Bell
J.T.C.C.:—The
appeal
of
Central
Supply
Company
(1972)
Limited
("Central")
is
from
a
reassessment
of
its
1987
taxation
year,
ending
on
December
31,
1987,
by
virtue
of
which
the
Minister
of
National
Revenue
("Minister")
disallowed
a
deduction
in
the
amount
of
$10,000,000
claimed
by
it
as
"cumulative
Canadian
exploration
expense"
pursuant
to
the
provisions
of
subsection
66.1(3)
and
paragraph
66.1(6)(b)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
appeal
of
Carousel
Travel
1982
Inc.
("Carousel")
is
from
a
reassessment
of
its
1987
taxation
year,
ending
on
December
31,
1987,
by
virtue
of
which
the
Minister
disallowed
a
deduction
in
the
amount
of
$6,000,000
claimed
by
it
as
"cumulative
Canadian
exploration
expense"
under
the
same
provisions
of
the
Act
for
that
taxation
year.
The
appeal
of
Central
and
the
appeal
of
Carousel
were
heard
together
on
common
evidence.
For
ease
of
comprehension
these
reasons
for
judgment,
with
respect
to
both
appellants,
will
set
forth
the
facts
and
reasons
relating
to
the
two
appeals.
Issue
The
issue
is
whether
four
limited
partnerships
incurred
"Canadian
exploration
expense"
pursuant
to
the
provisions
of
paragraph
66.1(6)(a)
of
the
Act
and,
if
so,
whether
the
appellants
became
members
of
those
partnerships
on
December
14,
1987,
the
last
day
of
the
fiscal
period
of
each
of
those
partnerships,
with
the
result
that
the
appellants
would
be
entitled
to
the
deductions
claimed
as
aforesaid.
As
explained
below,
oil
and
gas
expenses
incurred
by
a
partnership
are
not
claimed
at
the
partnership
level.
Rather,
for
the
purposes
of
deduction,
they
become
the
expenses
of
the
taxpayers
who
are
members
of
such
partnership
at
the
end
of
its
fiscal
period
in
which
the
expenses
are
incurred.
It
appears
from
respondent’s
counsel’s
submissions
that
the
reassessments
were
made
because
the
appellants
were
partners
for
24
hours
only
and
that
they
had
become
partners
of
the
partnerships
on
the
last
day
of
the
fiscal
period
in
which
such
partnerships
incurred
exploration
expenses,
the
well
having
been
proved
unsuccessful
two
and
one
half
months
earlier.
Facts
The
facts
are
complex
and
detailed
as
are
the
pleadings.
The
pleadings
consist
of
an
amended
notice
of
appeal,
reply,
answer,
appellant’s
request
to
admit,
respondent’s
response
to
request
to
admit,
respondent’s
request
to
admit
and
amended
reply.
The
Court
was
obliged
to
examine
several
documents
and
a
lengthy
transcript
of
the
evidence
herein
with
respect
to
most
of
the
facts
in
order
to
set
forth
a
cogent
statement
thereof.
Where
pleadings
are
numerous,
lengthy
and
complex,
a
statement
of
agreed
facts
(not
provided
in
this
case)
would
be
of
immense
assistance
to
the
Court.
In
order
to
aid
comprehension
of
the
facts,
diagrams
describing
same
and
referenced
herein
are
contained
in
the
appendix
hereto.
Before
setting
forth
a
full
statement
of
facts,
a
summary
of
the
salient
facts
is
presented
in
order
to
place
the
issue
in
focus.
Summary
of
facts
1.
The
four
limited
partnerships
were
formed,
under
the
Partnership
Act
of
Alberta
on
December
31,
1986.
2.
A
company,
herein
described
as
Northcor,
entered
into
an
agreement,
effective
that
day,
with
each
such
partnership.
Under
that
agreement
Northcor
became
the
agent
of
each
partnership
for
the
purpose
of
incurring
Canadian
exploration
expense
on
behalf
of
such
partnership
at
the
partnership’s
expense.
As
consideration
therefor
Northcor
granted
to
each
partnership
rights
to
purchase
its
shares.
3.
Each
partnership
assigned
to
Northcor
all
amounts
it
might
receive
by
way
of
drilling
assistance
from
the
Government
of
Canada
in
respect
of
the
Canadian
exploration
expense
so
incurred
by
it
as
payment
for
the
portion
of
the
drilling
costs
(80
per
cent)
not
being
provided
directly
by
it
and
it
appointed
Northcor
to
make
applications
therefor
on
its
behalf.
Northcor
commenced
drilling
operations
in
early
June
1987
on
a
well
off
the
east
coast
of
Canada
and
spent
a
sum
in
excess
of
$27,500,000
thereon,
approximately
$17,500,000
of
which
was
said
to
be
expended
on
behalf
of
the
four
partnerships.
4.
The
drilling
proved
unsuccessful
and
the
drilling
rig
was
released
and
abandonment
operations
commenced
on
October
1,
1987,
various
winding-up
activities
being
said
to
have
been
carried
on
for
the
rest
of
the
partnerships’
1987
fiscal
periods.
5.
A
company
described
herein
as
Encee,
which
controlled
Northcor,
under
documents
dated
December
10,
1987,
subscribed
for
and
paid
a
total
of
$3,500,000
for
units
in
the
four
partnerships.
Encee
replaced
the
founding
limited
partner.
6.
Encee,
on
December
14,
1987,
sold
its
interests
in
the
four
partnerships
to
a
company
described
herein
as
747942
for
the
total
sum
of
$1,855,414.
7.
On
that
date,
under
agreements
among
Encee,
a
company
herein
described
as
NRI
(controlled
by
Encee)
and
each
of
the
four
partnerships,
NRI
granted
a
"put"
whereby
it
agreed
to
purchase
the
units
of
each
partnership
if
so
required
by
747942
on
or
before
December
15,
1988.
8.
Also,
on
December
14,
1987,
747942
sold
to
Carousel,
for
$1,080,000,
such
number
of
units
in
the
four
partnerships
that
"Canadian
exploration
expense"
in
the
amount
of
$6,000,000
would
be
allocated
to
it
at
the
end
of
the
1987
fiscal
period
of
those
partnerships
and
747942
sold
to
Central,
for
$1,800,000,
such
number
of
units
in
the
four
partnerships
that
"Canadian
exploration
expense"
in
the
amount
of
$10,000,000
would
be
allocated
to
it
at
the
end
of
the
1987
fiscal
period
of
those
partnerships.
The
rights
of
747942
to
require
NRI
to
purchase
partnership
units
under
the
"put"
agreements
were
assigned
by
747942
to
Carousel
and
Central.
9.
Each
of
the
appellants
dealt
at
arm’s
length
with
Northcor
and
with
747942.
10.
All
documents
respecting
the
partnerships
and
the
registration
thereof
were
fully
executed
and
registered
in
accordance
with
the
provisions
of
Alberta
law.
11.
No
government
assistance
amounts,
which
would
have
had
to
be
deducted
from
the
appellants’
exploration
expenses
in
the
year
in
which
they
were
received
or
became
receivable,
were
so
received
or
receivable
by
the
appellants
in
their
respective
1987
taxation
year.
12.
On
December
15,
1987,
Central,
Carousel
and
747942
exercised
their
rights
to
compel
the
purchase
by
NRI
of
the
units
of
the
partnerships
owned
by
them
with
the
result
that
Central
and
Carousel
were
members
of
the
partnerships
for
approximately
24
hours
only.
Full
statement
of
facts
Encee
Group
Limited
("Encee”)
owned
72
per
cent
of
Northcor
Resources
Ltd.
("Resources”),
74
per
cent
of
Northcor
Energy
Ltd.
("Northcor")
and
100
per
cent
of
279397
Alberta
Limited
("279397").
See
Diagram
1.
Resources
owned
19
per
cent
of
Northcor
and
100
per
cent
of
NRI
Holdings
Ltd.
("NRI").
On
December
31,
1986,
279397,
as
general
partner,
and
one
Jan
M.
Alston,
as
initial
limited
partner,
entered
into
the
following
limited
partnership
agreements:
(a)
Northcor
Exploration
Program
1987-82
(b)
Northcor
Exploration
Program
1987-83
(c)
Northcor
Exploration
Program
1987-84
(d)
Northcor
Exploration
Program
1987-85
(e)
Northcor
Exploration
Program
1987-86
(f)
Northcor
Exploration
Program
1987-87
On
that
date
a
certificate
of
limited
partnership
was
filed
with
respect
to
each
of
those
limited
partnerships
in
the
central
registry
office
of
the
Province
of
Alberta.
The
contribution
of
the
initial
limited
partner
was
$100
in
respect
of
each
partnership.
Each
limited
partnership
was
described
in
the
respective
certificate
of
limited
partnership
as
being
formed
for
the
following
business
purposes:
(a)
To
acquire,
explore,
develop,
operate
and
sell
oil,
natural
gas
and
other
petroleum
substances;
(b)
To
purchase
or
sell
interests
in
oil,
natural
gas
and
other
petroleum
substances
or
rights
in
respect
of
any
of
the
foregoing;
(c)
To
construct
and
operate
facilities
for
the
treatment,
production,
collection,
storage,
delivery
and
sale
of
oil,
natural
gas
and
other
petroleum
substances;
(d)
To
incur
Canadian
exploration
expense
solely
as
consideration
for
the
issuance
of
shares
of
the
capital
stock
of
Northcor
Energy
Ltd.;
(e)
To
incur
Canadian
exploration
expense
solely
as
consideration
for
the
right
to
purchase
Class
"A"
common
shares
in
the
capital
stock
of
Northcor
Energy
Ltd.;
and
(f)
To
enter
into
a
share
subscription
agreement.
It
is
the
four
latter
partnerships
(”1987-84”,
"1987-85",
”1987-86”
and
"1987-87”)
which
are
involved
in
these
appeals.
See
Diagram
1.
Each
such
partnership
was
expressed
to
continue
until
December
31,
1990
unless
dissolved
"only
upon”
the
occurrence
of
certain
events,
each
of
which
is
normally
included
in
a
partnership
agreement.
Provision
was
made
in
the
limited
partnership
agreements
for
the
admission
of
additional
limited
partners.
The
paragraph
contained
in
each
certificate
of
limited
partnership
entitled
"participation
in
profits
and
losses",
reads
as
follows:
The
general
partner
shall
determine
and
allocate
the
net
income,
net
loss,
taxable
income
and
tax
loss
including
Canadian
exploration
expense
and
petroleum
incentive
payments
for
any
fiscal
year
as
at
the
end
of
such
fiscal
year.
If
at
any
time
during
the
fiscal
year
of
the
limited
partnership,
a
limited
partner
shall
assign
or
transfer
his
limited
partnership
interest(s)
in
the
partner
ship,
no
share
of
net
income,
net
loss,
taxable
income,
tax
loss
(including
Canadian
exploration
expense
and
petroleum
incentive
payments)
or
other
allocation
of
the
partnership
to
the
date
of
such
transfer
shall
be
allocated
to
such
limited
partner’s
account
as
at
the
date
of
such
sale
or
transfer.
Any
allocation
or
distribution
to
the
partners
as
provided
for
in
the
limited
partnership
agreement
shall
be
made
among
those
limited
partners
who
were
shown
on
the
register
as
limited
partners
at
the
end
of
the
fiscal
year
for
which
such
allocation
or
distribution
is
made.
Any
allocations
to
the
partners
as
provided
for
in
Article
8
of
the
limited
partnership
agreement
shall
be
allocated
among
the
partners’
accounts
or
distributed
to
the
partners
as
follows:
(a)
0.01
per
cent
to
the
general
partner;
and
(b)
99.99
per
cent
to
the
limited
partners
pro
rata
to
the
number
of
limited
partnership
interests
owned
as
at
the
end
of
the
fiscal
year
for
which
such
allocation
is
made.
Northcor
entered
into
an
identical
share
subscription
agreement
(’’agreement"),
expressed
to
have
effect
on
December
31,
1986,
with
each
of
the
four
limited
partnerships,
each
partnership
being
described
as
"investor".
Each
agreement
provided
that
Northcor
had
entered
into
a
farm
out
agreement
pursuant
to
which
it
would
be
expending
funds
in
the
drilling
and
testing
of
a
well
called
the
"Northcor
et
al
Narwhal
F-99
well"
("well")
off
the
east
coast
of
Canada.
It
also
provided
that
the
investor
wished
to
incur,
under
the
provisions
of
subparagraph
66.1(6)(a)(v)
of
the
Income
Tax
Act,
"Canadian
exploration
expense",
described
therein
as
"E
expenditures".
Each
Investor
appointed
Northcor
as
its
agent
to
incur
E
expenditures
on
its
behalf
in
an
amount
not
exceeding
$5,000,000
in
drilling
and
testing
the
well.
The
sole
consideration
for
the
investor
so
incurring
E
expenditures
was
the
issuance
by
the
company
to
the
investor
of
rights
to
purchase
Class
"A"
common
voting
shares
("rights").
The
rights
to
be
so
issued
thereunder
would
entitle
the
investor
to
purchase
one
Class
"A"
common
voting
share
at
a
price
of
$20
per
share
for
each
$50
of
E
expenditures,
such
rights
to
be
exercised
on
or
before
June
30,
1980.
Paragraph
3(d)
respecting
income
tax
deductions
read
as
follows:
The
investor
shall
be
entitled
to
all
income
tax
deductions
relating
to
the
E
expenditures
incurred
on
the
investor’s
behalf
by
the
company
and
the
company
hereby
acknowledges
that
it
has
no
right
to
any
such
E
expenditures
and
will
not
claim
the
same
when
filing
any
of
its
income
tax
returns.
Another
pertinent
provision,
paragraph
4(b)
reads,
in
part,
as
follows:
the
investor
agrees
to
pay
to
the
company
by
December
31,
1987
in
connection
with
this
agreement
amounts
equal
to
20
per
cent
of
the
amount
of
E
expenditures
set
out
in
clause
1
hereof.
In
addition,
the
investor
hereby
assigns
to
the
company
as
further
and
final
payment
of
its
obligations
hereunder,
all
of
the
investor’s
right,
title,
estate
and
interest
in
and
to
any
governmental
grants
Or
assistance
payments
which
may
arise
or
be
available
to
the
investor
pursuant
to
the
E
expenditures
to
be
made
hereunder,
and
shall
execute
an
assignment
in
the
form
of
Schedule
"A"
attached
hereto.
The
final
relevant
clause
from
that
agreement,
paragraph
6(b),
reads
as
follows:
All
federal
grants
and
incentive
payments
earned
as
a
result
of
any
exploration
associated
with
the
farm
out
agreement
and
contemplated
hereby
will
be
earned
solely
for
the
account
of
the
investor.
The
company
hereby
agrees
to
apply
monthly
for
such
grants
and
incentives
on
behalf
of
the
investor
and,
subject
to
clause
4(b)
hereof,
to
pay
such
sums
to
the
investor
promptly
upon
receipt
thereof
by
the
company.
The
company
also
agrees
to
send
to
the
investor
copies
of
such
applications
forthwith
upon
the
making
of
same.
Each
agreement
has
a
two-page
attachment
entitled
"This
is
Schedule
"A"
to
that
certain
assignment
of
petroleum
incentive
payments
and
power
of
attorney".
This
description
is
strange
because
those
two
pages
constitute
the
agreement
whereby
each
of
the
four
limited
partnerships
assigns
to
Northcor
all
and
any
petroleum
incentive
payments
(PIPs)
to
which
it
is
or
may
become
entitled
pursuant
to
the
Petroleum
Incentives
Program
Act
("PIP
Act")
respecting
costs
incurred
or
to
be
incurred
by
that
partnership
pursuant
to
the
agreement.
It
also
authorizes
and
instructs
the
administrators
of
the
Petroleum
Incentive
Program
("program")
to
pay
to
Northcor
all
moneys
to
which
it
becomes
entitled
pursuant
to
the
aAgreement.
