Canterra Energy Ltd. v. The Queen, 87 DTC 5019, [1987] 1 CTC 89 (FCA)

Urie, J.:—This appeal from a judgment of the Trial Division in which the appellant’s appeal from a reassessment for income tax was dismissed, raises an interesting question of statutory interpretation.

The appellant is in the business of exploring for and developing petroleum, natural gas and mineral resources. During the 1976 and 1977 calendar years, it participated with other corporations in drilling natural gas and petroleum exploration wells off the east coast of Canada. In so doing it incurred Canadian exploration expenses within the meaning of section 66.1 of the Income Tax Act (the "Act”) in respect of three different wells. The appellant’s participation in the three wells, both as to expense sharing and product, was 13 / per cent. It was agreed by the parties that the Canadian exploration expenses incurred by the appellant and the other corporations in drilling each of the three wells exceeded $5 million.

Paragraphs 65(1)(a) and 65(2)(b) of the Act authorize the Governor in Council to prescribe by regulation a formula to determine the amount that may be allowed to a taxpayer, in respect of an oil or gas well, for deduction in the computation of the taxpayer's income.*[1] Pursuant thereto regulations 1200 and 1207, inter alia, were enacted. Section 1207 was added by P.C. 1977-2471 dated August 31, 1977, SOR/77-731, for taxation years ending March 1977. The portions thereof, relevant in this appeal, read 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 1 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, the “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 66%% 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, as determined under subsection (3), minus the amount that would be determined under subparagraph (i) 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”, ...

(3) For the purposes of subparagraph (2)(a)(ii), a taxpayer's “threshold amount” in respect of an oil or gas well means

(a) where the taxpayer and one or more other persons have filed an agreement with the Minister in prescribed form in respect of the well and, . . .

The narrow issue in the appeal is, as stated by the learned trial judge, “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?

With respect to the deduction the trial judge pointed out that:

. . . 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 667, 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.

In resolving the issue, the trial judge had this to say:

I accept counsel for the plaintiff's argument that what is determined by regulation 1207 is an allowance granted as an incentive to drill high cost wells. I accept

65(2) ... For greater certainty it is hereby declared that, in the case of a regulation made under subsection (1) allowing to a taxpayer an amount in respect of an oil or gas well or a mineral resource or in respect of the processing of ore,

(b) notwithstanding any other provision contained in this Act, the Governor in Council may prescribe the formula by which the amount that may be allowed to the taxpayer by such regulation shall be determined.

1200 ... For the purposes of section 65 of the Act, there may be deducted in computing the income of a taxpayer for a taxation year such of the amounts determined in accordance with sections 1201 to 1210 as are applicable.

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(a)(ii) is of such a technical nature that one must calculate it in accordance with mathematical principles rather than in accordance with the ordinary 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.

I think it useful to employ hypothetical amounts to illustrate the problem which arises from the wording of subparagraph 1207(2)(a)(ii). For that purpose the Canadian exploration expenses referred to in clause (i) for the period after March 1977 and before April 1980 shall be called the “1977 expenses”. The expenses referred to in clause (ii) for the period after June 1976 and before April 1977 shall be called the "1976 expenses”. The formula prescribed by Regulation 1207(2)(a)(ii) provides that the "frontier exploration base” equals the amount by which the "1977 expenses” exceeds "the threshold amount” (calculated pursuant to subsection 3 which is agreed to be 5 million minus the 1976 expenses.

The parties agree that columns 1 and 2 reflect a correct application of the formula. They disagree on column 3. This occurs because on those hypothetical figures, since the 1976 expenses exceed the "threshold amount” by $1 million, the amount derived as a deduction is a negative amount, i.e. minus $1 million. The appellant argues that in mathematics when a negative amount (-$1 million) is subtracted from a positive amount ($4 million) such amounts are added together. The deduction thus becomes $5 million. On the other hand, the respondent says that while mathematically that may be correct, the usual rule of interpretation is that a word should, unless the context otherwise requires, be given its plain and ordinary and grammatical meaning and not its technical one. Thus the effect of using the word "minus”, in that sense, is that a taxpayer's threshold amount can be reduced by the amount of its 1976 expenses only to the stage where the thres- shold amount becomes “nil”. It follows from this reasoning that the more 1976 expenses, the lower the threshold amount becomes and the more 1977 expenses that are eligible for the frontier exploration allowance. Therefore, in this case, since the threshold amount is “nil”, the appellant can include all of its 1977 expenses in calculating its frontier exploration allowance but no 1976 expenses. The appellant's position is, of course, that by its calculation it is entitled to deduct its full Canadian exploration expense incurred in respect of each well after June 1976 and before April 1980 as its frontier exploration base.

In making his reassessment, the Minister of National Revenue proceeded on the basis that the negative amount could not be included in the calculation.

