Hugessen,
J.A.:—This
is
an
appeal
and
a
cross-appeal
from
a
decision
of
McNair,
J.
rendered
October
25,
1990.
By
that
decision,
the
trial
judge
allowed
in
part
the
taxpayer's
appeal
from
its
assessments
for
the
1974
and
1975
taxation
years.
The
Crown's
appeal
contests
McNair,
J.'s
interpretation
of
the
definitions
of
“taxable
production
profits
from
mineral
resources
in
Canada"
and
"taxable
production
profits
from
oil
or
gas
wells
in
Canada"
which
were,
at
the
relevant
times,
found
in
sections
124.1
and
124.2
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act"):
124.1(1)
For
the
purposes
of
this
Part,
"taxable
production
profits
from
mineral
resources
in
Canada"
of
a
corporation
for
a
taxation
year
means
the
amount,
if
any,
by
which
the
aggregate
of
(a)
where
the
corporation
has
production
from
a
mineral
resource
in
Canada
operated
by
it,
the
amount,
if
any,
included
in
computing
its
income
for
the
year
by
virtue
of
subsection
59(2.1)
and
paragraphs
59(3.2)(b)
and
(c),
less
any
deduction
allowed
in
computing
its
income
by
virtue
of
subsection
64(1.1),
and
(b)
the
amount,
if
any,
of
the
aggregate
of
its
incomes
for
the
year
from
(i)
the
production
in
Canada
of
(A)
petroleum,
natural
gas
or
related
hydrocarbons,
or
(8)
metals
or
minerals
to
any
stage
that
is
not
beyond
the
prime
metal
stage
or
its
equivalent,
from
mineral
resources
in
Canada
operated
by
it,
(ii)
the
processing
in
Canada
of
ores
from
mineral
resources
in
Canada
not
operated
by
it
to
any
stage
that
is
not
beyond
the
prime
metal
stage
or
its
equivalent,
and
(iii)
a
rental
or
royalty,
the
amount
of
which
is
computed
by
reference
to
the
amount
or
value
of
production
from
a
mineral
resource
in
Canada,
exceeds
(c)
the
aggregate
of
its
losses
for
the
year
from
those
sources,
computed
in
accordance
with
this
Act,
on
the
assumption
that
it
had
during
the
taxation
year
no
incomes
or
losses
except
from
those
sources
and
was
allowed
no
deductions
in
computing
its
income
for
the
taxation
year
other
than
(i)
amounts
deductible
under
any
of
section
66
(other
than
amounts
in
respect
of
foreign
exploration
and
development
expenses
as
defined
therein)
and
subsections
17(2)
and
(6)
and
section
29
of
the
Income
Tax
Application
Rules,
1971
where
the
corporation
has
no
taxable
production
profits
from
oil
or
gas
wells
in
Canada
and,
in
any
other
case,
such
proportion
of
those
amounts
as
may
reasonably
be
regarded
as
wholly
applicable
to
mineral
resources
in
Canada,
(ii)
the
amount,
if
any,
by
which
the
aggregate
of
the
losses
referred
to
in
paragraph
124.2(1)(c)
exceeds
the
aggregate
of
the
incomes
referred
to
in
paragraphs
124.2(1)(a)
and
(b),
(iii)
such
part
of
the
aggregate
of
amounts
deducted
under
section
65
for
the
year
as
is
in
respect
of
sources
of
income
described
in
any
of
subparagraphs
(b)(i),
(ii)
and
(iii),
(iv)
where
no
amount
is
deducted
pursuant
to
subparagraph
124.2(1)(c)(iv)
in
computing
its
taxable
production
profits
from
oil
or
gas
wells
in
Canada
for
the
year,
the
amounts
deductible
or
deducted,
as
the
case
may
be,
under
subsections
66.1(2)
or
(3)
and
66.2(2)
for
the
year,
and
(v)
such
other
deductions
as
may
reasonably
be
regarded
as
applicable
to
the
sources
of
income
described
in
any
of
subparagraphs
(b)(i),
(ii)
and
(iii).
