Minister of National Revenue v. Fording Coal Ltd., (1995) 190 N.R. 186 (FCA)

• Judge: Strayer, Décary and McDonald, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: September 26, 1995
• Jurisdiction: Canada (Federal)
• Citations: (1995), 190 N.R. 186 (FCA)

MNR v. Fording Coal Ltd. (1995), 190 N.R. 186 (FCA)

MLB headnote and full text

Her Majesty The Queen (appellant) v. Fording Coal Limited (respondent)

(A-656-94)

Indexed As: Minister of National Revenue v. Fording Coal Ltd.

Federal Court of Appeal

Strayer, Décary and McDonald, JJ.A.

November 15, 1995.

Summary:

On December 2, 1985, Elco Mining pur­chased a .001% interest in the Fording River Coal Mine from Fording. On December 30, 1985, Fording purchased all or substantially all of Elco's "Canadian resource properties" which included the .001% interest in the Coal Mine and a 50% interest in a joint venture known as the Elk River Coal Joint Venture. Fording and Elco then "elected" under the Income Tax Act, ss. 66.1 and 66.2(3), to make Fording a successor cor­poration of Elco. As a successor corporation, Fording deducted expenses that were ac­cumulated by Elco, including a cumulative Canadian exploration expense (CCEE) of $7,277,134 and a cumulative Canadian development expense (CCDE) of $6,642,581 from the Coal Mine. On reassessment, Rev­enue Canada disallowed the use of these deductions by Fording from the years 1985 through 1990. Fording appealed.

The Tax Court of Canada allowed the appeal. The Minister of National Revenue appealed.

The Federal Court of Appeal, McDonald, J.A., dissenting in part, allowed the appeal.

Income Tax - Topic 2696

Deductions in computing income - Ex­plor­ation and development expenses - Suc­cessor rules - Prior to 1955, if a com­pany accumulated undeducted drilling and oil expenses, when it sold its property, the purchaser could not deduct those expenses as it had not personally incurred them - Then the successor rules were enacted - The successor rules allowed a successor corporation to access the predecessor's unused resource pool deductions and deduct them against future income from the acquired property - The Federal Court of Appeal reviewed the history of the successor rules, and how they have changed and developed since their incep­tion - See paragraphs 17 to 21.

Income Tax - Topic 2696

Deductions in computing income - Ex­plor­ation and development expenses - Suc­cessor rules - On December 2, 1985, Elco Mining purchased a .001% interest in the Fording River Coal Mine from Fording - On December 30, 1985, Fording pur­chased all or substantially all of Elco's "Canadian resource properties" which included, inter alia, the .001% interest in the Coal Mine - Fording and Elco then "elected" under the Income Tax Act, ss. 66.1 and 66.2(3), to make Fording a suc­cessor corporation of Elco - As a suc­cessor corporation, Fording deducted expenses that were accumulated by Elco, including a cumulative Canadian explora­tion expense (CCEE) of $7,277,134 and a cumulative Canadian development expense (CCDE) of $6,642,581 from the income on the Coal Mine - On reassessment, Reve­nue Canada disallowed the use of these deductions by Fording from the years 1985 through 1990 - After reviewing the scope of ss. 66.1(4) and 66.2(3), the Federal Court of Appeal affirmed Revenue Can­ada's decision.

Income Tax - Topic 2696

Deductions in computing income - Ex­ploration and development expenses - Suc­cessor rules - [See Income Tax - Topic 9541 and Income Tax - Topic 9543 ].

Income Tax - Topic 9541

Tax evasion and tax avoidance - Artificial transactions - General - The Federal Court of Appeal discussed the scope of s. 245(1) of the Income Tax Act, which stipulated that "[i]n computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income" - Particularly, the court addressed whether deductions made under ss. 66.1(4) and 66.2(3) of the Act (the "successor" rules) could be disallowed because they contravened s. 245(1) - See paragraphs 3 to 14 and 39 to 50.

Income Tax - Topic 9543

Tax evasion and tax avoidance - Artificial transactions - What constitutes an artificial transaction - On December 2, 1985, Elco Mining purchased a .001% interest in the Fording River Coal Mine from Fording - On December 30, 1985, Fording purchased all or substantially all of Elco's "Canadian resource properties" which included, inter alia, the .001% interest in the Coal Mine - Fording and Elco then "elected" under the Income Tax Act, ss. 66.1 and 66.2(3), to make Fording a successor corporation of Elco - As a successor corporation, Fording deducted expenses that were accumulated by Elco, including a cumulative Canadian exploration expense (CCEE) of $7,277,134 and a cumulative Canadian development expense (CCDE) of $6,642,581 from the income on the Coal Mine - On reassessment, Revenue Canada disallowed the use of these deductions by Fording from the years 1985 through 1990 - The Federal Court of Appeal affirmed Revenue Canada's decision, stating that the deduc­tions were disbursements or expenses which "artificially" reduced Fording Coal Mine's income (Income Tax Act, s. 245(1)) - See paragraphs 9 to 14 and 39 to 50.

