Rouleau, J.:—The plaintiff is appealing the decision of the Tax Court of Canada which upheld assessments by the Minister of National Revenue for income taxes and interest payable for its 1980 and 1981 taxation years.
An agreed statement of facts was filed which reads:
1. At all material times commencing with the acquisition described below, St. Ives Resources Ltd. ("St. Ives") was a principal-business corporation as defined in paragraph 66(15)(h) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
2. At all material times, Carter Oil & Gas Ltd. ("Carter") was a principalbusiness corporation as defined in paragraph 66(15)(h) of the Act.
3. Prior to December 11, 1979, Carter was the owner of certain resource properties and associated depreciables as more particularly described in the schedule to the Sale Agreement (as hereinafter defined) (the "Properties").
4. On December 11, 1979 and pursuant to the terms of a petroleum, natural gas and general rights conveyance made as of December 11, 1979 (the “Sale Agreement"), Carter sold and St. Ives purchased a 10% interest in the Properties (the "Property Interest”). The Property Interest was a Canadian resource property as defined in paragraph 66(15)(c) of the Act.
5. St. Ives paid the purchase price provided in the Sale Agreement for the Property Interest of $3,500,000 by granting to Carter an interest-bearing promissory note in the amount of $3,500,000 due five days after demand (the"Original Note”).
6. The sole asset of St. Ives was the Property Interest acquired from Carter.
7. By a letter dated February 29, 1980 (the "Demand"), Carter demanded payment of the principal and accrued interest under the Original Note.
8. Pursuant to a Price Rectification Agreement dated March 5, 1980, St. Ives agreed to grant to Carter in place of the Original Note, a Promissory Note for $4,750,000 on the same terms and conditions as the Original Note.
9. In a valuation written in April 1980 Pitfield Mackay Ross Ltd. ("PMR") determined that in their opinion the fair market value of the Property Interest acquired by St. Ives was not less than $4,750,000 at acquisition.
In filing an income tax return for the 1980 taxation year, the plaintiff reported the sum of $4,554,700 as the amount of its cumulative Canadian development expense at the end of the year and deducted, pursuant to subsection 66.2(2) of the Act, the sum of $1,366,410 in computing its income for the year. For the 1981 taxation year, the plaintiff reported the sum of $3,215,537 as the amount of its cumulative Canadian development expense at the end of the year and deducted the sum of $964,661.
By notices of reassessment dated January 27, 1984, the defendant assessed the taxable income of the plaintiff for the taxation years in issue by reducing the cumulative Canadian development expense claimed at the end of each year on the basis that the $1,250,000 adjustment in purchase price was not referable to the property. The defendant takes the position that this amount could only be referable to the refinancing of the original promissory note and/ or forbearance of the creditor from pursuing available legal remedies. Therefore it could not be included in the plaintiff's cumulative Canadian development expense.
The main argument advanced on behalf of the plaintiff in the Tax Court was that the additional payment of $1,250,000 was part of the purchase price in so far as the parties had made a“ mistake” which was subsequently rectified by the letter agreement dated March 15, 1980. This argument was dismissed by the learned trial judge.
The issue before me in these proceedings is whether or not the payment was in fact a ” preservation cost". Subparagraph 66.2(5)(a)(iii) of the Act which existed at the time reads:
(5) in this section and sections 66 and 66.1,
(a) "Canadian development expense" of a taxpayer means any outlay or expense made or incurred, or deemed to have been made or incurred, after May 6, 1974 that is
(iii) notwithstanding paragraph 18(1)(m), the cost to him of a Canadian resource property or an amount paid or payable to Her Majesty in right of the Province of Saskatchewan as a net royalty payment pursuant to a net royalty petroleum and natural gas lease that was in effect on March 31,1977 to the extent that it can reasonably be regarded as a cost of acquiring the lease, but not including any payments made to any of the persons referred to in any of subparagraphs 18(1)(m)(i) to (iii) for the preservation of a taxpayer's rights in respect of a Canadian resource property or a property that would have been a Canadian resource property if it had been acquired by the taxpayer after 1971, and not including a payment (other than a net royalty payment referred to in this subparagraph) to which paragraph 18(1)(m) applied by virtue of subparagraph (v) thereof,
[Emphasis added.] This issue was not before Judge Sarchuk in the Tax Court, counsel for the defendant having erroneously taken the position that the words "preservation of a taxpayer's rights in respect of a Canadian resource property" could not be construed as being the "cost of a Canadian resource property”. Revenue Canada has since stated that the department is of the belief that the costs of preserving rights are capital in nature and therefore a "cost" of acquiring a resource property.
Counsel for the plaintiff submits that this extra payment was in fact a preservation cost. As the term "preservation" is not defined in the Income Tax Act, I was referred to the Black's Law Dictionary definition which reads:
Keeping safe from harm; avoiding injury, destruction or decay; maintenance. It is not creation, but the saving of that which already exists, and implies the continuance of what previously existed.
[Emphasis added.] Counsel argued that the effect of Carter's calling the demand note, was to “threaten” St. Ives's interest in the property because if they were unable to pay up, they would lose the property. He went on to add that even if this additional payment was characterized as a" refinancing charge", it was nevertheless a cost incurred to preserve the property and therefore properly included in calculating the cumulative Canadian development expense.
I am not satisfied that the additional payment constitutes a " preservation cost”. On December 11, 1979, the plaintiff entered into an agreement with Carter Oil & Gas, whereby he purchased from Carter certain resource properties for the agreed price of $3,500,000. It appears to me that the price was fixed at $3,500,000 and was not subject to the determination of its “fair market value”. Furthermore, on reading the agreement it is obvious that this was an absolute sale. The vendor held no mortgage on the purchase, nor was there any provision in the agreement whereby he retained title subject to payment. When the plaintiff gave Carter the promissory note, this transaction was effectively completed. At that time, all interest in the property vested with the plaintiff. The vendor retained no interest in the property, his rights were limited to those rights accorded by the promissory note, i.e. the right to be paid the sum of $3,500,000 five days from demand and the right to interest on this sum.
I am aware that Carter did have some “rights” with regards to the sold property, these rights having been given Carter through an agency agreement entered into by all the parties on January 4, 1980. Under the terms of this agreement, Carter Oil & Gas was to act as agent for all those who had purchased the resource properties in handling all the finances, expenses, revenues and disbursing income. This agreement did not however give Carter any interest in the property itself.
I am not convinced that on February 29, 1980, when Carter demanded payment of the principal and accrued interest on the original note, there was a “threat” to the plaintiff's interest. The plaintiff could have gone to any commercial bank and borrowed money to pay off the note, particularly so since the appraised fair market value had been established as $4,750,000. Had the plaintiff done so, it could have avoided any action in debt being instituted.
It is also clear that, had the plaintiff borrowed money to satisfy the demand, any costs incurred by it could not have been capitalized, rather they would have been treated as a "cost of doing business"; see The Queen v. Sterling, [1985] 1 C.T.C. 275, 85 D.T.C. 5199 (F.C.A.). In doing as it did, the plaintiff was attempting to take advantage of the preservation costs permitted by subparagraph 66.2(5)(a)(iii).
Having said as much, I am unable to conclude that there was, in fact, a "threat" to the plaintiff's interest. Any such finding would be based on nothing more than conjecture. In the absence of a"threat", it follows that no action (or payment) was necessary to preserve the plaintiff's interest. Accordingly, the appeal is dismissed. Costs to the defendant.
Appeal dismissed.
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