(2)
For
the
purposes
of
this
section,
a
person
who
has
an
interest
in
the
proceeds
of
production
from
a
mineral
resource
in
Canada
under
an
agreement
providing
that
he
is
to
share
in
the
profits
remaining
after
deducting
the
operating
costs
of
the
mineral
resource
shall
be
deemed
to
be
a
person
who
operates
the
mineral
resource.
(3)
Income
or
loss
from
a
source
described
in
paragraph
(1)(b)
does
not
include
income
or
loss
derived
from
transporting
or
processing
petroleum,
natural
gas
or
related
hydrocarbons.
124.2(1)
For
the
purposes
of
this
Part,
"taxable
production
profits
from
oil
or
gas
wells
in
Canada"
of
a
corporation
for
a
taxation
year
means
the
amount,
if
any,
by
which
the
aggregate
of
(a)
where
no
amount
is
included
in
computing
the
taxable
production
profits
from
mineral
resources
in
Canada
of
the
corporation
by
virtue
of
paragraph
124.1
(1)(a)
and
the
corporation
has
production
from
an
oil
or
gas
well
in
Canada
operated
by
it,
the
amount,
if
any,
included
in
computing
its
income
for
the
year
by
virtue
of
subsection
59(2.1)
and
paragraphs
59(3.2)(b)
and
(c),
less
any
deduction
allowed
in
computing
its
income
by
virtue
of
subsection
64(1.1),
and
(b)
the
amount,
if
any,
of
the
aggregate
of
its
incomes
for
the
year
from
(i)
the
production
of
petroleum,
natural
gas
or
related
hydrocarbons
from
oil
or
gas
wells
in
Canada
operated
by
it,
and
(ii)
rentals
or
royalties,
the
amounts
of
which
are
computed
by
reference
to
the
amount
or
value
of
production
from
oil
or
gas
wells
in
Canada,
exceeds
(c)
the
aggregate
of
its
losses
for
the
year
from
those
sources,
computed
in
accordance
with
this
Act,
on
the
assumption
that
it
had
during
the
taxation
year
no
incomes
or
losses
except
from
those
sources,
and
was
allowed
no
deductions
in
computing
its
income
for
the
taxation
year
other
than
(i)
amounts
deductible
under
any
of
section
66
(other
than
amounts
in
respect
of
foreign
exploration
and
development
expenses
as
defined
therein)
and
subsections
17(2)
and
(6)
and
section
29
of
the
Income
Tax
Application
Rules,
1971
to
the
extent
that
those
amounts
are
not
deductible
pursuant
to
subparagraph
124.1
(1)(c)(i),
(ii)
the
amount,
if
any,
by
which
the
aggregate
of
the
losses
referred
to
in
paragraph
124.1(1)(c)
exceeds
the
aggregate
of
the
incomes
referred
to
in
paragraphs
124.1(1)(a)
and
(b),
(iii)
such
part
of
the
aggregate
of
amounts
deducted
under
section
65
for
the
year
as
is
in
respect
of
sources
of
income
described
in
subparagraphs
(b)(i)
and
(ii),
(iv)
where
the
corporation
has
production
from
oil
or
gas
wells
in
Canada
operated
by
it,
the
amounts
deductible
or
deducted,
as
the
case
may
be,
under
subsection
66.1(2)
or
(3)
and
66.2(2)
for
the
year,
and
(v)
such
other
deductions
as
may
reasonably
be
regarded
as
applicable
to
the
sources
of
income
described
in
subparagraphs
(b)(i)
and
(ii).
(2)
For
the
purposes
of
this
section,
a
person
who
has
an
interest
in
the
proceeds
of
production
from
an
oil
or
gas
well
in
Canada
under
an
agreement
providing
that
he
is
to
share
in
the
profits
remaining
after
deducting
the
operating
costs
of
the
oil
or
gas
well
shall
be
deemed
to
be
a
person
who
operates
the
oil
or
gas
well.
