A-46-74
Wardean Drilling Co., Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Pratte J. and Man
ning D.J.—Calgary, March 2 and 3, 1978.
Income tax — Income calculation — Deductions —
Petroleum exploration and drilling expenses — Appellant's
gas well sold — Whether or not this transaction amounting to
sale of all or substantially all assets so as to deny appellant
the right to deduct drilling and exploration expenses in future
years — Income Tax Act, R.S.C. 1952, c. 148, s. 83A(8a).
This is an appeal from the Trial Division's decision to dismiss
an appeal from assessments, under Part I of the Income Tax
Act, for the 1968 and 1969 taxation years. At issue is the
contention that appellant's principal business in 1964 was not a
gas business but a combination of a gas business and a mining
business and the contention that the sale of the "well" was not
a sale of all or substantially all the assets used by the appellant
in carrying on such business. If the sale of the well amounted to
the sale of all or substantially all the assets, by operation of
section 83A(8a) the drilling and exploration expenses that
appellant sought to deduct would flow from the property, but if
the transaction did not amount to a sale of all or substantially
all the assets, appellant would continue to have the right to
deduct those drilling and exploration expenses in future years
when sufficient income was generated to use those credits.
Held, the appeal is dismissed. The Trial Judge held that the
appellant's principal business in 1964 was a "gas business",
rejecting appellant's contentions. There was evidence on which
he could so find and it cannot be said that such finding was
clearly wrong. The Trial Judge also held that the sale of the
well in 1964 was a sale of "substantially all the property" used
by appellant in that business; he was clearly right. It was
argued that the relevant portion of section 83A(8a) must be
construed as not applying to the sale of a single producing
property (even though it was substantially all the assets used in
the activities of the business) when the sale did not include
corporate books and records that would enable the purchaser to
take advantage of the section 83A deductions to which it would
become entitled by virtue of section 83A(8a) if that provision
did apply. The relevant words of the provision are not open to
any such restrictive interpretation.
Minister of National Revenue v. Consolidated Mogul
Mines Ltd. [1969] S.C.R. 54, distinguished.
INCOME tax appeal.
COUNSEL:
F. R. Matthews, Q.C., for appellant.
L. P. Chambers and C. G. Pearson for
respondent.
SOLICITORS:
MacKimmie, Matthews, Calgary, for appel
lant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered orally in English by
JACKETT C.J.: This is an appeal from a judg
ment of the Trial Division [[1974] 1 F.C. 336]
dismissing an appeal from assessments under Part
I of the Income Tax Act, R.S.C. 1952, c. 148, for
the 1968 and 1969 taxation years.
The legislative provisions involved and the facts
giving rise to the controversy appear from a read
ing of the reasons of the learned Trial Judge and I
propose to mention only what I regard as relevant
to the view that I take of the merits of the appeal
to this Court on the assumption that one has in
mind what appears in the reasons of that learned
Judge.
As it seems to me, it is clear
(1) that the appellant is not entitled to the
section 83A deductions in issue unless its princi
pal business in the 1968 and 1969 taxation years
was
(a) production, refining or marketing of
petroleum, petroleum products or natural gas,
or exploring or drilling for petroleum or natu
ral gas (hereinafter referred to as a "gas
business"), or
(b) mining or exploring for minerals (herein-
after referred to as a "mining business"); and
(2) assuming that the appellant was otherwise
entitled to such deductions, on the findings of
fact of the Trial Division
(a) that the appellant's business in 1964 was
a "gas business", and
(b) that the "well" sold by the appellant in
1964 was "all or substantially all of the prop
erty" used by it in carrying on that business,
and assuming that such findings are upheld, that
the appellant had, by virtue of the sale of that
"well" become disentitled to make such deduc
tions, by virtue of the concluding words of sec
tion 83A(8a).
On the pleadings on which the matter went to
trial, it would seem that both these branches of the
relevant facts were in issue. With reference to the
principal business of the appellant, see paragraph
A(2) of the notice of appeal and paragraph
A(1) (c) of the amended reply. With reference to
section 83A(8a), see section 3(b) of the amended
reply.
By his opening address at the trial, counsel for
the appellant said that the dispute was, essentially,
"whether or not that single transaction in April,
1964, amounted to a sale of all or substantially all
of the assets, in which case we admit that by the
operation of subsection (8a) the drilling and
exploration expenses which we have sought to
deduct .. . flowed with the property" and he fur
ther said "Our position ... is that was not a sale of
all or substantially all of the assets of the company
used by it in carrying on its business of petroleum
and natural gas and mining, but therefore it con
tinued to have the right to deduct those drilling
and exploration expenses in future years when
sufficient income was generated to justify the use
of those credits" and, having said that, he said
"Now that's the dispute in a nutshell ...".
