Executive Summary: Key Legal and Evidentiary Issues

• Central issue was how subsection 13(31) and paragraph 13(27)(b) of the Income Tax Act interact when depreciable property is transferred to a taxpayer that did not exist when the transferor acquired the property.

• The Federal Court of Appeal disagreed with the Tax Court’s view that paragraph 13(27)(b) required two actual year-ends of the transferee before the long-term project property could be considered available for use in this non-arm’s-length transfer context.

• The Court held that subsection 13(31) is a statutory fiction: the transferee is deemed to acquire the property at the transferor’s acquisition time in what would have been the transferee’s taxation year, even if the transferee had not yet been formed.

• Subsection 13(31) was interpreted as ensuring continuity of ownership for the available-for-use rules where depreciable property moves between non-arm’s-length parties, including in butterfly reorganizations, so that the paragraph 13(27)(b) timing mechanism can operate.

• On this interpretation, the Millennium Coker Unit depreciable properties were considered available for use in the Suncor Energy Oil Sands Limited Partnership’s fiscal period ending January 31, 2007, and capital cost allowance could be claimed for that period.

• Suncor’s appeal was allowed, the Tax Court’s judgment was set aside, the 2007 reassessment was referred back to the Minister on that basis, and Suncor was awarded costs in the Tax Court and in the Federal Court of Appeal, with appeal costs calculated at the midpoint of Column III of Tariff B of the Federal Courts Rules.

Facts of the case

Suncor Energy Inc. acquired $34,368,000 of depreciable property in January 2005, described as Class 41 property in Schedule II of the Income Tax Regulations, in relation to the Millennium Coker Unit project (the “MCU Project”), which began in 2003. The project’s purpose was to add a third set of cokers to the upgrader associated with the Millennium Coker Unit and to make modifications to other upgrader components. The MCU Project was not completed during any of the taxation years relevant to the appeal.
Suncor Energy Oil Sands Inc. was incorporated on January 19, 2005 as a wholly owned subsidiary of Suncor. On February 1, 2005, the Suncor Energy Oil Sands Limited Partnership (the “Limited Partnership”) was formed and registered, with Suncor as general partner and the subsidiary as limited partner. Suncor held a 99.9% interest and the subsidiary held 0.1%. The Limited Partnership’s fiscal period ended on January 31, and Suncor’s taxation year ended on December 31.
On January 1, 2006, Suncor transferred assets used in its oil sands business, including the MCU Depreciable Properties, to the Limited Partnership. The elected amount for the MCU Depreciable Properties was their fair market value of $34,368,000. Suncor and the Limited Partnership were not dealing at arm’s length for purposes of the Act.
The Limited Partnership added $34,368,000 in computing the undepreciated capital cost of its Class 41 property for its fiscal period ending January 31, 2007, on the basis that the MCU Depreciable Properties became available for use immediately after the beginning of that fiscal period. It deducted the related capital cost allowance in computing its net income for that period. The Limited Partnership allocated 99.9% of its income for the fiscal period ending January 31, 2007 to Suncor, and Suncor included that amount in computing its income for its taxation year ending December 31, 2007.
The Minister reassessed Suncor’s 2007 taxation year on the basis that the MCU Depreciable Properties were not available for use during the Limited Partnership’s fiscal period ending January 31, 2007. The reassessment disallowed the $34,368,000 addition to the Limited Partnership’s undepreciated capital cost balance and the related capital cost allowance deduction, increasing the income of the Limited Partnership and, in turn, Suncor’s share of that income.

Tax Court decision and issue on appeal

The Tax Court judge reviewed the available-for-use rules. Under subsection 13(26), capital cost allowance cannot be claimed until a property has become available for use. Under paragraph 13(27)(a), property already being used to earn income becomes available for use when it is first so used. Under paragraph 13(27)(b), long-term project property that is not yet being used to earn income is considered available for use after the beginning of the first taxation year that begins more than 357 days after the end of the taxation year in which the property was acquired.
The judge accepted that subsection 13(31) deems a non-arm’s-length transferee to have acquired depreciable property at the time it was acquired by the transferor, and agreed that the purpose of subsection 13(31) is to provide continuity of ownership between non-arm’s-length parties when applying the two-year rolling start rule in paragraph 13(27)(b). However, he found that subsection 13(31) does not deem the transferee to have a taxation year at the time of that deemed acquisition if the transferee did not yet exist.
Because the Limited Partnership did not exist in January 2005, it had no taxation year then. The judge noted that the taxation year of a Canadian resident partnership is its fiscal period. He concluded that, under paragraph 13(27)(b), two actual year-ends of the Limited Partnership had to pass before the property became available for use, so the MCU Depreciable Properties were not available for use on February 1, 2006 and no capital cost allowance could be claimed for the fiscal period ending January 31, 2007. He indicated that, in his view, the MCU Depreciable Properties would have been available for use on February 1, 2007, for the Limited Partnership’s fiscal period ending January 31, 2008. Suncor’s appeal from the 2007 reassessment was dismissed.
On appeal, the only issue was the correct interpretation of subsection 13(31) and paragraph 13(27)(b) where depreciable property is transferred to an entity that did not exist when the transferor acquired the property.

