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Petro-Canada v. Canada (2004)

Key Lessons / Points

  • Be sure to carefully review all decisions made by the CRA in regards to your SR&ED applications.
  • The Tax Court of Canada (TCC) allows SR&ED applicants to question the CRA’s decisions regarding their SR&ED applications.
    • The TCC’s jurisdiction over a case begins once the CRA has assessed an SR&ED application.
    • Pre-assessment matters may be referred to the appropriate provincial court system or the Federal Court.

Fiscal Years in Question

1991, 1992

Court Heard In

Federal Court of Appeal (Ottawa, ON)

Dates Heard

February 9, 2004

Neutral Citation

2004 FCA 158

Docket

A-2-03

Amount Under Dispute

$8,884,497.00

Decision

[70] I would allow this appeal in part, set aside the judgment of the Tax Court of Canada, and replace it with a judgment allowing the appeal in part and referring the reassessment back to the Minister for reassessment on the basis that (1) the deduction for the cost of the seismic data is $8,884,497, and (2) effect must be given to the consent judgment filed in the Tax Court of Canada in respect of scientific research and experimental development expenses. As the appeal succeeded on only a relatively minor issue, the costs of this appeal should be borne by Petro-Canada.

Summary

Petro-Canada sought to appeal the Federal Court’s decision which upheld the CRA’s decision to disallow certain SR&ED expenditures totaling approximately $700,000. It was the opinion of the Federal Court of Appeal that the CRA had denied the SR&ED expenditures of approximately $700,000 to compensate for the allowance of Canadian exploration expenses that exceeded its entitlement by much more than $700,000. The presiding judge ruled that the previous judge attempted to do indirectly what the judge was not allowed to do directly: the Crown is not allowed to appeal their own assessment.  It was on these grounds that the presiding judge ordered the reassessment of the Appellant’s SR&ED application, requiring that their reason for denying the SR&ED expenses be most clearly stated.

Petro-Canada also appealed the interpretation of Canadian exploration expenses and the fair market value determination of seismic data used by the previous judge.  The judge upheld the prior ruling on the issue of the seismic data and Canadian exploration expenses.

Key Excerpts

[22] The appeal also challenged the Minister’s disallowance of certain scientific research and experimental development expenses totalling approximately $700,000. The Crown agrees that Petro-Canada should have been permitted to deduct those scientific research and experimental development expenses. The parties executed a consent to judgment on that point, which was presented to the Judge at the commencement of the trial.

[26] The Judge dismissed Petro-Canada’s appeal. In doing so, he found that only a small portion of the seismic data was acquired for the purpose stated in the definition of “Canadian exploration expense”, that the Phillips JEC and the CanEagle JEC did not deal at arm’s length with the vendors of the seismic data, and that the fair market value of all of the seismic data was $4,759,464, much less than the Minister’s valuation at the time of the reassessment. The Judge also declined to give effect to the consent judgment relating to scientific research and experimental development expenses. Petro-Canada has appealed to this Court.

[27] Petro-Canada argues that the Judge erred in his interpretation of the definition of “Canadian exploration expense”, in determining that the joint exploration corporations did not deal at arm’s length with the vendors of the seismic data, in determining the fair market value of the seismic data, and in failing to give effect to the consent judgment.

[65] The [previous] Judge declined to give effect to the consent judgment, which would have increased Petro-Canada’s deductions for scientific research and experimental development expenses by approximately $700,000. He reasoned that, because Petro-Canada had been allowed a deduction for renounced Canadian exploration expenses that exceeded its entitlement by much more than $700,000, and the ultimate issue before him was the correctness of the assessment under appeal, he could do nothing more than dismiss the appeal. He could not order the Minister to reassess in accordance with his reasons, because that would have increased the tax payable, which is not a permissible outcome in an income tax appeal.

[69] Refusing Petro-Canada’s rightful claim to the deduction for scientific research and experimental development had the same effect as an order allowing that claim but reducing Petro-Canada’s seismic expense deduction by the same amount. It is as though the Judge had allowed, in part, the Crown’s appeal of the seismic data deduction. The Judge was doing indirectly what he could not have done directly. In my view, the Judge erred in failing to give effect to the consent judgment.

[70] I would allow this appeal in part, set aside the judgment of the Tax Court of Canada, and replace it with a judgment allowing the appeal in part and referring the reassessment back to the Minister for reassessment on the basis that (1) the deduction for the cost of the seismic data is $8,884,497, and (2) effect must be given to the consent judgment filed in the Tax Court of Canada in respect of scientific research and experimental development expenses. As the appeal succeeded on only a relatively minor issue, the costs of this appeal should be borne by Petro-Canada.

Link to Full Ruling

View the full report here.

Related Ruling

Petro-Canada v. Canada (2004) – current ruling

Petro-Canada v. the Queen (2002)

 

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