Words and Phrases

Artificially - The Federal Court of Appeal discussed the meaning of this word as used in s. 245(1) of the Income Tax Act, S.C. 1970-71-72, c. 63 - See paragraphs 9 to 14.

Words and Phrases

In respect of - The Federal Court of Appeal discussed the meaning of this phrase as used in s. 245(1) of the Income Tax Act, S.C. 1970-71-72, c. 63 - See paragraphs 7 and 8.

Cases Noticed:

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241; 84 D.T.C. 6305, refd to. [paras. 3, 25].

Québec (Communauté Urbaine) et autres v. Corporation Notre-Dame de Bon-Secours (1994), 171 N.R. 161; 63 Q.A.C. 161; 95 D.T.C. 5017 (S.C.C.), refd to. [para. 3].

Antasko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16; [1994] 2 C.T.C. 25, refd to. [para. 3, footnote 1].

Friesen v. Minister of National Revenue (1995), 186 N.R. 243; 95 D.T.C. 5551 (S.C.C.), refd to. [para. 3, footnote 1].

Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175; 87 N.R. 300; 29 O.A.C. 268; [1988] 2 C.T.C. 294, refd to. [para. 5].

R. v. Esskay Farms Ltd., [1976] C.T.C. 24 (F.C.T.D.), refd to. [para. 6, footnote 2].

McKee v. Canada, [1977] C.T.C. 491 (F.C.T.D.), refd to. [paras. 6, 39, foot­note 2].

Nowegijick v. Minister of National Rev­enue, [1983] 1 S.C.R. 29; 46 N.R. 41; 83 D.T.C. 5041, refd to. [paras. 6, 41, foot­note 12].

Irving Oil Ltd. v. Minster of National Revenue (1991), 126 N.R. 47; 91 D.T.C. 5106 (F.C.A.), refd to. [paras. 9, 38, footnotes 3, 11].

Shulman v. Minister of National Revenue (1961), 61 D.T.C. 1213 (Ex. Ct.), refd to. [para. 10, footnote 4].

Don Fell Ltd. v. Canada (1981), 81 D.T.C. 5282 (F.C.T.D.), refd to. [para. 10, foot­note 4].

Consolidated-Bathurst Ltd. v. Minister of National Revenue (1986), 72 N.R. 147; 87 D.T.C. 5001 (F.C.A.), refd to. [para. 10, footnote 4].

Harris v. Minister of National Revenue, [1966] S.C.R. 489; 66 D.T.C. 5189, refd to. [paras. 13, 39, footnote 6].

Alberta and Southern Gas Co. v. Minister of National Revenue, [1978] 1 F.C. 454; 16 N.R. 220; 77 D.T.C. 5244 (F.C.A.), refd to. [paras. 13, 49, footnotes 7, 15].

Minister of National Revenue v. Mara Properties Ltd., [1995] 2 F.C. 433; 179 N.R. 363; 95 D.T.C. 5168 (F.C.A.), refd to. [paras. 14, 35, footnotes 9, 10].

Mark Resources Inc. v. Canada (1993), 93 D.T.C. 1004 (T.C.C.), refd to. [para. 27].

Inland Revenue Commissioners v. West­minster (Duke), [1936] A.C. 1, refd to. [para. 33].

Canterra Energy Ltd. v. Minister of Na­tional Revenue (1986), 71 N.R. 394 (F.C.A.), refd to. [para. 37].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 66.1(4), sect. 66.2(3), sect. 66.7(3), sect. 66.7(4) [para. 18]; sect. 245(1) [para. 6].

Counsel:

Roger Taylor and Kathleen T. Lyons, for the appellant;

Warren J.A. Mitchell, Q.C., Karen Sharlow and James Roche, for the respondent.

Solicitors of Record:

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

Thorsteinssons, Vancouver, British Col­umbia, for the respondent.

This appeal was heard on September 26, 1995, at Ottawa, Ontario, before Strayer, Décary and McDonald, JJ.A., of the Federal Court of Appeal. On November 15, 1995, the following opinions were filed by the Court:

Strayer, J.A. (Décary, J.A., concurring) - see paragraphs 1 to 15;

McDonald, J.A., dissenting in part - see paragraphs 16 to 51.