Interpretation of the available-for-use and deeming provisions

The Federal Court of Appeal applied the modern principle of statutory interpretation, considering the text, context and purpose of the provisions. It accepted that subsection 13(31) clearly deems the transferee to have acquired depreciable property at the time it was acquired by the transferor for the purposes of paragraphs 13(27)(b), 13(28)(c) and subsection 13(29). It reiterated that a deeming provision is a statutory fiction, which treats something as if it were so for a particular purpose, even though it is not or there is doubt whether it is.
The Court emphasized that paragraph 13(27)(b) requires identifying “the taxation year of the taxpayer in which the property was acquired by the taxpayer” because the 357-day period runs from the end of that year. If the time at which property is deemed to be acquired under subsection 13(31) does not fall in a taxation year of the transferee, the time period under paragraph 13(27)(b) does not commence and cannot be determined.
The Court noted that the Tax Court judge concluded the Limited Partnership’s first actual year-end was January 31, 2006, and that, in his view, the MCU Depreciable Properties only became available for use on February 1, 2007. The Federal Court of Appeal found this conclusion inconsistent with subsection 13(31), which deemed the Limited Partnership to have acquired the MCU Depreciable Properties in January 2005, before its fiscal period beginning February 1, 2005. In effect, the Tax Court judge’s approach changed the deemed acquisition date to sometime during the Limited Partnership’s first fiscal period.
The Crown’s position at the hearing was that because the Limited Partnership did not exist when the MCU Depreciable Properties were deemed acquired, the properties were not acquired in a taxation year of the partnership and the period in paragraph 13(27)(b) did not start. On that view, the Limited Partnership could not claim capital cost allowance in relation to the MCU Depreciable Properties until the properties were used to earn income or some other provision applied. The Crown did not identify any other such provision.
The Federal Court of Appeal framed the question as whether this was the correct interpretation of subsection 13(31) for paragraph 13(27)(b). It found that the purpose of subsection 13(31), as described in both commentary and the Tax Court’s reasons, is to provide continuity of ownership when applying the available-for-use rules for depreciable property transferred between non-arm’s-length parties. For this continuity to be achieved, the property must be considered to have been acquired in a taxation year of the transferee. The Court held that it is a necessary implication of deeming the time of acquisition that such time occurs during a taxation year; otherwise the time period in paragraph 13(27)(b) never commences and there is no continuity.

Use of necessary implication and butterfly reorganization context

The Court relied on the concept of necessary implication as described in earlier case law and commentary. It referred to its decision in La Survivance, which interpreted subsection 256(9). That provision deems the acquisition of control of a corporation to occur at the beginning of the day on which control is otherwise acquired, but is silent on the time at which control is surrendered. In La Survivance, the Court held that, read in context and in light of the statutory objective, the provision also necessarily deems the previous controller to surrender control at the commencement of that same day.
Drawing on that reasoning, the Court concluded that, in the context of subsection 13(31) and paragraph 13(27)(b), the deemed acquisition time must also be placed within a taxation year of the transferee. It held that the property is deemed to be acquired in what would have been the taxation year of the transferee if the transferee had existed at that time, and that this implication operates only for the limited purpose of determining when the property will be available for use under paragraph 13(27)(b).
The Court also examined paragraph 13(31)(b), which applies subsection 13(31) to divisive reorganizations, often called butterfly reorganizations. It referred to explanatory materials that describe a “typical butterfly reorganization” in which a corporation transfers assets to newly incorporated companies, and to commentary indicating that the use of newly formed corporations in butterfly transactions pre-dated the 1991 enactment of the available-for-use rules. The Court noted that subsection 13(31) is expressly made applicable to reorganizations in which depreciable property is transferred to newly formed corporations, meaning that such corporations may be deemed to have acquired property before they existed.
Because subsection 13(31) operates only for provisions that refer to the taxation year in which property was acquired, the Court reasoned that paragraph 13(31)(b) would be rendered meaningless if, in cases where property is transferred to a new corporation that did not exist at the time of the transferor’s acquisition, the property could not be treated as acquired in a taxation year of the transferee. The Court found no authority explaining how subsection 13(31) and paragraph 13(27)(b) would function in butterfly reorganizations without recognizing a notional taxation year of the transferee encompassing the deemed acquisition time.

Outcome, ruling, and practical effect

The Federal Court of Appeal held that, for the purposes of paragraph 13(27)(b), where subsection 13(31) deems a transferee to have acquired depreciable property at a time before the transferee is formed, that time is also deemed to occur in what would have been the taxation year of the transferee if it had then existed. The taxation year is determined using the fiscal period adopted by the transferee once it has been formed. This interpretation allows the time period in paragraph 13(27)(b) to start.
Applying this interpretation, the Court concluded that the MCU Depreciable Properties were available for use in the Limited Partnership’s fiscal period ending January 31, 2007. It therefore allowed the appeal, set aside the Tax Court’s judgment, and allowed Suncor’s appeal from the reassessment of its 2007 taxation year. The matter was referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the MCU Depreciable Properties were available for use in the Limited Partnership’s fiscal period ending January 31, 2007 and that the income allocated to Suncor for that period would reflect the capital cost allowance claimed on those properties.
The parties agreed that costs in the Federal Court of Appeal would be calculated at the midpoint of Column III of Tariff B of the Federal Courts Rules. The Court awarded Suncor its costs in the appeal on that basis, as well as its costs in the Tax Court.