Minister of National Revenue v. Shell Canada Ltd., (1999) 247 N.R. 19 (SCC)

• Judge: L'Heureux-Dubé, Gonthier, McLachlin, Iacobucci, Major, Bastarache and Binnie, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 15, 1999
• Jurisdiction: Canada (Federal)
• Citations: (1999), 247 N.R. 19 (SCC);247 NR 19;[1999] 4 CTC 313;[1999] ACS no 30;[1999] SCJ No 30 (QL);[1999] 3 SCR 660;[1999] CarswellNat 1809;1999 CanLII 647 (SCC);[1999] 3 SCR 622;178 DLR (4th) 26;53 DTC 5669;1999 CanLII 670 (SCC);139 CCC (3d) 492

MNR v. Shell Can. Ltd. (1999), 247 N.R. 19 (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: [1999] N.R. TBEd. OC.009

Shell Canada Limited (appellant) v. Her Majesty The Queen (respondent)

Her Majesty The Queen (appellant by cross-appeal) v. Shell Canada Limited (respondent by cross-appeal) and Canadian Pacific Limited and Her Majesty The Queen (intervenors)

(26596)

Indexed As: Minister of National Revenue v. Shell Canada Ltd.

Supreme Court of Canada

L'Heureux-Dubé, Gonthier, McLachlin, Iacobucci, Major, Bastarache and Binnie, JJ.

October 15, 1999.

Summary:

Shell needed to borrow $100 million (U.S.) for working capital. The prevailing market rate was 9.1%. Shell borrowed the monies in New Zealand dollars at 15.4%. Shell then converted the monies to U.S. dollars (separate transaction). Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain. Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act and, when the loan was retired, claimed a $21,165,000 (U.S.) capital gain. The Minister of National Revenue, for 1992 and 1993, disallowed the interest deduction beyond the 9.1% market rate on the ground that interest over that amount was not reasonable, as required by s. 20(1)(c). Further, the Minister determined that the $21,165,000 (U.S.) was income, not a capital gain. Shell appealed.

The Tax Court of Canada allowed the appeal. The entire interest charges were deductible under s. 20(1)(c) and the $21,165,000 (U.S.) was a capital gain, not income. The Minister appealed.

The Federal Court of Appeal, in a judgment reported 223 N.R. 122, allowed the appeal in part. The court affirmed that the $21,165,000 (U.S.) was a capital gain. However, the court held that interest in excess of the 9.1% rate was not deductible under s. 20(1)(c). Shell appealed respecting the interest deduction. Shell subsequently brought a motion for a ruling under rule 29 of the Rules of the Supreme Court of Canada that the failure of the Minister to seek leave to cross-appeal precluded it from challenging the Court of Appeal's decision that the $21,165,000 was a capital gain.

The Supreme Court of Canada, per Binnie, J., in a judgment reported 235 N.R. 384, held that the Minister must obtain leave to cross-appeal before raising the capital gain issue on appeal. The Minister obtained leave to cross-appeal the decision that the $21,165,000 was a capital gain, not income.

The Supreme Court of Canada allowed the appeal and dismissed the cross-appeal. The $21,165,000 was a capital gain and the interest in excess of 9.1% was deductible.

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in borrowing money - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% - Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transaction) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act - The Federal Court of Appeal held that the amount of interest in excess of 9.1% was not deductible under s. 20(1)(c) - First, the amount paid in excess of 9.1% was not "interest", but in essence principal (i.e., high interest rate coupled with discounted forward rate created a blended payment of interest and principal) - Secondly, the portion over 9.1% was not used for income earning purposes (overriding purpose was reduction of tax liability) - Thirdly, the amount in excess of 9.1% was not "reasonable" (although 15.4% was reasonable in New Zealand, it was not reasonable for Shell to pay that amount) - The Supreme Court of Canada restored the Tax Court's decision that the entire 15.4% was deductible under s. 20(1)(c) - See paragraphs 27 to 61.

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in borrowing money - Section 20(1)(c) of the Income Tax Act permitted a taxpayer to deduct interest charges on borrowed monies - The Supreme Court of Canada stated that interest was deductible only if (1) the amount was paid in the year; (2) it was paid pursuant to a legal obligation to pay interest on the borrowed monies; (3) the borrowed monies were used for the purpose of earning income from a business or property; and (4) the rate of interest was reasonable - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% - Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transaction) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act - The Supreme Court of Canada held that all four conditions were met and the entire 15.4% was deductible under s. 20(1)(c) - See paragraphs 27 to 48.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - [See Income Tax - Topic 1751 ].

