Minister of National Revenue (Appellant)
v .
Gustayson Drilling (1964) Ltd. (Respondent)
Trial Division, Cattanach J.—Ottawa, January 7
and February 15, 1972.
Income tax—Statute, repeal of, effect on acquired rights—
Oil production company—Exploration expenses, deductibili-
ty of from future income—Whether an acquired right—
Interpretation Act, R.S.C. 1970, c. I-23, s. 35(c)—Income
Tax Act, R.S.C. 1952, c. 148, s. 83A(8a).
By the end of 1960 respondent company had spent in
exploring for oil nearly two million dollars in excess of its
production income. In 1960 its assets were acquired by its
parent company to discharge a debt and respondent ceased
operations until 1964 when another company acquired con
trol of respondent. For 1965 and subsequent years respond
ent in computing its income sought to deduct some of the
exploration expenses incurred by it prior to the end of 1960.
The Minister disallowed the deduction.
Under s. 83A(1) and (3) of the Income Tax Act explora
tion expenses incurred by an oil company of respondent's
description are deductible in computing its subsequent pro
duction income. Section 83A(8a), however, provides that
where one such oil company's assets are acquired by anoth
er, the latter also acquires the former's deductible explora
tion expenses, provided (prior to 1962) that the acquisition
meets conditions set forth in paragraphs (c) and (d) of s.
83A(8a). Those paragraphs were repealed in 1962. The
acquisition of respondent's assets by its parent company in
1960 did not fall within those conditions. Section 35(c) of
the Interpretation Act provides that repeal of an enactment
does not affect "any right, privilege ... accrued, accruing or
incurred" under the repealed enactment.
Held, respondent was not entitled to the deduction
claimed.
Respondent did not have under s. 83A(8a) as it stood
before the repeal of paragraphs (c) and (d) in 1962 any
acquired or accrued right or privilege to deduct its
undeducted exploration expenses within the meaning of s.
35(c) of the Interpretation Act. Abbott v. Minister of Lands
[1895] A.C. 425; Western Leaseholds Ltd. v. M.N.R. [1961]
C.T.C. 490, applied.
APPEAL from Tax Appeal Board.
L. P. Chambers for appellant.
J. G. McDonald, Q.C. and David C. Nathan-
son for respondent.
CATTANACH J.—This is an appeal by the Min
ister from a decision of the Tax Appeal Board
rendered on October 29, 1970 whereby an
appeal against reassessments for tax, interest
and penalties for the respondent's 1965, 1966,
1967 and 1968 taxation years was allowed.
The parties concurred in the appeal being by
way of a special case stated for the opinion of
the Court pursuant to Rule 475.
The special case so agreed upon and set down
for trial by order of the Associate Chief Justice
reads as follows:
1. At all material times the Respondent was a corporation
(i) which was incorporated pursuant to the laws of
Canada on May 26, 1949,
(ii) whose name was "Sharples Oil (Canada) Ltd." until
October 6, 1964, and
(iii) which carried on in Canada as its principal business
the production, refining or marketing of petroleum,
petroleum products or natural gas, or exploring or drilling
for petroleum or natural gas, within the meaning of sec
tion 83A of the Income Tax Act.
2. Prior to the 1964 taxation year the Respondent was a
wholly owned subsidiary of The Sharples Oil Corporation, a
corporation incorporated pursuant to the laws of the United
States of America or one of the states thereof.
3. At all material times The Sharples Oil Corporation
carried on as its principal business the production, refining
or marketing of petroleum, petroleum products or natural
gas, or exploring or drilling for petroleum or natural gas,
within the meaning of section 83A of the Income Tax Act.
4. The Respondent had from May 26, 1949 and up to
November 30, 1960, incurred drilling and exploration
expenses, within the meaning of section 83A of the Income
Tax Act, in the amount of $2,042,407.68 in excess of its
income from the production of petroleum and natural gas
during the said period, but the amount was adjusted by
agreement between the Appellant and Respondent to the
amount of $1,987,547.19, as set out in a letter dated Octo-
ber 28, 1965, from the Calgary District Office of the
Department of National Revenue, Taxation, addressed to
the Respondent in the following terms:
DEPARTMENT OF NATIONAL REVENUE Taxa
tion Division October 28, 1965.
Calgary Public Building
205-8th Avenue S.E.
CALGARY, Alberta
Gustayson Drilling (1964) Ltd.
1660 Elveden House
Calgary, Alberta
J. A. Berthelsen
Attention: R. L. Timmins
Dear Sirs:
As discussed in our telephone conversation on October 26,
1965, the following represents the adjustments to the
exploration and development expenditures that may be car
ried forward by Gustayson Drilling (1964) Ltd. as at
December 31, 1964:
Changes to increase the 1964 income:
Drill Collars not used by year end 7,590.00
Rig repair costs that should be charged to
Gustayson Drilling (1962) Ltd. 3,422.88
$11,012.88 ,
The above changes were agreed to by the Company in a
letter to this office dated July 23, 1965.
Changes to reduce the balance of exploration
and development costs carried forward at
December 31, 1964:
Carry forward errors in 1958 and 1960 32,180.32
Capital cost allowance claimed in excess of
income for 1949 to 1954 14,528.03
Legal fees disallowed 3,287.32
Lease and royalty acquisition cost disallowed 1,823.92
$51,819.59
The above adjustments have reduced the balance of
exploration and development expenses that may be carried
forward under section 83A at December 31, 1964 to
$1,987,547.19.