Finally,
it
appoints
Northcor
as
the
agent
of
the
partnership
for
all
matters
in
connection
with
any
application
for
PIPs.
There
follows
a
Subscription
agreement
and
power
of
attorney
in
respect
of
each
of
the
four
partnerships.
Encee
subscribed
for
10,000
limited
partnership
interests
in
each
of
1987-84,
1987-85
and
1987-86
for
the
sum
of
$1,000,000
and
10,000
limited
partnership
interests
in
1987-87
for
the
sum
of
$500,000,
the
total
of
such
subscriptions
being
$3,500,000?
In
each
case,
Encee
appointed
279397
its
attorney
and
agent
for
the
purposes
of
executing
documents
and
performing
acts
necessary
to
conduct
the
business
of
the
partnership
and,
in
particular,
to
execute
and
file
documents
with
any
governmental
agency
and
to
execute
and
deliver
to
the
Petroleum
Monitoring
Agency
any
and
all
applications,
certificates
and
documents
required
in
order
to
apply
for
and
to
receive
on
behalf
of
the
partnership
and\or
the
limited
partners
all
payments
to
be
made
under
the
program.
These
documents
were
dated
December
10,
1987.
Northcor
then
issued
a
certificate
of
rights
to
each
of
the
four
partnerships
granting
to
1987-4,
1987-5
and
1987-6
the
right
to
acquire
100,000
Class
"A"
common
voting
shares
of
Northcor
at
a
price
of
$20
per
share
and
to
1987-7
the
right
to
acquire
50,000
of
such
shares
at
the
same
price.
These
certificates,
each
dated
December
11,
1987
provided
that
the
rights
could
be
exercised
by
1987-4
on
or
before
June
30,
1988,
by
1987-5
on
or
before
July
31,
1988,
by
1987-6
on
or
before
August
31,
1988
and
by
1987-7
on
or
before
September
30,
1988.
By
documents
described
as
"notice
no.
1
to
amend
the
certificate
of
limited
partnership"
of
each
of
the
four
partnerships
dated
December
10,
1987
and
bearing
endorsement
of
registration
in
the
Calgary
Registration
District,
each
certificate
of
limited
partnership
was
amended
to
delete
Jan
M.
Alston
as
initial
limited
partner
and
to
add
Encee
as
a
limited
partner
with
10,000
limited
partnership
interests,
the
contribution
totalling
$3,500,000
above
described.
This
sum
was
paid
to
the
limited
partnerships
by
Encee
on
December
11,
1987.
As
at
December
14,
1987
Northcor
had
incurred
Canadian
exploration
expense
("E")
in
excess
of
$27.5
million
in
drilling
and
testing
the
well.
It
is
agreed
that
the
first
$10,000,000
of
expenses
giving
rise
to
entitlement
for
PIPs
under
the
PIP
Act
was
allocable
under
the
provisions
of
the
Agreements
to
Northcor
Exploration
Program
1987-2
and
Northcor
Exploration
Program
1987-3,
the
two
limited
partnerships
in
respect
of
which
the
appellants
had
no
interest.
By
document
dated
December
14,
1987,
279397,
as
general
partner
for
the
four
partnerships,
set
the
fiscal
year
end
of
each
of
same
at
11:59
p.m.
on
December
14,
1987.
Jan
M.
Alston,
the
initial
limited
partner,
gave
evidence
on
behalf
of
the
appellants.
At
the
relevant
times,
he
provided
general,
corporate
and
administrative
legal
services
to
the
Northcor
group
of
companies.
He
testified
that
he
worked
on
a
daily
basis
with
management
of
Northcor.
He
was
involved
in
setting
up
several
limited
partnerships
and
assisting
in
attempts
to
raise
financing
by
way
of
seeking
investors
for
the
limited
partnership
units.
He
stated
that
"flow-through
limited
partnerships"
were
a
common
financing
tool
for
junior
exploration
companies
in
the
oil
and
gas
business
and
that
this
was
the
financing
method
contemplated
by
Northcor.
He
made
it
clear
that
the
sum
of
approximately
$10,000,000
had
been
raised
and
expended
in
relation
to
investors
other
than
the
appellants
and
that
a
sum
equal
to
the
remaining
exploration
costs
of
approximately
$17,500,000
related
substantially
to
the
appellants.
He
described
the
relationship
of
Northcor
with
the
Petroleum
Incentives
Administration
("PIA")
as
being
very
businesslike
because
the
successful
raising
of
funds
depended
upon
its
cooperation
in
structuring
transactions
where
receipt
of
PIP’s
would
be
as
assured
as
possible.
He
explained
that
the
Northcor
Group
had
$1,375,000
available
in
cash
and
that
it
negotiated
a
loan
with
DCC
Equities
Limited
of
$3,275,000,
the
total
of
$5,000,000
being
deposited
with
Chevron,
the
farmor
of
the
resource
property
to
be
drilled.
This
"gave
the
Department
comfort
that
we
wouldn’t
default
on
the
non-PIP
portion
of
the
well".
He
stated
that
drilling
operations
by
Northcor
commenced
in
early
June
1987,
that
the
well
was
spudded
on
July
14,
1987
and
drilling
operations
were
completed
by
October
1,
1987,
the
date
on
which
it
was
known
that
the
well
had
proven
unsuccessful.
He
confirmed
that
a
sum
in
excess
of
$27,500,000
had
been
expended
in
so
drilling.
He
testified
that
the
drilling
rig
was
released
on
October
1,
1987,
meaning
that
drilling
operations
and
abandonment
operations
were
completed
and
that
the
rig
was
no
longer
required
on
the
well
site.
He
said
that
there
would,
after
that
date,
be
a
number
of
de-
commissioning
activities
that
would
be
associated
with
the
well.
He
said
that
there
was
a
lot
of
heavy
equipment
involved
resulting
in
ongoing
activities
and
expenses
in
winding
up
the
operations.
He
stated
that
one
of
the
specific
pieces
of
equipment
that
had
to
be
tailor-made
for
any
particular
well
is
the
risers,
being
the
tubing
string
down
through
which
the
drill
pipe
is
extended
through
the
water.
That
would
have
to
be
refurbished
and
put
back
into
the
same
state
that
it
was
in
when
it
was
acquired
for
the
well.
He
said
there
were
a
number
of
other
things
of
that
nature
that
remained
to
be
done,
such
as
returning
unused
casing
equipment
and
casing
pipe
to
shore
and
to
suppliers.
He
stated
that
the
general
partner
monitored
the
expenses
through
the
flow-through
share
agreements
and
did
accounting
and
financial
statements
for
the
limited
partnerships
and
that
it
was
in
continuing
discussion
with
officials
of
the
PIA.
He
said
that
Northcor
incurred
a
sum
in
excess
of
$27.5
million
of
E
in
drilling
and
testing
the
well
and
that
it
was
incurred
as
agent
for
the
partnerships
that
had
been
established
pursuant
to
the
agreement.
Mr.
Alston
confirmed
receipt
of
a
letter
dated
December
14,
1987
addressed
to
Northcor
Energy
Ltd.
from
the
PIA
division
of
Energy,
Mines
and
Resources
Canada,
reading,
in
part,
no
entitlement
to
Northcor
Energy
Ltd.
for
petroleum
incentives
for
exploration
costs
incurred
drilling
the
Narwhal
F-99
well
subsequent
to
December
31,
1986
and
prior
to
December
15,
1987
in
excess
of
$10,322,000
has
arisen.
He
said
that
Northcor
wanted
to
be
sure
that
the
partnerships
whose
interests
were
being
sold
had
not
received
any
notices
of
entitlement
with
respect
to
E
incurred
by
Northcor
as
agent
on
their
behalf.
There
was
considerable
evidence
by
this
witness
respecting
the
$10,322,000
of
E
above
referred
to.
It
is
clear
that
these
were
expenses
incurred
before
the
$17.5
million
of
E
was
incurred
in
respect
of
the
four
partnerships
in
which
the
appellants
had
interests.
Mr.
Alston
also
explained
that
the
normal
mechanism
in
the
industry
for
selling
a
partnership
interest
was
that
the
PIP
income
would
be
received
in
the
second
year
of
the
partnership
so
that
the
limited
partners
would
then
include
it
in
their
income,
having
deducted
the
E
incurred
by
the
partnership
in
its
first
fiscal
year.
He
stated
that
it
helped
the
sale
of
partnership
interests
and
that
the
PIA,
over
the
years,
understood
that
fact.
He
then
referred
to
the
sale
and
purchase
agreement
made
December
14,
1987
between
Encee
Group
Ltd.
and
747942
Ontario
Ltd.
("747942”)
in
which
Encee
sold
to
747942
for
the
sum
of
$1,855,414
(receipts
for
the
constituent
figures
of
which
were
filed
as
exhibits)
all
of
Encee’s
interest
in
1987-4,
1987-5
and
1987-6
and
8,500
of
the
10,000
limited
partnership
interests
in
1987-7.
By
virtue
of
a
put
agreement
made
December
14,
1987,
NRI,
747942
and
Encee
entered
into
an
agreement
with
each
of
the
four
partnerships
whereby
NRI
granted
a
’’put”
in
which
it
agreed
to
purchase
the
units
of
each
partnership
if
so
required
on
or
before
December
15,
1988.
Under
this
agreement,
Encee
represented
and
warranted
that
NRI
had
sufficient
tax
deductions
available
to
shelter
the
allocation
of
petroleum
incentive
grants
allocable
to
it,
in
respect
of
the
units,
after
exercise
of
the
put.
Mr.
Alston
stated
that
this
agreement
was
intended
to
enable
the
partnership
units
to
be
sold
to
NRI
and
had
no
other
purpose.
Mr.
Alston
was
then
referred
to
two
exhibits,
each
being
entitled
assignment
and
novation
agreement
re:
sale
and
purchase
agreement,
both
stated
to
be
made
and
effective
as
of
December
14,
1987.
By
virtue
of
one
of
these
agreements
entered
into
by
747942,
Carousel
and
Encee,
747942
assigned
to
Carousel
such
number
of
limited
partnership
units
of
the
four
partnerships
that
the
total
amount
of
E
to
be
allocated
to
Carousel
by
them
at
the
end
of
their
1987
fiscal
year
would
be
$6,000,000.
The
sale
and
purchase
agreement
expressed
to
be
made
December
14,
1987
between
Encee
and
747942
referred
to
above
was
attached
as
an
exhibit.
Carousel,
under
an
assignment
and
novation
agreement,
accepted
an
assignment
to
it
and
agreed
to
be
bound
by
the
provisions
of
the
aforesaid
sale
agreement.
A
similar
agreement
with
respect
to
Central
provided
for
the
assignment
by
747942
to
it
of
such
number
of
limited
partnership
units
of
the
four
partnerships
that
the
total
amount
of
E
to
be
allocated
to
Central
by
them
at
the
end
of
their
1987
fiscal
year
would
be
$10,000,000.
Carousel
paid
$1,080,000
for
its
partnership
units
and
Central
paid
$1,800,000.
Mr.
Alston
stated
that
these
documents
were
intended
to
provide
for
the
conveyance
of
those
interests
and
had
no
other
purpose.
Further,
in
each
case
there
was
an
assignment
and
novation
agreement
re:
put
agreement
expressed
to
be
made
and
effective
as
of
December
14,
1987
under
which
Carousel
and
Central
respectively
had
the
rights
of
747942
under
the
aforesaid
put
agreements
assigned
to
them
and
they
accepted
the
assignment
and
agreed
to
be
bound
by
and
to
perform
under
same.
Mr.
Alston
said
that
they
were
intended
to
accomplish
exactly
that
and
had
no
other
purpose.
The
respondent
admitted
in
pleadings
that
Encee,
Carousel,
Central
and
747942
were
not
related
corporations
for
the
purposes
of
the
Act
but
did
not
admit
that
they
dealt
with
each
other
at
arm’s
length.
Mr.
Alston’s
evidence
was
that
Northcor
had
never
done
business
with
Carousel,
Central
or
747942
before
these
transactions.
He
also
testified
that
the
purchase
price
of
$1,855,414
paid
by
747942
to
Encee
was
negotiated
by
a
commission
agent
for
the
Northcor
group
and
that
such
price
was
agreed
on
after
’’tough
negotiations".
He
stated
that
Northcor
had
no
participation
with
or
dealings
with
Carousel
or
Central
other
than
through
the
assignment
and
novation
agreements.
He
testified
further
that
Northcor
had
nothing
to
do
with
establishing
the
price
at
which
the
assignments
from
747942
to
Carousel
and
Central
took
place,
stating
that
he
had
no
direct
knowledge
of
those
transactions.
His
only
function
with
respect
thereto
was
to
make
appropriate
filing
of
the
notices
of
amendment
in
order
to
reflect
the
new
partners.
He
was
then
referred
to
four
exhibits,
each
of
which
was
a
photocopy
of
a
notice
to
amend
the
certificate
of
limited
partnership
and
each
of
which
bore
an
endorsement
of
registration
on
December
14,
1987
in
the
Calgary
registration
district
and
identified
them
as
the
registrations
filed
by
him.
His
evidence
was
also
clear
that
NRI
acquired
its
partnership
interests
pursuant
to
notices
dated
December
15,
1987
from
each
of
Carousel
and
Central
compelling
NRI
to
purchase
all
the
partnership
units
held
by
each
of
them,
copy
of
which
notices
were
introduced
in
evidence.
He
stated
that
he
had
no
knowledge
of
what
claims
the
appellants
made
in
their
respective
income
tax
returns
for
the
1987
taxation
year.
Finally,
Mr.
Alston
testified
that
notices
of
entitlement
from
the
PIA
with
respect
to
eligible
expenditures
totalling
almost
$17,500,000
and
PIPs
totalling
almost
$14,000,000
were
all
received
after
December
15,
1987.
On
cross-examination,
Mr.
Alston
stated
that
all
of
the
PIPs
were
to
end
up
with
Chevron,
the
farmor,
or
with
the
drilling
contractors.
He
also
stated
that
a
letter
was
sent
from
Northcor
to
the
PIA
dated
October
15,
1987
asking
it
not
to
issue
further
PIP
entitlements
for
the
Narwhal
F-99
well
costs
until
notified
in
writing
by
Northcor.
He
said
that
the
$3,500,000
received
by
the
partnerships
was
paid
on
the
following
day
to
Northcor.
He
said
that
the
registration
of
documents
respecting
the
partnership
was
effected
at
the
Central
Registry
pursuant
to
the
Partnership
Act
of
Alberta.
In
response
to
a
question
about
the
possibility
of
benefiting
from
the
project
having
disappeared
on
October
1,
1987,
he
said
he
agreed
with
that
proposition
to
a
considerable
extent
but
that
there
was
a
post-mortem
on
the
well
that
would
be
carried
out
for
several
months
and
there
was
a
slim
possibility
that
something
further
might
be
done
in
the
structure,
even
though
that
was
not
considered
probable.
The
second
and
last
witness
for
the
appellants
was
Bernard
D.
Katchen
who
was
a
shareholder,
officer
and
director
of
747942.
He
stated
that
his
company
was
approached
by
an
agent
in
the
fall
of
1987
with
respect
to
finding
investors
for
the
partnerships.
He
said
that
the
matter
was
researched
from
a
tax
view
point
and
that
he
then
pursued
it.
He
stated
that
the
purchase
price
of
$1,855,414
was
established
through
negotiations,
747942
having
set
out
to
buy
the
interest
as
cheaply
as
possible.
He
also
stated
that
he
had
never
dealt
with
Encee
or
Northcor
or
any
of
the
Northcor
companies
before
these
transactions.
He
testified
that
the
sale
price
of
the
partnership
interests
of
$2,880,000
was
negotiated
as
the
best
price
possible.