A great deal of argument was directed to ascertaining the meaning of the word “minus” in the context of Regulation 1207(2). The Shorter Oxford Dictionary (3rd ed.) defines “minus” in this way:

1. With the deduction of, exclusive of, c.f. less

2. As the oral equivalent of the symbol (-), as helping to form a negative quantity, e.g. in '-3', ‘-x’, which are read as minus. b. Hence, attributively in 'minus' quantity; a negative quantity.

3. In mathematics, the symbol minus; also ‘minus sign’. b. A subtraction, a quantity subtracted; a loss, deficiency; c. A negative quantity.

The trial judge pointed out that the Oxford English Dictionary (Clarendon Press, 1971) 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 e.g. in ‘-3’, '-x', which are read as minus 3, minus x.

In the appellant’s view, since the regulation in issue prescribes a “formula” for the calculation of an allowance for the taxpayer which is, effectively, a mathematical equation, the word “minus” must be construed in its technical, algebraic sense in which a negative result is permissible. The respondent, on the other hand, as has been seen, argues that the word should be construed in its ordinary and grammatical sense. The trial judge agreed with this submission and found that the threshold amount could be reduced only to zero. A negative amount could not, in her view, constitute the applicable result.

What then are the applicable interpretive rules? I think it unnecessary to review in depth the principles upon which the words in a statute are to be interpreted. Most are so well known that they require no review by me in this case. As Estey, J. observed in Stubart Investments Limited v. The Queen, [1984] C.T.C. 294 at 316; 84 D.T.C. 6305 at 6323 the learned author of Construction of Statutes, 2nd ed., (1983), at p. 87, E.A. Dreidger, held this view:

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. This principle is expressed repeatedly by modern judges, as, for example, Lord Reid in Westminster Bank Ltd v. Zang, and Culliton C.J. in R. v. Mojelski. Earlier expressions, though in different form, are to the same effect; Lord Atkinson in Victoria (City) v. Bishop of Vancouver Island put it this way:

In the construction of statutes their words must be interpreted in their ordinary grammatical sense, unless there be something in the context, or in the object of the statute in which they occur, or in the circumstances with reference to which they are used, to show that they were used in a special sense different from their ordinary grammatical sense.

[1965] A.C. 182, at p. 222.

(1968), 65 W.W.R. 565, at p. 570 supra, pp. 85-86. See also Cash v. George Realty Ltd., (1973), 1 O.R. (2d) 241.

[1921] A.C. 384, at p. 387; and see also Nothman v. Barnet Council, [1978] 1 W.L.R. 220

Mr. Driedger's observations are as applicable for guidance in the interpretation of the Income Tax Act as for any other statute. There are, however, occasions when the ordinary and grammatical meaning cannot be adopted. One of those occasions is where the legislature chooses to use technical words to convey its meaning. If it does then “in general [it is] to be supposed that it uses them in the technical sense"'.*[1] The difficulty arises in determining, as here, whether the Governor in Council intended to use the word “minus” in its ordinary or technical sense. Counsel for the appellant argues that the ordinary meaning of “minus" is a technical one, i.e. they are synonymous. Respondent's counsel disagrees. He argues that only if the context supports the contention can a technical meaning be given a word in a statute in preference to its ordinary and grammatical meaning. I agree with this view, and, thus, it becomes necessary to examine the word in its context not only with the other words of the paragraph of the regulation but in the context of the statute as a whole.

The authority to enact the regulation here in issue, as was shown above, arises from subsection 65(2) which enables the Governor in Council to “ .. . prescribe the formula by which the amount that may be allowed to the taxpayer by such regulation may be determined." Regulation 1200 says, “For the purposes of section 65 of the Act . . ." the deductions [are to be] determined in accordance with section 1207, inter alia, of the regulations. For convenience sake I repeat subparagraph (ii) of that regulation:

exceeds

(i) the taxpayer's threshold amount in respect of the well, as determined under subsection (3), minus the amount that would be determined under subparagraph (i) in respect of the taxpayer for the well if the reference therein to "after March, 1977 and befoe April, 1980” were read as "after June, 1976 and before April, 1977, . . . ” [Emphasis added].

Clearly, Regulation 1207 as a whole and subparagraph (ii) in particular, set forth in words a method or a formula for determining the allowances granted by section 65 of the Act. The method or formula is clearly mathematical in nature. The word “minus" therein must, therefore, it seems to me, be used in its mathematical sense which I take it to be in its technical sense because it requires the application of the arithmetic principles involved in subtraction. It is not used in its non-technical sense in which, no matter what non-technical meaning is attributed to it, it is compared in all the dictionaries to which we were referred, to the word “less”. That word clearly implies a subtraction of something from the whole and does not contemplate the result being a negative amount.

That its use is technical in nature in subparagraph (ii) is demonstrated by the fact that as part of subsection 2 a double subtraction is involved. By way of illustration, if subparagraph (i) were designated x and subparagraph (ii) as y, y would be subtracted from x only after y was determined by subtracting from A (the threshold amount), B (the 1976 expenses). The formula, as I see it, would be an equation which would be clearly algebraic in nature. In my opinion, the word “minus” thus would be used in its mathematical or technical sense. If that is so, the learned trial judge erred in finding that it was used in its ordinary, non-technical sense.