(3)
Income
or
loss
from
the
production
in
Canada
of
petroleum,
natural
gas
or
related
hydrocarbons
from
an
oil
or
gas
well
does
not
include
income
or
loss
derived
from
transporting
or
processing
petroleum,
natural
gas
or
related
hydrocarbons.
McNair,
J.
was
of
the
view
that
the"
production”
referred
to
in
subparagraph
(1)(b)(i)
of
each
of
the
sections
was
production
in
the
narrow
sense
of
extraction
from
the
ground.
As
a
result,
he
did
not
accept
the
Crown's
view
that
taxable
production
profits
(and
consequently
the
taxpayer's
base
for
the
calculation
of
depletion
allowance,
petroleum
profits
abatement
and
corporate
surtax)
should
be
reduced
by
amounts
representing,
first,
expenses
in
respect
of
long
term
scientific
research
not
directly
related
to
production
and,
second,
capital
cost
allowance
in
respect
of
investments
by
the
taxpayer
in
a
project
(Syncrude)
for
the
extraction
of
oil
from
a
mineral
resource
which
was
still
some
years
away
from
production.
We
are
all
of
the
view
that
McNair,
J.
reached
the
right
conclusion
and
that
the
reasons
he
gave
for
doing
so
are
unimpeachable.
While
we
are
content
to
adopt
those
reasons,
we
wish
to
add
a
very
few
observations
of
our
own
which
serve
to
reinforce
his
view
of
the
proper
interpretation
of
sections
124.1
and
124.2.
The
structure
of
the
two
sections
is
clearly
such
as
to
identify
and
isolate
income
from
certain
specific
and
described
"sources"
of
income
and
then
to
subtract
therefore
the
aggregate
of
the
losses
from
those
same
sources
together
with
five
specific
and
described
categories
of
deductions".
The
most
important
of
these
for
our
purposes
and
the
one
upon
which
the
Crown
principally
relies
in
support
of
its
appeal,
is
subparagraph
(c)(v):
"such
other
deductions
as
may
reasonably
be
regarded
as
applicable
to
the
sources
of
income
described
in
[the
subparagraphs
of
paragraph
(b)]”.
Again,
for
present
purposes,
the
"source"
of
income
described
in
paragraph
(1)(b)
of
both
sections
which
is
of
concern
to
us
is
the
"production"
of
“petroleum,
natural
gas
or
related
hydrocarbons”
from
mineral
resources
or
oil
or
gas
wells
in
Canada
operated
by"
the
taxpayer.
In
our
view,
the
texts
of
sections
124.1
and
124.2
themselves
offer
three
strong
arguments
why
the
interpretation
of"
production"
proposed
by
McNair,
J.
is
the
correct
one.
First,
the
word
"production"
appears
in
three
places
in
subsection
(1)
of
each
section.
The
first,
in
paragraph
(1)(a),
refers
to
situations
where
the
corporation
"has
production"
from
a
mineral
resource
or
oil
or
gas
well.
Counsel
for
the
Crown
concedes
(indeed
as
appears
below
he
based
an
argument
on
the
point)
that
the
use
of
the
present
tense
"has"
in
the
context
must
be
taken
to
mean
that
there
is
actual
tangible
production.
It
is
likewise
with
the
third
use
of
the
word
"production"
in
subparagraphs
124.1(1)(b)(iii)
and
124.2(1)(b)(ii)
respectively:
the
amounts
of
the
rentals
or
royalties
there
referred
to
could
only
be
computed
on
the
basis
of
production
in
the
sense
of
physical
extraction
from
the
ground.
The
remaining
use
of
the
word
"production"
is
the
one
in
issue
in
the
present
case
and
appears
in
subparagraph
(1)(b)(i)
of
both
sections.
There
is
a
strong,
indeed
overwhelming,
presumption
that
Parliament,
having
used
the
same
word
three
times
in
the
same
subsection,
intended
it
to
bear
the
same
meaning
each
time.
Second,
the
relevant
“source”
in
paragraph
(1)(b)
of
each
section
is
described
as
production
from
a
mineral
resource
or
well
"operated
by”
the
taxpayer.
