Wardean Drilling Co. Ltd. v. M.N.R., 78 DTC 6202, [1978] CTC 270 (FCTD)

The Chief Justice (judgment delivered from the Bench):—This is an appeal from a judgment of the Trial Division dismissing an appeal from assessments under Part I of the Income Tax Act for the 1968 and 1969 taxation years.

The legislative provisions involved and the facts giving rise to the controversy appear from a reading of the reasons of the learned trial judge and I propose to mention only what I regard as relevant to the view that I take of the merits of the appeal to this Court on the assumption that one has in mind what appears in the reasons of that learned judge.

As it seems to me, it is clear

(1) that the appellant is not entitled to the section 83A deductions in issue unless its principal business in the 1968 and 1969 taxation years was

(a) production, refining or marketing of petroleum, petroleum products or natural gas, or exploring or drilling for petroleum or natural gas (hereinafter referred to as a “gas business”), or

(b) mining or exploring for minerals (hereinafter referred to as a “mining business”); and

(2) assuming that the appellant was otherwise entitled to such deductions, on the findings of fact of the Trial Division

(a) that the appellant’s business in 1964 was a “gas business”,

and

(b) that the “well” sold by the appellant in 1964 was “all or substantially all the property” used by it in carrying on that business,

and assuming that such findings are upheld, that the appellant had, by virtue of the sale of that “well” become disentitled to make such deductions, by virtue of the concluding words of subsection 83A(8a).

On the pleadings on which the matter went to trial, it would seem that both these branches of the relevant facts were in issue. With reference to the principal business of the appellant, see paragraph A(2) of the notice of appeal and paragraph A(1)(c) of the amended reply. With reference to subsection 83A(8a), see section 3(b) of the amended reply.

By his opening address at the trial, counsel for the appellant said that the dispute was, essentially, “whether or not that single transaction in April, 1964, amounted to a sale of all or substantially all of the assets, in which case we admit that by the operation of subsection 8(a) the drilling and exploration expenses which we have sought to deduct . . . flowed with the property” and he further said: “Our position . . . is that was not a sale of all or substantially all of the assets of the company used by it in carrying on its business of petroleum and natural gas and mining, but therefore it continued to have the right to deduct those drilling and exploration expenses in future years when sufficient income was generated to justify the use of those credits” and, having said that, he said “Now that’s the dispute in a nutshell . . .”. .

In effect, as I understand it, counsel for the appellant, with the acquiescence of counsel for the respondent, drew the lines of battle on the basis that what had to be decided was

(a) the correctness of his contention that the principal business of the appellant in 1964 was not a “gas business” but was a combination of a “gas business” and a “mining business”; and

(b) the correctness of his contention that the sale of the ‘‘well” was not a sale of all or substantially all of the assets used by the appellant in carrying on such business.

No mention was made in opening of the other fact essential to the appellant’s success, which was put in issue by the pleadings, viz: that, during the 1968 and 1969 taxation years, the appellant’s principal business was either a “gas business” or “a mining business”.,

The learned trial judge rejected the appellant’s contention as to the appellant’s principal business in 1964 and held that its principal business in that year was a “gas business”. I am of opinion that there was evidence on which he could so find and that it cannot be said that such finding was clearly wrong.

In reaching that conclusion, I have carefully considered the appellant’s contention in this Court that the learned trial judge failed to give effect: to a legal principle established by MNR v Consolidated Mogul Mines Limited, [1969] SCR 54; [1968] CTC 429; 68 DTC 5284. As I understand that decision, it establishes that a person may carry on a ‘‘mining business” by becoming, in effect, a partner in the : ‘mining business” of each of several companies in each of which it has a substantial shareholding and with which it has an arrangement or contract under which it, to a large extent, controls the carrying on of the other company’s mining activities. Whether or not a person is carrying on such a “mining business” must be a question to be determined on the facts of each case and, in my view, no facts have been established in this case to show that the appellant was carrying on such a business in 1964. The Mogul case does not, in my view, have the effect of making it follow as a matter of law that a parent company is a company carrying on a “mining business” by reason only of the fact that its subsidiary carries on a “mining business”, the fact that the directors of the two companies are substantially the same, and rather vague indications of possible, minor uncoordinated forays into mining exploration such as is found on the record of this case.

Having decided that the appellant was, in 1964, carrying on a “gas business”, the learned trial judge, after a careful review of the evidence, held that the sale of the “well” in 1964 was a sale of “substantially all the property’’ used by the appellant in that business. In my view, he was not only not clearly wrong in so holding but, on the facts as revealed by the record, he was clearly right.

In this Court, as I understood counsel, it was argued that the relevant portion of subsection 83A(8a) must be construed as not applying to a sale of a single producing property (even though it was substantially all the assets used in the activities of the business) when the sale did not include corporate books and records that would enable the purchaser to take advantage of the section 83A deductions to which it would become entitled by virtue of subsection 83A(8a) if that provision did apply. In my view, the relevant words of the provision are not open to any such restrictive interpretation.

I am, therefore, of opinion that the appeal should be dismissed with costs.

I should, moreover, say that, in my view, even if the appellant had succeeded in escaping from the provisions of subsection 83A(8a), the question would still have remained as to whether the appellant was entitled to take advantage of subsections 83A(3) and (3b), in respect of the 1968 and 1969 taxation years, having regard to the necessity of establishing that, in those years, its principal business was either a “gas business” or a “mining business”. Even if there were admissions at trial on this question (which is not clear to me), having regard to the evidence, it would seem that the sole profit-making operation of the appellant in those years was “contract drilling”, which, prima facie, is neither a “gas business” nor a “mining business”.* [1] However, as this fact does not appear to have been. considered as being in issue at trial, if it had become relevant, I would have been inclined to refer the assessments back to the respondent for reconsideration having regard only to this aspect of the matter. In this connection, I must express my reservation with respect to any suggestion that subsection (3) or (3b) would apply where the “principal business” at the relevant time was a combination of a “gas business” and a “mining business” and was neither a “gas business” nor a “mining business”.