Income Tax - Topic 1751

Capital gains and losses - Capital gains - Foreign exchange gain on a loan for a capital purpose - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% - Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transaction) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - In 1993, Shell claimed the $21,165,000 (U.S.) as a capital gain, which was offset against capital losses - The Minister reassessed the gain as income - The Federal Court of Appeal held the borrowed monies provided working capital (a capital transaction) - Accordingly, the gain was on account of capital and the $21,165,000 (U.S.) was a capital gain, not income - The Supreme Court of Canada affirmed that there was a capital gain - See paragraphs 62 to 77.

Income Tax - Topic 2502

Deductions in computing income - General - Reasonableness - Section 67 of the Income Tax Act provided that no deduction for an outlay or expense was permitted except to the extent that the outlay or expense was reasonable in the circumstances - The Supreme Court of Canada held that s. 67 applied only to those deductions claimed under provisions of the Act that did not have their own internal limiting clauses - Where a provision of the Act had its own internal requirement that the deduction be reasonable (e.g., s. 20(1)(c)), s. 67 did not apply - The court stated that if a claimed deduction was reasonable under s. 20(1)(c), "I have difficulty seeing how it would not also be 'reasonable' within the meaning of s. 67" - See paragraphs 50 to 51.

Income Tax - Topic 3906

Interpretation - General - In favour of taxpayer - The Supreme Court of Canada restated that "in the absence of a specific statutory bar to the contrary, taxpayers are entitled to structure their affairs in a manner that reduces the tax payable" - A court should not look into the "economic realities" of complex transactions by sophisticated taxpayers to preclude such taxpayers from using complex transactions designed to minimize their tax liability - A taxpayer was entitled to structure its affairs to take advantage of the clear and unambiguous provisions of the Income Tax Act - The court stated that "it is not the court's role to prevent taxpayers from relying on the sophisticated structure of their transactions, arranged in such a way that the particular provisions of the Act are met, on the basis that it would be inequitable to those taxpayers who have not chosen to structure their transactions in this way" - See paragraphs 43 to 46.

Income Tax - Topic 9507

Tax evasion and tax avoidance - General principles - Unduly reducing income - Section 245(1) of the Income Tax Act provided that no deduction was permitted if to do so would "unduly or artificially reduce the income" - Shell needed to borrow $100 million (U.S.) for working capital - The prevailing market rate was 9.1% -Shell borrowed the monies in New Zealand dollars at 15.4%, then converted the monies to U.S. dollars (separate transaction) - Since the future rate for New Zealand dollars was discounted against the U.S. dollar, Shell would receive more U.S. dollars with the loan proceeds than it would cost to retire the loan, creating a $21,165,000 (U.S.) gain - Shell deducted the 15.4% interest charge under s. 20(1)(c) of the Income Tax Act - The Minister submitted that the amount of interest in excess of 9.1% would "unduly" reduce income contrary to s. 245(1) - The Supreme Court of Canada held that it was unnecessary to interpret the requirements of s. 245(1) - Even on the broadest interpretation, s. 245(1) did not apply to limit Shell's deduction to 9.1% - See paragraphs 52 to 61.

Cases Noticed:

Canada Safeway Ltd. v. Minister of National Revenue, [1957] S.C.R. 717, refd to. [para. 28].

Bronfman (Phyllis Barbara) Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134, refd to. [para. 28].

Reference Re Validity of Section 6 of the Farm Security Act, 1944 (Sask.), [1947] S.C.R. 394, affd. [1949] A.C. 110 (P.C.), refd to. [para. 30].

Tennant v. Minister of National Revenue, [1996] 1 S.C.R. 305; 192 N.R. 365, refd to. [para. 31].

Mohammad v. Minister of National Revenue (1997), 216 N.R. 303; 97 D.T.C. 5503 (F.C.A.), refd to. [para. 34].

Irving Oil Ltd. v. Minister of National Revenue, [1991] 1 C.T.C. 350; 126 N.R. 47 (F.C.A.), refd to. [para. 34].

Continental Bank Leasing Corp. v. Minister of National Revenue, [1998] 2 S.C.R. 298; 229 N.R. 58, refd to. [para. 39].

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 40].

Friesen v. Minister of National Revenue, [1995] 3 S.C.R. 103; 186 N.R. 243, refd to. [para. 40].

