https://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/366037/index.do
Plains Midstream Canada ULC v. Canada (March 27, 2019 – 2019 FCA 57, Nadon (author), Stratas, Boivin JJ.A.).
Précis: This is an appeal from a decision of the Tax Court blogged earlier on this site.
As part of a complex restructuring of Dome Petroleum Limited (Dome Petroleum) and Dome Canada Limited (Dome Canada) in the late 1980’s and early 1990’s, Amoco Canada Petroleum Company Ltd. (the predecessor of the appellant corporation) assumed liability for a $225 million loan payable by Dome Canada to Arctic Petroleum Corporation of Japan in 2030. As consideration for the assumption of such liability Amoco received $17.5 million and additional consideration. In this appeal the taxpayer argued that it was entitled to deduct the difference between $225 million and $17.5 million as a form of interest. Although the original claim was based on a straight-line deduction at trial the appellant reduced its interest deduction claim to $1,043,700 per year. This amount was determined by applying a simple interest rate of 5.964% to the $17.5 million. The original expense claimed had been roughly $4.8 million per year. In characterizing the deduction claimed as simple interest the taxpayer relied upon subsection 16(1) and paragraph 20(1)(c) of the Income Tax Act.
The Court rejected the taxpayer’s “economic substance” argument holding that subsection 16(1) did not operate to convert the difference between $225 million and $17.5 million into an interest expense. In obiter the Court observed that the payment might be an additional element of the cost of the shares of Dome Petroleum acquired by the taxpayer. As a result the appeal was dismissed by the Tax Court.
Plains Midstream appealed to the Federal Court of Appeal. The Court of Appeal dismissed the appeal with costs. The panel accepted the analysis of the Tax Court.
Decision: The Court of Appeal essentially eviscerated the arguments of the taxpayer’s counsel:
[91] I therefore conclude that it cannot be seriously argued on a textual interpretation that the Judge erred in interpreting subsection 16(1). Both in writing and orally, the appellant suggested that for the purpose of subsection 16(1), interest was not to be understood as interest in the usual sense. I cannot accept this submission as I see no basis for that proposition in the wording of subsection 16(1). To the contrary, the words of the provision lead me to conclude, as the Judge did, that interest is to be understood in its usual sense, as defined in the Concise Oxford Dictionary and as explained by the Supreme Court in Saskatchewan and Shell.
[92] Notwithstanding the fact that a textual interpretation leads to only one possible conclusion, Canada Trustco suggests that we should nonetheless consider both the context and the purpose of the provision. This exercise is necessary because of what my colleague Stratas JA says at paragraph 24 of his reasons in Hillier v. Canada (Attorney General), 2019 FCA 44:
[24] Even where, as here, the words of the legislative provision seem to be precise and unequivocal, we still must examine legislative purpose and context: ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), 2006 SCC 4 (CanLII), [2006] 1 S.C.R. 140 at para. 48. This is to ensure that we are not mistaken in our understanding of the meaning of the legislative text. On occasion, words that, at first glance, seem clear, can admit of ambiguity after broader examination: Montréal (City) v. 2952-1366 Québec Inc., 2005 SCC 62 (CanLII), [2005] 3 S.C.R. 141 at para. 10; Canada Trustco, above at para. 47.
[93] In the present matter, as I have already indicated, the judge closely examined the purpose and context of subsection 16(1) (see paragraphs 61 – 84 of the Judge’s reasons), and concluded that both the context and the purpose supported the view that symmetry was a necessary requirement of the provision. I agree entirely with that part of the Judge’s analysis, and adopt it for the purpose of these reasons.
[94] In criticizing the Judge’s interpretation of subsection 16(1), the appellant argues that the Judge erred because he found, by reason of his application of the notion of symmetry to the provision, that a taxpayer was entitled to a deduction under the provision only if another taxpayer was entitled to an income inclusion. In my view, the Judge made no such finding. Rather, his determination is that there can be no interest if the amount at issue is not interest to both parties to a contract or other arrangement. What the tax consequences of such a finding will be, in any given case, is beside the point. Whether a tax deduction to a taxpayer will lead to a tax inclusion for another taxpayer is not what the Judge had in mind when he found that symmetry was a requirement for the application of subsection 16(1).
[95] I therefore conclude that the Judge did not err in his interpretation of subsection 16(1). The question then is whether he made a palpable and overriding error in applying the provision to the relevant circumstances so as to determine whether the $207.5 million could, in whole or in part, be reasonably regarded as interest. In my view, the Judge made no such error.
[96] First, on the basis of his understanding of subsection 16(1) and of the meaning of interest, the Judge had no difficulty finding that the $207.5 million was an amount that could not reasonably be regarded as interest for the purpose of the provision. In other words, because the $207.5 million was not, in his view, interest from the perspective of both Amoco and APCJ and/or Encor, it was not interest under subsection 16(1). That determination on my understanding of subsection 16(1) is unassailable.
[97] Second, notwithstanding his understanding of subsection 16(1), the Judge closely examined the Key Transactions in order to determine whether or not the $207.5 million differential was interest by reason of its economic character or effect, i.e. that the amount reflected compensation for the use of the $17.5 million over 43 years. The Judge found that it did not constitute interest. More particularly, he found that on the evidence before him, the economic impact, consequences and substance of the Key Transactions did not have the characteristics or consequences of a defeasance transaction. He further found that Amoco had received from Encor greater compensation than the payment of $17.5 million (Reasons, paragraphs 36-43).
[98] The Judge also found that the evidence adduced by the appellant in support of its theory of the case was not satisfactory. In making that finding, the Judge criticized the appellant’s evidence concerning its accounting treatment of the $17.5 million, pointing to the appellant’s failure to produce any witness, and in particular, its failure to produce experts’ testimony, to explain the manner in which the Key Transactions had been treated in its financial statements.
[99] The respondent says that the appellant has not challenged these findings. I need not decide this contention as I am entirely satisfied that the appellant has not shown that, in making these findings, the Judge made any palpable and overriding error.
[100] Before concluding, I should say that like the Judge, I have found none of the cases on which the appellant relies in support of its theory of the case to be relevant. They are all distinguishable on their facts. Also, because of the conclusion I arrive at in respect of subsection 16(1), I need not address the arguments raised by the parties concerning paragraph 20(1)(c) of the Act. Finally, I wish to add that I am in total agreement with the Judge that the evidence led by the Appellant in support of its theory of the case is clearly insufficient to meet the objective sought.
Thus the appeal was dismissed with costs.