Yours truly,
E. Sharp for Director—Taxation
JAB/ep
The difference between the $2,042,407.68 and $1,987,-
547.19 represents the amount of drilling and exploration
expenses originally allocated to the 1964 taxation year and
subsequently disallowed by the Appellant. The respondent
accepted and now accepts the amount of $1,987,547.19 as
the correct amount, and if the Respondent is not precluded
from making deductions on account thereof in computing its
income for the 1965, 1966, 1967, 1968 and subsequent
taxation years, the aggregate of such deductions in all of
such years would be $1,987,547.19.
5. On or about November 30, 1960 The Sharples Oil
Corporation acquired from the Respondent, in consideration
for the cancellation of a debt, substantially all of the proper
ty used by the Respondent in carrying on its business in
Canada, as described in paragraph 1 (iii) hereof.
6. Subsequent to the said transfer of property the
Respondent discontinued its business and did not carry on
any business until after June 18, 1964.
7. By agreement dated June 18, 1964 Mikas Oil Co. Ltd.
purchased all of the issued and outstanding shares of the
capital stock of the Respondent from the shareholders of
The Sharples Oil Corporation and their respective heirs,
executors, administrators, successors and assigns, who had
acquired such shares of the Respondent on or about March
2, 1964 in the course of liquidation proceedings of The
Sharples Oil Corporation which had commenced on March
25, 1963 and which had ended on March 25, 1964. An
executed copy of the above-mentioned agreement made as
of June 18, 1964 is annexed hereto as Exhibit "1".
8. On or about October 6, 1964 the Respondent's name
was changed to Gustayson Drilling (1964) Ltd. and thereaf
ter the Respondent recommenced carrying on such busi
ness, as described in paragraph 1 (iii) hereof, with newly
acquired assets none of which had been owned or used by
the Respondent prior to June 18, 1964.
9. On March 25, 1969, the Appellant reassessed the
Respondent with respect to the 1965, 1966, 1967 and 1968
taxation years, disallowing as deductions, in computing the
Respondent's income for those years, any amounts of the
aforesaid sum of $1,987,547.19 on account of drilling and
exploration expenses. In particular, the Appellant disal
lowed as deductions in computing the Respondent's income
for the 1965, 1966, 1967 and 1968 taxation years the
amounts of $119,290.49, $447,369.99, $888,084.10 and
$31,179.00, respectively, which amounts were claimed by
the Respondent as part of the said amount of $1,987,-
547.19, but allowed as deductions the amounts of $41,-
770.21, $1,778.00, $2,581.46 and $49,127.00, respectively,
on account of drilling and exploration expenses incurred by
the Respondent in the 1965, 1966, 1967 and 1968 taxation
years, respectively, and not forming part of the said amount
of $1,987,547.19.
10. In so reassessing the Respondent with respect to the
1965, 1966, 1967 and 1968 taxation years the Appellant
allowed, pursuant to the Respondent's request, as deduc
tions in computing the Respondent's income for those
years, the amounts of $21,884.56, $105,372.86, $192,-
828.72 and $215,919.17, respectively, on account of capital
cost allowances.
11. The facts above stated are agreed by the Appellant
and by the Respondent.
12. The question for the opinion of the Court is whether
subsection (8a) of section 83A of the Income Tax Act as
amended by the repeal of paragraphs (c) and (d) thereof by
Statutes of Canada, 1962-63, c. 8, section 19, subsections
(11) and (15), precludes the Respondent from deducting in
the computation of its income for the 1965, 1966, 1967 and
1968 taxation years amounts on account of the drilling and
exploration expenses mentioned in paragraph 4 hereof,
which but for the repeal would have been deductible by the
Respondent under subsections (1) and (3) of section 83A of
the Act.
13. The Appellant and Respondent agree:
(1) that if the Court shall be of opinion in the positive,
then
(i) the appeal shall be allowed with costs payable to the
Appellant and the assessments of March 25, 1969 with
respect to the 1965, 1966, 1967 and 1968 taxation years
restored, and
(ii) the Respondent's cross-appeal, as raised by paragraph
9 of the Respondent's Reply to the Appellant's Notice of
Appeal, shall be dismissed without costs payable to either
party,
and
(2) that if the Court shall be of opinion in the negative,
then
(i) the appeal shall be dismissed with costs payable to the
Respondent, and
(a) the Appellant shall allow as deductions in computing
the Respondent's income for the 1965, 1966 and 1967
taxation years the amounts of $119,290.49, $447,-
369.99 and $888,084,10, respectively, on account of
drilling and exploration expenses incurred by the
Respondent prior to November 30, 1960,
(b) the Appellant shall, in computing the Respondent's
income for the 1968 taxation year, reduce the amount
of the deduction on account of drilling and exploration
expenses from $49,127.00 to $31,179.00,
and
(ii) the Respondent's cross-appeal, as raised by paragraph
9 of the Respondent's Reply to the Appellant's Notice of
Appeal shall be allowed without costs payable to either
party and the said assessments with respect to the 1965,
1966, 1967 and 1968 taxation years shall be referred
back to the Appellant for reconsideration and reassess
ment on the basis that
(a) in computing the Respondent's income for the 1965,
1966 and 1967 taxation years the deductions on
account of capital cost allowances, as described in the
Capital Cost Allowance Schedule, annexed hereto as
Exhibit "2", shall be reduced by $21,884.56, $105,-
372.86 and $192,828.72, respectively, and
(b) in computing the Respondent's income for the 1968
taxation year the deduction on account of capital cost
allowances, as described in the Capital Cost Allow-
ances Schedule, annexed hereto as Exhibit "2", shall
be increased from $215,919.17 to $325,883.00.
