Subsection 66.7(2) - Successor of foreign exploration and development expenses
Administrative Policy
13 November 1991 T.I. (Tax Window, No. 13, p. 5, ¶1593)
A Canadian resource property is acquired with a foreign resource property only if they are acquired at the same time.
Subsection 66.7(3) - Successor of Canadian exploration expense
Administrative Policy
94 C.P.T.J. - Q. 11
Where there is an acquisition of control of Company A thereby causing Company A's resource pools to be successored, and Company A subsequently transfers its resource properties to a partnership electing a nominal amount under s. 97(2), Company A's proportionate share of production revenue allocated to it by the partnership will be considered to be income under, for example, s. 66.7(3)(b)(i)(C) which is eligible for successor pool deductions.
31 August 1992 Memorandum (Tax Window, No. 23, p. 16, ¶2165)
There is no requirement in s. 66.7 for the successor to have an interest in the Canadian resource property by reference to which it is taking the deduction, or to have a "right to take". The successor need only have acquired the Canadian resource property under circumstances such that the provision is applicable. For these purposes, a successor corporation does not have an interest in the property of a partnership of which it is a partner.
Articles
Carr, "The Successor Corporation Rules after Bill C-18", 1992 Canadian Tax Journal, No. 6, p. 1261.
Subsection 66.7(5) - Successor of Canadian oil and gas property expense
Administrative Policy
10 October 2006 Internal T.I. 2006-0169051I7 - Successor Pool Issues
Given that the successor provisions concern income attributable to "production from the particular property", rather than income attributable to the "particular property", a taxpayer may deduct its successored resource pools against income from a particular successor property (e.g., a lease) that has only arisen as a result of development of the property after the successoring of the resource pools, even though the further development could itself be regarded as giving rise to a new form of Canadian resource property (the oil or gas well).
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| Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1) | 43 |
Subsection 66.7(7) - Application of s. 29(25) of ITAR and ss. (1), (3), (4) and (5)
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.56 In the case of an amalgamation to which subsection 87(1.2) does not apply, any undeducted balance in a predecessor corporation's resource expense pools (successored resource expenses) will only be deductible where the amalgamated corporation has filed the election (Form T2010) described in paragraph 66.7(7)(c). The amount of any successored resource expenses that the amalgamated corporation may deduct will be determined under the successor rules in subsections 66.7(1) to (5) and will generally be limited to specified resource income from the resource property acquired from the particular predecessor corporation.
12 June 1992 Memorandum (Tax Window, No. 21, p. 9, ¶2019)
Discussion whether the limitations in s. 66.7 apply where a corporation ("A") carrying on both a mining business and an oil and gas business and having substantial earned depletion, transfers its mining assets to a newly incorporated subsidiary ("Newsub"), transfers its oil and gas assets to a sister corporation ("B") in a butterfly transaction and elects to have the successor rules apply to that transaction, and then arranges to have the shares of A sold to a purchaser.
90 C.P.T.J. - Q.35
Since resource pools are neither Canadian resource properties nor foreign resource properties, no value need be assigned to them for the purposes of applying the "all or substantially all" test in ss.66.7(7)(b) and 66.7(8)(b).
Subsection 66.7(10) - Change of control
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
Successoring rules not an issue for flow-through shares (p. 12:18)
...[S]ubsection 66.7(10) stipulates that it does not apply for the operative FTS provisions, and therefore the successor rules should not be an issue for the PBC.
Paragraph 66.7(10)(j)
Cases
Devon Canada Corporation v. The Queen, 2013 TCC 415
Following an acquisition of control of a predecessor of the taxpayer (Home Oil), a partnership of which Home Oil was a direct member (the Anderson Partnership) transferred resource properties (the Anderson Properties) to a subsidiary partnershp of it (the Devon Partnership). The question posed (under s. 58(1)(a) of the Tax Court of Canada Rules (General Procedure)) was whether Home Oil could continue to deduct successored resource expenses from income allocated to it by the Anderson Partnership (which, in turn, had been allocated to it by the Devon Partnership as income from the Anderson Properties) notwithstanding that the Anderson Properties were no longer held by the Anderson Partnership.
Before turning to this question, Hogan J noted (at para. 35) that there was no requirement that the directly held partnership referred to in s. 66.7(10)(j) (i.e., the Anderson Partnership) continue to own the resource properties (i.e., the Anderson Properties) in respect of which the successored resource expenses are deducted.
Respecting the main question, Hogan J stated (at para. 45):
In a tiered partnership, the source and location of income is preserved through each level of partnership until the income is ultimately recognized by, and taxed in the hands of, the corporate or individual partners.
Since the income allocated to Home Oil through the tiered partnerships thus continued to be attributable to the Anderson Properties, he was able to conclude (at para. 36) that Home Oil was entitled (based on its partnership interest percentage) to successor deductions in respect of the Anderson Properties:
[I]ncome attributable to property transferred by a corporate partner from a partnership of which it was a direct member to a subsidiary partnership following an acquisition of control remains income that "may reasonably be regarded as being attributable to the production from" the resource property for the purposes of subparagraph 66.7(10)(j)(ii).
