I do not believe that Revenue Canada could successfully defend, on the basis of the finding in the Dome - Hunt case, against an appeal should an assessment be raised against a company resident in a country which has a favourable shipping clause in its treaty with Canada. The subsequent refund of amounts withheld pursuant to Regulation 105 to the non - resident (not the contractor) represents a needless cash outflow to the contractor resulting in an erosion of his Canadian tax base and an unnecessary cost to the Petroleum Incentive Program.
Yours truly,
XXXX
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© Her Majesty the Queen in Right of Canada, 1982
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© Sa Majesté la Reine du Chef du Canada, 1982
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