The question for determination is as outlined
in paragraph 12. Broadly stated the issue is the
question of what effect does the repeal of para
graphs (c) and (d) of subsection (8a) of section
83A of the Income Tax Act applicable to the
1962 and subsequent taxation years have on the
applicability of subsection (8a) to the deducti-
bility of drilling and exploration expenses
incurred prior to the 1962 taxation year, which
the respondent seeks to deduct in computing its
income for its 1965, 1966, 1967 and 1968 taxa
tion years.
Section 83A is obviously incentive legislation
designed to encourage the search for oil and gas
in Canada by allowing expenditures incurred in
drilling and exploring for oil and gas to be
deducted in computing income in prescribed
circumstances and within defined limits which
would ordinarily not be deductible as capital
expenditures within section 12(1)(b) of the
Income Tax Act.
Section 83A subsections (1) and (3) reads as
follows:
83A. (1) A corporation whose principal business is pro
duction, refining or marketing of petroleum, petroleum
products or natural gas or exploring or drilling for
petroleum or natural gas may deduct, in computing its
income under this Part for a taxation year, the lesser of
(a) the aggregate of such of the drilling and exploration
expenses, including all general geological and geophysical
expenses, incurred by it on or in respect of exploring or
drilling for petroleum or natural gas in Canada as were
incurred during the calendar years 1949 to 1952, to the
extent that they were not deductible in computing income
for a previous taxation year, or
(b) of that aggregate, an amount equal to its income for
the taxation year
(i) if no deduction were allowed under paragraph (b) of
subsèction (1) of section 11, and
(ii) if no deduction were allowed under this section,
minus the deductions allowed for the year by subsections
(8a) and (8d) of this section and by section 28.
(3) A corporation whose principal business is
(a) production, refining or marketing of petroleum,
petroleum products or natural gas, or exploring or drilling
for petroleum or natural gas, or
(b) mining or exploring for minerals,
may deduct, in computing its income under this Part for a
taxation year, the lesser of
(c) the aggregate of such of
(i) the drilling and exploration expenses, including all
general geological and geophysical expenses, incurred
by it on or in respect of exploring or drilling for
petroleum or natural gas in Canada, and
(ii) the prospecting, exploration and development
expenses incurred by it in searching for minerals in
Canada,
as were incurred after the calendar year 1952 and before
April 11, 1962, to the extent that they were not deduct
ible in computing income for a previous taxation year, or
(d) of that aggregate, an amount equal to its income for
the taxation year
(i) if no deduction were allowed under paragraph (b) of
subsection (1) of section 11, and
(ii) if no deduction were allowed under this section,
minus the deductions allowed for the year by subsections
(1), (2), (8a) and (8d) of this section and by section 28.
The respondent was incorporated in 1949
under the name of Sharples Oil (Canada) Ltd.
and was a wholly owned subsidiary of Sharples
Oil Corporation incorporated pursuant to the
laws of one of the states of the United States of
America. With moneys advanced by its parent
the respondent incurred drilling and exploration
expenses within the meaning of section 83A.
The effect of section 83A(1) and (3) is that
drilling and exploration expenses may be
deducted in subsequent taxation years to the
extent of income earned in each subsequent
taxation year subject to the limitations indicat
ed. The undeducted expenses, colloquially
speaking, remain on the shelf for use in subse
quent years.
It is agreed between the parties that between
1949 and November 30, 1960 the respondent
had incurred undeducted drilling and explora
tion expenses in the amount of $1,987,547.19.
In 1960 the respondent was heavily indebted
to its parent company, which was also engaged
in the principal business of the production,
refining and marketing of natural gas. The
respondent ceased its operations and disposed
of substantially all of its assets by way of sale
to its parent company in consideration of the
cancellation of its indebtedness to its parent
company on November 30, 1960. Thereafter
the respondent remained inactive and dormant
for a period.