He
testified
that
747942
retained
partnership
interests
entitled
to
$800,000
of
E,
that
it
deducted
same
in
its
income
tax
return
and
had
not
been
reassessed
with
respect
thereto.
On
cross-examination,
Mr.
Katchen
stated
that
there
was
a
closing
book
for
the
transactions
which
took
place
on
December
14,
1987
and
that
the
closing
was
coordinated
between
the
offices
of
lawyers
in
Calgary
and
in
Toronto.
Appellants’
counsel
then
read
into
the
record
extracts
from
the
examination
for
discovery
of
one
Mr.
Nowoselski,
an
auditor
with
the
Department
of
National
Revenue.
On
that
examination
for
discovery,
Mr.
Nowoselski
stated
that
he
accepted
certain
paragraphs
contained
in
a
memorandum
from
the
Department
of
National
Revenue,
Head
Office,
Rulings
Directorate
Resource
Industries
Section
to
Calgary
District
Office.
He
said
he
did
not
know
what
the
general
partner
itself
actually
did
and
further,
that
although
he
did
not
verify
same,
he
accepted
paragraphs
6
and
7,
these
two
paragraphs
reading
as
follows:
6.
Since
the
rig
release
date,
the
general
partner
has
been
actively
engaged
on
behalf
of
all
of
the
limited
partnerships
to
locate
and
bring
in
additional
limited
partners
to
pay
the
indebtedness
incurred.
In
addition,
the
limited
partnerships
were
engaged
in
various
wind-down
activities,
1.e.,
(i)
refurbishing
risers
(the
tube
that
they
drilled
through);
(ii)
refurbishing
other
equipment
etc.
(this
occurred
basically
from
October
1,
1987
to
mid-November
1987);
(iii)
disposing
of
leftover
material
and
equipment
and
the
same
is
still
ongoing
(see
letter
from
Manadrill,
dated
November
9,
1987
attached
hereto).
7.
The
general
partner
maintains
an
office
at
10th
Floor,
600-
6th
Avenue
S.W.,
Calgary,
Alberta,
and
prior
to
the
rig
release
date
and
subsequent
to
that
date,
has
maintained
a
staff.
The
general
partner
has
been
and
continues
to
perform
various
accounting
functions.
The
general
partner,
through
Dundee
Capital
Corporation
(there
is
an
agreement
between
the
general
partner
and
Dundee
Capital
Corporation)
have
been
actively
soliciting
investors
for
each
of
the
limited
partnerships.
Then,
with
respect
to
a
letter
dated
March
30,
1988
to
Code
Hunter,
a
Calgary
law
firm,
from
the
Department
of
National
Revenue,
Head
Office
in
Ottawa,
Mr.
Nowoselski
stated
that
he
accepted
all
of
the
facts
in
paragraph
1
through
paragraph
18.
Those
paragraphs
include
two
paragraphs
identical
to
those
referred
to
above.
The
remaining
paragraphs
set
forth
matters
already
outlined
above
as
evidence.
Carousel
deducted
the
sum
of
$6,000,000
in
computing
its
income
for
its
fiscal
period
ending
December
31,
1987.
It
also
reported
a
capital
gain
of
$4,920,000
producing
a
taxable
capital
gain
of
$2,460,000
in
respect
of
the
disposition
of
limited
partnership
interests
for
deemed
disposition
proceeds
of
$6,000,000,
such
interests
having
an
adjusted
cost
base
of
$1,080,000.
Central
deducted
the
sum
of
$10,000,000
in
computing
its
income
for
its
fiscal
period
ending
December
31,
1987.
It
also
reported
a
capital
gain
of
$8,200,000
producing
a
taxable
capital
gain
of
$4,100,000
in
respect
of
the
disposition
of
limited
partnership
interests
for
deemed
disposition
proceeds
of
$10,000,000,
such
interests
having
an
adjusted
cost
base
of
$1,800,000.
Questions
posed
by
the
respondent
I
shall
set
forth
my
distillation
of
the
questions
raised
by
the
respondent
in
support
of
its
position
that
the
appellants
should
not
succeed
in
their
appeals.
For
convenience
the
pertinent
portion
of
the
statutory
references
contained
in
the
statement
of
each
such
question
will
be
set
out
in
the
discussion
thereof.
1.
Were
the
appellants
members
of
the
four
partnerships
in
question?
2.
If
the
appellants
were
members
of
the
aforesaid
partnerships
were
they
entitled,
subject
to
the
determination
of
the
issues
below,
to
the
deductions
claimed
as
"cumulative
Canadian
exploration
expense"
by
virtue
of
subsection
66.1(3)
and
subparagraph
66.
l(6)(b)
of
the
Income
Tax
Act?
3.
Were
the
transactions
or
any
of
them
a
sham?
4.
Did
the
deduction
of
$10,000,000
claimed
by
Central
and
the
deduction
of
$6,000,000
claimed
by
Carousel
unduly
or
artificially
reduce
the
respective
incomes
of
those
appellants
within
the
meaning
of
subsection
245(1)
of
the
Act?
5.
Were
the
transactions
under
which
the
appellants
acquired
and
sold
limited
partnership
interests
in
the
partnerships
within
the
object
and
spirit
of
section
66.1
of
the
Act?
6.
Were
the
appellants,
within
the
meaning
of
subparagraph
66.1(6)(b)(ix)
entitled
to
receive,
any
"assistance"
as
defined
in
paragraph
66(15)(a.
1)
in
respect
of
any
of
the
E
in
the
1987
taxation
year
of
the
partnerships
thereby
reducing
the
amount
of
the
E
pool
that
could
be
deducted?
7.
Was
the
interest
held
by
each
appellant
in
each
of
the
four
partnerships
an
"exempt
interest"
within
the
meaning
of
subsection
96(2.5)
with
the
result
that
by
virtue
of
subsection
96(2.4)
it
would
not
be
a
"limited
partner"
as
defined
therein?
If
it
were
not
a
"limited
partner",
then
by
virtue
of
subsection
96(2.2)
it
would
not
have
an
"at-risk
amount"
with
the
result
that
no
amount
would,
under
subsections
66.8(1)
and
(3),
reduce
the
appellants’
E
for
the
purpose
of
subparagraph
66.1(6)(a)(iv).
General
I
propose
dealing
with
each
question
by
stating
the
appellants’
position
and
the
respondent’s
position
followed
by
my
analysis
and
conclusion.
This
process
should
assist
the
comprehension
of
a
parade
of
complicated
facts
that
become
mired
in
the
complexity
of
knotty
and
gnarled
legislation.
Before
so
doing
I
will
set
forth
my
understanding
of
the
relevant
sections
of
the
Act
and
of
the
PIP
Act.
In
the
oil
and
gas
context,
a
taxpayer,
other
than
a
corporation
whose
principal
business
is
in
the
oil
and
gas
area,
may
deduct
in,
computing
income,
an
amount
not
exceeding
his
"cumulative
Canadian
exploration
expense".
This
is
a
cumulative,
continuing
pool
of
expenses
("E
pool")
to
which
defined
exploration
expenses
such
as
seismic
and
drilling
costs
are
added
and
from
which
certain
sums
received
or
receivable
are
deducted.
One
of
such
amounts
required
to
be
deducted
for
the
taxation
period
herein
was
any
grant
under
the
PIP
Act.
In
short,
a
taxpayer
would
add
all
E
to
his
E
pool
and
deduct
statutorily
described
amounts
therefrom.
If
the
E
pool
at
any
year
end
was
a
positive
amount
the
taxpayer
could
deduct
same.
If
the
E
pool
was
a
negative
amount
the
taxpayer
was
obliged
to
include
same
in
income.
Partnerships
did
not
deduct
E
and
they
did
not
include
in
income
any
amounts
received
or
receivable
in
respect
thereof.
These
expenses
were
deemed
to
be
the
expenses
of
the
partners
in
the
appropriate
amounts
and
were
added
to
a
partner’s
E
pool
and
that
partner
deducted
same
as
above
described.
A
partner
could
deduct
his
share
of
the
E
incurred
by
the
partnership
in
a
fiscal
period
if
he
was
a
member
thereof
at
end
thereof.
Section
66.8,
combined
with
certain
subsections
of
section
96
provided,
in
essence,
that
unless
a
partnership
carried
on
an
active
business
continuously
throughout
a
defined
period,
a
limited
partner
thereof
would
not
have
an
’’exempt
interest”
and
would
be
limited
to
deducting
an
amount
of
his
share
of
the
partnership’s
E
equal
to
the
amount
for
which
he
was
"at
risk".
Therefore,
assuming,
A.
that
the
appellants
were
members
of
the
four
partnerships
on
December
14,
1987,
B.
that
the
appellants
incurred
E
of
$16,000,000
in
respect
of
their
partnership
interests
therein,
C.
that
none
of
those
partnerships
was
entitled
to
any
"assistance"
(PIPs)
in
respect
of
the
$16,000,000
of
E
in
its
1987
taxation
year,
D.
that
the
partnership
interest
of
each
of
the
appellants
was
an
"exempt
interest",
and
E.
that
the
issues
of
undue
and
artificial
reduction
of
income,
sham,
object
and
spirit,
self-cancellation
and
other
such
arguments
raised
by
the
respondent
did
not
exist,
the
appellants
would
be
entitled
to
succeed
in
their
appeals
with
the
result
that
Carousel
could
deduct
$6,000,000
of
its
E
pool
and
Central
could
deduct
$10,000,000
of
its
E
pool
in
its
appropriate
taxation
year.
This
places
the
issues
in
focus.
First
question
Were
the
appellants
members
of
the
four
partnerships
in
question?
Appellant's
position
Appellant’s
counsel
commenced
his
argument
in
respect
of
a
number
of
issues
with
reference
to
Antosko.
v.
The
Queen,
[1994]
2
S.C.R.
312,
[1994]
2
C.T.C.
25,
D.T.C.
6314.
He
referred
to
Mr.
Justice
lacobucci’s
quotation,
at
pages
326-28
(C.T.C.
31-2,
6319-20),
of
the
words
of
Estey
J.
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305,
namely,
where
the
substance
of
the
Act,
when
the
clause
in
question
is
contextually
construed,
is
clear
and
unambiguous
and
there
is
no
prohibition
in
the
Act
which
embraces
the
taxpayer,
the
taxpayer
shall
be
free
to
avail
himself
of
the
beneficial
provision
in
question.
lacobucci
J.
then
said,
This
principle
is
determinative
of
the
present
dispute.
While
it
is
true
that
the
court
must
view
discrete
sections
of
the
Income
Tax
Act
in
light
of
the
other
provisions
of
the
Act
and
of
the
purpose
of
the
legislation,
and
that
they
must
analyze
a
given
transaction
in
the
context
of
economic
and
commercial
reality,
such
techniques
cannot
alter
the
result
where
the
words
of
the
statute
are
clear
and
plain
and
where
the
legal
and
practical
effect
of
the
transaction
is
undisputed.
and
The
motives
of
the
parties,
and
the
setting
in
which
the
transfer
took
place,
are
simply
not
determinative
of
the
application
of
the
subsection.
and
In
this
appeal,
despite
conceding
that
these
factual
elements
are
present,
the
respondent
is
asking
the
Court
to
examine
and
evaluate
the
transaction
in
and
of
itself,
and
to
conclude
that
the
transaction
is
somehow
outside
the
scope
of
the
section
in
issue.
In
the
absence
of
evidence
that
the
transaction
was
a
sham
or
an
abuse
of
the
provisions
of
the
Act,
it
is
not
the
role
of
the
court
to
determine
whether
the
transaction
in
question
is
one
which
renders
the
taxpayer
deserving
of
a
deduction.
If
the
terms
of
the
section
are
met,
the
taxpayer
may
rely
on
it,
and
it
is
the
option
of
Parliament
specifically
to
preclude
further
reliance
in
such
situations.
Counsel
then
stated
that
the
partnerships
in
question
were
limited
partnerships
within
the
meaning
of
Part
2
of
the
Alberta
Partnership
Act,
the
law
in
respect
of
same
being
different
from
the
law
applicable
to
ordinary
partnerships
falling
under
Part
1
of
that
Act.
He
referred
to
the
definition
of
partnership
in
section
1
of
the
Act
(appearing
before
Part
1
and
Part
2),
reading
as
follows,
"partnership"
means
the
relationship
that
subsists
between
persons
carrying
on
a
business
in
common
with
a
view
to
profit.
and
then
referred
to
section
4
of
Part
1
which
sets
forth
certain
criteria
for
determining
whether
or
not
a
partnership
exists.
He
pointed
out,
by
way
of
contrast,
that
section
48,
the
first
section
under
Part
2,
reads,
This
Act
shall,
in
the
case
of
limited
partnerships,
be
read
subject
to
this
Part.
He
submitted
that
whereas
section
4
under
Part
1
sets
out
certain
criteria
for
determining
whether
a
partnership
exists,
subsection
51(1)
under
Part
2
reads,
Subject
to
subsection
(1.1),
a
limited
partnership
is
formed
when
a
certificate
substantially
complying
with
subsection
(2)
is
filed
with
and
recorded
by
the
Registrar.
He
submitted
that
no
criteria
are
specified
under
this
Part
and
that,
therefore,
the
simple
filing
of
a
certificate
was
all
that
was
required
to
form
a
limited
partnership.
Subsection
51(2)
requires
the
certificate
to
be
signed
by
all
persons
desiring
to
form
a
limited
partnership
and
requires
it
to
state
the
firm
name,
character
of
business,
name
and
place
of
residence
of
each
general
partner
and
limited
partner,
the
term
of
the
partnership,
the
assets
contributed,
etc.
Counsel
then
referred
to
subsection
65(1)
which
provides
that
a
limited
partner’s
interest
is
assignable,
to
subsection
65(2)
which
says
that
a
substituted
limited
partner
is
a
person
admitted
to
all
the
rights
of
a
limited
partner
who
has
died
or
has
assigned
his
interest
in
the
limited
partnership
and
to
subsection
65(5)
which
states
that
an
assignee
becomes
a
substituted
limited
partner
when
the
certificate
is
appropriately
amended
in
accordance
with
Part
2.
He
continued
with
reference
to
subsection
65(6)
which
provides
that
a
substituted
limited
partner
has
all
the
rights
and
powers
and
is
subject
to
all
the
restrictions
and
liabilities
of
his
assignor
except
those
liabilities
of
which
he
was
ignorant
at
the
time
he
became
a
limited
partner
and
which
could
not
be
ascertained
from
the
certificate.
He
submitted
that
we
don’t
need
to
deal
with
whether
or
not
there
is
a
relationship
that
subsists
between
persons
carrying
on
business
in
common
with
a
view
to
profit.
Once
you
comply
with
the
requirements
of
the
statute,
you
have
a
limited
partnership
and
a
substituted
limited
partner
who
complies
with
the
requirements
of
the
statute,
is
a
member
of
the
partnership.
Section
56
of
the
Partnership
Act
provides
that
subject
to
Part
2,
a
limited
partner
is
not
liable
for
the
obligations
of
the
limited
partnership
except
in
respect
of
the
amount
of
property
he
contributes
or
agrees
to
contribute
to
the
capital
of
the
limited
partnership.
Counsel
then
stated,
with
obvious
reference
to
section
63
of
the
Partnership
Act,
that
where
a
limited
partner
participates
in
the
business
of
the
partnership
he
loses
his
limited
liability.
Section
63
of
the
Act
reads,
A
limited
partner
does
not
become
liable
as
a
general
partner
unless,
in
addition
to
exercising
his
rights
and
powers
as
a
limited
partner,
he
takes
part
in
the
control
of
the
business.
He
then
asked
how
it
could
be
said
that
a
limited
partner,
in
order
to
be
considered
a
partner
in
the
partnership,
"must
carry
on
business".
He
said
that
if
he
does
so
participate
he
loses
his
limited
liability
and
that
makes
no
sense.”
sense.
