Imperial Oil Resources Ltd. v. Canada (Minister of Indian Affairs and Northern Develpment), docket T-151-97

Date: 19971216

Docket: T-151-97

BETWEEN:

     IMPERIAL OIL RESOURCES LIMITED

     APPLICANT

     - and -

     RONALD A. IRWIN, in his capacity as MINISTER OF INDIAN

     AFFAIRS AND NORTHERN DEVELOPMENT and HER MAJESTY

     THE QUEEN IN RIGHT OF CANADA as represented by the

     EXECUTIVE DIRECTOR OF INDIAN OIL AND GAS CANADA,

     DEPARTMENT OF INDIAN AFFAIRS AND NORTHERN DEVELOPMENT

     RESPONDENTS

     REASONS FOR ORDER

ROTHSTEIN J.

     THE ISSUE

[1]      This is a judicial review of a decision of the Minister of Indian Affairs and Northern Development (Minister) dated November 25, 1996 made under the Indian Oil and Gas Regulations 1995, SOR/94-753. The Minister's decision arose by reason of an application by the applicant, Imperial Oil Resources Ltd. ("IORL") to the Minister to review earlier decisions made by the Executive Director of Indian Oil and Gas Canada ("IOGC").¹

[2]      The issue involves royalties on products of natural gas extracted from certain lands at or near Bonnie Glen, Alberta on the Pigeon Lake Indian Reserve No. 138A payable by the applicant to Her Majesty in Right of Canada in Trust for the Sampson, Ermineskin, Louis Bull and Montana Indian Bands. The relevant period is August 1, 1979 to December 31, 1985. During this time, Texaco Canada Resources Limited ("TCRL"), predecessor in title to the applicant, was the lessee and operator of the Bonnie Glen gas producing facility. TCRL sold gas products from the Bonnie Glen facility to an affiliated company, Texaco Canada Incorporated ("TCI") at the Bonnie Glen plant gate. Under an agreement between TCRL and TCI, TCI undertook to market gas products acquired from TCRL and to pay TCRL ninety-five percent of TCI's downstream sale price, netted back (i.e. after deducting transportation and other costs incurred beyond the plant gate) to the Bonnie Glen plant gate.² Payment of 95% of TCI's resulting sale price netted back reflected a five percent marketing fee deduction by TCI from the final selling price. Royalties were calculated on the plant gate price ie. ninety-five percent of TCI's selling price netted back to the plant gate.

[3]      The Executive Director of IOGC formed the opinion that the five percent marketing fee should not have been deducted before calculation of royalties. As a result, he decided to conduct a formal audit of gas product prices prior to January 1, 1986. It was this decision that gave rise to the applicant's appeal to the Minister.

[4]      The Minister concluded that the Executive Director of IOGC had the right to examine, including the right to audit, the pre-1986 records of the TCRL and TCI. The Minister also determined that the five percent marketing fee was improperly deducted and required that the deduction be totally eliminated. The relevant portions of the Minister's decision state:

The second review requested was of the Executive Director's decision in 1994 to audit product prices for the period prior to 1986. It is my conclusion that IOGC has the right to examine, including conducting an audit, pre-1986 records of Imperial and its affiliates, including marketing and sales records. Imperial's request in this matter is therefore denied. In any follow-up on this matter the Executive Director may consider that if sufficient documents were disclosed by Imperial during the course of the examination, IOGC's audit may no longer be necessary. The Executive Director may take such further actions as he determines necessary to resolve the matter.

Incidental to the review, I have also considered the issue of the marketing fee deduction itself. Despite the passage of time, the record is clear that Imperial's predecessor improperly deducted a five percent marketing fee from the prices of natural gas products, other than ethane and pentane plus, in the period August 1979 through December 1985. Because of the nature of my responsibilities to First Nations, an adjustment by Imperial to totally eliminate this deduction will be required.

     THE INDIAN OIL AND GAS REGULATIONS

[5]      The review by the Minister was conducted under subsection 57(2) of the Indian Oil and Gas Regulations 1995. Section 57 provides:

57. (1) A person who is dissatisfied with a decision, direction, action or omission of the Executive Director under these Regulations may, within 60 days after the decision, direction or action or, in the case of an omission, within 60 days after the day on which the omission was discovered or ought to have been discovered, apply in writing to the Minister for a review of the decision, direction, action or omission.

