TCC finds successor rules properly applied in tiered-partnership structure

In Devon Canada Corporation v. The Queen, 2013 TCC 415, the Tax Court of Canada (TCC) held that the “successor” resource rules continued to apply in favor of the taxpayer, even though the resource properties in question had been transferred to a second-tier partnership following an acquisition of control. The company owned resource properties in a first tier partnership when the company was acquired. The acquisition of control triggered the successor rules, such that the company was deemed to own the resource properties of the partnership and could thereafter use its successored resource pools to shelter income that was “…reasonably regarded as attributable to production from” those particular resource properties. At some point following the acquisition of control, the first-tier partnership transferred the particular resource properties to a second-tier partnership. For some inexplicable reason, the CRA concluded that this transfer somehow prevented the company from thereafter using its successor resource expenses against underlying income sourced to these particular properties. Thankfully, the TCC soundly rebuffed this position as “manifestly incorrect” (paragraph 33). The TCC further confirmed that the successor rules were engaged with respect to the particular resource properties on hand when control of the company was acquired, and the sourcing-rule in s. 96 thereafter meant that the underlying income earned in the second-tier partnership (and ultimately allocated to the company) was income “…reasonably regarded as attributable to production from” the particular resource properties (paragraph 47).