Counsel
then
stated
that
he
had
found
no
authorities
providing
that
a
limited
partner
is
required
to
carry
on
business
in
order
to
be
considered
a
partner.
He
then
referred
to
Robinson
Trust
et
al.
v.
The
Queen,
[1993]
2
C.T.C.
2685,
93
D.T.C.
1179,
in
which
Judge
Beaubier
of
this
Court
found
that
not
only
was
it
not
necessary
for
a
limited
partner
to
be
carrying
on
business
but
the
appellant
there
had
taken
no
part
in
the
management
or
business
of
the
partnership
and
could
not
be
considered
to
have
carried
on
any
"active
business".
Respondent"
s
position
Respondent’s
counsel
argued
that
the
appellants
were
not
persons
carrying
on
business
in
common
with
a
view
to
profit.
He
said
that
the
definition
of
"partnership"
applied
to
both
Part
1
and
Part
2
of
the
Partnership
Act
of
Alberta.
He
referred
to
section
50
of
that
Act
which
reads,
A
limited
partnership
may,
subject
to
this
Part,
be
formed
to
carry
on
any
business
that
a
partnership
without
limited
partners
may
carry
on.
and
argued
that
the
definition
of
"partnership"
applies
respecting
limited
partnerships
and
that
it
requires
a
business
to
be
carried
on.
He
submitted
that
the
appellants
were
not
carrying
on
business
in
common
with
a
view
to
profit
on
December
14
and
15,
1987
and
that
no
business
was
being
carried
on
by
the
Northcor
partnership
at
that
time.
He
said
that
the
business
that
had
been
carried
on
was
the
partial
financing
of
a
drilling
program
in
the
summer
of
1987.
He
said
the
view
to
profit
that
the
partnerships
had
was
the
possibility
of
successful
drilling
increasing
the
value
of
the
share
options
granted
to
them.
He
stated
that
the
"clean-up
activity"
could
not
be
regarded
as
an
ongoing
business
activity
and
certainly
not
one
with
a
view
to
profit.
He
stated
that
it
was
contemplated
that
the
partnership
units
would
be
"put"
by
the
appellants
to
NRI
forthwith
and
there
could
subsequently
be
no
view
to
profit.
He
then
quoted
Lindley
on
the
Law
of
Partnership,
15th
edition
at
page
12
which
reads,
Where
a
partnership
is
formed
with
some
predominant
motive
other
than
the
acquisition
of
profits,
e.g.,
tax
avoidance,
but
there
is
also
a
real,
albeit
ancillary,
profit
element,
then
it
may
be
permissible
to
infer
that
the
business
is
being
carried
on
"with
a
view
of
profit"....
But
it
is
apprehended
that
if
any
given
"partner"
entered
the
partnership
solely
with
a
view
to
being
credited
with
a
tax
loss
(or
capital
allowance),
and
it
was
contemplated
from
the
outset
that
whilst
he
remained
a
partner,
there
would
be
no
real
profit
(in
the
sense
of
an
income
profit),
then
he
would
not
be
a
partner
properly
so
called.
He
then
stated
that
the
partnerships
were
valid
at
the
outset
but
that
there
was
no
possibility
of
profit
when
the
appellants
arrived
on
the
scene.
Respondent’s
counsel
then
referred
to
Van
Halderen
et
al.
v.
The
Queen,
[1994]
1
C.T.C.
2187,
94
D.T.C.
1027,
in
which
Judge
Christie,
holding
that
there
was
not
a
partnership
said,
at
page
2201-2
(D.T.C.
1037):
When
the
certificate
of
limited
partnership
signed
by
the
appellant
on
behalf
of
the
general
partner...was
filed
with
the
Registrar...there
was,
contrary
to
what
is
envisaged
under
paragraphs
5
l(2)(a)
and
(d)
of
the
Partnership
Act
and
what
is
said
in
paragraphs
(b)
and
(d)
of
the
certificate,
no
intention
whatever
on
the
part
of
anyone
concerned
with
the
partnership
that
it
would
carry
on
a
mining
business
or
a
business
of
any
kind.
And
no
business
was,
in
fact,
ever
carried
on
by
it.
The
exclusive
aim
and
purpose
of
the
limited
partnership
was
to
create
a
capital
gain
with
respect
to
the
profit
on
the
disposition
of
the
coal
licenses
and
the
surface
assets.
and
To
my
mind
the
limited
partnership
was
intended
to
give
the
appearance
of
a
legal
entity
having
been
created
that
had
a
bona
fide
intention
of
carrying
on
a
business
and,
in
particular,
the
business
of
owing
and
exploiting
mineral
resources
in
the
province
of
British
Columbia.
This
was
a
case
in
which,
essentially,
assets
were
"rolled
over"
on
a
tax
free
basis
to
a
limited
partnership
with
the
object
of
disposing
of
partnership
interests
thereby
converting
what
would
otherwise
be
an
income
gain
to
a
capital
gain.
He
stated
that
no
ongoing
profit
was
being
generated
and
reiterated
his
submission
that
there
was
no
purpose
of
carrying
on
business
in
common
with
a
view
to
profit.
Discussion
and
conclusion
The
evidence
was
clear
that
each
partnership
was
formed
on
December
31,
1986
with
the
execution
of
a
limited
partnership
agreement
and
the
appropriate
filing
of
a
certificate
of
limited
partnership.
Each
partnership
had,
inter
alia,
the
express
business
purposes
of
exploring
for
and
developing
oil
and
natural
gas,
incurring
Canadian
exploration
expense
as
consideration
for
the
right
to
purchase
shares
of
Northcor
and
to
enter
into
a
share
subscription
agreement.
Northcor
did
enter
into
such
an
agreement
with
each
of
the
four
partnerships
and
each
partnership,
by
virtue
of
same,
appointed
Northcor
as
its
agent
to
incur
exploration
expenses
on
its
behalf
in
drilling
and
testing
the
well.
The
consideration
for
each
partnership
so
incurring
expenses
was
the
issue
by
Northcor
of
rights
to
purchase
its
shares.
Northcor
conducted
the
drilling
operations
as
contracted
for,
monies
were
raised
on
behalf
of
the
partnerships
and
paid
to
the
partnerships
and
other
activities
were
carried
on.
The
four
partnerships
carried
on
business
in
quest
for
profit.
Respondent’s
counsel
submitted
that
the
appellants
did
not
carry
on
business
in
common
with
a
view
to
profit.
His
reference
to
the
Van
Halderen,
supra,
case
is
not
helpful
to
the
respondent’s
position
because
it
was
clear
that
no
business
was
ever
intended
to
be
carried
on.
It
is
fact
that
Alston
assigned
his
interests
in
validly
formed
partnerships
to
Encee,
that
Encee
contributed
$3,500,000
to
such
partnerships,
that
Encee
sold
its
interests
to
747942
and
that
747942
sold
its
interests
to
the
appellants,
each
of
such
conveyances
being
meticulously
documented
and
appropriately
registered.
What
else
could
have
been
done?
I
am
not
persuaded
that
the
definition
of
’’partnership"
in
the
Partnership
Act
of
Alberta
does
not
apply
to
limited
partnerships
formed
thereunder.
If
it
does
not,
the
appellants’
argument
in
this
regard
succeeds.
However,
even
if
it
does
apply
(and
I
lean
to
that
view)
such
definition
must
be
read
in
the
context
of
and
as
modified
by
Part
2
of
that
Act.
Section
48
states
that
the
Act
"shall,
in
the
case
of
limited
partnerships,
be
read
subject
to"
that
Part.
Part
2
acknowledges
the
concept
of
partnerships
having
partners
whose
liability
is
limited
and
it
sets
out
provisions
for
their
formation
and
for
the
assignment
of
interests
therein.
If
the
definition
of
"partnership"
is
not
modified
for
the
purposes
of
Part
2
the
paradox
of
limited
partners
being
obliged
to
be
"carrying
on
business
in
common"
while
risking
the
loss
of
limited
liability
if
taking
"part
in
the
control
of
the
business"
defeats
the
apparent
reason
for
the
existence
of
that
Part.
Because
a
limited
partnership
is
a
statutory
creation
having
the
feature
of
limited
liability,
section
48,
supra,
must,
inter
alia,
have
the
effect
of
qualifying
the
definition
of
"partnership".
Counsel
for
the
respondent
admitted
the
validity
of
the
partnerships
at
the
outset.
There
is
no
pleading
and
he
made
no
submission
to
the
effect
that
they
had
ceased
to
exist
yet
he
argued
that
the
appellants
could
not
become
partners
because
there
was
no
longer
a
possibility
of
profit
when
they
arrived
on
the
scene.
The
appellants
did
not
form
the
partnerships.
They
complied
with
the
statutory
requirements
to
become
members
thereof
at
a
later
date.
How
can
a
person
be
said
to
be
unable
to
become
a
member
of
an
extant
partnership
when
that
person
did
everything
required
by
the
very
legislation
by
virtue
of
which
it
was
created,
in
order
to
become
a
member?
With
respect
to
the
reference
to
Lindley,
supra,
it
is
my
view
that
the
words
quoted
must
be
read
in
the
context
of
the
limited
partnership
provisions
in
the
Partnership
Act
of
Alberta
and
in
the
context
of
the
specific
provision
in
the
Act
allocating
deductible
expenses
to
a
taxpayer
who
is
a
member
of
a
partnership
at
the
end
of
its
fiscal
period
and
in
the
context
of
the
use
of
such
partnerships
as
funding
vehicles
created
pursuant
to
government
incentives
in
the
oil
and
gas
business.
Accordingly,
I
have
concluded
that
the
appellants
were
members
of
1987-4,
1987-5,
1987-6
and
1987-7
on
December
14,
1987.
Second
question
If
the
appellants
were
members
of
the
aforesaid
partnerships
were
they
entitled,
subject
to
the
determination
of
the
questions
below,
to
the
deduc-
tions
claimed
as
"cumulative
Canadian
exploration
expense"
by
virtue
of
subsection
66.1(3)
and
paragraph
66.1(6)(b)
of
the
Act?
Appellant's
position
The
appellants’
position
is
simply
stated.
It
is
that
in
1987,
the
four
partnerships
incurred
$17,242,400
of
E.
It
is
assumed
that
although
the
share
subscription
agreement
provides
that
Northcor
was
appointed
agent
of
the
partnerships
to
incur
such
expenses,
the
partnership
incurred
same
under
subparagraph
66.1(6)(a)(v).
Not
only
did
the
share
subscription
agreement
appoint
Northcor
as
agent
for
the
partnership
but,
in
an
obvious
effort
to
qualify
under
the
foregoing
subparagraph,
it
provided
that
the
sole
consideration
for
the
partnership
incurring
the
expenses
would
be
the
issuance
by
the
company
to
the
partnerships
of
rights
to
purchase
shares
of
the
company.
In
any
event,
the
appellants’
position
is
that
the
partnerships,
having
incurred
such
expenses,
the
appellants
were
partners
thereof
on
December
14,
1987,
the
end
of
the
fiscal
year
of
the
partnerships
and
were,
by
virtue
of
subsection
66.1(3)
entitled
to
deduct
the
cumulative
Canadian
exploration
expense
allocated
to
each
of
them,
namely
$6,000,000
in
the
case
of
Carousel
and
$10,000,000
in
the
case
of
Central.
Respondent's
position
The
respondent,
as
stated
above,
denies
that
the
appellants
were
members
of
the
partnerships
and
were,
accordingly,
not
entitled
to
any
deductions
whatever.
His
alternative
position
was
that
if
the
appellants
were
entitled
to
deduct
cumulative
Canadian
exploration
expense,
the
total
deduction
should
be
$3,200,000
made
up
of
$1,200,000
for
Carousel
and
$2,000,000
for
Central.
Counsel
arrived
at
such
figures
by
saying
that
the
total
funding
of
the
partnerships
was
the
sum
of
$3,500,000,
$3,200,000
of
which
related
to
the
$16,000,000
allegedly
allocable
to
the
appellants,
such
20
per
cent
figure
being
arrived
at
without
taking
into
account
the
80
per
cent
financing
provided
by
the
PIPs.
He
emphasized
that
Encee
contributed
$3,500,000
and
the
other
$14,000,000
came
from
the
government
as
PIPs.
Respondent’s
counsel
supported
his
submission
for
the
deductibility
of
such
reduced
amounts
in
an
amendment
to
the
reply
filed
at
the
commencement
of
the
hearing.
By
that
amendment
the
respondent
submitted
that
the
Petroleum
Incentive
Program
grants
were
not
expenses
incurred
by
the
partnerships
within
the
meaning
of
paragraph
66.1(6)(a)(iv)
of
the
Act.
He
argued
that
the
true
legal
effect
of
the
agreements
was
that
the
partnerships
were
liable
for
and
paid
only
20
per
cent
of
the
E.
He
argued
further
that
In
respect
of
the
Petroleum
Incentive
Program
payments
that
might
be
received,
the
said
agreements
were
self-cancelling
in
that
in
the
same
agreement
by
which
the
partnerships
purported
to
acquire
from
Northcor
the
right
to
receive
the
Petroleum
Incentive
Program
grants,
such
rights
were
assigned
back
to
Northcor.
He
referred
to
clause
4(b)
of
the
agreement
and
quoted
the
following
portion,
namely,
In
addition,
the
investor
hereby
assigns
to
the
company
as
further
and
final
payment
of
its
obligations
hereunder,
all
of
the
investor’s
right,
title,
estate
and
interest
in
and
to
any
governmental
grants
or
assistance
payments
which
may
arise
or
be
available
to
the
Investor
pursuant
to
the
E
expenditures
to
be
made
hereunder....
and
stated
that
there
was
no
period
of
time
whatever
where
the
partnerships
were
entitled
to
those
grants
because
paragraph
6(b)
assigned
them
back
to
Northcor
stating
that,
that’s
a
nothing,
that’s
self-cancelling
in
law....
For
ease
of
reference
I
shall
restate
the
pertinent
portions
of
paragraph
6(b)
as
follows,
All
federal
grants
and
incentive
payments
earned
as
a
result
of
any
exploration
associated
with
the
farm
out
agreement
and
contemplated
hereby
will
be
earned
solely
for
the
account
of
the
investor.
The
company
hereby
agrees
to
apply
monthly
for
such
grants
and
incentives
on
behalf
of
the
investor
and,
subject
to
clause
4(b)
hereof,
to
pay
such
sums
to
the
investor
promptly
upon
receipt
thereof
by
the
company.
Counsel
stated
that
the
legal
result
is
that
the
arrangement
could
not
be
considered
a
financing
provided
by
the
partnership
because
it
was
financing
provided
by
the
government
out
of
payments
that
could
only
be
earned
by
Northcor
at
the
moment
of
the
agreement
and
could
only
be
received
by
Northcor
after
the
agreement.
He
then
stated
that
the
PIP
payment
was
not,
in
law,
the
partnership’s
payment.
The
pith
of
his
submission
appears
to
be
contained
in
his
statement
that,
The
problem
is
they
cannot
properly
be
so
considered
in
law
because
in
order
to
be
considered
an
expenditure
incurred
by
the
partnership,
the
partnership
has
to
find
the
funding
from
somewhere
else
than
the
recipient
of
the
funding,
namely,
Northcor.
He
then
referred
to
Ensign
Tankers
(Leasing)
Ltd.
v.
Stokes
(Inspector
of
Taxes),
[1992]
2
ALL
E.R.
275
(H.L.).
In
that
case
the
appellant
and
four
other
companies
entered
into
a
limited
partnership
agreement
with
a
subsidiary
of
a
film
company,
LPI,
which
was
to
make
a
film
on
behalf
of
the
partnership
as
agent
thereof.
Under
a
production
services
agreement,
the
partnership
agreed
to
provide
the
financing
of
approximately
$13,000,000.
Specifically
the
partnership
was
to
provide
$3.25
million
in
cash
and
LPI
was
to
lend
$9.7
million
on
a
non-recourse
basis
to
the
partnership.