Minister of National Revenue v. Alberta (Treasury Branches) et al., [1996] 1 S.C.R. 963; 196 N.R. 105; 184 A.R. 1; 122 W.A.C. 1, refd to. [para. 40].

Canderel Ltd. v. Minister of National Revenue, [1998] 1 S.C.R. 147; 222 N.R. 81, refd to. [para. 43].

Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; 208 N.R. 161; 193 A.R. 321; 135 W.A.C. 321, refd to. [para. 43].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 44].

Minister of National Revenue v. Duha Printers (Western) Ltd., [1998] 1 S.C.R. 795; 225 N.R. 241, refd to. [para. 45].

Neuman v. Minister of National Revenue, [1998] 1 S.C.R. 770; 225 N.R. 190, refd to. [para. 45].

Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 46].

Minister of National Revenue v. Fording Coal Ltd., [1996] 1 F.C. 518; 190 N.R. 186 (F.C.A.), refd to. [para. 54].

Minister of National Revenue v. Central Supply Co. (1972) Ltd., [1997] 3 F.C. 674; 215 N.R. 46 (F.C.A.), refd to. [para. 54].

Minister of National Revenue v. Mara Properties Ltd., [1995] 2 F.C. 433; 179 N.R. 363 (F.C.A.), revsd. [1996] 2 S.C.R. 161; 197 N.R. 308, refd to. [para. 55].

Minister of National Revenue v. Nova Corp. of Alberta (1997), 212 N.R. 321; 97 D.T.C. 5529 (F.C.A.), refd to. [para. 55].

Produits LDG Products Inc. v. Minister of National Revenue (1976), 13 N.R. 438; 76 D.T.C. 6344 (F.C.A.), refd to. [para. 55].

Alberta and Southern Gas Co. v. Minister of National Revenue, [1978] 1 F.C. 454; 16 N.R. 220 (F.C.A.), refd to. [para. 55].

Tip Top Tailors Ltd. v. Minister of National Revenue, [1957] S.C.R. 703, refd to. [para. 68].

Alberta Gas Trunk Line Co. v. Minister of National Revenue, [1972] S.C.R. 498, refd to. [para. 68].

Columbia Records of Canada Ltd. v. Minister of National Revenue, [1971] C.T.C. 839 (F.C.T.D.), refd to. [para. 68].

Inspector of Taxes v. Woolworth (F.W.) plc, [1989] B.T.C. 233; 108 N.R. 151 (H.L.), refd to. [para. 69].

Friedberg v. Minister of National Revenue, [1993] 4 S.C.R. 285; 160 N.R. 212, refd to. [para. 73].

Ikea Ltd. v. Minister of National Revenue, [1998] 1 S.C.R. 196; 222 N.R. 161, refd to. [para. 74].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 9(1), sect. 9(3), sect. 20(1)(c), sect. 67 [para. 12].

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 245(1) [para. 12].

Authors and Works Noticed:

Broadhurst, David G., Income Tax Treatment of Foreign Exchange Forward Contracts, Swaps and Other Hedging Transactions, in Report of Proceedings of the Forty-First Tax Conference (1990), p. 26.1 [para. 66].

Hogg, Peter W., and Magee, Joanne E., Principles of Canadian Income Tax Law (2nd Ed. 1997), pp. 244, 245 [para. 51].

Ruby, Stephen S., Recent Financing Techniques, in Report of Proceedings of the Forty-First Tax Conference (1990), pp. 27.3 to 27.6 [para. 65].

Counsel:

Alnasir Meghji, Ronald B. Sirkis, Gerald A. Grenon and Edward Rowe, for the appellant/respondent on cross-appeal;

S. Patricia Lee and Harry Erlichman, for the respondent/appellant on cross-appeal/intervenor;

Michael E. Barrack and Gabrielle M.R. Richards, for the intervenor, Canadian Pacific Ltd.

Solicitors of Record:

Bennett Jones, Calgary, Alberta, for the appellant/respondent on cross-appeal;

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

McCarthy Tétrault, Toronto, Ontario, for the intervenor, Canadian Pacific Ltd.

This appeal and cross-appeal were heard on June 14, 1999, before L'Heureux-Dubé, Gonthier, McLachlin, Iacobucci, Major, Bastarache and Binnie, JJ., of the Supreme Court of Canada.

On October 15, 1999, McLachlin, J., delivered the following judgment in both official languages for the Supreme Court of Canada.