A-474-80
Spur Oil Ltd. (formerly Murphy Oil Quebec Ltd.)
(Appellant)
v.
The Queen (Respondent)
Court of Appeal, Pratte and Heald JJ. and Ver-
chere D.J.—Calgary, May 26, 27 and 28; Ottawa,
July 3, 1981.
Income tax — Income calculation — Deductions — Appeal
from Trial Division decision dismissing appeal from disallow-
ance of a deduction — Appellant entered into an agreement
with an affiliated company to purchase crude oil at $0.27 per
barrel more than what appellant had paid to a previous
supplier — Whether agreement with previous supplier was a
valid and subsisting contract — Whether the finding of the
Trial Judge that the second transaction was artificial amount
ed to a finding of sham — Appeal is dismissed — Income Tax
Act, R.S.C. 1952, c. 148, s. 137(1).
Appeal from a judgment of the Trial Division dismissing part
of an appeal from a tax assessment for the 1970 taxation year.
The Minister disallowed a deduction equal to $0.27 per barrel
of crude oil purchased by the appellant from Tepwin on
account of expenses. The appellant purchased oil for $1.9876
per barrel from a company owned by the same U.S. parent
company pursuant to a "Quotation Letter" until February 1,
1970, at which time it agreed to purchase crude oil for $2.25
per barrel from an affiliated off-shore Bermuda corporation
(Tepwin). The Trial Judge found that the agreement to pur
chase oil for $1.9876 per barrel was a valid and subsisting
contract and that the agreement to purchase oil for $2.25 per
barrel was artificial. Consequently he found that the $0.27 per
barrel was not an allowable expense. The appellant alleges that
the Trial Judge erred in failing to find that the fair market
value of the crude oil purchased in 1970 from Tepwin was
equal to or in excess of $2.25 per barrel paid to Tepwin and in
finding that the Quotation Letter was a valid and subsisting
contract.
Held, the appeal is allowed. The Trial Judge erred in finding
that the Quotation Letter was a valid contract. There is a total
failure of consideration flowing from the appellant under the
Quotation Letter. Also, the Quotation Letter is not a contract
because two essential and critical terms of the contract are not
settled, that is, quantity and quality of the goods. The contents
of the letter must be examined on the basis of whether, as a
matter of law, they form a legally binding contract, and not
whether, by extrinsic evidence, it appears that the parties
intended to enter into a legally binding contract. Regardless of
what the parties may have intended, they did not execute a
legally binding contract. There also was not any contract by
conduct during the relevant period. The principal officers of the
appellant knew in December 1969 that the purpose for the
creation of Tepwin was to take over the supply of proprietary
crude to the appellant. The appellant knew that beginning in
February of 1970 Murphy Trading would no longer be selling
crude oil to the appellant under the Quotation Letter. The
respondent submitted that the Quotation Letter was an offer to
supply oil which remained unrevoked. Since the appellant knew
that effective in February 1970 the Tepwin contract would
supplant the Quotation Letter, it was a necessary inference that
the Quotation Letter was no longer operative either as an offer
of crude oil to the appellant or an invitation to the appellant to
tender offers for crude. No formal termination was given by
either party, but there is no such requirement so long as the
appellant, at the relevant time, was aware that it was in fact no
longer operative. The final submission of the respondent was
that the finding by the Trial Judge of artificiality amounts to a
finding of sham. The question as to whether or not the Tepwin
contract is valid is irrelevant to a final determination of the
issue in this appeal. Subsection 137(1) does not prevent some
one from generating the same profit from a transaction with an
affiliate as it would from a similar transaction with a third
party with whom it was dealing at arm's length. Such a
transaction would only attract the prohibition of subsection
137(1) when the appellant's cost of crude oil supply by reason
of an act of the appellant, or those controlling it, increased
above the cost prevailing in the industry at the same time and
under similar circumstances. Such an event did not occur in
this case.
May and Butcher, Ltd. v. R. [1929] All E.R. Rep. 679,
referred to. Snook v. London & West Riding Investments,
Ltd. [1967] 1 All E.R. 518, referred to.
APPEAL.
COUNSEL:
F. R. Matthews, Q.C. for appellant.
L. P. Chambers, Q.C. and C. Pearson for
respondent.