The
partnership
was
to
receive
25
per
cent
of
the
net
receipts
from
exploitation
of
the
film
and
LPI
was
to
receive
75
per
cent
thereof.
The
appellant,
as
the
major
member
of
the
partnership,
took
the
position
that
the
sum
of
$14,000,000
(there
being
an
over-
run
of
$1,000,000)
was
expended
by
the
partnership
and
that
this
was
the
basis
for
capital
allowance.
The
House
of
Lords
decided
that
the
monies
paid
by
LPI
were
simply
paid
into
a
bank
account
opened
in
the
partnership’s
name
to
enable
it
to
indulge
in
a
tax
avoidance
scheme
and
for
no
other
purpose.
Counsel
referred
to
two
other
English
cases
describing
them
as
similar
but
not
adding
anything
to
the
analysis
contained
in
Ensign,
supra.
He
argued
that
the
principle
established
therein
should
be
applied
to
the
present
case
with
the
result
that,
leaving
out
the
amount
of
the
PIPs,
Carousel
would
be
entitled,
in
this
alternative
argument,
to
a
deduction
of
$1,200,000
and
Central
would
be
entitled
to
a
deduction
of
$2,000,000.
Discussion
and
conclusion
I
cannot
accept
the
respondent’s
submission
with
respect
to
the
agreement
being
"self-cancelling”.
He
conveniently
overlooks
the
fact
that
Northcor
had,
at
no
time,
any
right
to
receive
PIPs.
By
virtue
of
the
agreement
it
was
the
agent
of
the
partnerships
to
incur
E
on
their
behalf.
Further,
paragraph
6(b)
of
the
agreement
states
clearly
that
all
federal
grants
and
incentive
payments
earned
as
a
result
of
any
exploration
would
be
earned
solely
for
the
partnerships’
account.
In
this
situation,
Northcor
was,
of
itself,
never
entitled
to
receive
any
PIPs.
It
could
only
receive
same
as
agent
for
the
partnerships.
Under
paragraph
4(b),
the
partnerships
assigned
their
right
to
PIPs
to
Northcor
as
payment,
in
addition
its
20
per
cent,
of
the
amount
of
E
expenditures.
The
right
to
receive
PIPs
was
created
by
the
PIP
Act.
The
PIPs
were
a
percentage
of
eligible
exploration
expenses
incurred.
At
the
time
the
agreement
was
executed,
no
such
eligible
expenditures
had
been
made
and
no
one
was
entitled
to
PIPs.
The
right
to
apply
for
and
receive
PIPs
could
only
have
arisen
upon
the
incurring
of
expenses
as
aforesaid.
Accordingly,
I
do
not
accept
the
arguments
advanced
by
respondent’s
counsel.
The
case
of
Ensign,
supra,
dealt
with
a
situation
where
moneys
were
advanced
by
a
company
to
a
partnership
of
which
its
subsidiary
was
the
general
partner
in
a
partnership.
That
fact
situation
does
not
pertain
here.
Subparagraph
66.1(6)(b)(iv)
is
clear.
It
provides
that,
subject
to
section
66.8,
a
taxpayer’s
share
of
any
Canadian
exploration
expense
incurred
by
a
partnership
in
a
fiscal
period
is
his
share
thereof
if
at
the
end
of
that
period
he
was
a
member
thereof
[emphasis
added].
I
have
found
that
each
of
the
four
partnerships
existed
throughout
its
1987
fiscal
period
ending
on
December
14,
1987
and
that
the
appellants
were
members
thereof
on
that
date.
The
obvious
intent
of
the
resource
and
partnership
provisions
was
that,
until
the
implementation
of
section
66.8,
all
E
incurred
by
a
partnership
be
deductible
just
as
it
was
for
any
corporation
or
individual
who
incurred
same.
The
method
selected
was
simple.
The
expenses
were
allocated
to
taxpayers,
as
to
their
respective
share,
who
were
members
of
a
partnership
at
the
end
of
its
fiscal
period
in
which
they
were
so
incurred.
I
reiterate
the
words
of
Estey
J.,
in
Stubart
Investments
Ltd,
supra,
at
page
580
(C.T.C.
317,
D.T.C.
6324),
where
the
substance
of
the
Act,
when
the
clause
in
question
is
contextually
construed,
is
clear
and
unambiguous
and
there
is
no
prohibition
in
the
Act
which
embraces
the
taxpayer,
the
taxpayer
shall
be
free
to
avail
himself
of
the
beneficial
provision
in
question.
and
the
words
of
lacobucci
J.
in
Antosko
et
al.,
supra,
in
referring
to
same,
at
pages
326-28
(C.T.C.
31-32,
D.T.C.
6320):
This
principle
is
determinative
of
the
present
dispute.
While
it
is
true
that
the
courts
must
view
discrete
sections
of
the
Income
Tax
Act
in
light
of
the
other
provisions
of
the
Act
and
of
the
purpose
of
the
legislation,
and
that
they
must
analyze
a
given
transaction
in
the
context
of
economic
and
commercial
reality,
such
techniques
cannot
alter
the
result
where
the
words
of
the
statute
are
clear
and
plain
and
where
the
legal
and
practical
effect
of
the
transaction
is
undisputed.
and
In
the
absence
of
evidence
that
the
transaction
was
a
sham
or
an
abuse
of
the
provisions
of
the
Act,
it
is
not
the
role
of
the
court
to
determine
whether
the
transaction
in
question
is
one
which
renders
the
taxpayer
deserving
of
a
deduction.
If
the
terms
of
the
section
are
met,
the
taxpayer
may
rely
on
it,
and
it
is
the
option
of
Parliament
specifically
to
preclude
further
reliance
on
such
situations.
Parliament
has
chosen
the
method
for
the
allocation
of
certain
resource
expenses
incurred
by
a
partnership
and
for
the
deduction
thereof
by
the
partners.
Both
are
clear.
It
has
amended
subparagraph
66.1(6)(a)(iv),
the
allocating
provision,
to
make
it
subject
to
section
66.8
and
has
added
complex
companion
provisions
to
prevent
claims
evidently
offensive
to
its
intended
purpose
and
operation.
Those
amendments
related
to
the
amount
to
be
deducted
and
not
to
allocation
of
E
for
the
purpose
of
deduction.
Therefore,
I
find
that
the
appellants
were
members
of
the
aforesaid
partnerships
and
were
entitled,
subject
to
the
questions
below,
to
the
deductions
claimed
as
"cumulative
Canadian
exploration
expense".
Third
question
Were
the
transactions
or
any
of
them
a
sham?
Appellant’s
position
Appellants’
counsel
referred
to
Snook
v.
London
&
W.
Riding
Invest.
Ltd.,
[1967]
2
Q.B.
78,
[1967]
1
All
E.R.
518,
at
page
802
(D.T.C.
528),
where
Diplock
L.J.
said,
As
regards
the
contention
of
the
plaintiff
that
the
transactions
between
himself,
Auto-Finance
Ltd.
and
the
defendants
were
a
"sham",
it
is,
I
think,
necessary
to
consider
what,
if
any,
legal
concept
is
involved
in
the
use
of
this
popular
and
pejorative
word.
I
apprehend
that,
if
it
has
any
meaning
in
law,
it
means
acts
done
or
documents
executed
by
the
parties
to
the
"sham"
which
are
intended
by
them
to
give
to
third
parties
or
to
the
courts
the
appearance
of
creating
between
the
parties
legal
rights
and
obligations
different
from
the
actual
legal
rights
and
obligations
(if
any)
which
the
parties
intend
to
create.
He
also
referred
to
Stubart
Investments
Ltd.
v.
The
Queen,
supra,
and
said,
Mr.
Justice
Estey,
I
believe,
took
it
even
a
little
bit
farther.
He
said
that
a
sham
necessarily
involved
an
element
of
deceit,
creating
or
giving
the
appearance
of
creating
legal
rights
and
obligations
with
the
intention
of
fooling
someone,
(i.e.,
the
taxing
authority
that
you
intended
to
create
those
legal
rights
but
never
did).
Counsel
then
stated
that
the
respondent
had
contended,
not
that
the
transactions
as
a
whole
were
a
sham
but,
that
a
very
narrow
part
of
the
transactions,
namely,
the
appellants’
membership
in
the
partnerships,
was
a
sham.
He
submitted
that
such
argument
was
not
open
to
the
respondent,
stating
that
either
the
whole
transaction
or
series
of
transactions
stands
or
falls.
He
said
that
one
isolated
element
of
same
cannot
be
regarded
as
being
a
sham.
He
referred
to
Mark
Resources
Inc.
v.
The
Queen,
[1993]
2
C.T.C.
2259,
93
D.T.C.
1004,
at
page
2267
(D.T.C.
1010),
where
Judge
Bowman
of
this
Court
said,
One
final
observation
must
be
made.
We
have
here
a
series
of
interrelated
transactions.
The
Crown
has
challenged
under
subsection
245(1)
only
one
aspect
of
the
entire
arrangement,
the
deduction
of
interest,
on
the
basis
that
it
results
in
an
artificial
or
undue
reduction
of
the
appellant’s
income.
Yet
it
has
chosen
to
leave
intact
the
consequences
of
all
but
one
of
the
component
parts.
Either
the
whole
structure
falls
or
it
does
not.
It
cannot
be
dismembered
piecemeal.
In
any
fiscally
motivated
scheme,
if
no
sham
is
involved,
there
must
necessarily
be
legally
effective
steps
that
have
specific
tax
consequences.
The
tax
results
of
each
of
those
steps
that
forms
an
integral
part
of
the
entire
scheme
must
be
respected
unless
the
Minister
is
prepared
to
say
that
the
scheme
as
a
whole
fails.
Counsel
then
referred
to
Continental
Bank
of
Canada
et
al.
v.
The
Queen,
[1995]
1
C.T.C.
2135,
94
D.T.C.
1858
(T.C.C.),
and
said,
The
allegation
of
sham
in
Continental
Bank...was
very
similar
to
the
allegation
in
the
present
case.
The
allegation
was
not
that
the
entire
series
failed,
it
was
that
the
appellant’s
membership
in
a
partnership
was
a
sham.
And
Judge
Bowman
said,
essentially,
you
can’t
do
that,
you
can’t
simply
take
one
piece
out
of
a
larger
transaction
and
call
that
piece
a
sham.
Either
the
whole
transaction
is
a
sham
or
it’s
not.
He
then
submitted
that
the
evidence
was
clear
that
the
parties
intended
to
accomplish
exactly
what
the
documents
purported
to
do.
He
stated
that
the
appellants
would
not
have
intended
anything
different
because
their
object
was
to
bring
themselves
within
the
statute,
that
being
the
only
manner
of
availing
themselves
of
the
deductions
sought.
He
emphasized
this
point
by
saying
that
that
was
exactly
what
the
documents
were
designed
to
do
and
that
was
exactly
what
the
parties
intended
to
do
and
that
to
intend
something
different
would
have
been
entirely
self-defeating.
He
referred
to
Alberta
and
Southern
Gas
Co.
v.
The
Queen,
[1976]
C.T.C.
639,
76
D.T.C.
6362,
where
Cattanach
J.,
at
page
650
(D.T.C.
6370)
said,
The
agreements
between
the
plaintiff
and
Amoco
created
between
the
parties
the
exact
legal
rights
consequent
thereon
that
the
parties
intended
to
create
and
which
both
parties
complied
with
in
accordance
with
the
terms
of
the
agreements
between
them.
That
being
so
the
parties
had
no
intention
whatsoever
that
the
agreements
did
not
create
the
legal
rights
and
obligations
other
than
those
which
the
agreements
did
in
fact
create.
and
In
my
opinion
the
"carve-out"
agreements
were
not
intended
to
give
to
strangers
thereto,
including
the
Minister
of
National
Revenue,
the
appearance
of
creating
rights
and
obligations
other
than
those
created
by
the
agreements
as
were
intended
by
the
parties.
To
do
otherwise
would
defeat
the
very
motive
which
influenced
the
plaintiff
to
seek
out
these
agreements.
There
was
no
dissemblance.
Put
another
way
and
in
more
succinct
and
colloquial
language
if
the
parties
to
a
contract
do
precisely
what
they
contract
to
do
there
is
no
sham.
Counsel
then
returned
to
the
decision
in
Continental
Bank
Ltd.,
supra,
quoting
Bowman
J.
at
page
2149
(D.T.C.
1868),
If
the
legal
relationships
are
binding
and
are
not
a
cloak
to
disguise
another
type
of
legal
relationship
they
are
not
a
sham,
however
much
the
tax
result
may
offend
the
Minister
or,
for
that
matter,
the
court,
and
whatever
may
be
the
overall
ulterior
economic
motive.
When
something
is
a
sham
the
necessary
corollary
is
that
there
is
behind
the
legal
facade
a
different
real
legal
relationship.
If
the
legal
reality
that
underlies
the
ostensible
legal
relationship
is
the
same
as
that
which
appears
on
the
surface,
there
is
no
sham.
He
stated
that
in
that
case
the
appellants
were
members
of
a
partnership
over
a
three
day
period,
two
of
which
days
were
holidays.
Respondent's
position
Respondent’s
counsel
seems
to
have
abandoned
the
sham
argument.
During
his
submission
with
respect
to
whether
the
appellants
were
members
of
the
four
partnerships
he
said,
the
real
issue
is
more
confused
by
calling
it
sham
than
simply
by
addressing
the
real
issue:
Did
these
people
become
partners?
We
don’t
have
to
accuse
them
of
sham,
we
simply
have
to
persuade
your
honour
that
they
didn’t
become
partners
because
they
couldn’t
become
partners
in
law.
Discussion
and
conclusion
I
have
no
difficulty
in
concluding
that
the
actions
taken
by
the
appellants
were
precisely
those
that
were
anticipated
and
that
were
reflected
in
the
detailed
documentation.
The
uncontroverted
evidence
made
it
clear
that
those
documents
created
precisely
the
legal
rights
intended
by
the
parties
who
executed
same.
Accordingly,
no
sham
exists
in
the
transactions
entered
into
by
the
appellants.
Fourth
question
Did
the
deduction
of
$10,000,000
claimed
by
Central
and
the
deduction
of
$6,000,000
claimed
by
Carousel
unduly
or
artificially
reduce
the
respective
incomes
of
those
appellants
within
the
meaning
of
subsection
245(1)
of
the
Act?
Appellant's
position
Appellant’s
counsel
referred
to
paragraph
12(a)
of
the
respondent’s
amended
reply
which
said
that
one
of
the
issues
is
whether
the
$6,000,000
deduction
claimed
by
the
appellant
was
in
respect
of
transactions
or
operations
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income
of
the
appellant
within
the
meaning
of
subsection
245(1)
of
the
Income
Tax
Act....
He
then
referred
to
The
Queen
v.
Irving
Oil
Ltd.,
[1991]
1
C.T.C.
350,
91
D.T.C.
5106.
At
page
360
(D.T.C.
5114)
Mahoney
J.,
dealing
with
this
subject,
said,
In
order
to
come
within
the
terms
of
subsection
245(1),
a
transaction
or
operation
must
have
the
effect
of
unduly
or
artificially
reducing
income;
the
artificiality
of
the
transaction
or
operation
itself
does
not
determine
the
issue.
The
learned
justice
then
referred
to
Spur
Oil
Ltd.
v.
The
Queen,
[1981]
C.T.C.
336,
81
D.T.C.
5168,
where
Heald
J.A.,
speaking
for
the
Court
at
pages
343
(D.T.C.
5173)
said:
To
be
caught
by
that
subsection,
the
expense
or
disbursement
being
impeached
must
result
in
an
artificial
or
undue
reduction
of
income.
"Undue"
when
used
in
this
context
should
be
given
its
dictionary
meaning
of
"excessive".
and
Turning
now
to
"artificial",
the
dictionary
meaning
when
used
in
this
context
is,
in
my
view,
"simulated"
or
"fictitious".
