Crude pumped from an undersea oil reservoir of the Hibernia joint venture up to the “Hibernia Platform” above the ocean surface was temporarily stored there (in the “GBS”) and then pumped from there, through two underwater flow lines, to an “offshore loading system” (“OLS”) two kilometers away (consisting of a north and south base). The OLS was used to load the crude onto tankers for sale and shipment to refineries.
CRA took the position that the production activity referenced in Reg. 1204(1)(b) “ceased at the wellhead” – and it reassessed to the taxpayer (a participant in the joint venture) to reduce the amount of the taxpayer’s production profits by the expenses of the OLS (effectively treating them as equalling the income from transporting the crude, and then deducting the same amounts as an expense applicable to the transportation profits). CRA in particular relied on the exclusion in Reg. 1204(3)(a) for “income … derived from transporting … petroleum”.
In rejecting this adjustment, Owen J stated (at paras. 49, 54-55):
[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …
[T]he OLS allowed the joint venture owners of the crude to ship that crude to market so that income could be realized from the sale of the crude. However, the income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners. …
…[P]aragraph 1204(3)(a) was intended to ensure that additional income derived from transporting/transmitting crude does not attract the resource allowance. It was not intended to reduce a taxpayer’s income from the production of crude when that income reflects solely the market value of the crude.