In effect, as I understand it, counsel for the
appellant, with the acquiescence of counsel for the
respondent, drew the lines of battle on the basis
that what had to be decided was
(a) the correctness of his contention that the
principal business of the appellant in 1964 was
not a "gas business" but was a combination of a
"gas business" and a "mining business"; and
(b) the correctness of his contention that the
sale of the "well" was not a sale of all or
substantially all of the assets used by the appel
lant in carrying on such business.
No mention was made in opening of the other fact
essential to the appellant's success, which was put
in issue by the pleadings, viz: that, during the 1968
and 1969 taxation years, the appellant's principal
business was either a "gas business" or "a mining
business".
The learned Trial Judge rejected the appellant's
contention as to the appellant's principal business
in 1964 and held that its principal business in that
year was a "gas business". I am of opinion that
there was evidence on which he could so find and
that it cannot be said that such finding was clearly
wrong.
In reaching that conclusion, I have carefully
considered the appellant's contention in this Court
that the learned Trial Judge failed to give effect to
a legal principle established by Minister of Na
tional Revenue v. Consolidated Mogul Mines
Limited'. As I understand that decision, it estab
lishes that a person may carry on a "mining
business" by becoming, in effect, a partner in the
"mining business" of each of several companies in
each of which it has a substantial share holding
and with which it has an arrangement or contract
under which it, to a large extent, controls the
carrying on of the other company's mining activi
ties. Whether or not a person is carrying on such a
"mining business" must be a question to be deter
mined on the facts of each case and, in my view,
no facts have been established in this case to show
that the appellant was carrying on such a business
in 1964. The Mogul case does not, in my view,
have the effect of making it follow as a matter of
law that a parent company is a company carrying
on a "mining business" by reason only of the fact
that its subsidiary carries on a "mining business",
the fact that the directors of the two companies
are substantially the same, and rather vague indi
cations of possible, minor uncoordinated forays
into mining exploration such as is found on the
record of this case.
Having decided that the appellant was, in 1964,
carrying on a "gas business", the learned Trial
Judge, after a careful review of the evidence, held
that the sale of the "well" in 1964 was a sale of
"substantially all the property" used by the appel
lant in that business. In my view, he was not only
' [1969] S.C.R. 54.
not clearly wrong in so holding but, on the facts as
revealed by the record, he was clearly right.
In this Court, as I understood counsel, it was
argued that the relevant portion of section 83A(8a)
must be construed as not applying to a sale of a
single producing property (even though it was
substantially all the assets used in the activities of
the business) when the sale did not include corpo
rate books and records that would enable the
purchaser to take advantage of the section 83A
deductions to which it would become entitled by
virtue of section 83A(8a) if that provision did
apply. In my view, the relevant words of the
provision are not open to any such restrictive
interpretation.
I am, therefore, of opinion that the appeal
should be dismissed with costs.
I should, moreover, say that, in my view, even if
the appellant had succeeded in escaping from the
provisions of section 83A(8a), the question would
still have remained as to whether the appellant was
entitled to take advantage of section 83A(3) and
(3b), in respect of the 1968 and 1969 taxation
years, having regard to the necessity of establish
ing that, in those years, its principal business was
either a "gas business" or a "mining business".
Even if there were admissions at trial on this
question (which is not clear to me), having regard
to the evidence, it would seem that the sole profit
making operation of the appellant in those years
was "contract drilling", which, prima facie, is
neither a "gas business" nor a "mining business". 2
However, as this fact does not appear to have been
considered as being in issue at trial, if it had
become relevant, I would have been inclined to
refer the assessments back to the respondent for
reconsideration having regard only to this aspect
of the matter. In this connection, I must express
my reservation with respect to any suggestion that
subsection (3) or (3b) would apply where the
2 As I understand the law as laid down by the Supreme Court
of Canada, where there is an admission that is contradicted by
the evidence, the admission must be regarded as having been
made in error. See Sinclair v. Blue Top Brewing Co. Ltd.
[1947] 4 D.L.R. 561, at 562, and The Queen v. Secretary of
State [1953] 1 S.C.R. 417, at p. 424.
"principal business" at the relevant time was a
combination of a "gas business" and a "mining
business" and was neither a "gas business" nor a
"mining business".
* * *
PRATTE J. concurred.
* * *
MANNING D.J. concurred.
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.