SOLICITORS:
MacKimmie Matthews, Calgary, for appel
lant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal from a judgment of
the Trial Division [[1981] 1 F.C. 461], allowing in
part, but otherwise dismissing the appeal of the
appellant from its income tax assessment for the
taxation year 1970. The appellant was a Canadian
corporation with head office at Calgary. At all
material times it carried on business under the
name of Murphy Oil Quebec Ltd., in the Province
of Quebec as a refiner and marketer of petroleum
products and in the Province of Alberta as an
explorer and producer of crude oil and natural gas.
Its corporate name was changed in 1976 to Spur
Oil Ltd. The appellant was a wholly-owned sub
sidiary of Murphy Oil Company Ltd. of Calgary
(the Canadian parent) which also engaged in the
business of exploring for and producing oil and gas
in Western Canada and the business of marketing
crude oil in Western Canada and of refining
petroleum products in Ontario. At all material
times the Canadian parent was, in turn, a partial-
ly-owned subsidiary of Murphy Oil Corporation
(the U.S. parent) of El Dorado, Arkansas, U.S.A.
which, through subsidiary corporations carried on
the business of a fully-integrated oil company in
the United States and Canada, as well as the
business of refining crude oil and marketing
refined products in the United Kingdom and
Sweden and the business of exploring for and
producing and selling petroleum substances in
Venezuela, off-shore Iran, Libya, Nigeria,
Indonesia and elsewhere. Tepwin Company Lim
ited (Tepwin) was an off-shore Bermuda company
wholly owned by the Canadian parent.
In the 1970 assessment, the Minister had disal
lowed as a deduction the amount of $1,622,728.55
on account of expenses claimed by the appellant in
computing its income for 1970 and had failed to
eliminate from the appellant's 1970 income the
profit element of a crude oil shipment which was
properly attributable to the 1971 rather than to
the 1970 taxation year.
The elimination of the said profit element
reduced the appellant's taxable income in 1970 to
$1,063,368. Accordingly, the learned Trial Judge,
to give effect to that elimination, allowed the
appeal of the appellant and referred the assess
ment back to the Minister for reassessment on the
basis that the appellant's taxable income for its
1970 taxation year was $1,063,368. The said disal
lowed deduction of $1,622,728.55 was found by
the learned Trial Judge to be approximately the
equivalent of 27 cents U.S. per barrel of crude oil
purchased by the appellant in its 1970 taxation
year from Tepwin (hereinafter referred to as "the
Tepwin charge"). The Tepwin charge represents
the difference between $1.9876 U.S. per barrel,
the price at which the appellant had purchased
crude oil from Murphy Oil Trading Company (a
Delaware corporation wholly owned by the U.S.
parent) under its arrangement with that company
dated August 2, 1968 (the Murphy Oil trading
arrangement), and $2.25 U.S. per barrel, the price
at which the appellant agreed to purchase crude oil
in its 1970 taxation year after February 1970
under its contract with Tepwin dated February 1,
1970 (the Tepwin contract).
The learned Trial Judge made the following
findings on the evidence adduced:
(a) that the Murphy Oil trading arrangement
was considered by the parties to be a valid contract
and all parties acted upon it pursuant to its terms,
at all relevant times, including the taxation year
1970, notwithstanding the Tepwin contract;
(b) that Murphy Oil Trading Company, prior to
and up to February 1, 1970, did in fact sell crude
oil to the appellant at $1.9876 U.S. per barrel
under the Murphy Oil trading arrangement and
that this arrangement was never formally or infor
mally abrogated, the learned Trial Judge accord
ingly concluding that the Murphy Oil trading
arrangement was a valid and subsisting contract;
(c) that it was never intended that the officers
and directors of Tepwin in Bermuda would exer
cise management and control of Tepwin's business
in any aspect. Instead they were to carry out the
instructions given by the officers and directors of
the U.S. parent, and, to a lesser degree in certain
matters, the instructions given by the officers and
directors of the Canadian parent and the
appellant;
(d) that the officers and directors of Tepwin in
Bermuda had nothing to do with the purchase of
crude oil from the Persian Gulf area or from the
spot market or with the delivery of it to Portland,
Maine, for on-going pipeline delivery to Montreal
or with the sale of the crude oil to the appellant;
and specifically that Tepwin did not do so in
Bermuda by way of those officers or directors qua
Tepwin who had the management and control of
Tepwin (those directors being personally resident
in El Dorado, Arkansas and in Canada);
(e) that the purpose of acquiring and operating
Tepwin was to use it as a vehicle to repatriate
tax-free dividends to its Canadian parent by caus
ing Tepwin to declare such dividends; and
(f) that what the officers, directors and solicitors
in Bermuda did was to act merely as "scribes"
under the direction of Mr. J. W. Watkins, Secre
tary and General Counsel of the U.S. parent of El
Dorado, Arkansas, for the purpose of having direc
tors' meetings, declaring dividends, which divi
dends were passed tax-free to the Canadian
parent; that said dividends were based on the
quantum of the Tepwin charge times the number
of gallons of crude oil in each shipload which left
the Persian Gulf for delivery to Portland, Maine,
en route by pipeline to Montreal; that, besides
declaring those dividends, the Bermuda officers,
directors and solicitors did practically nothing
because Tepwin did not carry on the business of
buying, selling and delivering crude oil in 1970.
