Digests

Petro-Canada v. Canada

A-2-03

2004 FCA 158, Sharlow J.A.

23/4/04

31 pp.

Appeal from Tax Court's dismissal of appeal from reassessment--In 1992, Petro-Canada claimed deduction of $46,751,752, amount paid by two joint exploration corporations for certain seismic date and "renounced" to Petro-Canada pursuant to Income Tax Act (Act), s. 66(10.1)--M.N.R. reduced deduction to $8,884,497, fair market value, according to M.N.R., of seismic data at time of purchase--Petro-Canada arguing Tax Court erred in interpretation of definition of "Canadian exploration expense", in determining joint exploration corporations not dealing at arm's length with vendors of seismic data, in determining fair market value of seismic data, and in failing to give effect to consent judgment--(1) As to definition of "Canadian exploration expense", statutory purpose test in definition may be met by expenditure made for more than one purpose --However, one purpose of expenditure must be determination of existence, location, extent or quality of accumulation of petroleum or natural gas--Purpose test in definition requires at least some connection between purchased seismic data and actual exploration work--In absence of evidence of actual use of seismic data for exploration, must be credible plan for use of seismic data in exploration program within reasonable time after acquisition --Here, evidence of actual use of small portion of seismic data for exploration, but no evidence of any use of remainder of seismic data, or plan to use it--Purchase of seismic data merely to create seismic reference library cannot meet statutory purpose test--Petro-Canada's tax motive not relevant in determining whether there was exploration purpose for acquisition of seismic data by joint exploration corporations--However, consideration of Petro-Canada's tax motive not leading to incorrect conclusion on question of whether statutory purpose test met--Tax Court determined purpose of acquisition of seismic data by looking at all evidence offered relating to nature of business and joint exploration corporations, manner in which exploration business conducted, circumstances in which seismic data purchased, and its actual use--No error in treatment of evidence of use of seismic data to shed light on purpose of acquisition--Tax Court relied on Global Communications Ltd. v. Canada, [1999] 3 C.T.C. 537 (F.C.A.) and Gulf Canada Ltd. v. Canada, [1992] 1 C.T.C. 183 (F.C.A.)-- Although facts differed, Tax Court correctly found these cases established principles guiding any interpretation of purpose test in definition of "Canadian exploration expense"--Judge made no error in interpretation or application of purpose test or in finding only acquisition of small part of seismic data met statutory purpose test--Crown's alternative argument Petro-Canada's deduction should be no greater than fair market value of seismic data at time of acquisition, which Judge determined to be $4,759,464, requiring consideration of what fair market value of seismic data was at time of acquisition, and then Act limiting Petro-Canada's deduction to fair market value--Fair market value question of fact--As no palpable, overriding error in Tax Court's conclusion as to value, remainder of these reasons based on conclusion fair market value of seismic data at time of acquisition $4,759,464--(2) S. 69(1)(a) applies if joint corporations not dealing at arm's length--Necessary to look to s. 251(1)--Common ground joint exploration corporations not "related"--Case law identifying three questions for framework for analysis of whether parties dealing at arm's length--Tax Court addressed questions implicitly--Evidence justifying conclusion joint exploration corporations not dealing at arm's length with vendors of seismic data--(3) Act, s. 67 basis for argument fact purchase price of seismic data exceeded fair market value sufficient to limit deduction to fair market value--Gabco Ltd. v. Minister of National Revenue, [1968] 2 Ex. C.R. 511 stating test for application of provision--Not appropriate case for application of s. 67--(4) Consent judgment in respect of issue in income tax appeal not binding, but should be given effect unless reason to conclude it is contrary to Act--No evidence consent judgment would have contravened Act in any way--By refusing to require M.N.R. to give effect to consent judgment, Tax Court Judge did indirectly what could not be done directly--Erred in failing to give effect to consent judgment--Appeal allowed in part--Reassessment referred back to M.N.R. for reassessment on basis deduction for cost of seismic data $8,884,497, and on basis effect must be given to consent judgment--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 66(10.1) (as am. by S.C. 1994, c. 7, Sch. II, s. 38; c. 8, s. 5), 66.1(6) "Canadian exploration expense", 67, 251(1).