Counsel
then
submitted
that
over
$27,500,000
of
E
was
incurred
in
drilling
and
testing
the
Narwhal
well
and
that
this
not
being
disputed
by
the
respondent,
there
was
nothing
fictitious
or
simulated
about
those
expenses.
He
said
that
the
expenses
had
actually
been
incurred
and
that
there
was
nothing
undue
or
excessive
about
them,
the
amount
having
been
certified
on
audit
by
the
Government
of
Canada
as
expenses
actually
incurred,
80
per
cent
of
same
having
been
reimbursed
by
it.
Counsel
said,
How
could
it
be
said
in
this
case
that
the
expense
would
unduly
or
artificially
reduce
the
income
of
the
taxpayer
when
it
is
uncontested
that
these
expenses,
in
these
amounts,
were
in
fact
incurred?
With
respect
to
the
question
of
artificiality
he
referred
to
Alberta
and
Southern
Gas,
supra,
in
which
the
taxpayer
had
entered
into
a
"carve-out"
arrangement
with
Amoco.
In
short,
the
appellant,
wanting
to
shelter
$4,000,000
of
income,
purchased
from
Amoco
a
working
interest
in
Amoco’s
properties
for
$4,000,000
under
which
arrangement
Alberta
and
Southern
Gas
was
to
receive
certain
petroleum
and
natural
gas
substances.
The
working
interest
was
to
terminate
when
Alberta
and
Southern
Gas
had
received
petroleum
substances,
the
value
of
which
totalled
$4,000,000
plus
an
amount
as
an
interest
factor.
The
Minister
of
National
Revenue,
inter
alia,
advanced
an
argument
of
artificial
reduction
of
income.
On
appeal
([1977]
C.T.C.
388,
77
D.T.C.
5244
(F.C.A.)
aff’d
[1979]
1
S.C.R.
36,
[1978]
C.T.C.
780,
78
D.T.C.
6566
(S.C.C.)),
the
learned
chief
justice
referred
to
amounts
specifically
deductible
by
statute,
for
example,
at
page
396
(D.T.C.
5248):
amounts
that
were
not
laid
out
for
the
earning
of
profit
(either
as
current
or
capital
expenditures)
but
the
deduction
of
which
is
allowed
by
Parliament
to
achieve
some
end
that
Parliament
wishes
to
encourage
(incentive
allowances).
With
reference
to
the
resource
sections
of
the
Act,
the
Court
said,
at
page
397
(D.T.C.
5249),
These
provisions
for
deduction
and
taxation
of
capital
amounts
seem
to
me
to
have
the
obvious
purpose
of
encouraging
taxpayers
to
put
money
into
such
resource
properties
and
keep
it
there.
That
being
what
the
provisions
seem
to
have
been
intended
to
encourage,
as
it
seems
to
me,
a
transaction
that
clearly
falls
within
the
object
and
spirit
of
section
66
cannot
be
said
to
unduly
or
artificially
reduce
income
merely
because
the
taxpayer
was
influenced
in
deciding
to
enter
into
it
by
tax
considerations.
Counsel
stated
that
this
case
was
followed
in
Edmonton
Liquid
Gas
Ltd.
v.
The
Queen,
[1984]
C.T.C.
536,
84
D.T.C.
6526
(F.C.A.),
in
which
MacGuigan
J.,
at
page
545
(D.T.C.
6533)
said,
In
The
Queen
v.
Alberta
Southern
Gas
Co.
Ltd.,
[1977]
C.T.C.
388,
77
D.T.C.
5244,
aff’d
by
the
Supreme
Court
of
Canada,
[1979]
1
S.C.R.
36,
[1978]
C.T.C.
780,
78
D.T.C.
6566,
Jackett
C.J.,
held
for
this
Court
that
where
provisions
of
the
Income
Tax
Act
have
the
obvious
purpose
of
encouraging
taxpayers
to
enter
into
an
expenditure
of
a
particular
kind,
a
taxpayer
who
otherwise
falls
within
the
object
and
spirit
of
the
relevant
provisions
cannot
be
said
to
unduly
or
artificially
reduce
income
because
he
was
influenced
to
enter
into
it
by
tax
considerations.
At
page
546
(D.T.C.
6534)
the
Court
said,
Earlier
the
Government
had
made
a
positive
decision
to
continue
to
encourage
exploration
through
a
100
per
cent
write-off
for
Canadian
exploration
expenses.
and
then
cited
the
part
of
a
budget
speech
made
by
the
Minister
of
Finance
in
the
House
of
Commons,
noting
that
there
had
been
quick
response
after
that
speech
to
the
newly
enunciated
Government
Economic
Policy
Objective.
It
concluded
with
this
statement,
There
was
nothing
contrived
or
artificial
in
this
corporate
initiative.
It
was
a
good-faith
response
to
what
was
in
effect
a
new,
or
at
least
an
unexpectedly
renewed
government
policy,
and
was
fully
in
accord
with
the
object
and
spirit
of
the
allowance
provision.
Respondent's
position
Respondent’s
counsel
stated
that
the
deductions
claimed
by
the
appellants
would
unduly
or
artificially
reduce
the
incomes
of
the
appellants
and
were,
therefore,
prohibited
by
subsection
245(1)
of
the
Act.
That
subsection
read
as
follows,
245(1)
In
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
Counsel
shaped
his
argument
by
saying,
I
say
that
245(1)
applies
because
in
structuring
a
complicated
prearranged
transaction
involving
these
features
that
are
very
unusual,
the
taxpayer
becoming
a
partner
in
a
business
that
has
already
fully
or
substantially
completed
its
activities
for
which
it
was
formed,
and
in
remaining
a
partner
only
24
hours
and
in
seeking
to
receive
an
allocation
only
of
expenses
incurred
before
the
taxpayer
joined
the
partnership
and
in
seeking
to
deliberately
avoid
an
allocation
of
receipts
relating
to
those
expenses,
the
appellants
have
engaged
in
a
transaction
that
would
unduly
or
artificially
reduce
their
income.
The
special
arrangements
made
with
Petroleum
Incentives
Administration
to
deliberately
delay
the
issue
of
some
of
the
notices
of
entitlement
and
payment
of
the
PIP
grants
was
also
an
artificial
step,
in
my
submission.
He
stated
that
the
appellants
had
blocked
the
receipt
of
an
offsetting
credit
that
should
properly
reduce
the
amount
of
the
expense
they
had
borne
by
virtue
of
their
manipulation
of
the
PIP
grants.
He
submitted
that
a
transaction
becomes
undue
where
one
effectively
departs
from
what,
in
every
sense
but
a
tax
sense,
would
be
the
only
advantageous
way
to
proceed-namely
to
collect
receipts
as
soon
as
possible.
He
stated,
When
you
don’t
do
that,
you
are
conducting
your
business
so
as
to
unduly
reduce
your
income.
He
then
referred
to
Don
Fell
Ltd.
et
al.
v.
The
Queen,
[1981]
1
C.T.C.
363,
81
D.T.C.
5282
(F.C.T.D.),
where
Cattanach
J.,
said,
at
page
375
.
(D.T.C.
5292):
The
word
"unduly"
relates
to
quantum
and
means
"excessively"
or
"unreasonably"
and
"artificially"
means
"not
in
accordance
with
normality”.
The
learned
justice
stated
that
the
complex
procedure
in
that
case
was
"not
in
accordance
with
normality"
and
so
"artificial"
within
the
adverb
form
of
that
word
used
in
the
subsections.
Counsel’s
point
was
that
it
is
abnormal
for
a
business
person
to
delay
receipt
of
moneys
until
after
a
certain
date.
He
stated
that
it
is
reasonable
to
arrange
affairs
in
that
order
if
one
could
obtain
a
tax
advantage
from
so
doing
but
that
it
is
not
reasonable
to
do
so
apart
from
the
tax
factor.
He
referred
to
one
of
Mr.
Justice
Estey’s
interpretation
guidelines
in
the
Stubart,
supra,
case
respecting
section
245
when
he
said,
on
page
579
(C.T.C.
316,
D.T.C.
6323),
of
his
decision,
Where
the
facts
reveal
no
bona
fide
business
purpose
for
the
transaction,
s.
137
may
be
found
to
be
applicable
depending
upon
all
the
circumstances
of
the
case.
After
stating
that
137
was
the
former
number
of
section
245
he
submitted
that
the
learned
justice’s
statement
showed
that
the
business
purpose
can
have
a
role
in
the
analysis
of
that
provision.
He
referred
to
page
558
(C.T.C.
305,
D.T.C.
6314),
of
the
Stubart
Investments
Ltd.,
supra,
quoting
Lord
Wilberforce
in
W.T.
Ramsay
v.
Inland
Revenue
Comrs.
(H.L.
(E.)),
[1981]
2
W.L.R.
449,
at
page
459,
To
say
that
a
loss
(or
gain)
which
appears
to
arise
at
one
stage
in
an
indivisible
process,
and
which
is
intended
to
be
and
is
cancelled
out
by
a
later
stage,
so
that
at
the
end
of
what
was
bought
as,
and
planned
as,
a
single
continuous
operation,
is
not
such
a
loss
(or
gain)
as
the
legislation
is
dealing
with,
is
in
my
opinion
well
and
indeed
essentially
within
the
judicial
function.
Mr.
Justice
Estey
referred
to
the
statements
of
Lord
Fraser
of
Tullybelton,
at
page
469
of
the
Ramsay
judgment
as
follows,
Each
of
the
appellants
purchased
a
complete
prearranged
scheme,
designed
to
produce
a
loss
which
would
match
the
gain
previously
made
and
which
would
be
allowable
as
a
deduction
for
corporation
tax
(capital
gains
tax)
purposes.
In
these
circumstances
the
court
is
entitled
and
bound
to
consider
the
scheme
as
a
whole:
see
Inland
Revenue
Commissioners
v.
Plummer
[1980]
A.C.
896,
908
and
Chinn
v.
Hochstrasser
[1981]
2
W.L.R.
14.
The
essential
feature
of
both
schemes
was
that,
when
they
were
completely
carried
out,
they
did
not
result
in
any
actual
loss
to
the
taxpayer.
The
apparently
magic
result
of
creating
a
tax
loss
that
would
not
be
a
real
loss
was
to
be
brought
about
by
arranging
that
the
scheme
included
a
loss
which
was
allowable
for
tax
purposes
and
a
matching
gain
which
was
not
chargeable.
Counsel
then
referred
to
Mr.
Justice
Estey
having
quoted
Lord
Fraser
of
Tullybelton
in
Furniss
(Inspector
of
Taxes)
v.
Dawson
et
al.,
[1984]
A.C.
475,
[1984]
1
All
E.R.
530
(H.L.),
and
quotes
at
page
562
(C.T.C.
307,
D.T.C.
6316)
as
saying,
The
true
principle
of
the
decision
in
Ramsay
was
that
the
fiscal
consequences
of
a
preordained
series
of
transactions,
intended
to
operate
as
such,
are
generally
to
be
ascertained
by
considering
the
result
of
the
series
as
a
whole,
and
not
by
dissecting
the
scheme
and
considering
each
individual
transaction
separately.
He
then
referred
to
the
appellants
as
having
purchased
a
complete
prearranged
scheme
designed
to
produce
$16,000,000
of
deductible
expense,
no
amount
approaching
these
sums
having
been
expended
by
them,
followed
by
the
act
of
deferring
receipt
of
the
PIPs
and
followed
by
the
put
arrangement
by
virtue
of
which
the
appellants
disposed
of
all
their
partnership
interests.
Discussion
and
conclusion
It
is
my
view
that
a
specific
section
of
the
Act
with
incentive
intent
clearly
provided
for
the
deduction
of
the
total
exploration
expenses
incurred
by
a
partnership.
The
four
partnerships
of
which
the
appellants
were
members
did,
in
fact,
incur
the
$16,000,000
of
exploration
expense
which
the
appellants
seek
to
deduct.
The
expenses
were
not
created
by
some
imaginative
scheme.
They
were
intended
to
be
incurred,
they
were
incurred,
they
were
allocated
to
the
appellants
exactly
in
accordance
with
the
terms
of
the
limited
partnership
agreements
and
so
became
their
"share"
as
provided
in
subparagraph
66.1(a)(iv).
The
Act
is
so
constructed
that
these
amounts
claimed
by
the
appellants
cannot
be
deducted
by
any
other
person.
Based
upon
my
findings
above,
the
deduction
of
such
expenses
by
the
appellants
is
clearly
authorized
by
statute.
In
the
Federal
Court
of
Appeal,
Pratt
C.J.,
in
his
reasons
for
judgment
in
the
Alberta
and
Southern
Gas
case
said
at
page
396
(D.T.C.
5248),
subsection
245(1)
is
applicable
to
every
class
of
deductible
expenses.
Even
if,
reading
the
Act
as
a
whole,
I
came
to
a
different
conclusion,
I
should
feel
constrained
to
hold
that
subsection
245(1)
does
apply
to
deductions
such
as
those
otherwise
permitted
by
section
66....
I
read
that
as
meaning
"potentially
applicable"
or
as
being
available.
The
learned
justice
goes
on
to
say,
after
referring
to
specific
deduction
sections,
These
provisions
for
deduction
and
taxation
of
capital
amounts
seem
to
me
to
have
the
obvious
purpose
of
encouraging
taxpayers
to
put
money
into
such
resource
properties
and
keep
it
there.
That
being
what
the
provisions
seem
to
have
been
intended
to
encourage,
as
it
seems
to
me,
a
transaction
that
clearly
falls
within
the
object
and
spirit
of
section
66
cannot
be
said
to
unduly
or
artificially
reduce
income
merely
because
the
taxpayer
was
influenced
in
deciding
to
enter
into
it
by
tax
considerations.
My
conclusion
in
respect
of
this
question
will
be
stated
together
with
my
conclusion
in
respect
of
the
fifth
question.
Fifth
question
Where
the
transactions
under
which
the
appellants
acquired
and
sold
limited
partnership
interests
in
the
partnerships
within
the
object
and
spirit
of
section
66.1
of
the
Act?
Appellant's
position
Counsel
referred
to
a
document
entitled
"The
National
Energy
Program
1980
issued
by
Energy,
Mines
and
Resources
Canada"
and
read
from
page
39
thereof
the
following:
The
major
incentives
available
to
date
for
exploration
have
been
delivered
through
the
income
tax
system.
Thus
only
taxpaying
firms
and
individuals
have
been
able
to
make
immediate
use
of
these
incentives.
A
new
system
is
required
to
provide
incentives
not
only
to
those,
but
to
other
Canadian
investors.
He
then
referred
to
a
document
introduced
as
an
exhibit
described
as
Revenue
Canada,
Taxation
memorandum
written
by
an
official
of
Rulings
Directorate,
Resource
Industries
Section,
Head
Office,
Revenue
Canada,
Taxation
dated
July
12,
1989
which
refers
to,
inter
alia,
subparagraph
66.1
(6)(a)(iv)
including
in
the
definition
of
"Canadian
exploration
expense"
a
taxpayer’s
share
of
those
expenses
incurred
by
a
partnership,
if
at
the
end
of
the
fiscal
period
of
the
partnership,
the
taxpayer
was
a
member
thereof.
The
memorandum
continues
as
follows:
It
has
been
our
position
that
any
amounts
determined
under
the
aforesaid
subparagraphs
will
be
considered
to
have
been
incurred
by
the
partner
on
the
last
day
of
the
partnership’s
fiscal
period.
Based
on
the
above
analysis,
and
prior
to
the
general
anti-
avoidance
rule
("GAAR"),
we
have
issued
favourable
rulings
and
opinions
to
the
effect
that
’’warehousing”
arrangements
as
described
hereunder
would
be
acceptable
for
tax
purposes.
