January 27, 2012

Her Majesty the Queen v. Anchor Pointe Energy Ltd.

2003 DTC 5512
Federal Court of Appeal
Date: July 2, 2003

Court File No. A-559-02

Appeal procedure — Motions to strike portions of Replies — In reassessing five predecessors of the corporate taxpayer within the normal reassessment period, the Minister reducing the Canadian Exploration Expense (“CEE”) deductions claimed, on the basis that the fair market value (“FMV”) of the seismic data acquired by them less than the amounts in respect of which the deductions having been claimed — The Minister holding the predecessors’ Notices of Objection in abeyance pending the decision of the Federal Court of Appeal in Global Communications Limited v. The Queen — In Notices of Confirmation, the Minister then taking the position that the seismic data in issue not qualifying as CEE within the meaning of paragraph 66.1(6)(a) of the Act and that even if it had so qualified, its FMV was not equal to the amounts claimed as deductions in respect thereof — Whether, on appeal to Tax Court of Canada, the taxpayers entitled to an Order striking from the Minister’s Reply certain assumptions and facts that arose for the first time when the reassessments were confirmed — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 66.1(6)(a), 152(3.1), 152(9), 165(3), and 165(5).

Facts: In reassessing five predecessors of the corporate taxpayer within the normal reassessment period, the Minister reduced the Canadian Exploration Expense (“CEE”) deductions claimed for 1991 on the basis that the fair market value (“FMV”) of the seismic data acquired by them was less than the amounts in respect of which the deductions had been claimed. The Minister held the predecessors’ Notices of Objection in abeyance pending the decision of the Federal Court of Appeal in Global Communications Limited v. The Queen, which was eventually rendered on June 18, 1999. In that case, it was held that seismic data purchased for the purpose of resale or licensing does not qualify as CEE. However, the issue of fair market value (which was the basis of the Minister’s original assessment in the present case) was not dealt with. In Notices of Confirmation, the Minister then took the position that the seismic data in this case did not qualify as CEE within the meaning of paragraph 66.1(6)(a) of the Act, and that even if it had so qualified, its FMV was not equal to the amounts claimed as deductions in respect thereof. During the course of their appeal to the Tax Court of Canada, the taxpayers moved to strike from the Minister’s Reply, certain assumptions and facts that arose for the first time when the reassessments were confirmed. In allowing the taxpayer’s motion in part (2002 DTC 2071), the Tax Court concluded that the Minister had not properly pleaded the assumptions that were first contained in his Notifications of Confirmation, and hence he could not include them in the Reply. Provisions setting out the factual allegations arising from the application of the Global Communications decision could remain in the Reply. The Crown appealed to the Federal Court of Appeal and the taxpayer cross-appealed.

Held: The Crown’s appeal and the taxpayer’s cross-appeal were both dismissed. The issue concerning the Crown’s appeal was merely one involving the accuracy of the pleadings. The Minister’s Reply indicated that certain facts had been relied upon when making the reassessments in issue, whereas, as the Tax Court judge accurately pointed out, those facts had been relied upon in formulating the Notices of Confirmation following the receipt of the Notices of Objection. The Tax Court judge was also correct in striking from the Reply, a conclusion of mixed fact and law. As for the taxpayer’s cross-appeal, subsection 165(5) permits the Minister to reassess after the expiry of the normal reassessment period where a Notice of Objection has been filed, but not to include in a taxpayer’s income amounts not included in an assessment or reassessment made within the normal reassessment period. In relying on the Global Communications decision, moreover, the Minister was not attempting to increase the amount of the taxpayer’s income not included in an assessment or reassessment made within the normal reassessment period, but only to raise an additional argument based on that decision. The Tax Court judge was correct in determining that there was nothing objectionable about the Minister’s Reply containing an additional argument based on the Global Communications decision.