When the assets of the respondent were
transferred to its parent in 1960 section 83A(8a)
read as follows:
83A. (8a) Notwithstanding subsection (8), where a corpo
ration (hereinafter in this subsection referred to as the
"successor corporation") whose principal business is
(a) production, refining or marketing of petroleum,
petroleum products or natural gas, or exploring or drilling
for petroleum or natural gas, or
(b) mining or exploring for minerals,
has, at any time after 1954, acquired from a corporation
(hereinafter in this subsection referred to as the "predeces-
sor corporation") whose principal business was production,
refining or marketing of petroleum, petroleum products or
natural gas, exploring or drilling for petroleum or natural
gas or mining or exploring for minerals, all or substantially
all of the property of the predecessor corporation used by it
in carrying on that business in Canada,
(c) pursuant to the purchase of such property by the
successor corporation in consideration of shares of the
capital stock of the successor corporation, or
(d) as a result of the distribution of such property to the
successor corporation upon the winding-up of the pre
decessor corporation subsequently to the purchase of all
or substantially all of the shares of the capital stock of the
predecessor corporation by the successor corporation in
consideration of shares of the capital stock of the succes
sor corporation,
there may be deducted by the successor corporation, in
computing its income under this Part for a taxation year, the
lesser of
(e) the aggregate of
(i) the drilling and exploration expenses, including all
general geological and geophysical expenses, incurred
by the predecessor corporation on or in respect of
exploring or drilling for petroleum or natural gas in
Canada, and
(ii) the prospecting, exploration and development
expenses incurred by the predecessor corporation in
searching for minerals in Canada,
to the extent that such expenses
(iii) were not deductible by the successor corporation in
computing its income for a previous taxation year, and
were not deductible by the predecessor corporation in
computing its income for the taxation year in which the
property so acquired was acquired by the successor
corporation or its income for a previous taxation year,
and
(iv) would, but for the provisions of paragraph (b) of
subsection (1), paragraph (b) of subsection (2), para
graph (d) of subsection (3) and paragraph (d) of subsec
tion (8) or of any of those paragraphs or this subsec
tion, have been deductible by the predecessor
corporation in computing its income for the taxation
year in which the property so acquired was acquired by
the successor corporation, or
(f) of that aggregate, an amount equal to such part of its
income for the year
(i) if no deduction were allowed under paragraph (b) of
subsection (1) of section 11, and
(ii) if no deduction were allowed under this section,
(minus any deduction allowed for the year by section 28),
as may reasonably be regarded as attributable to the
production of petroleum or natural gas from wells, or the
production of minerals from mines, situated on property
from which the predecessor corporation had, immediately
before the acquisition by the successor corporation of the
property so acquired, a right to take or remove petroleum
or natural gas or a right to take or remove minerals;
and, in respect of any such expenses included in the aggre
gate determined under paragraph (e), no deduction may be
made under this section by the predecessor corporation in
computing its income for the taxation year in which the
property so acquired was acquired by the successor corpo
ration or its income for any subsequent taxation year.
Subsection (8a) was enacted in 1956 appli
cable to transactions as described therein that
took place after 1954.
The transfer of its assets by the respondent to
its parent was not in consideration for shares in
the capital stock of the parent in accordance
with 83A(8a)(c) above, nor did the transfer
result from the winding-up of the respondent in
accordance with 83A(8a)(d) above.
It is clear that the parent company did not
acquire the right at that time to deduct the
drilling and exploration expenses incurred by
the respondent, because the assets were not
acquired in the manner prescribed by section
83A(8a)(c) and (d). It is equally clear that under
the legislation as it read at that time, that right
remained in the respondent.
On June 18, 1964 Mikas Oil Co. Ltd. pur
chased all of the issued and outstanding shares
of the respondent from the company's
shareholders.
With moneys provided by Mikas Oil Co. Ltd.
the respondent resumed drilling and exploration
activities.
On October 6, 1965 the corporate name of
the respondent was changed from that of Shar-
ples Oil (Canada) Ltd. to that of Gustayson
Drilling (1964) Ltd. the name which appears in
the style of cause herein.
The respondent incurred further drilling and
exploration expenses subsequent to June 18,
1964 which it claimed as deductions in its
subsequent taxation years under section 83A(1)
and (3) and these deductions were allowed by
the Minister. However the respondent also
sought to carry forward and deduct the amounts
of $119,290.49, $447,369.99, $888,084.10 and
$109,963.83, as part of the $1,987,547.19
deferred development expenses incurred prior
to 1960 in its 1965, 1966, 1967 and 1968 taxa
tion years respectively. The Minister disallowed
the deduction of the foregoing amounts in the
foregoing taxation years and reassessed the
respondent accordingly. Therefore, the issue is
the deductibility of those amounts in those
years. This issue is unaffected by the change in
ownership of the respondent's shares.
By chapter 8, Statutes of Canada 1962-1963,
section 19, subsection (11) paragraphs (c) and
(d) of subsection (8a) of section 83A of the
Income Tax Act were repealed and by subsec
tion (15) thereof that repeal was made appli
cable to the 1962 and subsequent taxation
years.
The rival contentions of the parties, as I
understood them, are summarized as follows:
(1) On behalf of the respondent it was con
tended that when the respondent disposed of its
assets in 1960 to its parent company by sale in
consideration of the discharge of its indebted
ness, it did not fall within paragraphs (c) and (d)
of subsection (8a) of section 83A and according
ly the parent company was not a "successor
corporation" within the meaning of subsection
(8a) and for that reason did not acquire the right
to deduct deferred drilling and exploration
expenses and that the respondent as vendor was
not a "predecessor corporation" within the
meaning of subsection (8a). Therefore it is the
contention of the respondent that it retained a
"vested" right to deduct the deferred develop
ment and exploration expenses to the total
extent of $1,987,547.19 in its 1965, 1966, 1967
and 1968 and subsequent taxation years if other
conditions prescribed by the Income Tax Act
apply.
