HazMat Management
News

Supreme Court ruling sets precedent for taxes on clean-up obligations

A new Supreme Court of Canada ruling on deforestation could have wide-reaching implications for the tax treatment of oil and gas companies’ clean-up obligations.


Print this page

May 30, 2013 by Hazmat Management

A new Supreme Court of Canada ruling on deforestation could have wide-reaching implications for the tax treatment of oil and gas companies’ clean-up obligations.

The unanimous May 23, 2013 ruling in favour of Japanese firm Daishowa-Marubeni International Ltd., or DMI, said that passing on future liabilities for land reclamation cannot be considered taxable at the time of the sale. This was the case for appellant DMI, who argued that the obligation to reforest was embedded in the havesting rights it was granted by the Alberta government.  

DMI had harvesting rights for the pulp mills it operated in Alberta. When the company sold those rights, it did not include any amounts for the reforestation liabilities assumed by the buyers in the proceeds of disposition for its tax claims in 1999 and 2000.

Following DMI’s land deals, Revenue Canada reassessed DMI to include proceeds of disposition as income. Revenue Canada added the reforestation obligation of $11 million for the Tolko Industries Ltd. sale and approximately $3 million for the Seehta Forest Products Ltd. sale.

In the long-running court battle, Revenue Canada argued the cost of such liabilities should be treated like a mortgage. It said the value should be added to the sale price of the land for tax purposes.

The Supreme Court agreed that since Alberta wouldn’t allow the transfer of the timber rights, unless the buyer assumed the reforestation demands, that actually depressed the sale price. The liabilities for land reclamation cannot be considered taxable at the time of the sale, the court ruled.

The ruling’s implication for oil and gas companies is that when they sell land, they also transfer any environmental clean-up liabilities along with the property, and the buyer assumes those clean-up liabilities.

Justice Marshall Rothstein, writing the decision, ruled that the reforestation obligation was “not a separate existing debt of the vendor that is assumed by purchaser” as part of the sale price.

This news item first appeared in EcoLog News. To learn how to subscribe, visit www.ecolog.com