McLarty v. Minister of National Revenue, (2008) 374 N.R. 311 (SCC)

• Jurisdiction: Federal Jurisdiction (Canada)
• Judge: McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.
• Citation: (2008), 374 N.R. 311 (SCC),2008 SCC 26,[2008] 2 SCR 79,[2008] SCJ No 26 (QL),[2008] 4 CTC 221,46 BLR (4th) 1,374 NR 311,[2008] ACS no 26,293 DLR (4th) 659
• Court: Supreme Court (Canada)
• Date: 22 May 2008

McLarty v. MNR (2008), 374 N.R. 311 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2008] N.R. TBEd. MY.017

Her Majesty The Queen (appellant/respondent on cross-appeal) v. Allan McLarty (respondent/appellant on cross-appeal)

(31516; 2008 SCC 26; 2008 CSC 26)

Indexed As: McLarty v. Minister of National Revenue

Supreme Court of Canada

McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.

May 22, 2008.

Summary:

A taxpayer invested $100,000 in proprietary seismic data as part of a joint venture ($15,000 cash and $85,000 promissory note). The taxpayer added the $100,000 to his Cumulative Canadian Exploration Expense (CCEE) and claimed Canadian Exploration Expenses (CEE) of $81,655 for 1992 and $14,854 for 1994. If the taxpayer's liability was absolute ("incurred expense"), the full amount was deductible. If it was a contingent liability, it was not deductible. If the taxpayer purchased his interest in the data as part of a non-arm's length transaction, only the fair market value of the purchased interest was deductible. The Minister reassessed the taxpayer and disallowed the additions to the taxpayer's CCEE account on the basis that the purchase price of the seismic data exceeded the fair market value. The taxpayer appealed.

The Tax Court of Canada, in a judgment reported 2005 TCC 55, allowed the appeal, permitting the taxpayer to claim the entire $100,000 as CCEE. The Minister appealed, submitting that (1) the seismic data purchased did not meet the statutory definition of a CEE; (2) the Tax Court erred in failing to find that the promissory note was a contingent liability rather than an incurred expense; and (3) the seismic data purchase was not an arm's length transaction.

The Federal Court of Appeal, in a judgment reported (2006), 348 N.R. 90, allowed the appeal. The court affirmed that liability was absolute, not contingent, but held that the data purchase was not an arm's length transaction. Accordingly, the court remitted the matter to determine whether the taxpayer could prove a higher fair market value for the data than that determined by the Minister. The Minister appealed. The taxpayer cross-appealed.

The Supreme Court of Canada, Bastarache and Abella, JJ., dissenting in part (liability contingent), dismissed the Minister's appeal and allowed the taxpayer's cross-appeal. Liability under the limited recourse debt was absolute, not contingent, rendering the incurred expense deductible. The court restored the Tax Court's decision that the purchase was an arm's length transaction, making the full amount of the incurred expense deductible.

Income Tax - Topic 1307

Income from a business or property - Deductions not allowed - Contingent liabilities - The Supreme Court of Canada, in distinguishing contingent liabilities from absolute liabilities (incurred expenses), stated that "by themselves, three uncertainties will not determine whether a liability is contingent. ... (a) Uncertainty as to whether the payment will be made. For example, a liability may be incurred when the taxpayer is in financial difficulty and there is a significant risk of non-payment. That does not mean the obligation was never incurred; (b) Uncertainty as to the amount payable. There is always uncertainty as to the amount that may be payable. There is never certainty that the borrower will be able to pay the amount owing when the note comes due. That type of uncertainty does not make a liability contingent; (c) Uncertainty as to the time by which payment will be made. An obligation is not contingent because payment may be postponed if certain events occur. The test is simply whether a legal obligation comes into existence at a point in time or whether it will not come into existence until the occurrence of an event which may never occur." - See paragraph 18.

Income Tax - Topic 1307

Income from a business or property - Deductions not allowed - Contingent liabilities - A taxpayer invested $100,000 in proprietary seismic data as part of a joint venture ($15,000 cash and $85,000 promissory note) - The taxpayer added the $100,000 to his Cumulative Canadian Exploration Expense (CCEE) and claimed Canadian Exploration Expenses (CEE) of $81,655 for 1992 and $14,854 for 1994 under s. 66.1(6) of the Income Tax Act - Section 66.1(6) defined CEE as an "expense incurred" for the purpose of exploration for petroleum or natural gas - The Minister disallowed the deduction on the ground that it was a contingent liability, not an "incurred expense" - The note, on its face, was for $85,000 at 8% interest payable on December 31, 1999 - The note provided that 60% of the cash proceeds from any future sales or licensing of technical assets and 20% of any production cash flow general from petroleum rights from drilling programs, was assigned to the vendor - The Supreme Court of Canada, in affirming the Tax Court of Canada's finding that liability was absolute (incurred expense), rather than a contingent liability, held that "were these the only conditions upon which the note would be repaid, the liability would be contingent, because repayment was predicated on events which may or may not occur" - However, the note also provided that if any principal or interest remained unpaid upon maturity of the note, the seismic data was to be sold with 60% of the sales proceeds to reduce the amount owing under the note - The court stated that "whether liability under the note is to be satisfied from the generation of revenue or from the sale of the seismic data, when these events are viewed in the sequence they occur, it is clear the liability is to be repaid and thus its existence does not depend upon an event which may or may not happen. ... uncertainty as to the source from which the liability is to be repaid ... does not affect the existence of the liability." - See paragraphs 14 to 42.