(2) On behalf of the Minister it was contend
ed that in the 1965, 1966, 1967 and 1968 taxa
tion years the respondent and its parent compa
ny were respectively "predecessor" and
"successor" corporations within the meaning of
subsection (8a) of section 83A by reason of the
repeal of paragraphs (c) and (d) in 1962 appli
cable to the 1962 and subsequent taxation years
and therefore the respondent, as a "predecessor
corporation", was precluded by subsection (8a),
as amended, from deducting any amount of
drilling and exploration expenses incurred by it
prior to November 30, 1960 in its 1962 and
subsequent taxation years, but rather that that
right enures to the parent corporation as a
"successor" in accordance with subsection (8a)
as so amended.
It is common ground that if paragraphs (c)
and (d) of subsection (8a) had not been
repealed, then the respondent would be entitled
to continue the deduction of its accumulated
drilling and exploration expenses and that its
parent company, after the purchase of the
respondent's assets in 1960, would not be enti
tled to deduct those expenses because it was
not a successor corporation, the transaction not
being within the limitations of paragraphs (c)
and (d).
Similarly, I think it is clear that if paragraphs
(c) and (d) had never been enacted then in the
circumstances of the present transaction, the
parent company would be entitled to deduct the
accrued drilling and exploration expenses as a
successor corporation and the respondent as a
predecessor corporation would be precluded
from deducting those expenses by the conclud
ing provisions of subsection (8a).
Therefore the issue between the parties
resolves itself into the question of what effect
does the repeal of paragraphs (c) and (d) of
subsection (8a) applicable to the 1962 and
subsequent taxation years have on the deducti-
bility of the drilling expenses accrued up to
1960 by the respondent in its subsequent 1965,
1966, 1967 and 1968 taxation years bearing in
mind the sale of its assets to its parent company
on November 30, 1960. Put another way the
question is whether subsection (8a) of section
83A precludes the respondent from taking the
deductions claimed in 1965 and for three subse
quent years notwithstanding subsections (1) and
(3).
The position of the respondent is that under
the legislation as it existed prior to 1962 it had
acquired the vested right to deduct accumulated
drilling and exploration expenses in future
years. Counsel for the respondent contends that
the repeal of paragraphs (c) and (d) does not
deprive the respondent of that right because if
subsection (8a) were to be interpreted as
depriving the respondent of that right that
would give to subsection (8a) a retrospective
operation and that Parliament expressed no
clear intention of doing so. The transaction took
place in 1960. At that time in order for the
successor corporation to inherit the drilling and
exploration expenses of the predecessor the
acquisition of the assets had to be in accord
ance with paragraphs (c) and (d). By the repeal
of paragraphs (c) and (d) in 1962 Parliament is
saying that it is not now necessary to acquire
assets of a predecessor in the manner pre
scribed by paragraphs (c) and (d) in order for
the successor corporation to inherit deferred
drilling and exploration expenses and preclude
their deductibility by the predecessor. How
ever, if Parliament is now legislating that,
although the successor did not acquire assets in
conformity with paragraphs (c) and (d), it was
not necessary to do so in order that the succes
sor may deduct deferred drilling and explora
tion expenses and the predecessor corporation
may not, then this is legislation with retroactive
effect. Counsel contends that the character of
the transaction and the tax consequences which
flow therefrom must be governed by the law in
force when the transaction took place. To say
later that the tax consequences of the transac
tion are different is retroactive legislation.
On the other hand the position of the Minis
ter, as I understood it, might be simply put as
that the repeal of paragraphs (c) and (d) of
subsection (8a) of section 83A of the Income
Tax Act makes subsection (8a) applicable in the
computation of the respondent's income for its
1965, 1966, 1967 and 1968 taxation years and
thus precludes the respondent from deducting
the deferred drilling and exploration expenses
incurred by the respondent prior to 1962 in
those taxation years.
The determination of the conflicting positions
taken by the parties is, in my view, dependent
on the resolution of two questions,
(1) is the operation of section 83A(8a) as
amended in 1962 by the repeal of paragraphs
(c) and (d) retrospective in its effect, and if not
(2) what right or privilege did the respondent
acquire or what right accrued to the respondent
under the legislation as it read prior to its
amendment by the repeal of paragraphs (c) and
(d) in 1962,
(a) was it an accrued right which is not affect
ed by repeal of the enactment in part, or
(b) was that right not an accrued right, but
merely a hope or expectation that the legisla
tion would not be amended so as to deprive
the respondent of its tax advantage in future
taxation years which is tantamount to saying
that the respondent had no "right" at all?
The obvious intention of Parliament in repeal
ing paragraphs (c) and (d) of subsection (8a) of
section 83A of the Income Tax Act was to
ensure that a successor corporation need not
acquire the assets of a predecessor corporation
in the restricted manner prescribed, by those
paragraphs to enable the successor to deduct
the drilling and exploration expenses incurred
by the predecessor in computing the successor's
income. As a corollary of the foregoing it seems
to me to be equally obvious that the intention of
Parliament is to preclude a predecessor corpo
ration from deducting drilling and exploration
expenses incurred by it, in computing its
income, when the predecessor has disposed of
its assets or substantially all of its assets to a
successor corporation in a much less restricted
manner than was the case when paragraphs (c)
and (d) were in effect and applicable.
The problem which follows from the forego
ing is whether Parliament intended that differ
ent tax consequences would flow from a trans
action which occurred in 1960 when paragraphs
(c) and (d) were present in the legislation than in
1962 and subsequent taxation years when para
graphs (c) and (d) had been repealed.