If I am right, since in an algebraic or technical sense subtracting a larger amount from a smaller one can result in a negative amount, I must conclude, with respect, that Reed, J. was wrong in concluding that the subtraction of the 1976 expenses from the threshold amount was limited, at a maximum, to the threshold amount since in ordinary parlance subtraction cannot lead to a minus or negative quantity.

I am fortified in my view of the meaning to be accorded the subparagraph by a further analysis thereof. Subparagraph (i), as earlier pointed out, comprises the 1977 expenses calculated as therein set out. Subparagraph (ii) provides the method for calculating the amount deductible for 1976 expenses. It directs that from the taxpayer’s threshold amount is to be deducted “the amount that would be determined under subparagraph (i) ... if . . . .” There is no restriction in words on “the amount that would be determined” any more than there is any limitation, other than those expressed in words, as to the quantum of deductible expenses under subparagraph (i). Rather the subparagraph is notable for what it does not say. For example, it does not contain such words of limitation as “... to an amount up to but not exceeding the taxpayer’s threshold amount,” nor the words “. . . to the extent that such an amount is not greater than the taxpayer's threshold amount”. Only if the respondent's interpretation of “minus”, as not permitting the finding of a minus quantity, is accepted can there be found such a limitation. I do not believe that this Court is entitled to give to that word such a meaning when the context in which it appears does not support It.

I agree with counsel for the respondent that my view means that in circumstances such as prevail in this case, all of the appellant’s 1976 and 1977 expenses are eligible for the frontier exploration allowance once the threshold amount has been deducted therefrom. While that may be so, I have not been persuaded by my analysis of the regulation that that was not the result which the Governor in Council intended. If he did not, then the appropriate remedy for the future is readily available to him. If the regulation was not aptly worded to carry out his original intention it does not mean that this Court should preclude the taxpayer from taking advantage of the benefits of the provision as worded. The following excerpt from the recent judgment of the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46 at 72; [1985] 2 C.T.C. 111 at 126, states succinctly what I believe to be the current approach in the interpretation of taxing statutes.

... Such a determintaion is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

If the regulation in issue is insufficiently explicit to carry out what may have been the intention of the Governor in Council, the taxpayer should not be deprived of benefits arising from that lack of explicitness.

The words of Lord Reid in Inland Revenue Commissioners v. Hinchy, [1960] A.C. 748; [1960]1 All E.R. 505 are also apposite in dealing with what may have appeared to be unfortunate results arising from giving to words in a statute their plain meaning. At pages 767 and 768 (All E.R. 512) he had this to say:

Difficulties and extravagant results of this kind caused Diplock J. and the Court of Appeal to search for an interpretation which would yield a more just result. What we must look for is the intention of Parliament, and I also find it difficult to believe that Parliament ever really intended the consequences which flow from the appellants’ contention. But we can only take the intention of Parliament from the words which they have used in the Act, and therefore the question is whether these words are capable of a more limited construction. If not, then we must apply them as they stand, however unreasonable or unjust the consequences, and however strongly we may suspect that this was not the real intention of Parliament.

I agree with the Court of Appeal that if it is possible to infer the meaning which they attach to these words that should be done. One is entitled and indeed bound to assume that Parliament intends to act reasonably, and therefore to prefer a reasonable interpretation of a statutory provision if there is any choice. But I regret that I am unable to agree that this case leaves me with any choice... . .

Moreover, I do not see any lack of harmony with the remainder of the Act nor with the object and spirit thereof in adopting my construction of the subparagraph. As Estey, J. pointed out in Stubart, supra, at 315 (D.T.C. 6322):

Thus, the statute [the Income Tax Act] is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect a specific activity.

Reed, J. in this case, found that Regulation 1207 “‘is an allowance granted as an incentive to drill high cost wells.” (A.B. p. 98). The interpretation which I have given recognizes the nature of the allowance and by giving a realistic, supportable meaning to the regulation which determines how the incentive is to be calculated. It enhances the benefit to be derived therefrom and, at the same time, accords with the sound principles of statutory interpretation propounded by Dreidger as earlier referred to herein.

Since the learned trial judge gave little or no weight to the contents of a budget document referred to by counsel for the respondent at trial, counsel for the appellant, at the hearing in this Court, abandoned his attack on the propriety of referring to such documents. Not having had the benefit of argument from either counsel on this ground of attack, I refrain from any comment thereon.

For all of the foregoing reasons the appeal should be allowed, the judgment of the Trial Division should be set aside and the matter should be referred back to the Minister of National Revenue for reassessment in a manner not inconsistent with these reasons. The appellant should recover its costs in this Court and in the Trial Division.

Appeal allowed.