The Queen v. Pan Ocean Oil Ltd., 94 DTC 6412, [1994] 2 CTC 143 (FCA)

Hugessen J.A.:—This appeal requires this Court to rexamine the precise scope and reach of the provisions relating to amalgamation found in section 87 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and our own earlier decision in The Queen v. Guaranty Properties Ltd., [1990] 2 C.T.C. 94, 90 D.T.C. 6363. The appeal is by the Crown from a reported decision of the Trial Division [[1993] 2 C.T.C. 236, 93 D.T.C. 5330] which allowed the respondent's appeal in respect of its assessments for the 1974 and 1975 taxation years. [1]

The respondent is a corporation created in accordance with the laws of Alberta. Its corporate history is extremely complex but, for present purposes, may be reduced to a few essentials. It was formed by the amalgamation of two other Alberta corporations, Pan Ocean Alberta Ltd. ("ALBERTA") and Pan Ocean Oil Ltd. ("POOL"). The latter was itself the result of a complicated series of mergers and manoeuvres which ended up in its being the holder of a number of oil and gas assets which had previously been owned By a group known as "The Dynamic Companies". Those companies had incurred certain deductible exploration and drilling expenses in the period prior to 1972 and the coming into force of the 1972 revision of the Income Tax Act. It is the respondent's attempt to deduct those expenses in respect of its 1974 and 1975 taxation years that gives rise to the present litigation.

The case was tried on an agreed statement of facts and it is enough, for our purposes, to reproduce paragraphs 21 and 22 (Appeal Book, pages 133-34):

21. In computing its income for its 1971 and 1972 taxation years, POOL deducted part of the exploration and drilling expenses incurred by each of the Dynamic Companies before the end of the 1971 taxation year and which had not been deductible in computing the income of the Dynamic Companies or the New Dynamic Subsidiary Companies for a previous taxation year. The basis of such deduction was that POOL was a second successor corporation entitled to deduct same within the meaning of subsection 83(A)(8d) of the pre-72 Act and subsection 29(29) of the Income Tax Application Rules, 1971.

AMALGAMATION OF POOL AND ALBERTA

22. On or about February 4, 1974 the Plaintiff was formed by statutory amalgamation of POOL and ALBERTA pursuant to the provisions of the Alberta Companies Act. Section 87 of the Income Tax Act, R.S.C. 1970-71-72, c. 63, as amended applied to this amalgamation.

Since the exploration and drilling expenses had been incurred prior to 1972 the "successor" rules governing the availability of deductions in respect of such expenses are found in the transitional provisions contained in the Income Tax Application Rules, R.S.C. 1970-71-72, c. 63, Part Ill, subsections 29(25) and 29(29) of which read in their relevant parts as follows:

29(25) Notwithstanding subsection (24), where a corporation (hereinafter in this subsection referred to as the "successor corporation") whose principal business is

has, at any time after 1954, acquired from a corporation (hereinafter in this subsection referred to as the "predecessor corporation”). . . all or substantially all of the property of the predecessor corporation used by it in carrying on that business in Canada, there may be deducted by the successor corporation, in computing its income for a taxation year. . . .

29(29) . . . where a corporation (hereinafter in this section referred to as the "second successor corporation") . . . has, at any time after April 10, 1962, acquired from a corporation (hereinafter in this subsection referred to as the "first successor corporation") that was a successor corporation within the meaning of subsection (25) all or substantially all of the property of the first successor corporation . . . there may be deducted by the second successor corporation, in computing its income for a taxation year, the lesser of. . . .

(In his reasons for judgment the trial judge referred to the successor rules found in subsections 66(6) and 66(7) of the Income Tax Act which, although generally similar to the quoted provisions of the Income Tax Application Rules, do not apply to the facts of this case. In my view nothing turns on this error.)

