Canterra Energy Ltd. v. The Queen, 85 DTC 5245, [1985] 1 CTC 329 (FCTD), rev'd 87 DTC 5019, [1987] 1 CTC 89 (FCA)

Reed, J:—This case raises a very narrow point of law — the proper interpretation of Regulation 1207(2)(a)(ii) of the Income Tax Regulations, SOR/77-731 as applicable to the 1978 taxation year. The regulation reads as follows:

1207. (1) A taxpayer may deduct in computing his income for a taxation year such amount as he may claim not exceeding the lesser of

(a) his income for the year, computed in accordance with Part I of the Act, if no deduction were allowed under this subsection; and

(b) his frontier exploration base as of the end of the year (before making any deduction under this subsection for the year).

(2) For the purposes of this section, “frontier exploration base” of a taxpayer as of a particular time means the amount that is equal to

(a) the aggregate of all amounts, each of which is an amount in respect of a particular

oil or gas well in Canada equal to 667; per cent of the amount by which

(i) expenses incurred after March, 1977 and before April, 1980 . . . exceeds

(ii) the taxpayer’s threshold amount in respect of the well, minus the amount that would be determined under subparagraph (1) in respect of the taxpayer for the well if the reference therein to “after March, 1977 and before April, 1980” were read as “after June, 1976 and before April, 1977”, . . . [Emphasis added.]

The issue is whether subparagraph (ii) can result in a negative amount. That is, if the taxpayer’s June 1976 to April 1977 expenses exceed the threshold amount ($5 million) does the negative sum so arrived at become the applicable figure for the purposes of subparagraph (ii) of regulation 1207(2)(a), or can that figure never be lower than zero. The latter requires an interpretation of the subparagraph which sees it as designed to allow the taxpayer a deduction of the threshold amount ($5 million) but no more while the former sees it as more generous in nature and designed to allow a deduction of all expenses actually incurred.

It should perhaps be noted that the deduction allowed pursuant to section 65 of the Income Tax Act and calculated pursuant to Regulation 1207 is exceptional in nature. While I have referred to it above as a deduction, counsel for the plaintiff rightly pointed out, it is an allowance. It is an allowance over and above the normal deduction of expenses allowed in computing taxable income. Its effect, in conjunction with other provisions of the Income Tax Act, can be to allow a taxpayer a deduction of 200 per cent of the expenses he actually incurred. One hundred per cent of the expenses are deducted in the normal way; 33'/, per cent can be deducted as earned depletion allowance; and then 6674, per cent can be deducted as a frontier exploration allowance pursuant to regulation 1207 and section 65 of the Income Tax Act to which it relates, (a “super depletion allowance”) — and this last can be deducted by the taxpayer from his income from any source.

Extrinsic Evidence

Counsel for the defendant’s main argument in support of his contention that the subparagraph should never be allowed to result in a sum less than zero is based on what is argued to be the purpose of the Regulation. That purpose, it is argued, was expressed in statements made by the Minister of Finance in announcing the new program. The provision was brought into force March 31, 1977. It is clear it was designed as an incentive to encourage exploration for oil in what are called frontier areas (ie: the drilling of high cost wells).

A budget document dated March 31, 1977 and distributed by the Minister of Finance at the time of the announcement of the incentive program was referred to in argument. It stated:

In present circumstances a fuller knowledge of Canada’s petroleum and natural gas production potential is essential. To date, however, there has not been the level of exploration activity in Canada’s frontier areas, particularly in deep water, to provide this knowledge. . . . An incentive to encourage exploration in these areas of Canada is appropriate at this time.

Additional encouragement will be provided to taxpayer’s in respect of drilling costs in excess of $5 million incurred in connection with an exploratory well. The well must be located in Canada, including the continental shelf, and the expenses must be incurred between March 31, 1977 and April 1, 1980.

The incentive will take the form of an additional earned depletion entitlement of 667; per cent of qualifying drilling costs. A taxpayer will be entitled to offset this additional depletion against income from any source, whereas normal depletion is deductible only to the extent of 25 per cent of resource profits. . . .

Reference to this document was objected to by counsel for the plaintiff, who relied particularly on the Supreme Court decision in The Attorney General of Canada v The Reader’s Digest Association (Canada) Ltd, Sélection du Reader’s Digest (Canada) Liée, [1961] SCR 775; [1961] CTC 530.