Income Tax - Topic 2684

Deductions in computing income - Exploration and development expenses - Canadian exploration expenses - [See second Income Tax - Topic 1307 ].

Income Tax - Topic 3444

Computation of income - Non-arm's length transactions - What constitutes "arm's length" - Section 69(1)(a) of the Income Tax Act provided that where a taxpayer acquired anything in a non-arm's length transaction at an amount in excess of the fair market value, the taxpayer was deemed to have acquired the thing at fair market value - A taxpayer purchased, as part of a joint venture, an interest in proprietary seismic data - The data was part of a larger data bank owned by a corporation (CRC) - The data was purchased from CRC by CRC acting as agent for the joint venture - The Federal Court of Appeal held that the purchase was not an arm's length transaction because the same person (Sapieha) was "a common mind ... dictat[ing] the terms of the bargain on both sides of the transaction" - The taxpayer, and the joint venturers as a whole, had minimal input into setting the terms of the purchase - The court stated that "given that Sapieha was the directing mind of both parties [vendor and agent purchasing] on the critical issue of the Data purchase price, this transaction was not conducted at arm's length" - The Supreme Court of Canada restored the Tax Court of Canada's decision that the Minister failed to prove that the purchase was not an arm's length transaction - The proper question was whether the taxpayer, as an acquirer of an interest in the seismic data, was dealing at arm's length with CRC as the vendor - The Tax Court considered relevant indicia: CRC did not influence the taxpayer's decision to invest; there was no evidence that CRC and the taxpayer acted in concert without separate interests; and no party had the power to impose its will on the other - The Court of Appeal erred in interfering with the Tax Court's factual findings and inferences - The taxpayer did not subordinate his entire decision-making power to CRC as his agent - See paragraphs 43 to 74.

Cases Noticed:

Wawang Forest Products Ltd. v. Minister of National Revenue (2001), 271 N.R. 82; 2001 D.T.C. 5212; 2001 FCA 80, refd to. [para. 14].

Winter v. Inland Revenue Commissioners, [1963] A.C. 235 (H.L.), appld. [para. 17].

Mandel v. Minister of National Revenue, [1979] 1 F.C. 560; 24 N.R. 329 (F.C.A.), affd. [1980] 1 S.C.R. 318; 31 N.R. 97, refd to. [para. 24].

Global Communications Ltd. v. Minister of National Revenue (1993), 243 N.R. 134; 99 D.T.C. 5377 (F.C.A.), dist. [para. 26].

Hill v. Minister of National Revenue, 2002 D.T.C. 1749 (T.C.C.), refd to. [para. 35].

Swiss Bank Corp. v. Minister of National Revenue, [1974] S.C.R. 1144, refd to. [para. 43].

Guay (J.L.) ltée v. Ministre du Revenu national, [1971] C.T.C. 686; 6 N.R. 533 (F.C.T.D.), affd. [1973] C.T.C. 506; 6 N.R. 552 (F.C.A.), affd. [1975] C.T.C. 97; 6 N.R. 550 (S.C.C.), refd to. [para. 80].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 66.1(6) [para. 12]; sect. 69(1)(a) [para. 43]; sect. 251(1) [para. 44].

Income Tax Act, Interpretation Bulletins, Interpretation Bulletin IT-419R2, paras. 22, 23 [para. 62].

Interpretation Bulletins - see Income Tax Act, Interpretation Bulletins.

Authors and Works Noticed:

Hogg, Peter W., Magee, Joanne E., and Li, Jinyan, Principles of Canadian Income Tax Law (6th Ed. 2007), p. 230 [para. 80].

Counsel:

Wendy Burnham and Pierre Cossette, for the appellant/respondent on cross-appeal;

Jehad Haymour, Carman R. McNary and Peter D. Banks, for the respondent/appellant on cross-appeal.

Solicitors of Record:

Attorney General of Canada, Ottawa, Ontario, for the appellant/respondent on cross-appeal;

Fraser Milner Casgrain, Calgary, Alberta, for the respondent/appellant on cross-appeal.

This appeal and cross-appeal were heard on January 28, 2008, before McLachlin, C.J.C., Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ., of the Supreme Court of Canada.

On May 22, 2008, the judgment of the Court was delivered in both official languages and the following opinions were filed:

Rothstein, J. (McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish and Charron, JJ., concurring) - see paragraphs 1 to 76;

Bastarache and Abella, JJ., dissenting in part - see paragraphs 77 to 92.