As indicated above, the parties have agreed that POOL was a "second successor corporation" within the meaning of the Income Tax Application Rules. It is also common ground that the successor rules at the relevant time did not permit the deduction of expenses of the kind here in issue by a third or a subsequent successor corporation. Accordingly, only POOL could take the deductions for tax purposes. The parties are also in agreement that the amalgamation of POOL and ALBERTA in 1974 was one to which section 87 of the Income Tax Act applied. The parts of that section which are relevant, for our purposes, read as follows:

87(1) In this section, an amalgamation means a merger of two or more corporations each of which was, immediately before the merger, a Canadian corporation (each of which corporations is referred to in this section as a "predecessor corporation") to form one corporate entity (in this section referred to as the "new corporation") in such manner that

(a) all of the property of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger,

(b) all of the liabilities of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger, and

(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger become shareholders of the new corporation by virtue of the merger,

otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of such property by the other corporation or as a result of the distribution of such property to the other corporation upon the winding-up of the corporation.

(2) Where there has been an amalgamation of two or more corporations after 1971 the following rules apply:

(a) for the purposes of this Act, the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation;

[Emphasis added.]

The trial judge allowed the respondent's appeal, as I understand his reasons, because he was of the view that, as a matter of corporate law, the respondent was simply a continuation of POOL; as such it had not "acquired" anything from POOL so as to trigger a third successoring. The judge was also of the opinion that paragraph 87(2)(a), above, did not have the effect of depriving the respondent of the right to take the deductions to which POOL was or would nave been entitled.

As to the first point, there is no doubt that in corporate law, both in Alberta and in most other Canadian jurisdictions, an amalgamation does not put an end to the amalgamating companies and the latter continue to exist in the new entity (see The Queen v. Black & Decker Manufacturing Co., [1975] 1 S.C.R. 411, 43 D.L.R.

(3d) 393). That is not the end of the matter, however, for the tax consequences of an amalgamation must be dealt with in the light of the applicable provisions of the Income Tax Act and in particular of section 87.

The trial judge’s view as to the reach of paragraph 87(2)(a) is in large part based on certain obiter dicta of this Court in the case of Guaranty Properties, supra, and in particular the following passage at page 101 (D.T.C. 6368):

Unfortunately for the respondent's analysis of paragraph 87(2)(a), it seems to me that the purpose Parliament had in mind was not to bring amalgamating corporations to an end but merely to give them a deemed year-end and the new corporation a deemed year- beginning. The words “shall be deemed to be a new corporation” are immediately followed by the clause “the first taxation year of which shall be deemed to have commenced at the time of the amalgamation.” This subsequent clause I find to be a defining or restrictive relative clause, which limits the scope of the antecedent principal clause to the combined concept expressed by the two clauses. The amalgamated corporation is deemed new in that its first taxation year commences at the time of the amalgamation. To have created a non-defining or non-restrictive relative clause, the Parliamentary drafter would, at the very least, have had to insert a comma after a new corporation,” or otherwise vary the syntax. The principal effect of paragraph 87(2)(a) is that, for income tax purposes the amalgamated corporation is deemed to be a new taxpayer with a fresh taxation year as of the date of amalgamation. In sum, nothing in the paragraph evinces an intention on the part of Parliament to deem that the amalgamating taxpayer ceased to exist, much less that it should be relieved of liability for its own income taxes prior to the date of amalgamation.

[Emphasis added.]

In Guaranty Properties, supra, the Court was concerned with the validity of a notice of assessmentwhich had been sent to an amalgamating company after it had amalgamated with other companies. The question, in effect, came down to deciding whether the presumption (or “deeming”) enacted by paragraph 87(2)(a) was applicable to either Division A of the Act relating to “Liability for Tax", or to Division I, “Returns, Assessments, Payment and Appeals”. That question was fully answered by the last sentence of the quoted paragraph. I do not think that the Court intended in the earlier parts of that passage to establish a general rule that the presumption of paragraph 87(2)(a) was limited solely to the timing of the new corporation's first taxation year; rather, the intention was to indicate that the presumption was one that is limited in scope and not applicable generally to the whole of the Income Tax Act.

That view is confirmed by the immediately following paragraph of the decision at page 101 (D.T.C. 6368):

That the paragraph, indeed the entire section, deals with the computation of income is also an inference to be drawn from the fact that it falls under Division B of Part I of the Act which deals with the computation of income, as opposed to Part A, which is concerned with liability for tax. As the appellant pointed out, it is Part A (section 2 of the Act) that constitutes the charging section.

