Gulf Canada Resources Ltd. v. Canada
A-195-95
Pratte J.A. and Linden J.A. (dissenting)
26/1/96
26 pp.
Appeal from Trial Division judgment allowing in part respondent Gulf's appeal from reassessment of income tax for 1978 taxation year-Gulf petroleum producer-Deductions depending on amount of resource profits-Computation of resource profits within meaning of Income Tax Regulations, s. 1204-Held (Linden J.A. dissenting), appeal allowed in part-Per Pratte J.A.: Whether Trial Judge right in deciding Minister could not reduce amount of respondent's resource profits (and therefore, amount of special deductions) by taking into account in calculation of those profits deduction of $45,656,563 claimed by respondent as capital cost allowance with respect to assets acquired for purpose of "Syncrude project" and another deduction of $9,504,818 representing interest paid by respondent on money borrowed to finance same project-In 1978, Syncrude had not only commenced its mining operations but also produced and sold substantial quantity of synthetic crude-Trial Judge disallowed deductions on basis as Syncrude not capable of being operated on scale which could be expected to be profitable in 1978 or near future, no oil producing business existed at Syncrude in 1978- Essential issue whether deductions applicable to production of petroleum from mineral resources and therefore authorized by Regulations, s. 1204(1)(b)(ii)(A)-Trial Judge erred in interpreting s. 1204 and previous decision herein (Gulf Canada Ltd. et al. v. The Queen (1990), 90 DTC 6622 (F.C.T.D.); conf. by (1992), 92 DTC 6123 (F.C.A.)) as imposing requirement incomes and deductions referred to in Regulations, s. 1204(1) be income from and deductions relating to business of viable oil producing undertaking sufficiently well established to be capable of generating profit in near future-During whole of 1978, Syncrude actually produced $50,000,000 worth of petroleum-Sum clearly revenue derived from production of petroleum within meaning of s. 1204-No reason to prorate deductions in 1978 on basis first barrel of synthetic crude produced end of July 1978 as oil producing activities commenced before 1978-However, deductions relating to extraction and upgrading operations specifically prohibited by Regulations, s. 1204(3) prescribing that, in calculating resource profits from source described in Regulations, s. 1204(1)(b), income or loss derived from processing petroleum, natural gas or related hydrocarbons must not be taken into account-Extraction and upgrading of bitumen two operations involving processing of petroleum or related hydrocarbons-Therefore, in computing respondent's resource profits, Minister could not deduct part of two deductions reasonably regarded as applicable to extraction and upgrading operations-Per Linden J.A. (dissenting): appeal should be allowed-Issue proper income source from which two deductions should be taken-Crown arguing source one of "resource" income sources described in Regulations, s. 1204-Gulf arguing proper source its world-wide income, source described in Income Tax Act, s. 3-Broader tax scheme considered-Syncrude covered by language in both Regulations, s. 1204(1)(b)(ii)(A) and (B)-As to (A), Syncrude producing "petroleum" from mineral resource, and petroleum, in context, meaning crude oil-As to (B), bituminous sands deposit "mineral resource" as defined in Act, s. 248(1)-Regulations, s. 1204(1)(b)(ii) applying to Syncrude as applying to activities comprising "production . . . from mineral resource"-Also, s. 1204(1)(b)(ii)(B) applying to Syncrude as bituminous sands "mineral" within Act, s. 248(1)-As minerals not including petroleum, and bituminous sands minerals, bituminous sands therefore not petroleum for purposes of Act-Every aspect of Syncrude operation contemplated by Regulations, s. 1204(1)(b)(ii)(B) as speaking of "production . . . of . . . minerals to any stage beyond prime metal stage . . . equivalent"-Applying Canadian National Railway Co. and Canadian Pacific Limited v. Canada (1994), 171 N.R. 64 (F.C.A.), equivalent of prime metal stage for mineral production that point where production processes have produced marketable, saleable commodity meeting specification of consumers-For bituminous sand, equivalent of prime metal stage crude oil-As only marketable product created by Syncrude mine crude oil, complete operation geared toward production of marketable crude oil and two deductions at issue herein therefore properly related to resource profit computation- Above interpretation reconciling, with no inconsistency, income and capital sides of resource tax scheme-Conclusion all of Syncrude's operation resource activities supported by need to view Income Tax Act as specifically designed for commercial realities-Resource scheme also written with eye to commercial realities-In Regulations, s. 1204(3), "petroleum" meaning crude oil-Bitumen and bituminous sands not "petroleum or . . . related hydrocarbons" within meaning of Regulations, s. 1204(3)-Such treatment forclosed by definition of "minerals" in Act, s. 248(1) which specifically excludes "petroleum . . . or related hydrocarbons", but expressly includes bituminous sands in definition of mineral-Consequently, "mineral" including bituminous sands but not encompassing petroleum or related hydrocarbons and, therefore, processing of bituminous sands not caught by Regulations, s. 1204(3)-Income Tax Act, S.C. 1970-7172, c. 63, ss. 3 (as am. by S.C. 1977-78, c. 42, s. 1), 248(1) "mineral resource" (as am. by S.C. 1973-74, c. 14, s. 69(5)), "minerals" (as am. idem, s. 69(4))-Income Tax Regulations, s. 1204(1) (as am. by SOR/78-502; 79-245), (3).