(2) The Minister shall review an application made pursuant to subsection (1) and advise the applicant in writing of the final decision in the matter.

It is necessary to consider the Indian Oil and Gas Regulations, C.R.C. 1978, c. 963, as amended by SOR/81-340 with respect to the substantive rights and obligations of the applicant and the power of the IOGC.³ The provisions to which reference will be made in these reasons are:

2. (1) In these Regulations,

"contract" means a permit, lease, licence or other disposition issued, made or granted under these Regulations and, unless the context otherwise requires, includes a grant, permit, lease licence or other disposition that is deemed to be subject to these Regulations by section 6 of the Act.

"lease" means a lease of oil and gas rights or surface rights granted under these Regulations and, unless the context otherwise requires, includes a lease that is deemed to be subject to these Regulations by section 6 of the Act;

"operator" means a person engaged in any work or activity on Indian lands pertaining to the exploitation of oil and gas and includes the holder of a contract and his employees, servants and agents;

"person" means an individual of the full age of majority or an incorporated company registered or licensed in Canada or in any province thereof to carry out the activities it is undertaking or proposes to undertake;

. . .

21. (1) Except as otherwise provided in a special agreement under subsection 5(2) of the Act, the royalty on oil and gas obtained from or attributable to a contract area shall be the royalty computed in accordance with Schedule I, as amended from time to time, and shall be paid to Her Majesty in right of Canada in trust for the Indian band concerned.

(2) Where oil or gas is obtained from or attributable to a contract area, the lessee shall

(a) on or before the 25th day of each month, or

(b) at such time intervals as are specified in the lease governing the area,

submit to the Manager a report and financial statement, in such form as the Manager may prescribe or approve, respecting the oil or gas so obtained or attributed during the preceding month or interval, together with the royalty payment due for that month or interval.

(3) Every sale of oil or gas obtained from or attributable to a contract area shall, unless otherwise directed by the Manager in writing, include the oil or gas that is the royalty payable under this section.

(4) Notwithstanding subsection (3), the Manager may at any time after giving reasonable notice in writing to the lessee and giving due consideration to any obligations that the lessee may have for the sale of oil, gas or any products thereof, take in kind oil or gas, as the case may be, as all or any part of the royalty payable.

(5) Upon application by a lessee and with the approval of the Band Council concerned, the Manager may in writing agree not to take in kind for a specified period all or any part of the royalty payable.

(6) No royalty is payable on oil or gas consumed for drilling, production or processing purposes in or attributable to a contract area.

(7) Where oil or gas that is the royalty payable under these Regulations, as amended from time to time, is sold or to be sold and, in the opinion of the Manager, the sale was or will be at a price that is less than the fair market value of the oil or gas, the Manager shall, by notice in writing addressed to the lessee, specify the dollar value of the oil or gas that would be realized if it were sold in a business-like manner, at the time and place of production in an arm's length transaction; and the lessee shall, in his royalty payment next following the receipt by him of the notice, account for and pay to the Manager the deficiency between the dollar value specified in the notice and the actual dollar value obtained by the lessee on the sale of the oil or gas.

. . .

42. (1) The Manager may, at any reasonable time,

(a) inspect the wells, plant, equipment and other operations of an operator;

(b) examine the records of an operator at the operation location and at the office of the operator; and

(c) attend at the drilling, testing and completion of any well.

(2) The information obtained under subsection (1) shall be kept confidential in accordance with section 43, except where disclosure is necessary to ensure compliance with a contract or these Regulations.

SCHEDULE I

2. (2) The royalty to be computed, levied and collected on gas obtained from or attributable to a contract area shall comprise the basic royalty of 25 per cent of the gas obtained from or attributable to the contract area plus the applicable supplementary royalty determined in accordance with subsection (3), all quantities to be calculated at the time and place of production free and clear of any deduction whatever except as provided under subsection (4).

. . .

(4) Where gas is processed by a method other than gravity, the royalty on the gas obtained therefrom shall be calculated on the actual selling price of that gas, but such costs of processing as the Manager may from time to time consider fair and reasonable, calculated on the total of the basic and the supplementary royalty portion of production, shall be allowed.