That view is also reinforced by the decision of Thurlow J, as he then was, in the Exchequer Court in the case of Palmer-McLellan (United) Ltd. v. M.N.R., [1968] C.T.C. 448, 68 D.T.C. 5304. In dealing with the predecessor to section 87 he said at pages 453-55 (D.T.C. 5307-08):

The appellant from the moment of the amalgamation did have the assets of the Shoe Company [one of the amalgamating companies] but these assets were not what the money borrowed by Old United [the other amalgamating company] on its first mortgage bonds and its general mortgage bonds had been used to purchase and 1 do not see any way in which these assets can even be regarded as having been acquired in exchange for the shares. The shares went, if anywhere, to the shareholders of Old United. The assets of the Shoe Company went nowhere. They simply became part of the property of the amalgamated company of which the Shoe Company itself was a continuing element just as Old United as well was a continuing element.

Accepting that the statute requires that the appellant be treated as a new corporation for the purposes of the Income Tax Act such purposes, so far as relevant, are, as I see it, the measuring of its income for prescribed periods of time, including the determination of deductions to which it may be entitled, and the computation of its liability for tax. These purposes do not seem to me to require any inference to be made as to how the new corporation came into possession of whatever assets it had at the commencement of its fictitious existence. It is to be treated as a new corporation for the purposes I have mentioned but, as I see it, it is not to be treated as a new corporation for any other purposes and I see in section 851 [now section 87] no basis for treating the assets of such a corporation as having been acquired in any other manner than that in which they were in fact acquired, that is to say, the manner in which they were acquired by the amalgamating corporations.

The new company contemplated by section 851, simply starts off with certain assets and certain liabilities, that is to say, the assets and the liabilities of the amalgamating companies. With respect to such assets and liabilities nothing further is, as I see it, required for the purposes of the Income Tax Act, and if for the purpose of characterizing some item of assets or of liability, it becomes necessary to know its history that history, as I see it, is nought but its actual history. There is no need to take the further step of assuming some fictitious transaction or event conferring that asset on the fictitious new company or visiting it with the liability.

[Emphasis added.]

The underlined passages make it clear, in my view, that the provisions of paragraph 87(2)(a) are applicable only to the amal amated company's computation of income under Division B (including the "deductions to which it may be entitled") and, where necessary as a consequence thereof, to its computations of taxable income (Division C) and of tax (Division E). That is what this Court held in Guaranty Properties and the decision in that case should be limited to that holding. In particular, it should not be read as denying that the amalgamated corporation is to be deemed to be a new corporation for all purposes relating to the computation of its income.

The quoted passages from Palmer-McLellan, supra, which I have emphasized above, also make it plain, in my view, that the deemed "new" company, which, for tax purposes, came into being upon the amalgamation, did not "acquire" the property of the amalgamating companies which were merged into it; rather, such property “simply became" the property of the new company upon amalgamation. Indeed, if it were otherwise the remaining paragraphs of subsection 87(2) would have little purpose; for the most part they deal in detail with such parts of the property, assets and liabilities of the amalgamating companies which shall be deemed, for tax purposes, to have become part of the property, assets and liabilities of the new company and with the tax consequences thereof. Those provisions would be quite unnecessary if the Act were to regard the amalgamated company as being "new" solely for the purposes of establishing its first taxation year.

Applying the law as I understand it to the facts of the present case, it is clear that this appeal must succeed. It is common ground that POOL was a second successor corporation and that the amalgamation of POOL and ALBERTA is governed by section 87. That being so, the respondent is, for tax purposes, deemed to oe a new corporation whose first taxation year is deemed to have commenced at the time of the amalgamation. As a new corporation, the respondent manifestly is not POOL, whatever the situation may be under ordinary corporate law principles. There is no provision of the Income Tax Act allowing the respondent to deduct oil and gas exploration expenses incurred by other taxpayers. Exceptionally subsections 29(25) and 29(29) of the Income Tax Application Rules would allow a “first successor corporation" and a "second successor corporation", to make such deductions but the respondent is neither. The Minister accordingly was correct to disallow them.

I would allow the appeal with costs. I would set aside the judgment of the Trial Division and I would dismiss the action with costs.

Appeal allowed.