Irving Oil Ltd. v. Minister of National Revenue, (1991) 126 N.R. 47 (FCA)

• Judge: Mahoney, Hugessen and MacGuigan, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: February 18, 1991
• Jurisdiction: Canada (Federal)
• Citations: (1991), 126 N.R. 47 (FCA)

Irving Oil Ltd. v. MNR (1991), 126 N.R. 47 (FCA)

MLB headnote and full text

Her Majesty The Queen (appellant) v. Irving Oil Limited (respondent)

(A-592-88)

Indexed As: Irving Oil Ltd. v. Minister of National Revenue

Federal Court of Appeal

Mahoney, Hugessen and MacGuigan, JJ.A.

February 18, 1991.

Summary:

Irving Oil Ltd. was equally owned and controlled by Standard Oil (Socal) and the Irvings. Irving purchased crude oil for its refinery from its wholly owned Bermuda subsidiary (Irvcal). Irvcal purchased the oil from Socal. Socal sold to Irvcal at cost and Irvcal sold to Irving at fair market value. The price differential was shared by Socal and Irving as nontaxable non-Canadian production and transportation profits. For the income tax years 1971-1975 Irving deducted the price paid to Irvcal. The Minister of National Revenue disallowed the full deduc­tion on the ground that the overstated costs to Irving would unduly or artificially reduce Irving's income contrary to s. 245(1) of the Income Tax Act. The disallowed deductions totalled $141,946,190. The Minister con­cluded that Irvcal's inclusion in the supply chain was a "sham", therefore Irving's de­duction was limited to the price paid to Socal by Irvcal. Irving appealed the Minis­ter's assessments.

The Federal Court of Canada, Trial Divi­sion, in a judgment reported 16 F.T.R. 253, allowed the appeal. The court held that the full price paid by Irving was deductible. The full cost was incurred to produce income and, where it represented the fair market value, there was no undue or artificial re­duction of income. The court stated that Irvcal was created for a bona fide business purpose and the supply chain created, although reducing tax, was not a sham or artifice. The Minister appealed.

The Federal Court of Appeal dismissed the appeal. The court stated that the tax avoid­ance scheme was not for a bona fide busi­ness purpose, but was permissible where not an artificial reduction of income under s. 245(1).

Income Tax - Topic 9543

Tax evasion - Artificial transaction - What constitutes - Socal and the Irvings equally controlled Irving Oil - Irving purchased crude oil from Irvcal (fair mar­ket value) - Irvcal purchased from Socal (cost) - The Minister disallowed Irving's full deduction of the amount paid to Irvcal, because the price differential unduly and artificially reduced Irving's income (Income Tax Act, s. 245(1)) and the scheme was a "sham" - The Federal Court of Appeal allowed the full deduction - The intervention of Irvcal was not a "sham" - The tax avoidance scheme was not for a bona fide business purpose, but income was not artificially reduced (s. 245(1)) where market value was paid - Tax avoidance schemes were permitted unless contrary to the Act.

Income Tax - Topic 9545

Tax evasion - Artificial transaction - "Sham" defined - [See Income Tax - Topic 9543 ].

Income Tax - Topic 9546

Tax evasion - Artificial transaction - Bona fide business purpose - [See Income Tax - Topic 9543 ].

Cases Noticed:

Indalex Ltd. v. Minister of National Reve­nue, [1988] 1 C.T.C. 60; 83 N.R. 185; 88 D.T.C. 6053, refd to. [para. 16].

Stein Estate v. Ship "Kathy K", [1976] 2 S.C.R. 802; 6 N.R. 359, refd to. [para. 19].

N.V. Bocimar S.A. v. Century Insurance Co. of Canada, [1987] 1 S.C.R. 1247; 76 N.R. 212, refd to. [para. 19].

Spur Oil Ltd. v. Minister of National Rev­enue, [1982] 2 F.C. 113; 42 N.R. 131 (F.C.A.), reving. [1981] 1 F.C. 461, refd to. [para. 22].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 24].

Snook v. London & West Riding Invest­ments Ltd., [1967] 1 All E.R. 518, refd to. [para. 27].

Inland Revenue Commissioners v. Duke of Westminster, [1936] 1 A.C. 1, refd to. [para. 35].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 18(1)(a), sect. 67 [para. 25]; sect. 113(1) [para. 24]; sect. 245(1) [para. 25].

Counsel:

Eric A. Bowie, Q.C., Deen C. Olsen and Bonnie F. Moon, for the appellant;

J. Edgar Sexton, Q.C., Robert F. Lindsay, Q.C., and Andrew H. Kingissepp, for the respondent.

Solicitors of Record:

John C. Tait, Q.C., Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

Osler, Hoskin & Harcourt, Toronto, Ontario, for the respondent.

This appeal was heard on January 14-17, 1991, before Mahoney, Hugessen and Mac­Guigan, JJ.A., of the Federal Court of Appeal.

On February 18, 1991, Mahoney, J.A., delivered the following judgment for the Court of Appeal.