The
reference
to
operation
cannot
be
for
the
purpose
of
identifying
the
relevant
taxpayer
(as
for
example
by
distinguishing
between
an
"operator"
and
a
non-operator")
because
subsection
(2)
in
each
case
provides
that
anyone
having
an
interest
in
the
proceeds
of
production
is
deemed
to
be
an
operator.
Thus
the
only
reason
for
including
the
requirement
that
the
resource
be
operated"
must
be
that
it
be
operating
i.e.,
physically
producing.
Third,
as
indicated
earlier,
the
Crown
has
sought
to
draw
an
argument
from
the
words
“where
the
corporation
has
production
from
oil
or
gas
wells
in
Canada
operated
by
it"
as
they
appear
in
subparagraph
124.2(1)(c)(iv).
These
words
imply
actual
physical
production
and
extraction
and
the
suggestion
is
made
that
if”
"production"
in
subparagraph
(1)(b)(i)
is
limited
in
the
same
way
there
would
be
redundancy.
Inclusio
unius
est
exclusio
alterius.
Not
only
is
the
argument
without
merit
but
the
quoted
text
actually
supports
the
opposite
conclusion.
Production
is
not
the
only"
source”
referred
to
in
paragraph
(1)(b);
rentals
and
royalties
are
also
included.
It
is
by
no
means
inconceivable
that
a
taxpayer
could
have
income
from
the
latter
and
not
from
the
former.
Such
a
taxpayer
would
not
have
production
from
oil
or
gas
wells
operated
by
it
and
one
would
not
expect
that
it
would
be
allowed
to
deduct
Canadian
exploration
expenses
(subsections
66.1(2)
and
(3))
and
Canadian
development
expenses
(subsection
66.2(2))
from
its
rentals
or
royalties.
On
the
other
hand,
where
the
taxpayer
does
have
production
from
oil
or
gas
wells,
such
production
becomes
one
of
the
identified
"sources"
in
paragraph
(1)(b)
and
the
deduction
of
the
expenses
described
in
subparagraph
124.2(1
)(c)(iv)
is
permitted
and
is
entirely
consistent
with
the
scheme
of
the
sections
(and
indeed,
of
the
Act)
as
a
whole.
Finally,
we
would
simply
mention
the
Crown's
argument
to
the
effect
that
"production"
simpliciter
cannot
be
a
"source"
of
income
and
that
it
is
rather
the
business”
of
production
which
is
in
fact
the
source.
To
the
extent
that
the
argument
is
one
of
semantics,
it
is
meritorious
but
sterile.
It
is
true
that
the
mere
physical
act
of
taking
minerals
or
oil
or
gas
from
the
ground
does
not
and
cannot
produce
income;
when
Parliament
has
described
“production”
as
being
a
“source”,
as
it
clearly
has
insections
124.1
and
124.2,
it
must
be
understood
as
the
business
of
production.
That
does
not,
however,
assist
us
in
determining
what
is
meant
by
"production"
or
what
is
included
in
the
business;
it
certainly
does
not
support
the
Crown's
argument
that
production"
comprises
the
whole
of
the
upstream"
end
of
the
taxpayer's
business,
including
exploration
and
development
and
whether
or
not
there
is
any
actual
production,
a
contention
for
which
there
is
no
warrant
whatsoever
in
the
sections.
The
taxpayer,
as
an
integrated
oil
company,
also
has
refining,
distribution
and
marketing
as
parts
of
its
whole
business,
but
it
could
not
be
seriously
suggested
that
they,
too,
should
be
included
in
the
concept
of
production
as
a
source
of
income.
As
McNair,
J.
said,
sections
124.1
and
124.2
set
up
their
own
separate
scheme
of
inclusions
and
exclusions
from
income
for
purposes
of
the
special
incentive
programs."
The
appeal
must
fail.