In my opinion the amendment of section 83A
(8a) by the repeal of paragraphs (c) and (d) is
not retrospective legislation. The repeal was
specifically made applicable to the 1962 and
subsequent taxation years. It does not purport
to change the tax which would have been pay
able by the respondent in its taxation years
prior to 1962. That would be the respondent's
vested right. The repeal does not purport to
provide that as at those past dates the law shall
be taken to have been what it was not then. If
such were so the legislation would be retrospec
tive. Retrospective operation is one matter.
Interference with existing rights is another.
There is a presumption that legislation speaks
only as to the future, but there is no corre
sponding presumption that legislation is not
intended to affect existing rights. Most Acts of
Parliament do just that.
The cardinal rule of the interpretation of a
statute so as to avoid giving it a retrospective
operation and the established corollaries to such
rule are succinctly stated by Wright J. in In re
Athlumney, Ex Parte Wilson [1898] 2 Q.B. 547,
to which both counsel referred me, where he
said at pages 551, 552:
Perhaps no rule of construction is more firmly established
than this—that a retrospective operation is not to be given
to a statute so as to impair an existing right or obligation,
otherwise than as regards matter of procedure, unless that
effect cannot be avoided without doing violence to the
language of the enactment. If the enactment is expressed in
language which is fairly capable of either interpretation, it
ought to be construed as prospective only.
The legislative scheme of Part I of the
Income Tax Act is that taxes thereunder are
imposed on a yearly basis. Under Division A
thereof an income tax is imposed on the taxable
income for each taxation year of each person
resident in Canada. Division B lays down cer
tain rules to be applied in determining the
income of a taxpayer for a taxation year. These
rules are supplemented by additional rules to be
found in Division H which deals with "Excep-
tional Cases and Special Rules". Subsection
(8a) of section 83A falls within Division H.
Division C lays down the rules as to what
deductions may be made from income to ascer
tain taxable income. By Division H a taxpayer
is obliged to file a "return of income for each
taxation year".
Therefore the computation of income must be
done in each taxation year and to ascertain
taxable income the deduction of expenses must
also be done in each taxation year.
It is the applicable legislation in each taxation
year which governs what tax consequences
flow from a certain transaction and not the
transaction. Parliament may well enact legisla
tion which will provide that in one taxation year
certain tax consequences will flow from a cer
tain transaction and may subsequently enact
legislation which will provide that in later taxa
tion years different taxation consequences will
flow from that transaction. A taxpayer is not
entitled to have the tax consequences of a
transaction preserved inviolate for the future
when a subsequent and different law will be
applicable to it.
For the foregoing reasons I have concluded
that the repeal of paragraphs (c) and (d) of
subsection (8a) of section 83A is not retrospec
tive but prospective.
It is conceded by both parties that, but for the
repeal of paragraphs (c) and (d) of subsection
(8a) the respondent would have been entitled to
continue the deduction of the deferred drilling
and exploration expenses in its 1965, 1966,
1967 and 1968 taxation years.
The question therefore arises whether the
respondent had conferred upon it by the legisla
tion as it existed prior to 1962, that is when
paragraphs (c) and (d) of subsection (8a) had
not been repealed, any acquired or accrued
right or privilege that was not affected by the
repeal of paragraphs (c) and (d).
Whether the respondent has an accrued right
which survives the repeal of paragraphs (c) and
(d) is predicated upon section 35(b) and (c) of
the Interpretation Act R.S.C. 1970, c. I-23
which provides as follows:
35. Where an enactment is repealed in whole or in part,
the repeal does not
(b) affect the previous operation of the enactment so
repealed or anything duly done or suffered thereunder;
(c) affect any right, privilege, obligation or liability
acquired, accrued, accruing or incurred under the enact
ment so repealed; ... .
By section 2(1) "enactment" means an Act of
the Parliament of Canada or regulation or any
portion of an Act or regulation.
The provisions of the Interpretation Act by
virtue of section 3(1) thereof extend and apply,
unless a contrary intention appears, to every
enactment whether enacted before or after the
commencement of the Interpretation Act and
accordingly it is applicable to the Income Tax
Act.
In my opinion the respondent does not have a
right or privilege "acquired, accrued, accruing
or incurred" within the meaning of those words
in section 35(b) of the Interpretation Act.
There is support for this opinion in the deci
sion of the Judicial Committee of the Privy
Council in Abbott v. Minister of Lands [1895]
A.C. 425, an appeal from an order of the
Supreme Court of New South Wales. The
appellant in that case had purchased 40 acres of
Crown land under section 25 of the Crown
Lands Alienation Act, 1861 and had subse
quently become the conditional purchaser of an
additional 200 acres. Section 22 of the Act
provided that the holders in fee simple of lands
granted by the Crown in areas not exceeding
280 acres might make conditional purchases of
adjoining lands which would not be subject to
the condition of residence applicable to condi
tional purchases in other cases. In 1884 the
Crown Lands Alienation Act, 1861 was
repealed. In the repealing Act there was no
counterpart to section 22 of the repealed Act
but there was a proviso in section 2 as follows:
2. Provided always that notwithstanding such repeal
(b) All rights accrued and obligations incurred or imposed
under or by virtue of any of the said repealed enactments
shall subject to any express provisions of this Act in
relation thereto remain unaffected by such repeal.