The learned Trial Judge then found the Tepwin
contract artificial within the meaning of subsection
137(1) of the Income Tax Act, R.S.C. 1952, c.
148, which reads as follows:
137. (1) In computing income for the purposes of this Act, no
deduction may be made in respect of a disbursement or expense
made or incurred in respect of a transaction or operation that,
if allowed, would unduly or artificially reduce the income.
In the result, he found that the Tepwin charge was
not an allowable expense in computing appellant's
net income for the 1970 taxation year.
The appellant alleges two fundamental errors in
the reasons for judgment of the learned Trial
Judge. Initially, the appellant submits error in a
failure to determine the fair market value at Port-
land, Maine of the Iranian and Venezuelan crude
oil purchased by the appellant during its 1970
fiscal year from Tepwin and, in particular, error in
failing to find as an inference of fact that such fair
market value was equal to or in excess of the price
of $2.25 U.S. per barrel paid by the appellant to
Tepwin for such crude oil. The learned Trial Judge
made no specific finding as to fair market value.
However, there was considerable evidence adduced
that the fair market value at Portland, of the oil
purchased by the appellant from Tepwin, was in
excess of appellant's purchase price of $2.25 per
barrel (probably in the order of $2.2635 per
barrel). Furthermore, the respondent, in its
factum, (see paragraph 9 thereof) and in its oral
submissions before us, conceded that the Tepwin
contract was below fair market value but submit
ted that this fact was not determinative of the
applicability of subsection 137(1) supra.
The second allegation of fundamental error is
the finding by the learned Trial Judge that the
"Quotation Letter" was at all material times a
valid and subsisting contract (A.B., Vol. III, p.
1236).
The appellant conceded that if this finding by
the learned Trial Judge is correct, then the failure
to enforce such contractual right against Murphy
Oil Trading and the actual purchase by it from
Tepwin at an increase of 27 cents per barrel would
result in an artificial reduction of its income within
the meaning of subsection 137(1) even though that
purchase price of $2.25 U.S. was below the then
current fair smarket value in arm's length
transactions.
The "Quotation Letter" referred to supra reads
as follows (see A.B., Vol. II, pp. 211-214 incl.):
Gentlemen:
This letter when executed by you in the space hereinafter
provided shall constitute our agreement whereby Murphy Oil
Trading Company (Seller) agrees to sell and deliver and
Murphy Oil Quebec Ltd. (Buyer) agrees to purchase and
The appellant characterizes the letter of August 2, 1968
from Murphy Oil Trading to the appellant and its acceptance
by the appellant on August 30, 1968 as a "Quotation Letter".
The respondent and the learned Trial Judge characterized it as
the Murphy Oil trading contract.
receive crude oil in accordance with the following terms, provi
sions and conditions:
1. TERM: The term of this Agreement shall be for a period of
time commencing August 1, 1968 and ending April 30, 1973.
2. QUALITY: Iranian Light Export Grade crude oil of 33.0°-
34.9° API gravity as available to Seller from time to time.
Upon acceptance by Buyer, Seller may substitute other crudes
of similar quality.
3. QUANTITY: The maximum quantity of crude oil to be sold
and delivered under this agreement shall be as follows:
August 1, 1968 through April 30, 1969-12,750 barrels per
day.
May 1, 1969 through April 30, 1970-14,550 barrels per
day.
May 1, 1970 through April 30, 1973-15,225 barrels per
day.