By
its
cross-appeal,
the
taxpayer
contests
the
trial
judge's
finding
that
subsurface
lease
rental
payments
made
by
it
to
various
provincial
governments
in
the
years
1974
and
1975
should
not
be
included
in
its
earned
depletion
base
as
defined
in
Regulation
1205.
Despite
the
complexity
and
difficult
interrelationship
of
the
various
legislative
texts
involved,
there
is,
in
our
view,
and
with
respect,
a
good
deal
less
to
this
question
than
meets
the
eye.
For
our
purposes,
it
is
enough
to
know
that
for
this
taxpayer
the
lease
rental
payments
in
question
could
only
be
included
in
the
earned
depletion
base
if
they
met
the
definitional
requirements
of
either
"Canadian
exploration
ex-
pense”
in
paragraph
66.1
(6)(a)
of
the
Act
or
"Canadian
development
expense"
in
paragraph
66.2(5)(a).
In
the
latter
case,
to
qualify
for
inclusion
in
the
base,
the
expense
would
in
addition,
by
the
operation
of
Regulation
1205(a)(iii)(C),
have
not
to
be
“an
amount
referred
to
in
subparagraph
66.2(5)(a)(iii)
of
the
Act".
In
order
to
give
some
semblance
of
grammatical
clarity
to
the
discussion
which
follows,
which
is
not
in
fact
complicated,
we
shall
only
refer
to
such
parts
of
these
various
definitions
as
and
when
they
are
necessary.
First,
as
we
read
McNair,
J.'s
judgment,
he
found
as
a
fact
that
the
lease
rental
payments
in
question
were
not
made
for
the
purposes
only
of
exploration,
but
rather
"for
the
entire
upstream
sector
of
the
business”,
that
is
to
say
exploration,
development
and
production.
There
was
certainly
evidence
to
support
that
finding
since
it
appears
that
of
the
approximately
four
million
acres
that
the
taxpayer
had
in
its
land
inventory
in
the
years
in
question,
only
a
small
and
undetermined
proportion
was
the
subject
of
actual
exploration
or
drilling
in
any
one
year.
That
being
the
case,
we
certainly
cannot
say
that
the
judge
was
wrong
to
find
as
he
did.
As
a
matter
of
law,
to
qualify
as
a
Canadian
exploration
expense,
the
rental
payments
in
question
would
have
to
meet
the
definition
in
subparagraph
66.1(6)(a)(i)
as
an“.
.
.
expense
.
.
.
incurred
.
.
.
for
the
purpose
of
determining
the
existence,
location,
extent
or
quality
of
an
accumulation
of
petroleum
or
natural
gas".
We
agree
with
the
view,
apparently
accepted
by
the
trial
judge,
that
payments
made
to
maintain
an
acreage
inventory
upon
which
exploration,
development
and
production
may
or
may
not
take
place
at
some
undetermined
time
in
the
future
are
not
within
that
definition.
We
also
agree
with
the
statement
of
Mahoney,
J.,
as
he
then
was,
in
New
Continental
Oil
Co.
v.
The
Queen,
[1976]
C.T.C.
44,
76
D.T.C.
6038,
at
page
52
(D.T.C.
6043)
that
there
is
a
distinction
between
"payments
for
the
right
to
drill
and
explore"
and
"expen-
sesincurred
in
drilling
or
exploring".
Furthermore,
we
would,
as
a
general
rule,
expect
that
for
any
expense
to
be
said
to
have
been
incurred
for
the
purpose
of
determining
the
existence
etc.
of
petroleum
or
natural
gas
on
a
property,
there
would
have
to
be
at
least
some
connection
between
that
expense
and
work
actually
done
on
the
ground.
Accordingly,
and
while
the
rental
payments
made
in
respect
of
those
parts
of
the
acreage
inventory
upon
which
exploration
activity
actually
took
place
in
a
taxation
year
might
qualify
as
Canadian
exploration
expenses,
we
do
not
find
it
necessary
to
express
an
opinion
on
the
point
since
no
attempt
was
made
by
the
taxpayer
to
quantify
any
such
expenses,
the
amount
of
which
would,
in
any
event,
be
of
minimal
significance.