The effect of the above proviso is identical to
that of section 35(b) of the Interpretation Act
above quoted.
In 1892 the appellant applied for an addition
al conditional purchase of 150 acres adjoining
his holdings and for a conditional lease of 440
acres in virtue of his additional conditional pur
chase. The local land board disallowed his
application and their decision was affirmed by
the courts of New South Wales.
Before the Judicial Committee it was con
tended on the appellant's behalf that, although
section 22 of the 1861 Act was repealed and
there was no corresponding provision in the
1884 Act, the saving proviso in section 2 of the
1884 Act enabled him to make additional condi
tional purchases as if section 22 of the 1861
Act were still in force. He argued that under the
repealed Act he had a right to make the addi
tional conditional purchase and that this right
was a "right accrued" at the time the 1884 Act
was passed and notwithstanding the repeal it
remained unaffected by such repeal.
What the appellant wanted was an additional
conditional purchase free from the condition of
residence as if section 22 of the 1861 Act was
still in force, although under the 1884 Act this
freedom from residence was no longer in effect
as it had been.
This contention was rejected.
The Lord Chancellor said at pages 430 and
431:
The substantial effect of sect. 22, therefore, was, that
whilst it limited the fee-simple holder of lands to conditional
purchases which with the lands so held in fee simple should
not exceed 320 acres, it dispensed with the condition of
residence on the lands conditionally purchased.
Their Lordships think it fallacious to say that the section
in question conferred on the fee-simple holder of land the
"right" to make conditional purchases. The only right
which, as it appears to them, can be said to have been
conferred was that he should be absolved from the condi
tion of residence in the case of lands which he had condi
tionally purchased. The distinction is important, for it shews
how broad the contention of the appellant is. It must, their
Lordships think, necessarily go to this extent, that all the
enactments of the Act of 1861 of which any one could
before their repeal have taken advantage continue for an
indefinite time in force and may notwithstanding the repeal
still be taken advantage of. It is difficult to see how the
contention for example could stop short of this: that any
person entitled to make a conditional purchase under and on
the terms of sect. 13 has an accrued right which is reserved
to him by the saving proviso. For there is no difference
between his position and that of the holder in fee simple,
except that the latter may conditionally purchase without
the obligation of residence, and perhaps with the right to a
preference in case of simultaneous applications for the
same land.
It has been very common in the case of repealing statutes
to save all rights accrued. If it were held that the effect of
this was to leave it open to any one who could have taken
advantage of them, the result would be very far-reaching.
It may be, as Windeyer J. observes, that the power to take
advantage of an enactment may without impropriety be
termed a "right". But the question is whether it is a "right
accrued" within the meaning of the enactment which has to
be construed.
Their Lordships think not, and they are confirmed in this
opinion by the fact that the words relied on are found in
conjunction with the words "obligations incurred or
imposed." They think that the mere right (assuming it to be
properly so called) existing in the members of the communi
ty or any class of them to take advantage of an enactment,
without any act done by an individual towards availing
himself of that right, cannot properly be deemed a "right
accrued" within the meaning of the enactment.
The reasoning in Abbott v. Minister of Lands
(supra) was applied by Thorson P. in Western
Leaseholds Ltd. v. M.N.R. [1961] C.T.C. 490.
There were three issues before the President
but I shall refer -only to one. Section 50(1) of
the Income Tax Act as it then read provided
that when an amount was paid by a taxpayer on
account of tax payable for a taxation year
before the time for filing a return had expired
was less than the tax payable, then the taxpayer
was liable to pay interest on the difference
between those two amounts from the expiration
of the time for filing the tax return to the day of
payment at 6% per annum. But subsection (6)
provided a measure of relief from this obliga
tion to pay interest to the effect that no interest
would be payable for a specified period. Under
the statute as it existed the taxpayer was not
liable for interest for a period from July 1, 1953
to January 10, 1957.
Subsection (6) was repealed effective from
July 28, 1955. It was contended on behalf of
the appellant that it had the right to this free
dom from interest for the period specified by
subsection (6) and that its repeal could not take
away this right from it. This contention was
based on section 19(1)(c) of the Interpretation
Act [R.S.C. 1952, c. 158], which provided as
follows:
19. (1) Where any Act or enactment is repealed, or
where any regulation is revoked, then, unless the contrary
intention appears, such repeal or revocation does not, save
as in this section otherwise provided,
(c) affect any right, privilege, obligation or liability
acquired, accrued, accruing or incurred under the Act,
enactment or regulation so repealed or revoked, ...
It was submitted that subsection (6) con
ferred a right or privilege upon the appellant
and that, in the absence of express terms, the
repeal of the subsection did not deprive the
appellant of that right or privilege.
Thorson P. rejected that contention on the
ground that the appellant did not have a right or
privilege "acquired, accrued, accruing or
incurred under the Act repealed" within the
meaning of section 19(1)(c) of the Interpretation
Act of such a nature as to give it the benefit of
continual freedom from interest for a period
subsequent to the date of the repeal of the relief
giving subsection.
In support of this conclusion Thorson P.
relied upon Abbott v. Minister of Lands (supra)
in which the Judicial Committee held that the
appellant did not have a right accrued for the
reasons I have quoted above.