4. DELIVERY AND TITLE: Delivery shall take place and title and
risk of loss shall pass from Seller to Buyer when the crude oil
passes the vessel's outlet flange and enters Portland Pipe Line
Corporation's receiving hose, Portland, Maine, which is the
port of delivery therefor.
5. DETERMINATION OF QUANTITY & QUALITY: The quantity
and quality of crude oil sold and delivered hereunder shall be
determined by Portland Pipe Line Corporation's personnel, as
inspector, unless either Buyer or Seller desires an independent
inspector. In the latter case such inspector shall be appointed
jointly and the cost of his services shall be shared equally by the
parties hereto. The inspector's determination as to quantity and
quality shall be conclusive and binding.
The quantity of each cargo shall be determined by taking the
temperature of and measuring and gauging the crude oil either
in the tanks to which delivery is made, both immediately before
and immediately after delivery, or by using meters where
meters are available. All measurements hereunder shall repre
sent one hundred per cent (100%) volume, consisting of barrels
of forty-two (42) United States gallons, the quantity and
gravity of which will be adjusted to sixty degrees (60°) Faren-
heit temperature. Procedures for measuring and testing, except
for delivery through positive displacement type meters shall be
computed in accordance with the latest ASTM published meth
ods then in effect. Procedures for such meter type deliveries
shall be in accordance with latest ASME-API (Petroleum PD
Meter Code) published methods then in effect. In the event of
meter failure, all measurements and tests shall be computed in
accordance with the second and third sentence of this para
graph. The crude oil delivered hereunder shall be merchantable
and acceptable to the pipeline carriers involved but shall not
exceed one percent (1%) BS&W and full deductions shall be
made for all BS&W content according to the ASTM Standard
Method then in effect.
6. PRICE: Subject to the other provisions as in this "Article 6"
and "Article 8" hereinafter set forth, the price payable for
Iranian Light Export Grade Crude Oil delivered hereunder
shall be $1.9876 (U.S. funds) per barrel.
If, as a result of delivering crude oil other than Iranian Light
Export Grade, a "processing fee penalty" is assessed to the
existing processing fee now in existence between Buyer and BP
Canada Limited under contract dated October 20, 1966, as
amended, the price payable for the crude oil delivered here-
under shall be reduced by the amount of such "processing fee
penalty".
7. PAYMENT: Unless otherwise agreed to by Seller's prior
written consent, payment shall be made in U.S. Dollars within
15 days of receipt of invoice and supporting documents cover
ing each cargo unloaded.
8. DUTIES AND TAXES: The amount of any new or increased
taxes, duties, fees or other similar charges (hereinafter called
"taxes"), which may hereafter be imposed or levied by any
governmental authority having jurisdiction in the premises
upon the crude oil sold and delivered hereunder, or upon the
export from the country of origin or by the United States, or
upon the importation into the United States or Canada, or upon
the delivery, sale or use of such crude oil, or upon the produc
tion, manufacture, storage or transportation thereof, or upon
any vessel or pipeline used in such transportation, shall, subject
to the second paragraph of this Article 8, be for the account of
Buyer.
No new or increased taxes at any time imposed or levied upon
such crude oil, before the crude oil in question passes the
tankship's permanent hose connection at the loading port in the
country of origin, shall be for the account of Buyer, unless and
until Seller notifies Buyer of such new or increased taxes. From
the date such notice is received by Buyer, such new or increased
taxes shall, as aforesaid, be for the account of and paid by
Buyer unless Buyer forthwith notifies Seller that Buyer elects
not to pay such new tax or taxes or, in the case of any increased
tax, the amount by which such tax is increased. If Buyer does
so notify Seller, then, unless Seller elects forthwith to pay such
new tax or taxes, or the amount of increase of any such
increased tax, for Seller's own account, this Agreement shall
terminate effective as of the date on which such notice is
received from Buyer.
Any sums payable by Buyer as aforesaid and paid by Seller for
the account of Buyer shall be added to the price of the crude oil
sold and delivered hereunder and shall be reimbursed by Buyer
to Seller, when payment therefor is otherwise made as provided
herein.
9. WARRANTY: Seller warrants title to all crude oil sold and
delivered hereunder and that such crude oil shall be free from
all royalties, liens, encumbrances and that all taxes applicable
thereto prior to delivery shall have or will be paid.
10. RULES AND REGULATIONS: All of the terms and provisions
of this Agreement shall be subject to the applicable orders,
rules and regulations of all governmental authorities of all
countries having jurisdiction in the premises.
