Royal Bank of Canada v The Commissioners for HMRC

A bilateral tax treaty must be interpreted objectively, by the ordinary meaning of its terms in context and in light of its object and purpose. Equal English and French texts must both be considered, but do not justify adding a restriction absent from the treaty language.

Rights to variable payments forming part of the consideration for the transfer of an oil-working operation are income from immovable property under Article 6(2) of the UK / Canada Double Taxation Convention of 8 September 1978. A contractual entitlement calculated by reference to oil prices may also be a right to the commercial benefit of oil for section 1313 of the Corporation Tax Act 2009, although it is not necessarily profit from exploitation activities themselves.

The Canadian-resident bank had lent money to Sulpetro, which conducted North Sea oil operations through its UK subsidiary. Sulpetro sold its Buchan Field operation to BP. The consideration included variable contractual payments linked to oil production and price. Sulpetro's right to those payments was later assigned to the bank, and the obligation was assumed by Talisman.

HMRC assessed the payments to UK corporation tax. The First-tier Tribunal dismissed the bank's appeal: Royal Bank of Canada v Commissioners for HMRC [2020] UKFTT 267 (TC). The bank appealed on the construction of Article 6 of the treaty, section 1313 of the Corporation Tax Act 2009, and the deductibility of its loss on the original loan.

1. Appeal dismissed. The First-tier Tribunal made no error of law.

2. The treaty had to be construed under the Vienna Convention approach. Its purpose was to ascertain the parties’ common intention from the ordinary meaning of the terms, their context and the treaty’s object and purpose. Both authentic language texts required consideration. The French text did not establish that Article 6(2) applied only to consideration for an original grant, rather than a transfer or assignment, of a right to work natural resources.

3. Article 13(4) did not limit the definition of immovable property in Article 6(2). Its language was not identical to the fifth limb of Article 6(2), and the proposed limitation would create an implausible gap in the source state’s power to tax income from its oil resources.

4. On the reality of the sale to BP, Sulpetro transferred the package of assets and rights constituting the Buchan oil-working operation, including its subsidiary which held the licence. The variable payments were part of the consideration for that transfer. They were therefore rights to variable payments for the right to work natural resources and remained so after assignment to the bank. The payments were income from immovable property under Article 6(2) of the UK / Canada Double Taxation Convention of 8 September 1978.

5. The payments were profits from exploration or exploitation rights under section 1313(2)(b) of the Corporation Tax Act 2009. A right to the benefit of oil is wider than a proprietary interest in oil. A contractual right to payments directly dependent on the price realised for oil gave the recipient a commercial benefit of that oil. The payments did not, however, arise directly enough from exploitation activities to fall within section 1313(2)(a).

6. The loss on the original Canadian loan was not deductible. The assignment consideration was CAD$1; the loan and assignment were separate transactions. The loan loss was outside the ring-fenced oil trade and, in any event, was capital expenditure.

• Upper Tribunal (Tax and Chancery Chamber): Appeal dismissed. The Tribunal upheld the First-tier Tribunal’s decision.
• First-tier Tribunal (Tax Chamber): The bank’s appeal against closure notices and assessments was dismissed: [2020] UKFTT 267 (TC).