M.W.A. Gas and Oil Ltd. v. MNR, 74 DTC 6123, [1974] CTC 140 (FCTD)

Cattanach, J:—This is an appeal from an assessment to income tax by the Minister for the plaintiff’s taxation year ending October 31, 1968.

The issue in this appeal and the rival contentions with respect to the issue resolved themselves into a very narrow compass.

The issue is whether the principal business of the plaintiff in its 1968 taxation year was production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas within the meaning of paragraph 83A(3b)(a) of the Income Tax Act.

if that is the case then the plaintiff, in accordance with formulae outlined in subsection 83A(3b), may deduct in computing its income under Part I of the Act, in effect the aggregate of its drilling and exploration expenses incurred in the year to the extent that those expenses were not previously deducted.

The amount of those expenses total $955,000. Expenses in the amount of $55,000 were incurred by the plaintiff for exploring and drilling for oil in October 1968 and the plaintiff acquired oil and gas exploration rights at a cost of $900,000 also in October 1968.

it is admitted by the Minister that the expenditure of $900,000 by the plaintiff was for the acquisition of exploration and drilling rights within the meaning of subsection 83A(5a) and as such are deemed by subsection 83A(5a) to be a drilling and exploration expense for the purposes of subsection 83A(3b).

The pertinent portion of subsection 83A(3b) reads as follows:

83A. (3b) 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,

may deduct, in computing its income under this Part for a taxation year, the lesser of. . .

The formula for determining the amounts deductible is then outlined in paragraphs (f) and (g) of subsection (3b) of section 83A but there is no dispute between the parties as to the deductibility of a total amount of $955,000 provided the plaintiff qualifies as a corporation whose principal business as outlined in paragraph (a) of subsection (3b) of section 83A which is reproduced above.

The contention of the plaintiff is that the principal business of the plaintiff was, in the taxation year in question, as described in paragraph (a) whereas the Minister contends that its principal business was otherwise. Therein lies the dispute between the parties.

The plaintiff was incorporated pursuant to the laws of the province of Ontario by letters patent dated May 18, 1966 under the name of McDougall Walbridge Aldinger (Ontario) Limited for the purpose of carrying on the business of builders and general contractors. The company was formed by the Walbridge, Aldinger Company of Detroit, Michigan and by W A McDougall Ltd of London, Ontario each of whom held 50% of the issued shares of the capital stock of the plaintiff.

in effect the plaintiff was a combination of the resources of the Detroit-based and London-based companies. The Detroit-based company had done work for the Ford Motor Company and the London-based company had construction equipment in that area.

The plaintiff company so formed was the successful bidder for the construction of an automobile assembly plant for Ford Motor Company of Canada Limited (hereinafter referred to as Ford) at St Thomas, Ontario.

The original contract with Ford was for the foundation work, footings, caissons and concrete work. If I recall the evidence correctly the plaintiff’s bid was in the neighbourhood of $5,000,000. However over a period of 14 months from the beginning of construction in 1966 the contract went through some 338 change orders or amendments so that the plaintiff was continuously engaged in the completion of the project which was the construction of the Ford assembly plant and turning it over to Ford in an operable condition. Again it is my recollection that the total cost of the project was approximately $27,850,000. The contract was referred to as a turn-key contract.

In October and November 1967 there were about 200 employees of the plaintiff all of whom were iron workers doing the final work of completing the conveyor assembly in the plant.

Ford went into production before Christmas 1967. Mr McDougall bought an automobile which came off the assembly line in December 1967.

There were no employees of the plaintiff working on the site as at February 1, 1968. There were no sub-trades on the site except about 20 men doing the final landscaping.

The job superintendent left the job in November 1967 and returned to the employ of W A McDougall Ltd on projects underway in Eastern Canada.

Mr McDougall testified that the work was completed on February 1, 1968 subject to cleaning-up exercises in which he estimated that some 200 man-days were expended by employees of the plaintiff and 400 man-days by employees of the sub-trades.

It is the contention of the plaintiff that the project was completed in February 1968.

On the other hand counsel for the Minister contended that the construction business of the plaintiff continued throughout the plaintiff’s financial year ending October 31, 1968 and into the next ensuing financial year.

He based that contention by analogy to remarks made in Sorbara v MNR, [1965] 1 Ex CR 191; [1964] CTC 536; 64 DTC 5325, where it was said at page 199 [543, 5330]:

_. . In my view, the business of acquiring land for disposition at a profit includes all operations essential to the successful completion of the project, including not only sale, or other disposition, but collection of the proceeds of disposition.

He then pointed out that there were approximately 20 work-order amendments, the invoices for which were dated from April 1968 to August 1968.

Mr McDougall explained that the work had been done and the officers of the plaintiff were negotiating with Ford as to the amounts payable under the work-order amendments. When this was settled the invoices issued. The officers of the plaintiff had a meeting each month with Ford to negotiate the amounts payable.