11. FORCE MAJEURE: Either party hereto shall be relieved from
liability for failure to deliver or receive crude oil hereunder for
the time and to the extent such failure is occasioned by war,
fire, explosions, riots, strikes or other industrial disturbances,
acts of God, governmental regulations, restraints, embargoes,
disruption or breakdown of production or transportation facili
ties, perils of sea, delays of pipeline carrier in receiving and
delivering crude oil tendered, or by any other cause whether
similar or not, reasonably beyond the control of such party,
provided that nothing herein contained shall serve to excuse
Seller from making payment hereunder in the manner herein
required.
12. SPECIAL PROVISIONS: (a) The size of the vessels, arrival
dates at port of delivery, laytime and demurrage rates shall be
mutually agreed upon between Buyer and Seller.
(b) Buyer warrants that it has filed all documents with the
proper U.S. Customs offices and agents required in order for
the crude oil to be sold and delivered hereunder to be received
"in bond" upon entry into the United States at the port of
delivery and transported from such receiving facility into
Canada.
In the event this letter correctly sets forth your understanding
of our agreement, then you are requested to evidence that fact
by signing and returning the two duplicate originals hereof in
the space as so provided.
Yours very truly,
MURPHY OIL TRADING COMPANY
"E.H. Haire"
E.H. Haire
Vice President
EHH:mas
Enclosures
APPROVED AND ACCEPTED this
30th day of August, 1968.
MURPHY OIL QUEBEC LTD.
By "A.W. Grant".
The appellant's submission is that the question as
to whether or not the "Quotation Letter" supra is
a contract creating enforceable rights for the
respective parties thereto is a matter of law. I
agree with that submission 2 . I have also reached
the conclusion that the learned Trial Judge was in
error in finding that the "Quotation Letter" supra,
was a valid, subsisting and enforceable contract. I
agree with counsel for the appellant that there is a
total failure of consideration, flowing from the
appellant to Murphy Oil Trading under the "Quo-
tation Letter". The appellant does not agree to do
anything under the letter. Paragraph 3 dealing
2 See: Hillas & Co., Ltd. v. Arcos, Ltd. [1932] All E.R. Rep.
494 at p. 502 per Lord Wright.
with the quantity of crude oil speaks of a max
imum but provides no minimum quantity of oil to
be sold and delivered under the agreement. In my
opinion, appellant's counsel is correct when he says
that there is no obligation, present or future, on
the part of the appellant to purchase a single
barrel of crude oil from Murphy Oil Trading.
Furthermore, there is no certain or ascertainable
volume of crude oil which can be said to be the
subject-matter of a contract for purchase. Like
wise, in paragraph 2 of the letter, the quality of
the oil to be sold is not defined with any precision.
Thus, even if it could be said that there was
consideration moving from the promisee, the
"Quotation Letter" is not a contract because two
essential and critical terms of the contract are not
settled, that is, quantity and quality of the goods.
As stated by Lord Buckmaster in May and Butch
er, Ltd. v. R. 3 :
It has been a well-recognised principle of contract law for many
years that an agreement between two parties to enter into an
agreement by which some critical part of the contract matter is
left to be determined is no contract at all ... .
and by Viscount Dunedin in the same case at page
683:
The law of contract is that to be a good contract you must have
a concluded contract, and a concluded contract is one which
settles everything that is necessary to be settled, and leaves
nothing still to be settled by agreement between the parties.
The respondent, in reply, submits initially that
there was ample evidence to justify the finding of
the learned Trial Judge that both the appellant
and Murphy Oil Trading intended the "Quotation
Letter" of August 2, 1968, to be a binding con
tract. The difficulty with this submission in my
view is that the question as to whether the letter of
August 2, 1968 is a contract is a question of law
and not of fact. The contents of that letter must be
examined on the basis of whether, as a matter of
law, they form a legally binding contract, and not
whether, by extrinsic evidence, it appears that the
parties intended to enter into a legally binding
contract. On the basis of the August 2, 1968
document, it is my opinion that, regardless of what
they may have intended, they did not execute a
legally binding contract.
