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 theIncome 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.
Plains Midstream Canada ULC v. R. – FCA: Tax Court did not err in denying taxpayer interest deduction claimedPlus >