The defendant on the other hand relied on the recent Federal Court of Appeal decision in Edmonton Liquid Gas Limited v The Queen, [1984] CTC 536; 84 DTC 6526 dated September 28, 1984. In that decision (at CTC 546; DTC 6534) the Court quoted what was said by the Minister of Finance in the House of Commons Debates with respect to the provisions of the Income Tax Act there in issue.

I allowed counsel to refer to the budget document relating to what became Regulation 1207. It seems to me that there has been a modification of the approach taken by the courts since the Readers Digest case. I was referred to the fact that the Carter Royal Commission on Taxation was quoted in International Nickel Company of Canada Limited v MNR, [1969] CTC 106 at 123; 69 DTC 5092 at 5102. I am also aware that extrinsic material, including legislative debates and committee proceedings, has been relied upon in numerous cases as an aid to statutory interpretation. Such material has been referred to either for the purpose of providing the factual context and general purpose of the legislation or for more particular guidance with respect to the specific provisions of the Act. Reference can be made to an article by Professor W H Charles, “Extrinsic Evidence and Statutory Interpretation: Judicial Discretion in Context”, (1983) 7 Dal L J 7, for a discussion of the recent jurisprudence in this area.

Also, it is clear that opinions of the Department of National Revenue are admissible in the form of Interpretation Bulletins (see J Camille Harel v The Deputy Minister of Revenue of the Province of Quebec, [1978] 1 SCR 851 at 859; [1977] CTC 441 at 448; Gene A Nowegijick v The Queen, [1983] 1 SCR 29 at 37; [1983] CTC 20 at 24; and, The Queen v Royal Trust Corporation of Canada, [1983] CTC 159 at 165-166; 83 DTC 5172 at 5177). If this is so why should the courts refuse to admit budget documents of the kind in question here. Interpretation Bulletins, of course, are issued after the legislation is enacted (or the regulations promulgated) and for that reason they may have more weight; but in the light of the practice respecting these “opinion” documents emanating from the Department of Revenue I find it hard to conclude that the budget documents are inadmissible per se.

The Supreme Court has, on at least two occasions recently, when dealing with constitutional cases, indicated that no absolute rule of inadmissibility should be laid down respecting extrinsic materials: Re The Residential Tenancies Act, 1979, [1981] 1 SCR 714 at 722 and Re Anti-Inflation Act, [1976] 2 SCR 373 at 389. While normally there may be more scope in constitutional cases for extrinsic evidence to play a relevant role (since the enquiry in those cases is often addressed to the “pith and substance” of the legislation) it would seem surprising if a different rule respecting the admissibility of evidence, applied as a matter of principle to other types of litigation. This is particularly so with respect to the present case given the recent Supreme Court decision in Stubart Investments Limited v The Queen, [1984] CTC 294 at 316; 84 DTC 6305 at 6323; (1984) 53 NR 241 at 264. There Mr Justice Estey clearly indicates that the Courts should consider the purpose of the provisions of the Income Tax Act when interpreting them:

. . . Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable. See Whiteman and Wheatcroft, supra, at P 37.

While not directing his observations exclusively to taxing statutes, the learned author of “Construction of Statutes”, 2nd ed, (1983) at p 87, E A Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

I note that on at least two occasions (in constitutional cases) the Supreme Court has indicated that while extrinsic evidence may be admissible to ascertain the object of legislation, and thus indirectly influence the interpretation of statutory provisions, it is not admissible for the purpose of construing statutory provisions directly (see: Dickson, CJC (dissenting), Reference Pursuant to Section 27(1) of the Judicature Act, SCC No 18224 of December 20, 1984 at 19-20; Estey, J in Morguard Properties Ltd et al v The City of Winnipeg, [1983] 2 SCR 493 at 498-499.

With respect to the interpretation of regulations, as opposed to statutes, it was decided by Mr Justice Disberry in Central Canada Potash Co Ltd et al v Attorney-General for Saskatchewan et al (1975), 57 DLR (3d) 7 (Sask QB) that even if statements of members of the government or the legislature were not admissible to demonstrate the purpose, object, or effect of a statute, the rule was otherwise with respect to regulations. His reasoning was that regulations are made by the Executive Council, which acts collectively and unanimously in advising the Sovereign, and thus statements made by a member of the Council represents the views of all its members, and therefore must be relevant and admissible.