Alternatively, the respondent submits that if the
August 2, 1968 document was not a valid and
3 [1929] All E.R. Rep. 679 at p. 682.
subsisting contract, that nevertheless a contract for
the purchase and sale of specific quantities of
crude oil at a specific price came into existence by
the conduct of the parties by early August, 1968
which contract was at all material times a valid
and subsisting contract. In support of this submis
sion, counsel relied on, inter alia, Chitty on Con
tracts, 24th ed., Vol. 1, paragraph 749 (page 343)
where the view is expressed that while extrinsic
evidence is not admissible to vary the terms of a
written instrument, evidence may be admitted to
show that the instrument was not intended to
express the whole agreement between the parties.
However, the learned author also expresses the
following caution:
But a heavy burden of proof rests upon the party who alleges
that a seemingly complete instrument is incomplete and it
would seem that the extrinsic evidence must not be inconsistent
with the terms of the instrument.
In order to evaluate this submission, it is instruc
tive to look at the uncontradicted extrinsic evi
dence. For many years prior to 1970, the crude oil
trading function in the Murphy conglomerate was
performed by Murphy Oil Trading which serviced
the major needs of the enterprise around the world
from company headquarters in El Dorado, Arkan-
sas. Late in 1969, the management of the U.S.
parent decided to divide the functions of Murphy
Oil Trading into three segments based on the
geographical area being served by each segment.
So far as the Canadian operations were concerned,
it was necessary to transfer to a new corporation
that portion of the business of Murphy Oil Trad
ing which related to the crude oil supply from
off-shore Canada to meet appellant's needs under
its processing contract with B.P. Canada, together
with those arrangements by Murphy Oil Trading,
then in place for transportation of the crude oil
from point of its origin to Montreal. It was decided
that the new corporation would be a Bermuda
corporation (Tepwin) since it would not be trans
acting business in either Canada or the United
States. The Tepwin contract was entered into
effective February 1, 1970. The principal officers
of the appellant knew in December, 1969 that the
purpose for the creation of Tepwin was to take
over the supply of proprietary crude to the appel
lant. The appellant knew that beginning in Febru-
ary of 1970 Murphy Trading would no longer be
selling crude oil to the appellant under the Quota
tion Letter. Accordingly, it is my view that, on the
uncontradicted evidence in this case, there was not
any contract by conduct during the relevant
period. The respondent submitted, in the further
alternative, that the August 2, 1968 document was
an offer to supply oil to the appellant by Murphy
Oil Trading which remained unrevoked at all ma
terial times and on this basis, Murphy Oil Trading
was contractually bound to supply such quantities
of crude oil as the appellant may have ordered.
The answer to this submission is that since the
appellant knew that effective in February of 1970
the Tepwin contract would supplant the Quotation
Letter, it was a necessary inference that the Quo
tation Letter was no longer operative either as an
offer of crude oil to the appellant or an invitation
to the appellant to tender offers for crude. No
formal termination in writing of the Quotation
Letter was given by either party but there is no
such requirement so long as the appellant, at the
relevant time, was aware that it was in fact no
longer operative 4 as was the case here.
The final submission of the respondent was that
even if there was not in existence at all material
times a valid and subsisting contract, that, never
theless, the finding of the learned Trial Judge that
the purported transactions of February 1, 1970
and the subsequent conduct of the appellant,
Tepwin, and others giving rise to the Tepwin
charge, were artificial, stands independently of his
finding that there was a valid and subsisting con
tract and that in substance, the finding by the
learned Trial Judge of artificiality amounts to a
finding of sham.
My first comment with respect to this submis
sion would be that the finding of artificiality in the
transaction being examined, does not, per se,
attract the prohibition set out in subsection 137(1)
of the Income Tax Act, supra. To be caught by
that subsection, the expense or disbursement being
impeached must result in an artificial or undue
reduction of income. "Undue" when used in this
context should be given its dictionary meaning of
"excessive". In light of the Crown's concession
referred to supra, that under the Tepwin contract
the appellant would be paying slightly less than
4 See: Dickinson v. Dodds (1876) 45 L.J.Ch. 777.
fair market value, it cannot be said that the
Tepwin contract and the Tepwin charge result in
an excessive reduction of income. Turning now to
"artificial", the dictionary meaning when used in
this context is, in my view, "simulated" or "ficti-
tious". On the facts in this case, the reduction in
the income of the appellant resulting from the
Tepwin contract can, in no way, be said to be
fictitious or simulated. The Tepwin contract dated
February 1, 1970, provided for the purchase by the
appellant and the sale by Tepwin of crude oil of
33°-34.9° gravity at $2.25 U.S. per barrel at the
equivalent rate of 15,500 barrels per day (± 10%)
during the primary twelve-month term commenc
ing February 1, 1970. The actual payment by the
appellant to Tepwin during 1970 was effected by
set-offs made by the cashier of the U.S. parent
through operation in El Dorado of a "cash
account" with the objective of minimizing the
amount of foreign exchange currency purchases.