These
warehousing
arrangements
could
take
various
forms,
for
example:
(i)
A
limited
partnership
enters
into
flow-through
share
agreements
with
resource
companies.
Subsequently,
investors
purchase
limited
partnership
units
near
the
fiscal
year-end
of
the
partnership.
These
members
invariably
acquire
their
investments
in
the
partnership
after
the
resource
expenses
have
been
incurred
and
renounced
by
the
resource
companies,
but
in
time
to
have
their
share
of
those
expenses
allocated
to
them
from
the
partnership;
Another
document,
being
the
response
from
the
Acting
Director,
Current
Amendments
and
Regulations
Division
of
Revenue
Canada
Taxation,
read
in
part,
with
respect
to
(i)
above,
We
have
been
informally
advised
that
the
first
scenario
is
not
offensive
because
the
flow-through
share
agreement
is
entered
into
before
the
actual
expenses
are
incurred.
Counsel
then
referred
to
a
document
dated
November
10,
1994
entitled
Finance
Department
releases
evaluation
of
flow-through
shares.
It
reads,
in
part,
as
follows:
Flow-through
shares
are
one
way
for
mining
and
petroleum
companies
to
finance
their
exploration
and
development
activities
in
Canada.
These
equity
instruments
receive
special
tax
treatment
and
are
issued
by
means
of
agreements
between
resource
companies
and
their
investors.
An
investor
who
purchases
a
flow-through
share
from
a
mining
or
petroleum
company
under
such
an
agreement
receives
an
equity
interest
in
the
company
plus
the
right
to
income
tax
deductions
associated
with
new
expenditures
on
exploration
and
development
Although
flow-through
shares
are
available
to
all
mining
and
petroleum
companies,
the
mechanism
is
designed
to
be
of
principal
benefit
to
nontaxpaying
junior
exploration
companies,
that
is,
companies
which
are
unable
to
fully
utilize
income
tax
deductions
for
exploration
and
development
and
whose
access
to
alternative
sources
of
financing
is
limited.
For
investors,
flow-through
shares
are
an
alternative
type
of
resource
investment
which
offer
substantial
liquidity,
are
tax-
advantaged
relative
to
other
forms
of
risk
capital
and,
depending
on
how
investments
in
flow-through
shares
are
structured,
can
reduce
the
risk
associated
with
mining
and
petroleum
investments.
Flow-through
shares
are
designed
to
support
economic
and
social
policy
by:
—encouraging
additional
exploration
and
development
in
Canada;
-promoting
equity
investments
in
mining
and
petroleum
companies;
and
-assisting
junior
(typically
non-taxpaying)
exploration
companies....
...
The
time
period
for
empirical
analysis
was
principally
from
1987
to
1991,
but
goes
back
to
1983
in
some
cases.
The
evaluation
found
that
flow-through
shares
addressed
an
actual
need
and
were
consistent
with
government
priorities
during
the
evaluation
period.
Counsel
then
asked
whether,
if
this
type
of
transaction
was
fully
contemplated
and
actively
supported
by
the
Government
of
Canada,
how
could
it
possibly
be
found
to
be
outside
the
object
and
spirit
of
the
Act?
Respondent"
s
position
Respondent’s
counsel
said
that
when
the
provisions
of
subsection
66.1(6)
are
read
as
a
whole
with
the
object
and
spirit
and
purpose
of
the
allowance
provision
in
mind,
the
accounting
result
that
the
scheme
produced
should
not
avail
the
appellant
of
the
benefit
of
the
deduction.
He
referred
to
the
third
guideline
of
Mr.
Justice
Estey
at
page
580
(C.T.C.
317,
D.T.C.
6324)
of
the
Stubart
decision,
namely,
(c)
"the
object
and
spirit"
of
the
allowance
or
benefit
provision
is
defeated
by
the
procedures
blatantly
adopted
by
the
taxpayer
to
synthesize
a
loss,
delay
or
other
tax
saving
device,
although
these
actions
may
not
attain
the
heights
of
"artificiality"
in
section
137.
In
essence,
respondent’s
counsel
with
respect
to
this
argument,
relied
on
the
unusual
steps
that
had
been
taken
and
stated
that
the
appellants
did
not
fall
within
the
clear
meaning
of
the
income
tax
provisions.
Discussion
and
conclusion
Of
the
24
different
meanings
of
’’spirit"
in
The
Oxford
English
Dictionary,
Second
Edition,
Volume
XVI,
only
the
tenth
sheds
any
light
on
the
meaning
of
the
word
"spirit"
as
it
could
possibly
be
used
in
legal
analysis.
Part
C
thereof
reads,
The
broad
or
general
intent
or
meaning
of
a
statement,
enactment
etc.
Used
in
contrast
to
Letter.
After
the
exposition
of
arcane
examples
which
would
do
nothing
to
enlighten
even
the
most
compulsive
legal
pedant,
one
finds,
1982
Church
Times
15
Jan.
20\2
It
is...neither
in
the
letter
nor
spirit
of
these
resolutions
for
anyone...to
act
in
a
way
which
has
the
effect
of
forcing
one
view
upon
those
who
hold
the
other.
This
seems
to
suggest
that
the
resolutions
being
examined
were
not
so
clear
as
not
to
admit
the
possibility
of
a
construction
inconsistent
with
the
objective
that
the
words
thereof
were
selected
and
arranged
to
express.
It
is
my
view
that,
in
this
situation,
one
need
not
devote
effort
to
attempting
to
determine
the
"spirit"
of
legislation
whose
incentive
objective
is
not
only
readily
apparent
but
is
clearly
endorsed
by
governmental
scribes.
The
object
of
the
Act
with
respect
to
the
resource
industries
is
clearly
to
provide
incentive
deductions
to
encourage
exploration
and
development.
The
vehicles
created
by
the
oil
and
gas
industry
to
take
advantage
thereof
are
the
products
of
legislation
specifically
permitting
same.
That
has
resulted
in
the
arrangements
under
examination
in
this
case.
Respondent’s
counsel
refers
to
the
"unusual
steps"
that
had
been
taken.
They
are
unusual
in
the
sense
of
not
being
available
to
other
industries
but
they
are
not
unusual
having
regard
to
resource
industry
practice.
In
light
of
the
common
use
of
such
structures
in
the
extractive
industries
and
in
view
of
the
express
governmental
acceptance
of
such
structures
referred
to
above
I
conclude
that
the
transactions
under
which
the
appellants
acquired
and
sold
limited
partnership
interests
were
within
the
object
of
the
Act.
As
indicated
above,
I
do
not
find
an
analysis
of
the
word
"spirit"
to
be
of
assistance
in
this
context
since
it
would
add
nothing
to
what
is
the
obvious
object
or
purpose
of
the
legislation
under
examination.
Based
on
this
finding
and
upon
my
discussion
of
the
fourth
question
I
conclude
that
the
deductions
made
by
the
appellants
herein
do
not
unduly
or
artificially
reduce
their
respective
incomes.
Sixth
question
Were
the
appellants
within
the
meaning
of
subparagraph
66.1
(6)(b)(ix)
entitled
to
receive
any
"assistance"
as
defined
in
paragraph
66(15)(a.
1)
in
respect
of
any
of
the
E
in
the
1987
taxation
year
of
the
partnerships
thereby
reducing
the
amount
of
the
E
pool
for
the
purposes
of
deduction
entitlement?
Appellant's
position
Appellants’
counsel
referred
to
section
3
of
the
PIP
Act
which
reads
as
follows,
3.
On
application
to
the
Minister
for
an
incentive
by
a
qualified
person
who
establishes
in
the
application
in
the
form
and
manner
prescribed
that
the
applicant,
or
another
person
associated
with
the
applicant
in
the
manner
and
to
the
extent
prescribed,
has,
or,
to
the
extent
and
in
the
circumstances
prescribed,
is
deemed
to
have,
incurred
on
or
after
April
1,
1986
and
before
January
1,
1988
eligible
exploration
expenses
in
respect
of
a
prescribed
activity
on
Canada
lands,
the
applicant
is,
subject
to
such
terms
and
conditions
as
are
prescribed,
entitled
on
the
requisition
of
the
Minister
to
a
Crown
share
incentive
in
the
amount
of
25
per
cent
of
the
specified
portion
of
the
eligible
exploration
expenses.
Counsel
then
referred
to
section
4
of
that
Act
the
relevant
portions
of
which
he
quoted
as
being,
On
application
to
the
Minister
for
an
incentive
by
a
qualified
person
subject
to
section
5
and
to
such
terms
and
conditions
as
are
prescribed,
entitled
on
the
requisition
of
the
Minister
to
an
incentive
in
the
amount
determined
in
accordance
with
section
7,
8
or
9,
whichever
is
applicable.
..Appellants’
counsel
referred
to
paragraph
12(g)
of
the
respondent’s
amended
reply
which
describes
one
of
the
issues
as
alternatively,
if
the
appellant
is
entitled
to
deduct
any
amount
in
respect
of
Canadian
exploration
expense
whether
that
amount
must
be
reduced
pursuant
to
subparagraph
66.1
(6)(b)(ix)
or
paragraph
66.1
(9)(g)
of
the
Act.
He
said
that,
in
short,
the
question
is
whether
the
appellants
were
entitled
to
the
PIPs
and
whether
they
could
reduce
the
appellants’
claim
in
the
1987
taxation
year.
He
stated
that
no
requisitions
had
been
made
and
that
no
notices
of
entitlement
had
been
issued
prior
to
December
15,
1987
with
respect
to
more
than
$10,322,000
of
E.
His
position
was
that
if
the
appellants
had
been
entitled
to
the
assistance,
the
expenses
would
have
to
have
been
reduced
by
that
sum.
He
stated
that
the
provisions
of
the
Act
required
application,
requisition
and,
in
certain
circumstances,
approval
of
the
Minister.
He
pointed
out
that
legislation
was
sought
and
obtained
by
Northcor
to
"grandfather"
the
use
of
flow-through
shares
for
this
particular
project,
and
that
one
of
the
conditions
of
that
grandfathering
was
that
ministerial
approval
was
required.
He
submitted
therefore
that
in
the
appellants’
circumstances
there
were
three
requirements.
He
reviewed
Mr.
Alston’s
evidence
that
approvals
were
not
automatic,
that
the
Minister
had
to
be
satisfied
that
the
expenses
were
bona
fide,
that
the
Minister
sometimes
performed
an
audit,
sometimes
waited
until
after
the
fact
to
perform
such
audit,
sometimes
gave
entitlements
and
sometimes
revoked
them
at
a
later
date.
Mr.
Alston
said
that,
on
occasion,
negotiations
with
the
PIA
as
to
whether
certain
expenses
would
or
would
not
be
accepted
had
to
be
made.
He
stated
that
the
respondent’s
position
that
an
application
alone
was
necessary
to
obtain
entitlements
was
untenable.
Counsel
also
queried
the
necessity
of
language
in
the
statute
respecting
a
"requisition"
if
in
fact
that
were
not
necessary.
He
referred
to
Webster’s
Dictionary
which
defines
"requisition"
as
the
act
of
formally
requiring
or
calling
upon
someone
to
perform
an
action,
or
as
a
written
request
for
something
authorized
but
not
made
available
automatically.
He
referred
to
Canadian
Tax
Report
of
February
5,
1981
setting
forth
the
text
of
a
Department
of
Finance
Release
dealing
with
proposed
legislative
changes
and
read
the
following
portion,
Mr.
MacEachen
also
clarified
how
the
petroleum
incentive
payments
will
be
treated
by
Revenue
Canada
under
the
Income
Tax
Act.
He
stated
that
the
incentive
payments
will
reduce
the
deductions
for
exploration
and
development
expenditures
only
after
the
company
or
individual
becomes
entitled
to
receive
the
grant-that
is,
after
all
the
requirements
for
receiving
an
incentive
payment
have
been
completed.
and
Industry
representatives
had
expressed
concern
to
the
Energy
Minister
that
their
cash
flow
would
be
adversely
affected
if
their
eligible
tax
deductions
for
exploration
and
development
expenses
were
reduced
before
the
incentive
grants
were
actually
received.
and
Mr.
Lalonde
said
the
new
clarification
will
contribute
significantly
to
the
financing
of
oil
and
gas
exploration
and
development
since
the
expense
will
be
reduced
for
tax
purposes
only
at
such
time
as
the
investor
files
an
application
and
becomes
eligible
for
the
incentive
grants.
He
said
the
industry
had
indicated
to
him
that
such
an
interpretation
would
facilitate
the
raising
of
funds
for
oil
and
gas
exploration....
He
concluded
his
submission
in
this
regard
by
stating
that
the
PIA
knew
about
this
practice
and
referred
to
the
exhibited
letter
from
that
Administration
to
Northcor
dated
December
14,
1987.
That
letter
confirmed
that
no
entitlement
to
Northcor
for
Petroleum
Incentives
for
exploration
costs
incurred
drilling
the
Narwhal
F-99
well
subsequent
to
1986
and
prior
to
December
15,
1987
in
excess
of
$10,322,000
had
arisen.
Respondent’s
position
Respondent’s
counsel
submitted
that
the
full
amount
of
PIPs
in
respect
of
$16,000,000
of
exploration
expenses
(assuming
the
appellants
are
entitled
thereto)
should
be
applied
in
reduction
of
that
sum.
He
stated
that
the
partnerships
had
no
right
to
the
PIPs.
He
advanced
the
argument
that
if
the
partnerships
were
not
entitled
to
receive
the
PIPs
until
after
December
14,
1987
then
the
expenses
which
those
grants
paid
had
not
yet
been
incurred
by
the
partnerships
until
the
grants
became
payable.
Hence,
they
would
not
be
expenses
incurred
by
the
partnership
in
the
fiscal
period
ending
December
14,
1987...but
they’d
be
expenses
incurred
in
a
subsequent
period
for
purposes
of
paragraph
(iv)
of
66.1(6)(a).
He
then
advanced
the
following
theory,
namely:
And
if
the
payments
have
not
yet
arisen
by
the
end
of
the
fiscal
year
of
the
partnership,
they
have
not
yet
themselves
incurred
those
expenses
because
that’s
the
way
they
were
liable
to
pay
them
is
by
means
of
the....
Only
if
Petroleum
Incentives
Program
grants
became
payable,
did
they
become
liable
to
incur
those
expenses.
Because
any
other
kind
of
expenses
would
have
fallen
outside
of
the
terms
of
the
share
subscription
agreement.
The
share
subscription
agreement
is
premised
on
the
position
that
these
are
Canadian
exploration
expenses
under
the
Income
Tax
Act,
80
per
cent
of
which
will
be
reimbursed
by
Petroleum
Incentives
Program
grants
and
that
80
per
cent,
as
I
say,
is
the
means
by
which
the
partnerships,
and
the
only
means
by
which,
they
are
liable
to
pay
them.
And
so
they
don’t
incur
them
until
they
get
the
entitlement
to
the
program
grants.
Counsel
then
submitted
that
the
full
amount
of
the
PIPs
in
respect
of
$16,000,000
of
E
(assuming
the
appellants
are
entitled
thereto)
should
be
applied
to
reduce
that
sum.
He
said
that
there
was
an
entitlement
to
the
PIPs
despite
the
lack
of
notices
of
entitlement
on
December
14,
1987.
He
referred
to
section
3
of
the
Petroleum
Incentives
Program
Act,
reading
in
part
as
follows:
On
application
to
the
Minister
for
an
incentive
by
a
qualified
person...the
applicant
is...entitled
on
the
requisition
of
the
Minister
to
a
Crown
share
incentive....
He
then
referred
to
a
letter
written
by
the
Minister
of
Energy,
Mines
and
Resources
to
the
president
of
Northcor
Energy
Ltd.
dated
September
10,
1987
reading
as
follows:
I
wish
to
confirm
my
approval,
pursuant
to
subsection
5(2)
of
the
Petroleum
Incentives
Program
(PIP)
Act
and
section
13.8
of
the
PIP
Regulations,
of
expenses
incurred
in
respect
of
the
Narwhal
F-99
well.