(5) For the purposes of this section, "actual selling price" means the price at which gas is sold or the price specified pursuant to subsection 21(7) of these Regulations, whichever is greater.

THE FIVE PERCENT MARKETING FEE

[6]      The agreement made as of August 1, 1979 between TCRL and TCI was the basis for calculating the price received by TCRL as operator of the Bonnie Glen facility and seller of the gas products in question here. The relevant provisions of the agreement are:

1.      Definitions

In this agreement, including the recitals and this Article:

. . .

(c)      "Point of Delivery" means the plant outlet for Plant Products.

. . .

4.      Price

(a)      . . .

(ii)      Other Plant Products (excluding Pentanes Plus) " Seller shall be paid ninety-five percent (95%) of the sales price realized by Buyer netted back to the point of delivery sold at fair market value and adjusted to a whole volume price pursuant to Article 5.

(b)      Buyer will undertake to dispose of all Seller's Plant Products at competitive market values subject to governmental price and/or volume restrictions for export from Alberta or Canada. Sales of any product for use by Buyer or any Affiliate of Buyer will be priced or sold at fair market value.

(c)      In determining the amount to be netted back, Buyer shall deduct all taxes (other than income tax) which may be imposed upon the Plant Products after the Point of Delivery hereunder.

[underlining in the original]

[7]      By an amending agreement dated April 1, 1981, paragraph 1(d) was added to the agreement and paragraphs 4(a)(ii) and 4(b) were deleted and the following were substituted therefor:

1.      (d)      "Realizeable wholesale price" in reference to a transaction in a product contemplated by paragraphs 4 (a) (ii) and 4 (b) means the price which the Supply and Distribution Department of Buyer does or could realize in an arms-length sale transaction to a distributor or a broker of such product.

4.      (a)      . . .

(ii)      Other Plant Products (excluding Pentanes Plus) " Seller shall be paid ninety-five percent (95%) of the average weighted monthly realizable wholesale prices netted back to the point of delivery and adjusted to a whole volume price pursuant to Article 5.

(b)      Buyer will undertake to dispose of all Seller's Plant Products at realizable wholesale prices subject to governmental price and/or volume restrictions for export from Alberta or Canada.

[8]      The parties advised that nothing turns on the 1981 amendments.

[9]      It is apparent that TCI was to sell products "downstream" at "competitive market value" or at prices which could be realized "in an arm's-length sale transaction". From these downstream fair market value prices, deductions were to be made to establish the price to be received by TCRL at the "point of delivery" (the plant gate). These deductions included transportation costs incurred by TCI and taxes (other than income tax) which were imposed on products after the plant gate. TCRL's actual selling price was based on realizing ninety-five percent of the sale price realized by TCI netted back to the point of delivery to enable TCI to cover its five percent marketing fee, transportation, taxation or other after plant gate expenses.⁴

[10]      The approach of the Executive Director of IOGC and the Minister was to treat TCRL and TCI as one entity. Relying upon subsections 2(2) and 2(4) of Schedule I of the Regulations they were then able to treat TCI's downstream selling price as if it were TCRL's actual selling price and the five percent marketing fee as if it were an expense of TCRL. Given that it clearly was not a cost of processing, it could not be deducted for royalty calculation purposes under subsection 2(4). On the basis of the words "free and clear of any deduction whatsoever, except as provided under subsection (4)" in subsection 2(2), they concluded that the marketing fee could not be deducted for royalty calculation purposes.

[11]      For purposes of his review, the Minister retained G.J. DeSorcy, P.Eng., an experienced and respected participant in the oil and gas industry. In his report to the Minister, Mr. DeSorcy seems to agree with the argument that if the marketing fee was reflected in the price paid to TCRL by arm's-length third party purchasers, the actual selling price would be net of the marketing fee. (There is evidence that for some months prior to August 1979, TCRL sold gas products to arms length purchasers at the plant gate and the TCRL's price was ninety-five percent of the purchaser's ultimate selling price netted back to the plant gate.) However, where the sale was under a non arm's-length arrangement (as it was after August 1, 1979), Mr. DeSorcy was of the view that it was "almost the equivalent to the producer applying the fee". In these circumstances, Mr. DeSorcy concluded the Regulations did not permit the deduction of the marketing fee. He states:

In this particular situation, the marketing fee was a third party charge against the products, as opposed to one applied by the producer. Where a sale is at arm's-length and where such a marketing fee is reflected in the price paid by the third-party purchaser to the producer, it may be argued with considerable reason that the actual selling price is net of the marketing fee. In such a situation, the Reviewer sees an onus on the royalty collector to demonstrate that the selling price, including the marketing fee, is not the fair market value.

