McNair, J.:—These are appeals from the decision of the Minister of National Revenue concerning the deductibility of certain items in the calculation of Gulf Canada Limited's base for depletion allowance, petroleum profits abatement and corporate surtax. The parties are agreed upon the amounts in issue; the dispute centres around the interpretation to be given to certain sections of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), governing the calculations in question, primarily subparagraph 66.1(6)(a)(i) and sections 124.1 and 124.2. The two actions, pertaining to reassessments of the plaintiff's income for the 1974 and 1975 taxation years respectively, were tried together on common evidence inasmuch as they are concerned with virtually identical issues.
The parties filed an agreed statement of facts wherein they outlined the central facts out of which three basic issues arise, and as well posed a series of questions for consideration by the Court. For convenience, I will set out the facts under each of the three issues as well as the respective positions of the parties, and then return to an analysis of the evidence and argument under each respective heading.
By way of background, there were two budgets in 1974, one on May 6, which was reintroduced in substantially the same form on November 18,1974. This resulted in the application of differing sets of statutory provisions, one pre-May 7,1974, and one post-May 6,1974, to which reference will be made from time to time hereafter. It is unnecessary to detail the assessments and notices of objection which underlie the present appeals. The parties themselves have clearly identified and set out the issues involved.
Issue No. 1: Lease Rental Payments to the Provincial Crown
In the 1974 and 1975 taxation years, Gulf made certain rental payments to the Crown in right of Alberta, Saskatchewan and British Columbia for subsurface gas and oil rights. Gulf submits that these payments come within the definition of a "Canadian exploration expense" contained in paragraph 66.1(6)(a) of the Act, and are thus to be included in the earned depletion base under subparagraph 1205(1)(a)(ii) of the Income Tax Regulations for purposes of the depletion allowance authorized by section 65 of the Act.
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