As a result, a net balance of Canadian funds was
transmitted from El Dorado to the Canadian
parent each month and all accounts, including
indebtedness for Tepwin's dividend to the Canadi-
an parent, Tepwin's purchase of crude from
Murphy Trading, appellant's purchases of crude
from Tepwin, etc., were satisfied by set-off or
assignment of other indebtedness in the cash
account. These transactions are all documented in
the evidence and are demonstrated in the cash flow
chart (Exhibit 1, A.B., Vol. VI, at p. 942 and
Notes) thereto. The operation of the cash account
making settlement of indebtedness on a fixed day
each month (the 25th) required complete details of
all inter-corporate transactions between the vari
ous entities of the Murphy enterprise to be
immediately communicated to El Dorado as they
occurred without awaiting the formalities of
invoicing which followed later in the normal course
of events. The documentary evidence clearly
demonstrates, in my view, that the reduction in the
appellant's income can, in no way, be said to be
fictitious or simulated.
Turning now to the respondent's submission that
the finding of the learned Trial Judge of artificial
ity amounts to a finding of sham: first of all, it is
clear from his reasons that the learned Trial Judge
did not make a finding of sham. Furthermore, it is
my opinion that the facts of this case do not fit the
generally accepted definition of sham provided by
Lord Diplock in the Snook case'. Lord Diplock
defined "sham" as:
... acts done or documents executed by the parties to the
"sham" which are intended by them to give to third parties or
to the court the appearance of creating between the parties
legal rights and obligations different from the actual legal
rights and obligations (if any) which the parties intend to
create.
And again on page 528, Lord Diplock said:
... for acts or documents to be a "sham", with whatever legal
consequences follow from this, all the parties thereto must have
a common intention that the acts or documents are not to
create the legal rights and obligations which they give the
appearance of creating.
On the uncontradicted evidence in this case, par
ticularly the evidence detailed supra with respect
to the purchase by the appellant and' the sale by
Tepwin and with respect to the evidence of the
complex accounting procedures carried out with
respect to the actual payment for subject crude oil,
it is not possible, in my view, to make a finding of
sham.
I have, I believe, dealt with all of the respond
ent's submissions, and, in not accepting any of
them, have concluded that this appeal should
succeed.
However, even if one were to assume that on
this record, a proper finding would be that the
February 1, 1970 Tepwin contract was a "sham"
thereby vitiating it, then Murphy Trading itself as
the vendor of the crude to the appellant could have
increased its price to the appellant to $2.25 U.S.
per barrel effective February 1, 1970 on terms
corresponding to those of the Tepwin contract. I
say this because that price was slightly below fair
market value and therefore could not be construed
as a transaction prohibited by subsection 137(1)
supra. Thus, it is my opinion, that in the circum
stances of this case, the question as to whether or
not the Tepwin contract is valid is irrelevant to a
final determination of the issue in this appeal.
Subsection 137(1) supra, does not, in my view,
prevent someone in the position of either Murphy
Trading or Tepwin, from generating the same
5 Snook v. London & West Riding Investments, Ltd. [1967]
1 All E.R. 518 at p. 528.
profit from a transaction with an affiliate like the
appellant as it would from a similar transaction
with a third party with whom it was dealing at
arm's length. Such a transaction would, I think,
only attract the prohibition of subsection 137(1)
supra, when appellant's cost of crude oil supply, by
reason of an act of the appellant, or those control
ling it, increased above the cost prevailing in the
industry at the same time and under similar cir
cumstances. Such an event did not occur in this
case.
I have, therefore, for all of the above reasons,
concluded that this appeal should be allowed with
costs both here and in the Trial Division and that
the matter should be referred back to the Minister
for reassessment on the basis that the appellant's
cost of goods sold should be determined by refer
ence to the amounts actually paid or payable to
Murphy Trading and Tepwin for crude oil pur
chased by the appellant in the 1970 taxation year.
* * *
PRATTE J.: I agree.
* * *
VERCHERE D.J.: I agree.
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.