From 1 August 1979 onward, the NGL marketing fee at Bonnie Glen was not applied in an arm's length sales arrangement. This is almost the equivalent of the producer applying the fee. In such a situation, the Reviewer believes the producer, in calculating royalties, should only use those charges that are anticipated by the Regulations, which exclude the marketing fee.

[record page 551]

The Minister does not provide substantive reasons for finding that the five percent marketing fee had to be eliminated, except to state that "the record is clear that Imperial's predecessor improperly deducted a five percent marketing fee".

[12]      The record provides some indication as to why the Executive Director of IOGC and the Minister challenged the five percent marketing fee deduction. First, it appears that the Province of Alberta (Alberta Crown), in transactions in which it acted as lessor of lands from which natural gas was extracted, did not recognize the five percent marketing fee for royalty calculation purposes. It seems the Executive Director and Mr. DeSorcy considered the Alberta Crown's approach a precedent that should be followed when the federal Crown was lessor, especially in view of the federal Crown's fiduciary obligation to the First Nations. In its submission to Mr. DeSorcy of June 7, 1996, IOGC stated:

31. The results of the audits conducted by the province of Alberta appear to be relevant. IOGC considers its relationship with Imperial to be more like the Alberta Crown's than other free hold interest owners such as Pan Canadian or private suppliers of NGLs such as Chevron and Gulf.

32. Imperial's submission at paragraph 13 g. confirmed that the Alberta Crown required Imperial to recalculate royalties and remove the marketing fee deduction, that this recalculation took place, and that additional royalties were paid. Mr. Beaton's view that the Alberta Crown position that the marketing fee was not justified is irrelevant.

33. The limited information made available to IOGC by Imperial verifies that Texaco not only deducted a marketing fee prior to 1986, but was fully aware that the deduction was inappropriate for royalty purposes, and was required by the province of Alberta to recalculate this royalty and eliminate this deduction ...

[record page 421, footnote omitted]

[13]      In his report Mr. DeSorcy stated:

In the judgment of the reviewer, two important aspects of the issue are that such a deduction is not provided for in the Regulations and that the Alberta Crown refused such a deduction as far back as 1981. In the opinion of the reviewer, this action by the Alberta Crown should have been a signal to the producer that such deductions were not in keeping with typical Crown royalty agreements.

[record page 552]

[14]      The difficulty with the precedent rationale is that the Alberta Crown's arrangement, as far as I can understand it, was the product of a contractual negotiation and resolution. Evidently TCRL, for consideration, agreed to eliminate the five percent marketing fee deduction for royalty purposes. In its submission to Mr. DeSorcy of April 30, 1996, the applicant states:

The only lessor that was treated differently was the Alberta Crown. For 1980 and 1981 the Alberta Crown required the lessee to recalculate royalties to reflect a reduction in the TCI marketing fee from 5% to 3%. Thereafter the marketing fee component was eliminated. According to Mr. Beaton, the Alberta Crown's position was different from that of IOGC. Alberta Crown in its discussions with Mr. Beaton was prepared to defer receipt of royalty payments until an ultimate downstream sale had occurred. This was an off-setting concession to the elimination of the marketing fee. Unlike IOGC, the Alberta Crown accepted the risk of such matters as storage losses, transportation and inventory price changes.

[record page 74]

I have not been shown anything that contradicts this evidence.

[15]      While IOGC considers its position to be more like that of the Alberta Crown than other freehold interests, that does not entitle it to disallow the five percent marketing fee deduction after the fact. Apparently the Alberta Crown undertook certain risks that IOGC did not undertake at the time. What the federal Crown seeks is the advantage in price that the Alberta Crown obtained without accepting the risks that the Alberta Crown undertook, merely because the Alberta Crown negotiated what the federal Crown now considers to be more favourable than the arrangements provided for under the Regulations. I see nothing in the Regulations that entitles IOGC to the benefit it perceives the Alberta Crown obtained. Therefore I do not see the Alberta Crown precedent as a justification for elimination of the five percent marketing fee.