In this case, the Minister’s statement has relevance generally to the issues involved and is admissible. It carries little weight, however, as to whether or not Regulation 1207(2)(a)(ii) can result in a negative amount. The lack of weight flows from the fact that it carries no details with respect to the treatment to be accorded June 1976 to April 1977 expenses. Even if it had the weight such detail might carry would be questionable because of the ever-present possibility that the details of the implementation could change between the date of announcement of the program and the date of issuance of the regulation. Indeed, in this case the Minister’s statement indicated that only costs incurred between March 31, 1977 and April 1, 1980 would be eligible for the frontier exploration allowance. The regulation when finally promulgated took into account expenses incurred between June 1976 and April 1977 as well. Thus, while the Minister’s statement has relevance generally to the issues in this case it cannot settle the very point in issue.

Regulation 1207(2)(a)(ii)

The Oxford English Dictionary (Clarendon Press, 1971) clearly indicates that the word “minus” carries, at least, two significations:

. . . In non-technical use with the deduction of, exclusive of (some specified portion or constituent element of the whole). cf. less

. . . used as the oral equivalent of the symbol (-) in its algebraical interpretation as forming with the expression to which it is prefixed the representation of a negative quantity eg in “-3”, “-x”, which are read as minus 3, minus x.

The first definition set out above fits with the defendant’s arguments in this case; the second fits with those of the plaintiff.

The plaintiffs main argument is that Regulation 1207(2)(a)(ii) prescribes a “formula for the calculation” of an allowance granted to the taxpayer. As such the plaintiff argues there is nothing illogical in finding that the allowance is to be measured by reference to the total June 1976-April 1977 expenses incurred drilling a high cost well, as opposed to measuring that allowance by reference to a ceiling of $5 million. The plaintiff argues that the $5 million figure is used to determine which wells qualify as high cost wells — but once that determination is made all expenses incurred with respect to that well were intended to be eligible for the extra deduction (the allowance). Since Regulation 1207(2)(a)(ii) prescribes a “formula for the calculation” of the allowance the plaintiff argues that the word “minus” therein must carry its mathematical (or arithmetical) signification. Thus it is argued that subparagraph 1207(2)(a)(ii) must be interpreted as admitting a negative result.

At my request both counsel canvassed other provisions of the Income Tax Act in which the word minus is found to determine whether any pattern of usage was apparent which would assist in interpretation in this case. In most of those 60 sections the calculation could not result in a negative sum. This most often clearly had to be the case as a result of the context of the section eg: in subsection 112(4.2) the words “a taxpayer’s share of any loss” cannot be construed to be a negative figure; in subparagraph 145( 1 )(c)(iv) it makes no sense to have a negative earned income; and in subsection 164(7) it makes no sense to have a negative overpayment. In four out of the 60 sections it may be argued that a negative amount could enter into the calculation — in the context of very unusual circumstances — eg: under subparagraph 13(21)(f)(v) if the costs of the disposition of a property exceeded the proceeds of the sale of that property; see also sections 107(2)(c), 107(4)(f) and 28(1).

I accept counsel for the plaintiffs argument that what is determined by Regulation 1207 is an allowance granted as an incentive to drill high cost wells. I accept his argument that it would be equally consistent with this purpose for the allowance to be calculated by reference to all expenses actually incurred as for it to be calculated by reference to a ceiling of five million.

I do not accept, however, that the calculation determined by 1207(2)(a)(ii) is of such a technical nature that one must calculate it in accordance with mathematical principles rather than in accordance with the originary grammatical meaning of the words. “Threshold amount minus expenses” construed in an ordinary grammatical sense would not indicate to a reader that a negative sum could result. I am buttressed in this view by the definition of the word minus found in the Oxford dictionary, supra. It is there indicated that in its non-technical sense the word minus means “with the deduction of . . . some constituent element of the whole” and that its technical meaning is that contended for by the plaintiff.

While the Income Tax Act and regulations in many sections (section 1207 being one of them), set out formulae for the calculation of amounts, this is done by the use of concepts expressed in ordinary language. The context is not that of a mathematics text book. Accordingly I do not think the technical definition of the phrase “threshold amount minus expenses” for which counsel for the plaintiff argues is the appropriate one in this case.

In addition, while I accept counsel’s argument, as noted above, that the allowance could logically have been calculated by reference to total expenses as opposed to a ceiling of $5 million, I am of the view that the allowance being such as to confer an extraordinary benefit on the taxpayer, it would be appropriate to construe an ambiguity in favour of the Minister.

Accordingly, for the reasons given the plaintiffs claim is dismissed.

Appeal dismissed.