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|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 102 - Subsection 102(2) | source preservation in 2-tier partnership | 78 |
Administrative Policy
15 March 2012 External T.I. 2012-0432931E5 - Partnership property of successor corporation
Where the corporation is a member of a partnership which, in turn, is a member of a lower-tier partnership, s. 66.7(1)((j) applies on the basis that the corporation is a member only of the upper-tier partnership, so that it does not apply to deem the corporation to own a specified percentage of resource properties of the lower-tier partnership.
Articles
Marshall Haughey, "Tiered Partnerships: Successor Rules", Canadian Tax Highlights, Vol. 22, No. 2, February 2014, p. 13.
Creation of 2-tier partnership structure before v. after acquisition of control (p. 14)
Interestingly, if the tiered partnership structure in Devon Canada [2013 TCC 415] had been in place at the time of the acquisition of control, the lookthrough rules would not have applied and Home Oil would have been unable to deduct its successored pools. This result follows because paragraph 66.7(10)(j) applies only if at the time of the acquisition of control "the corporation was a member of a partnership that owned [resource property]." That condition is apparently satisfied only if the corporation was a direct member of the partnership that held the resource property when control was acquired.
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| Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(16) | 227 |
Subsection 66.7(16) - Non-successor acquisitions
Articles
Brian R. Carr, "Devon Canada Corporation v. The Queen", Resource Sector Taxation (Federated Press), Vol. IX, No. 4, 2014, p. 677.
Background to introduction of s. 66.7(1)(j) (p.678)
It has long been the position of the Canada Revenue Agency ("CRA") that a taxpayer does not have an interest in the properties owned by a partnership of which the taxpayer is a member. It follows that where a corporation is a partner of a partnership at the time of acquisition of control of the corporation and the corporation holds its resource properties in one or more partnerships, the corporation does not hold any resource properties from which to derive income from or proceeds of disposition against which to apply its successored expenses.
Paragraph 66.7(10)(j) provides relief to a corporation in those circumstances….
Purpose o
f s. 66.7(1)(j) (p.678)
Clause 66.7(10)(/')(ii)(B) prevents a corporation from negotiating an allocation of income that is disproportionate to its ownership of the properties and deducting that income against its successored expenses.
Transfer of resource properties to a partnership is not a transfer for successor corporation rules (p. 682)
The position that the Crown took at trial was that the successor rules are not triggered by a transfer of properties from one partnership to another. That statement is quite accurate but also quite irrelevant. This position mixes up two concepts in the successor corporation rules. This argument of the Crown assumes that the transferee partnership is a separate taxpayer and needs a specific rule to be able to claim the successored deductions. At the same time, it assumes that it is not able to claim the deductions because the transferor partnership is not a person and could not be either an original owner or a predecessor owner. This position of the Crown does complete violence to the scheme of the Act, which holds that resource expenses incurred by a partnership are the expenses of the partners, [fn 21: Paragraph 96(1)(d) and the definitions of CCEE, CCDE and CCPGPE in subsection 66.1(6), 66.2(5) and 66.4(4) respectively] it is the partners that claim resource deductions and that the transfer of properties from a person to a partnership is not a transfer of property for purposes of the successor corporation rules.
Wind-up post-AOC of resource partnership/two-tier resource partnership when AOC (pp. 682-3)
Two situations that have presented concerns in the past as to what happens to resource expenses are the following:
(i) a partnership in existence at the time of acquisition of control is wound up and the properties distributed to its partners; and
(ii) a two-tier partnership structure exists at the time of acquisition of control with the bottom partnership owning all the resource properties.
It was understood that in the first situation, the CRA was also taking the position that the partnership was not a person and therefore, the transfer of the property did not satisfy the successor corporation rules and the partner could not deduct the expenses.
In our view, the holding of Mr. Justice Hogan makes it clear that each partner has always held its property from the time of acquisition of control and can claim the deductions that were successored on the acquisition of control.
In the second scenario, we think that Mr. Justice Hogan's interpretation of the Act is broad enough to conclude that any income of the properties of the lower tier subsidiary is income from the properties so that the partner can claim successored expenses.
Marshall Haughey, "Tiered Partnerships: Successor Rules", Canadian Tax Highlights, Vol. 22, No. 2, February 2014, p. 13.
Transfer of successored property to a partnership (pp. 14-5)
It is also interesting that the Crown did not argue subsection 66.7(16) [in Devon, 2013 TCC 415]… .
In the past, the CRA has not denied the ability of a successor corporation to deduct successored pools if it transferred successored property to a partnership of which it was a member (a transfer to which the successor rules do not apply). The CRA has said that this situation is unique: "[I]n most cases, subsection 66.7(16) will operate to deny a successor corporation the use of its successor pools following a disposition of the particular property that gave rise to those pools" (2006-0169051I7, October 10, 2006). But the CRA's comments on subsection 66.7(16) do not accurately describe its operation, and the Crown would not have prevailed if it had argued that provision in Devon Canada. Subsection 66.7(16) could have applied only if the Devon partnership was a person for the purposes of the provision, and that does not appear to be the case. Even if the Devon partnership was a person (perhaps because of subsection 66(16)), Home Oil's deduction from its successored pools would not be denied: subsection 66.7(16) is relevant only to the acquiror (the Devon partnership), not to the successor corporation (Home Oil). Thus, even if the Crown in Devon Canada had argued subsection 66.7(16), that provision should not have operated to deny Home Oil's successor pool deductions.
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(10) - Paragraph 66.7(10)(j) | 107 |