This
approval
is
subject
to
the
condition
that
no
amendments
be
made
to
the
financing
agreement,
effective
May
26,
1987,
between
Northcor
and
Chevron
Canada
Resources
Limited
except
where
the
Petroleum
Incentives
Administration
is
notified
of
any
such
amendment
and
approves
it
in
writing.
The
present
approval
shall
apply
to
all
participants
in
the
Narwhal
F-99
well.
Counsel’s
thesis
was
that
since
this
represented
the
final
approval
from
the
Minister
nothing
further
remained
to
be
done.
He
stated
that
all
but
one
application
was
submitted
by
October
1987
and
that,
approval
having
been
received,
the
partners
were
entitled
on
the
requisition
of
the
Minister
to
a
Crown
share
incentive.
He
argued
that
this
was
not
a
payment
at
the
discretion
of
the
Crown
but
was
one
of
statutory
entitlement
and
that
the
word
"requisition"
had
no
significance
other
than
describing
the
procedure
for
payment.
He
stated
that
entitlement
to
the
PIPs
arose
by
the
making
of
an
application
for
same,
describing
it
as
analogous
to
the
rendering
of
an
account.
Counsel
then
referred
to
the
case
of
West
Kootenay
Power
and
Light
Co.
Ltd.
v.
The
Queen,
[1992]
1
C.T.C.
15,
92
D.T.C.
6023
(F.C.A.),
which
dealt
with
whether
the
appellant
was
obliged
to
take
amounts
into
income
which
had
been
earned
but
were
not
billed
at
its
year
end.
The
learned
justice
in
that
case
discussed
accounting
methods
and
referred
to
the
matching
of
revenue
and
expenditures.
He
concluded,
on
the
facts
and
with
reference
to
accounting
principles,
that
the
appellant
had
a
clear
legal
right
to
payment
and
though
sums
were
not
yet
billed
they
had
to
be
included
in
income.
He
said
that
this
thinking
should
apply
to
subparagraph
(ix)
of
paragraph
66.1(6)(b).
He
stated
that
the
bulk
of
the
PIP
grants
were
allowed
on
December
17
and
that
such
allowance
showed
that
the
notices
of
entitlement
issued
on
December
27
could
have
been
issued
earlier
but
were
deliberately
held
back
pursuant
to
the
correspondence
from
the
Petroleum
Incentive
Administration
dated
December
14,
1987
which
stated,
in
part,
...this
will
confirm
that
no
notices
of
entitlement
have
been
issued
to
Northcor
Energy
Ltd.
for
petroleum
incentive
grants...in
excess
of
$10,322,000.
Counsel
also
submitted
that
subparagraph
(ix)
should
be
read
so
that
the
word
’’assistance”
would
be
modified
by
the
words
"can
reasonably
be
related
to
Canadian
exploration
activities”
and
that
this
indicated
an
obvious
legislative
attempt
to
require
amounts
that
might
not
be
receivable
or
"legal
entitlements
as
of
the
year
end"
to
be
deducted
by
virtue
of
such
legislation.
Discussion
and
conclusion
I
discount
the
first
two
arguments
presented
by
respondent’s
counsel.
The
pertinent
wording
of
section
4
of
the
Petroleum
Incentives
Program
Act
applicable
to
the
discussion
of
this
issue
reads
as
follows,
the
applicant
is...entitled
on
the
requisition
of
the
Minister
to
an
incentive
in
the
amount
determined
in
accordance
with…
"Minister”
is
defined
in
that
Act
to
be
the
Minister
of
Energy,
Mines
and
Resources.
Although
no
evidence
was
produced
with
respect
to
the
procedure
followed
by
the
PIA,
it
would
be
surprising
that
monies
would
be
paid
by
the
Government
of
Canada
to
an
applicant
for
same
without
requisition
therefor
being
made
by
some
responsible
authorized
person.
It
seems
illogical,
having
regard
to
government
procedures,
that
simple
approval
of
an
application
could
result
in
the
issue
of
cheques
in
substantial
amounts
without
appropriate
procedures
being
observed.
I
do
not
find
the
fact
that
the
appellants
did
not
advance
the
receipt
of
the
PIPs
to
their
1987
taxation
year
to
be
of
any
assistance
to
the
respondent’s
position.
The
West
Kootenay
Power
and
Light
Co.
Ltd.
case
dealt
with
accounting
principles
applicable
to
commercial
transactions
and
provides
no
guidance
for
the
resolution
of
this
issue.
I
agree
with
appellants’
counsel
that
the
phrase
"on
the
requisition
of
the
Minister"
has
no
meaning
if
the
respondent’s
argument
that
payment
of
incentives
is
automatic
after
approval
is
obtained,
is
accepted.
Subparagraph
66.1(6)(b)(ix)
refers
to,
any
assistance
that
he
has
received
or
is
entitled
to
receive
in
respect
of
any
Canadian
exploration
expense
incurred
after
1980
or
that
can
reasonably
be
related
to
Canadian
exploration
activities
after
1980....
In
my
opinion,
respondent’s
counsel’s
argument
that
this
provision
should
be
read
so
that
the
word
"assistance”
would
be
modified
by
the
words
"can
reasonably
be
related
to
Canadian
exploration
activities”
could
only
be
valid
if
the
word
"assistance”
would
also
be
modified
by
the
words
"in
respect
of
any
Canadian
exploration
expense".
That
leaves
the
words
"that
he
has
received
or
is
entitled
to
receive"
without
meaning.
That
makes
no
sense.
I
agree
with
appellants’
counsel
that
the
phrase
"any
assistance
that
he
has
received
or
is
entitled
to
receive"
modifies
both
"in
respect
of
any
Canadian
exploration
expense
incurred
after
1980"
and
"that
can
be
reasonably
related
to
Canadian
exploration
activities
after
1980".
To
read
this
provision
in
the
manner
proposed
by
respondent’s
counsel
would
oblige
one
to
ignore
the
rule
that
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
as
set
out
at
page
87
of
professor
Driedger’s
Construction
of
Statutes
(2nd
ed.
1983).
I
conclude
that
the
appellants
were
not,
within
the
meaning
of
subparagraph
66.1(6)(b)(ix)
entitled
to
receive
any
"assistance"
in
the
1987
taxation
year
of
the
partnerships.
Seventh
question
Was
the
interest
held
by
each
appellant
in
each
of
the
partnerships
aforesaid
an
"exempt
interest"
within
the
meaning
of
subsection
96(2.5)
with
the
result
that
by
virtue
of
subsection
96(2.4)
it
would
not
be
a
"limited
partner"
as
defined
therein?
If
it
were
not
a
"limited
partner",
by
virtue
of
subsection
96(2.2)
it
would
not
have
an
"at-risk
amount"
and
there
would
be
no
amount
determinable
under
subsections
66.8(1)
and
(3)
that
would
reduce
the
appellants’
E
determined
under
subsection
66.8(1)
for
the
purpose
of
subparagraph
66.1(6)(a)(iv).
Appellants’
position
Appellants’
counsel
stated
that
respondent
admitted
that
Northcor
had
commenced
drilling
operations
in
early
June
1987
and
that
same
continued
until
October
1987,
all
subsequent
to
preliminary
work
conducted
earlier
in
that
year.
He
further
stated
that,
as
above
set
forth,
the
respondent’s
witness,
on
examination
for
discovery,
accepted
the
fact
of
wind-down
activities
continuing
until
the
end
of
the
1987
fiscal
period.
He
referred
to
subsection
96(2.5),
as
amended,
as
follows,
an
exempt
interest
in
a
partnership
at
any
time
means...an
interest
in
a
partnership
that
was
actively
carrying
on
business
on
a
regular
and
a
continuous
basis
immediately
before
June
17,
1987
and
continuously
thereafter
until
that
time.…
He
then
referred
to
section
66.8,
to
which
subparagraph
66(l)(a)(iv)
is
subject
and
pointed
out
that
if
an
appellant
had
an
exempt
interest
there
would
be
no
"at-risk
amount"
and
section
66.8
would
have
no
effect
upon
the
appellants’
share
of
partnership
Canadian
exploration
expense.
He
referred
to
Canadian
Dredge
and
Dock
Co.
v.
M.N.R.,
[1981]
C.T.C.
2212,
81
D.T.C.
154,
in
which
the
Tax
Review
Board
found
that
a
reduction
in
scale
of
the
company’s
operations
did
not
mean
that
the
taxpayer
discontinued
that
business.
The
Minister
of
National
Revenue
alleged
that
the
appellant,
which
was
in
the
marine
construction
business,
had
ceased
to
carry
on
that
business
in
that
all
of
its
current
revenues
were
from
rentals,
it
had
no
current
marine
contracts,
its
administrative
office
was
reduced
to
a
trailer,
it
had
disposed
of
its
major
fixed
assets,
it
had
substantially
reduced
the
use
of
its
warehouse
and
its
permanent
personnel
had
been
reduced
to
two
employees.
Counsel
then
referred
to
Carland
(Niagara)
Ltd.
v.
M.N.R.
(1964),
34
Tax
A.B.C.
386,
64
D.T.C.
139
in
which
the
Tax
Appeal
Board
stated
that
it
is
not
necessary
that
there
be
sustained
activity
before
it
can
be
maintained
that
a
business
is
carried
on
and
that
there
may
be
and
often
are
periods
of
quiescence
in
almost
any
business
enterprise.
He
also
referred
to
CIR
v.
The
South
Behar
Railway
Co.
(1925),
12
T.C.
657,
at
page
712
where
Sumner
L.J.,
said
as
long
as
her
trade
debts
remained
undischarged,
there
would
seem
to
be
a
presumption
that
a
company
continues
to
carry
on
business
as
long
as
it
is
engaged
in
collecting
debts
periodically
falling
due
to
it
in
the
course
of
its
former
business.
Business
is
not
confined
to
being
busy;
in
many
businesses
long
intervals
of
inactivity
occur.
Counsel
then
referred
to
Household
Products
Co.
v.
M.N.R.
(1964),
34
Tax
A.B.C.
441,
64
D.T.C.
164,
in
which
a
company
whose
business
was
selling
household
goods,
made
a
proposal
to
its
creditors
under
the
Bankruptcy
Act.
That
proposal
was
accepted
and
new
working
capital
was
obtained
by
the
issue
of
preferred
shares
and
the
company’s
only
activity
thereafter
was
the
collection
of
accounts
receivable.
In
response
to
the
Minister’s
contention
that
the
company
was
not
carrying
on
business,
the
Tax
Appeal
Board
held
that
since
the
collection
of
accounts
receivable
formed
part
of
the
business
which
was
previously
carried
on,
there
was
no
interruption
in
the
business,
even
if
one
of
its
two
main
activities
(the
selling
of
household
goods)
did
cease
to
exist.
Counsel
concluded
by
stating
that
the
appellants’
situation
was
analogous
in
that
although
the
partnerships’
drilling
activities
ceased
on
October
1,
1987,
a
part
of
those
activities,
namely
the
wind-down
activities
and
the
financing
activities,
continued
to
be
carried
on
until
at
least
December
14,
1987
and
thereafter
until
all
the
PIPs
had
been
received
and
the
affairs
of
the
partnerships
had
been
concluded.
Respondent's
position
At
the
hearing,
respondent’s
counsel
said,
with
obvious
reference
to
the
partnerships,
They
have
not
continously
carried
on
business
until
December
14,
1987.
The
business
ended
when
the
well
proved
unsuccessful,
and
the
business
ended
before
December
14,
1986.
And
that,
of
course,
is
the
actively
carrying
on
a
business;
they
weren’t
actively
carrying
on
business,
in
my
submission,
after
October.
In
a
subsequent
written
submission
on
this
issue
respondent’s
counsel
submitted
that
the
business
of
the
partnerships
was
not
drilling
and
testing
the
well
but
only
the
financing
of
that
activity
in
exchange
for
rights
to
purchase
shares
of
Northcor
in
accordance
with
terms
of
the
agreement.
He
wrote
further,
that
while
the
Agreement,
in
each
case,
provided
that
Northcor
was
the
agent
of
the
partnership
for
the
purpose
of
incurring
Canadian
exploration
expense,
it
did
not
provide
that
Northcor
was
carrying
on
business
as
agent
of
the
partnership.
Discussion
and
conclusion
Dealing
firstly
with
the
respondent’s
written
submission,
I
have
found
that
Northcor
was
the
agent
of
the
partnerships
to
incur
E
on
their
behalf
and
in
that
capacity
was
carrying
on
business
on
behalf
of
the
partnerships.
With
respect
to
the
submission
made
at
the
hearing,
I
accept
Mr.
Alston’s
evidence
with
respect
to
the
activities
conducted
by
the
partnerships
prior
to
June
17,
1987
and
his
evidence
respecting
activities
carried
on
by
the
partnerships
at
the
end
of
their
fiscal
periods.
I
attach
some
weight
to
Mr.
Nowoselski’s
acceptance
of
a
written
statement
of
activities
carried
on
by
the
partnerships
as
set
forth
above.
This
being
the
only
evidence
before
me
I
cannot
accept
the
respondent’s
position.
I
conclude,
therefore,
that
the
appellants
held
interests
in
partnerships
that
were
actively
carrying
on
business
on
a
regular
and
continuous
basis
throughout
the
period
specified
in
1987.
The
word
"actively"
was
not
commented
on
by
counsel.
However,
as
long
as
the
partnerships
were
conducting
some
activities
they
could
not
be
said
to
be
conducting
them
inactively.
Northcor
did
not
cease
being
the
partnerships’
agent
just
because
the
well
was
dry.
Further,
the
evidence
did
not
indicate
any
interruption
in
the
conduct
of
the
described
activities.
I
find,
therefore,
that
each
partnership
was
actively
carrying
on
business
on
a
regular
and
continuous
basis.
Accordingly,
each
partnership
interest
owned
by
the
appellants
was
an
"exempt
interest"
within
the
meaning
of
subsection
96(2.5)
with
the
result
that
he
was
not
a
"limited
partner"
as
defined
in
subsection
96(2.4)
and
would
not
have
an
"at-risk
amount"
by
virtue
of
subsection
96(2.2).
This
results
in
no
amount
being
determinable
under
subsections
66.8(1)
and
(3)
that
would
reduce
the
appellant’s
E
under
subsection
68(1)
for
the
purpose
of
subparagraph
66.1(6)(a)(iv).
In
summary,
the
appellants
became
members
of
four
limited
partnerships
on
the
last
day
of
their
1987
fiscal
periods
in
which
such
partnerships
incurred
E.
Their
partnership
interests
were
"exempt
interests"
within
the
meaning
of
the
Act.
The
transactions
were
not
a
sham.
The
Act
provided
specifically
for
the
deduction
of
expenses
of
a
partner
at
the
end
of
a
partnership’s
fiscal
period.
There
being
no
other
person
entitled
thereto,
and
with
a
deduction
being
clearly
contemplated
by
the
legislation,
the
deduction
claimed
fell
within
the
object
of
the
incentive
provisions
discussed.
The
partnerships
were
not
entitled
to
and
did
not
received
any
PIPs
in
the
1987
fiscal
period.
The
deductions
made
by
the
appellants’
deductions
did
not
unduly
or
artificially
reduce
their
income.
Each
appellant
declared
the
capital
gain
arising
on
the
disposition
of
its
interests
in
the
four
partnerships.
I
conclude
that
each
appellant
was
entitled,
in
its
1987
taxation
year,
to
deduct
the
amounts
aforesaid
as
"cumulative
Canadian
exploration
expense"
within
the
meaning
of
subsection
66.1(3)
and
paragraph
66.1(6)(b)
of
the
Act.
The
appeals
are
allowed
with
costs
to
the
appellant.
Appeals
allowed
with
costs.
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