[16]      Second, there is a suggestion that the applicant had acknowledged that the five percent marketing fee deduction was improper. The respondents referred to a letter dated September 29, 1995 from Brian Nowak of IORL to IOGC which states at page 2:

Imperial accepts that marketing fees are non deductible and agrees that the royalty obligation was valued at 95% of the actual sales price used for the royalty calculation.

[record page 454]

[17]      In its submission to Mr. DeSorcy of June 7, 1996, IOGC refers to Mr. Nowak's admission:

21. The 1986 to 1988 audit clearly states that the 5% marketing fee was an improper deduction from price used by Imperial to calculate the royalty paid to IOGC. By letter dated September 29, 1992, Imperial admitted that was the case. In that letter, which is Imperial's first formal response to the damaging audit revelations, the following statement is made at page 2:

Clearly, IOGC's regulations do not allow the deduction of marketing fees as a reduction in the valuation for royalty purposes.... Imperial accepts that marketing fees are non deductible and agrees that the royalty obligation was valued at 95% of the actual sales price used for the royalty calculation.

22. In other words, Imperial admitted that the marketing deduction was improper and contrary to the agreed upon arrangement, however defended the fee as reasonable.

[record page 417]

While Mr. Nowak's letter is somewhat obscure, I do not think he acknowledged that the marketing fee deduction was improper and contrary to any arrangement. Indeed, Mr. Nowak concludes his comments on the marketing fee issue as follows:

We believe that our methodology provides an accurate calculation of a fair and equitable price at the outlet of the Bonnie Glen facility and that this price is consistent with the requirement and the Regulations to provide a price "... at time and place of production...".

[record page 455]

At most, I think that Mr. Nowak acknowledged that marketing fees are not deductible under the Regulations by the operator and that royalties were calculated at ninety-five percent of the TCI downstream sale price netted back to the plant gate. Neither admission suggests he was acknowledging that the applicant had improperly deducted the five percent marketing fee.

[18]      I can readily appreciate the concern of the Executive Director of IOGC and the Minister that non-arm's length transactions may inappropriately reduce royalties. However, I cannot see any authority in the Regulations for the approach they have taken to resolve their concern in this case, ie. treating TCRL and TCI as one entity such that TCI's marketing fee is considered to be an expense of TCRL.

[19]      The normal rule that a corporation is a separate and distinct legal entity from its shareholders was approved by Wilson J. in Kosmopoulos v. Constitutional Insurance Co., [1987] 1 S.C.R. 2 at 10:

As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by "lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities" principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue": L.C.B. Gower, Modern Company Law (4th ed. 1979) at p. 112.

This rule is reconfirmed in The Queen v. MerBan Corporation (1989), 89 D.T.C. 5404 (F.C.A.) at 5410 per Iacobucci C.J. (as he then was) cited with approval in the Queen v. Jennings, D.T.C. 6507 (F.C.A.) at paragraph 2 per Robertson J.A. In Jennings Robertson J.A. observes, at 6508, that only in the clearest of cases and in compelling circumstances, and after a thorough legal analysis, could the "normal rule" be displaced.

[20]      In Kinookimaw Beach Association v. R. in Right of Saskatchewan, [1979] 6 W.W.R. 84 (Sask. C.A.) (leave to appeal refused, 30 N.R. 267n) Culliton C.J.S. states at pages 88 and 89:

I think the principle to be drawn from the Nedco case [Nedco Ltd. v. Clark, [1973] 6 W.W.R. 425, 43 D.L.R. (3d) 741 (Sask. C.A.)] is that the autonomous and independent existence of a corporate structure must be accepted in respect and unless it can be shown that such structure is being deliberately used to defeat the intent and purpose of a particular law or is intended to or does convey a false picture of independence between one or more corporate entities which, if recognized would result in the defeat of a just and equitable right.

There is no evidence in the case at bar that the use of separate legal entities, TCRL and TCI, was being used to defeat the intent and purpose of the Regulations or to convey a false picture of independence between TCRL and TCI. Indeed, in written argument (paragraph 33), respondents' counsel concedes there was no attempt by the respondents to "disregard the integrity of separate corporate entities or to 'pierce' the corporate veil". He further says the respondents do not allege that TCI as purchaser under the agreement with TCRL was a corporate facade. Accordingly, this is not a case in which there are clear and compelling circumstances that would justify displacing the normal rule.