We
are
quite
satisfied
that
the
purpose
of
the
special
treatment
accorded
by
the
legislation
to
exploration
expenses
was
to
encourage
actual
exploration
and
not
to
finance
from
public
funds
the
accumulation
of
huge
dormant
inventories
of
subsurface
rights.
This
view
is
further
supported
by
the
fact
that
the
costs
of
such
rights
are,
as
noted
below,
included
in
development
expenses
where
they
receive
a
different,
and
less
favourable,
tax
treatment.
This
brings
us
to
the
question
of
whether
the
payments
in
question
could
qualify
as
a
"Canadian
development
expense".
The
only
possible
relevant
provision
is
in
subparagraph
66.2(5)(a)(iii)
:
.
.
.
the
cost
.
.
.
of
any
Canadian
resource
property
.
.
.
but
not
including
any
payment
made
to
[a
provincial
government]
.
.
.
for
the
preservation
of
a
taxpayer's
rights
in
respect
of
a
Canadian
resource
property.
[Emphasis
added.]
By
paragraph
66(15)(c),
a
Canadian
resource
property
includes
"any
right,
licence
or
privilege
to
explore
for,
drill
for
or
take
petroleum,
natural
gas
or
related
hydrocarbons".
The
result
that
flows
from
these
texts
when
read
together
is
that
annual
rental
or
other
payments
to
provincial
governments
made
for
the
purpose
of
keeping
leases
or
licences
to
subsurface
rights
current
are
“not
included”
in
Canadian
development
expenses.
The
trial
judge
so
found
and
he
was
correct.
There
remains
one
other
category
of
payments
made
by
the
taxpayer
which
were
not
specifically
mentioned
by
the
trial
judge.
This
is
clearly
because
they
were
not
in
fact
claimed
by
the
taxpayer
as
forming
part
of
the
earned
depletion
base,
but
we
think
we
should
deal
with
them
so
as
to
complete
the
picture
of
our
understanding
of
the
statutory
scheme
involved.
The
evidence
shows
that
for
provincial
government
leases
of
subsurface
rights
the
practice
was
to
require
a
very
large“
bonus”
or
lump
sum
payment
at
the
very
beginning
of
the
term,
generally
as
part
of
a
public
bidding
process.
Those
payments
would
not
be
Canadian
exploration
expenses
for
the
reasons
already
mentioned.
However,
they
seem
to
qualify
as
Canadian
development
expenses
under
the
definition
in
subparagraph
66.2(5)(a)(iii)
quoted
above:
they
represent
the
cost
of
a
Canadian
resource
property,
and
being
one
time,
"front
end"
payments
they
are
not
caught
by
the
exclusion
of
payments
to
provincial
governments
"for
the
preservation
of"
the
taxpayer's
rights
in
the
resource.
They
are,
however,
clearly
excluded
from
the
earned
depletion
base
by
the
express
language
of
Regulation
1205(a)(iii)(C).
In
summary,
to
be
included
in
the
depletion
base
rental
payments
must
be
either
Canadian
exploration
expenses
or
Canadian
development
expenses.
They
are
not
the
former
because
their
purpose
was
not
exclusively
or
even
primarily
exploration,
but
rather
the
accumulation
of
an
acreage
inventory
which
might
or
might
not
be
used
to
serve
exploration,
development
and
production
in
the
future.
Insofar
as
concerns
annual
rental
payments
to
provincial
governments,
they
are
excluded
from
Canadian
development
expenses
by
words
internal
to
the
definition
of
that
term;
"bonus"
payments
to
provincial
governments,
on
the
other
hand,
while
they
may
be
within
the
definition
of
Canadian
development
expenses,
are
excluded
from
the
depletion
base
by
words
external
to
that
definition
but
which
are
contained
in
the
definition
of
the
base
itself.
Accordingly,
the
cross-appeal
too
must
fail.
The
appeal
and
the
cross-appeal
will
each
be
dismissed
with
costs.
Appeal
and
cross-appeal
dismissed.