The job superintendent had been paid a bonus of $67,000. He left the job in the fall of 1967. In the July previous he had been paid $15,000. The balance of $52,000 was paid to him August 1969 which was well into the next fiscal period of the plaintiff.

The financial statement of the plaintiff for the year ending October 31, 1968 disclosed as an asset an amount of $378,000 due from Ford.

The final invoice to Ford in the amount of $318,000 was sent on October 23, 1968, seven days before the fiscal year end and was paid in November 1968.

The explanation of the discrepancy between the amounts of $378,000 and $318,000 was that the negotiations with Ford resulted in the lesser amount.

The plaintiff was originally incorporated to construct one project, namely, the Ford motor assembly plant. Therefore the construction business of the plaintiff would come to an end of its own weight on the completion of that project. The evidence is that the plant was completed before March 1, 1968 and all that remained to be done was to negotiate with Ford and collect the amounts determined to be payable.

On completion of the Ford plant the Walbridge Aldinger Company of Detroit wanted out of the plaintiff company. This separation was arranged. The profits resulting from the construction of the Ford plant were divided. W A McDougall Ltd became the sole beneficial shareholder of the plaintiff and there remained in the plaintiff liquid assets in the approximate amount of $1,273,000 being the appropriate share of the profits from the construction business.

The plaintiff therefore sought other forms of business activity. After investigation it was decided to enter the oil and gas business.

By supplementary letters patent dated October 16, 1968 the objects authorizing the plaintiff to engage in the construction business were deleted and objects authorizing it to engage in an oil and gas business were substituted therefor.

The plaintiff obtained an extra-provincial licence from the Province of Alberta in October 1968 authorizing it to carry on business in that Province.

By supplementary letters patent dated April 30, 1969 the corporate name of the plaintiff was changed from McDougall Walbridge Aldinger (Ontario) Limited to MWA Gas and Oil Limited which name appears in the style of cause.

As previously recited the plaintiff incurred oil and gas drilling and exploration expenses in the amount of $55,000 and acquired oil and gas exploration and drilling rights at a cost of $900,000 both of which amounts were paid by the plaintiff by cheque in October 1968.

In its 1968 taxation year the plaintiff received revenue from its oil and gas business in the amount of $8,124 and in its 1969, 1970 and 1971 financial years it received revenue in the approximate amount of $350,000 in each year. From these figures I observe that the plaintiff recouped its expenses in three years.

The contention of the Minister, as I understood it, is that the language of subsection 83A(3b) reading, “A corporation whose principal business is” of necessity means that a corporation can have only one principal business in a taxation year and that no particular period of time within the taxation year is of more paramount importance than any other period.

Assuming the Minister’s contention to be correct, it follows that I must decide which of the two businesses, namely, the construction business and the business of exploring and drilling for gas and oil carried on by the plaintiff in its 1968 taxation year, was its principal business.

In contradistinction the position taken by the plaintiff is that until March 1, 1968 the plaintiff was exclusively in the business of construction. Since that was its sole business at that time it was its principal business.

However it was the plaintiff’s contention that the active construction business ended on March 1, 1968 on the completion of the project and from that time forward the plaintiff was dormant until October 1968 when it actively embarked on an oil and gas business.

The crux of the argument on behalf of the plaintiff, as I understood it, was that a corporation can have two principal businesses within a taxation year provided there is an hiatus between the conclusion of one business and the inception of another.

In American Metal Company of Canada, Ltd v MNR, [1952] CTC 302: 52 DTC 1180, Cameron, J had occasion to consider which of two businesses being carried on concurrently was a corporation’s “chief” business. The pertinent words of the section then in effect were ‘‘a corporation whose chief business is that of mining or exploring for minerals is entitled to deduct from income” expenses incurred for prospecting, exploration and by development in the taxation year.

He said at page 306 [1182]:

“Chief business” Is not defined in eIther of the Acts and the phrase, so far as I am aware, has not been the subject of judicial interpretation. In my view it is a question of fact to be determined by an examination and comparison of all the facts concerning each of the various types of business in which the company is engaged. . ..

In MNR v Consolidated Mogul Mines Limited, [1968] CTC 429; 68 DTC 5284, Spence, J, speaking for the Supreme Court of Canada, quoted and approved the foregoing statement by Cameron, J and applied the test therein set forth.

He noted that the statute then under consideration contained no definition of “principal business” although “business” is defined in paragraph 139(1)(e) in a manner not relevant to the question under review.

The same circumstance is applicable in the present instance. There is no distinction consequent upon the use of the adjective “principal” in place of the adjective “chief”. In their respective contexts the words are synonymous.

I therefore revert to the contention of the Minister, without purporting to decide the matter, that a corporation can have only one principal business in a taxation year.