At page 502 Thorson P. said:
Similarly, in my opinion, it ought to be held in the present
case that the freedom from interest granted by subsection
(6) of Section 50 was not a right or privilege "acquired,
accrued, accruing or incurred" under the subsection in the
sense that it continued to exist after the subsection was
repealed and freedom from interest was no longer permiss
ible. While the appellant was not required to pay interest for
the interest-free period as long as subsection (6) was in
effect, this privilege, if it may be so called, disappeared
when freedom from the payment of interest came to an end
when the subsection was repealed on July 28, 1955.
The right that the respondent herein enjoyed
was the right to take advantage of the provi
sions of the Income Tax Act as they read in
each taxation year. In its taxation years subse
quent to the sale of its assets in 1960 the
respondent had the right to deduct deferred
drilling and exploration expenses, if the other
prescribed conditions existed, by virtue of the
existence of paragraphs (c) and (d) of subsec
tion (8a) because that right did not pass to the
purchaser. That right continued until the repeal
of paragraphs (c) and (d) applicable to the 1962
taxation year. There was no act that the
respondent could have done which would con
vert its right to take advantage of the provisions
of the Income Tax Act in any prior taxation
year into an "accrued right" within the meaning
of the Interpretation Act which would survive
the repeal of paragraphs (c) and (d) of subsec
tion (8a) of section 83A of the Income Tax Act.
At the most what the respondent had was a
hope or expectation that it might be able to
deduct accumulated drilling and exploration
expenses in future years which hope or expec
tation is predicated upon the legislation confer
ring that right of deduction remaining
unchanged. The respondent is not entitled to
have its status or character as a "non-predeces
sor corporation" under the law as it read prior
to the repeal of paragraphs (c) and (d) of sub
section (8a) preserved inviolate for future taxa
tion years when a different law prevails. Such a
hope or expectation falls far short of anything
that answers to the description of the words
"right" or "privilege" in section 35(c) of the
Interpretation Act.
In recapitulation, the crux of the matter is, in
my view, that under the legislative scheme of
the Income Tax Act, a taxpayer is obliged to file
a return of income for each taxation year. The
deductibility of any amount to determine tax
able income; in each taxation year is dependent
1
upon the law as it exists in that taxation year.
Applying this premise to the circumstances in
the present appeal, it is clear that under the law
as it existed in the respondent's taxation years
between the sale of the respondent's assets in
1960 and the repeal of paragraphs (c) and (d) of
subsection (8a) of section 83A in 1962 the
respondent was entitled to deduct drilling and
exploration expenses over a period of years
until those expenses were exhausted, but by the
repeal of the above paragraphs in 1962 that law
was changed so that drilling and exploration
expenses would no longer be deductible in the
hands of respondent but in the hands of its
successor corporation.
The contention is made that by the repeal of
paragraphs (c) and (d) in 1962 it was the inten
tion of Parliament that the amended law would
be applicable to transactions which took place
subsequent to 1962. In my opinion that conten
tion is untenable because the tax consequences
which flow from a transaction are governed by
the law as applicable in the taxation year in
which the return of income is filed, rather than
the law as applicable in the year the transaction
occurred. At that prior time the respondent had
a "character" or "status" as a "non-predecessor
corporation" and as such was entitled to take
advantage of the legislation which permitted the
deduction of drilling and exploration expenses
in its taxation year when it had off-setting
income. But Parliament can change that "char-
acter" or "status" of the respondent from that
of a "non-predecessor corporation" to that of a
"predecessor corporation" which it did by the
repeal of paragraphs (c) and (d) in 1962.
Accordingly the taxable income of the
respondent in its 1965, 1966, 1967 and 1968
taxation years is governed by the legislation in
effect in those taxation years. By that legisla
tion the respondent was a "predecessor corpo
ration" precluded from deducting drilling and
exploration expenses. The tax results which fol
lowed from the transaction in 1960 are different
in the 1965, 1966, 1967 and 1968 years by
virtue of the change in legislation in 1962.
It therefore became necessary to consider
whether the respondent had an "acquired" or
"accrued" right prior to 1962 which would sur
vive the repeal of paragraphs (c) and (d) in
1962. For the reasons I have expressed I have
concluded that the respondent had no such "ac-
quired or accrued right" within the meaning of
those words in section 35(c) of the Interpreta
tion Act.
What the respondent had was the right to
take advantage of the legislation as it existed
and the hope that that legislation would remain
unchanged so that it might continue to take
advantage of that legislation. As I have previ
ously concluded that is not a "right" or "privi-
lege" that answers to the description of those
words in the Interpretation Act let alone an
"accrued right". I am unable to conceive of
what act the respondent could have done to
convert its very abstract right to take advantage
of the tax legislation conferring the benefit of a
deduction upon it which would convert such an
abstract right into a concrete right which would
survive the repeal of that legislation.
I therefore answer the question posed in
paragraph 12 of the special case in the
affirmative.
Having done so it follows that, in accordance
with paragraph 13 of the special case, the
appeal is allowed with costs payable to the
Minister and the assessments with respect to
the respondent's 1965, 1966, 1967 and 1968
taxation years are restored and the respondent's
cross-appeal, as raised by paragraph 9 of the
respondent's reply to the notice of appeal, is
dismissed without costs to either party.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.