Canadian Manufacturing

Can’t tax reforestation, top court rules; case could affect oil, gas transfers

by The Canadian Press   

Canadian Manufacturing
Environment Sustainability Energy Mining & Resources Oil & Gas clean-up environment Forestry gas oil

Decision was unanimous

OTTAWA—A Japanese-based forestry company has won a long-running tax battle with Ottawa over how reforestation obligations should be handled when harvest rights are sold.

The Supreme Court of Canada ruled 9-0 on Thursday that passing on future liabilities for land reclamation cannot be considered taxable at the time of the sale.

Revenue Canada had argued the cost of such liabilities should be treated like a mortgage and thus the value should be added to the sale price for tax purposes.

But Daishowa-Marubeni International Ltd., or DMI—with the backing of the Alberta government—argued that the obligation to reforest was embedded in the timber rights granted by the province.


The top court agreed that since Alberta wouldn’t allow any transfer of those timber rights unless the buyer assumed the reforestation demands, that cost actually depressed the sale price.

At issue was DMI’s sale of two timber tenures, which granted harvesting rights on provincially owned land, in 1999 and 2000. Reforestation obligations, which generally take between eight and 14 years to fulfil, were valued at $11 million and $3 million for the respective properties.

Revenue Canada said those values should be added to the proceeds of the sale for taxation purposes.

But 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.

“The obligations—much like needed repairs to property—are a future cost embedded in the forest tenure that serves to depress the tenure’s value at the time of sale.”

The judgment could set a precedent for the tax treatment of clean-up obligations for oil and gas companies, who were interveners in the court case.

The Canadian Association of Petroleum Producers was cited in the ruling as having argued that “statutory obligations to reclaim mined land may be so physically connected to the process of mining itself that the obligations cannot be separated from the property right.”

This suggests oil companies that sell land also transfer any environmental clean-up liabilities along with the property and that buyers assume those clean-up liabilities.

Rothstein noted that while he “need not decide that question” in his judgment, “I would not foreclose the possibility.”


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