As I have said before it is implicit in the submission that a corporation can have only one principal business that the question to be decided, as one of fact, is which of the plaintiff’s businesses in its taxation year was its principal business.

In this case the only business of the plaintiff following its incorporation in 1966 was the construction of the Ford assembly plant at St Thomas, Ontario. The plaintiff was incorporated for that project only. There is ample justification for that conclusion. The Detroit-based company had a long association with and was favourably known to Ford. The London-based company had experience in the construction business in that area. The Detroit-based company became a shareholder in the plaintiff for the construction of this particular plant only. This is borne out by the subsequent event that upon the completion of the plant it severed its connection with the plaintiff.

The plant, in an operable state, was completed in December 1967. Ford motor cars came off the assembly line in that month. All that remained to be done was in the nature of a cleaning-up exercise, the landscaping and the installation of external iron railings. This work was completed by March 1, 1968. As of that date the plaintiff had no more employees on the job, its job superintendent had left the site and the plaintiff's employ in November 1967. All employees of the sub-trades had left the site prior to that date.

In short the physical construction of the plant was completed as ot that date. All that remained to be done was for the officers of the plaintiff to settle with Ford the compensation for the work done pursuant to change orders and accept the payment of those amounts when determined. The actual work covered thereby had been undertaken and completed by the plaintiff prior to March 1, 1968.

I do not accept the testimony of Mr McDougall that the plaintiff then became dormant and remained dormant until October 1968 when it became engaged in exploring and drilling for oil and gas. The plaintiff performed numerous corporate acts in the interval. However I do accept as a fact that the plaintiff ceased to be engaged actively in the construction business as of that date. To all intents and purposes the plaintiff’s active engagement in the construction business ended as of that date never to be revived again nor was it the intention of the plaintiff from its inception to engage in the construction business on completion of this particular Ford plant. What the plaintiff did after that date was directed merely to winding up its construction business.

It is quite true that the revenue that the plaintiff received in its 1968 taxation year from the completed construction work exceeded the revenue from the oil and gas business in which the plaintiff engaged in October 1968 and so too the profit from the construction business received by the plaintiff in its 1968 taxation year far exceeded the profit from the oil and gas business in that year which was a negative quantity.

However, Mr Justice Cameron said in the American Metal case (supra) that the comparative income received by a corporation from two businesses carried on by it is an important element to be considered in determining which is the chief business but that is not the only matter to be considered and is not necessarily the determining factor.

On the other hand the plaintiff abandoned its construction business in the 1968 taxation year and became engaged in the oil and gas business in that year.

In that year supplementary letters patent were obtained authorizing the plaintiff to carry on an oil and gas business to the exclusion of a construction business and it exercised those changed objects in 1968.

From that time forward the sole business of the plaintiff was that of exploring and drilling for oil and gas and in its 1969, 1970, 1971 and 1972 financial years it derived substantial income from that business. Because that was the sole business from October 1968 on it follows as from that date it was the plaintiff’s principal business.

The plaintiff did not have employees, as distinct from officers, engaged in the oil and gas business. It operated through the facilities of Voyager Petroleum Limited.

Again in the American Metal case (supra) Cameron, J pointed out that the number of employees in the respective businesses is an element in determining which of the two businesses is the chief business but that it is not necessarily the determining factor.

It was preordained from the inception of the plaintiff that its construction business would end on the completion of the Ford project. That end was readily foreseeable in the early part of the plaintiff’s 1968 taxation year from the beginning of that year. What the plaintiff was doing from November 1967 to March 1968 of its 1968 taxation year was drawing its construction business to its inevitable end. In the initial four months of that financial year of the plaintiff’s construction business was on the wane until its ultimate demise on March 1, 1968.

There then followed a period of inactivity, but for passive corporate acts, until the oil and gas business was conceived and actively engaged in in October 1968.

In the plaintiff’s 1968 taxation year its construction business was in its death throes while the oil and gas business was born and in its dynamic infancy reaching maturity in the succeeding year.

In my opinion these facts establish that while the construction business had been the plaintiff’s principal business that business was superseded by the oil and gas business as the plaintiff’s principal business in its 1968 taxation year.

For the foregoing reasons I conclude, as a question of fact, that the plaintiff’s principal business was that of exploring or drilling for petroleum or natural gas, and so falls precisely within the qualification for the deduction of exploring and drilling expenses incurred by it in computing its income for its 1968 taxation year in accordance with subsection 83A(3b).

Because of the conclusion I have reached, it becomes unnecessary for me to decide between the rival contentions on behalf of the parties, which were, on the one hand, that subsection 83A(3b) prescribes that a corporation can have only one principal business in a taxation year and, on the other hand, that a corporation can have two principal businesses in one taxation year, within the meaning of subsection 83A(3b), provided that there is an hiatus between the conclusion of one business and the inception of another.

The appeal is, therefore, allowed with costs to the plaintiff.