[21]      When Parliament intends to treat affiliated corporations as one, it does so expressly. Statutory provisions that do so abound, the obvious example being the Income Tax Act, R.S.C. 1985, c. I-4. By contrast, there is nothing in the Regulations authorizing the Minister or IOGC to treat separate corporate entities as one. The definition of "lease", "operator" and "person" make it clear that the Regulations contemplate that an operator is a person who holds the leases on Indian land and who is engaged in the exploitation of gas. "Person" means an incorporated company registered and licensed to carry out the activity it is conducting which would include the exploitation of gas on Indian lands. There is no implied reference to affiliates or non arm's-length entities that at a later stage become involved in the marketing of gas products acquired from an operator. While the definition of operator includes the corporation's employees, servants and agents, none of these terms would apply to the purchaser of gas from the operator. Certainly there has been no suggestion that the arrangement between TCRL and TCI is one of agency.

[22]      Further, the attempt to consider TCRL and TCI as one entity results in the inconsistent treatment of beyond plant gate charges. The purported basis for disallowing the marketing fee charge is that it is not a cost of processing which is the only type of cost that may be deducted under subsection 2(4) of Schedule I of the Regulations. However, the respondents do not take the same position with respect to transportation charges or taxes incurred beyond the plant gate. In essence, the respondents, for marketing fee purposes, treat TCRL and TCI as one entity, but treat them as separate entities for other charges. If indeed the respondents had the authority under the Regulations to pierce the corporate veil and did so, they would be obliged to disallow all non-processing costs. They do not have a power to allow or disallow costs in their discretion. I think this anomaly makes it clear that the Regulations do not authorize the respondents to treat different corporate entities, even non arm's length entities, as one and the same.

[23]      In the same context, it is of some interest that in the 1994 amendment to the Indian Oil and Gas Regulations, "actual selling price" is defined, for the first time to address the issue of charges beyond the plant gate. Section 4 states:

4. For the purposes of sections 1 and 2, "actual selling price" means the greater of

(a) in respect of

(i) oil, the price at which the oil is sold, and

(ii) gas, the price or other consideration payable that is specified in the gas sales contract under which the gas is sold, free of any fees or deductions other than transmission charges beyond the facility outlet; and

(b) the fair market value of the oil or gas, determined pursuant to subsection 33(6) of these Regulations.

By this amendment, it would appear that the Regulations now contemplate the "downstream" selling price (although this is not explicitly stated) and require that the plant gate price reflect only transmission charges "beyond the facility outlet" but no other charges. Of course, the 1994 amendment does not affect the interpretation of the Regulations as they existed between 1979 and 1985.

[24]      In oral argument, counsel for the respondents encouraged the Court to interpret the Regulations broadly, especially in view of the undisputed fiduciary obligation of the federal Crown towards the First Nations on whose behalf it collects royalties. However, the existence of a fiduciary obligation between the federal Crown and the First Nations does not give IOGC, the Minister or the Court the authority to read words into the Regulations, which is what the respondents effectively request.

[25]      The absence from the Regulations of powers entitling the Executive Director of IOGC and the Minister to treat TCRL and TCI as one entity does not leave a loophole through which royalty obligations could be inappropriately reduced due to non-arm's length dealings. Subsection 21(7) of the Regulations expressly addresses the non arm's-length situation and provides a remedy. Where the Executive Director is of the opinion that a sale will be at a price that is less than fair market value, he is authorized to specify the dollar value of the gas that would be realized if it were sold in a business-like manner at the time and place of production in an arm's-length transaction, and the lessee must then account for the deficiency between the fair market value and the actual dollar value obtained. If the Executive Director was of the view that the deduction of the five percent marketing fee from the downstream selling price reduced the selling price at plant gate to less than fair market value, his remedy was under subsection 21(7).

[26]      For some reason not explained in the material and by counsel, the Executive Director and the Minister did not opt for this solution.⁵ Perhaps the Executive Director was unable, at this late date, to specify the dollar value obtainable between August 1, 1979 and December 31, 1985. Perhaps because royalties were to be calculated on "actual selling price" which was defined under subsections 2(4) and 2(5) of Schedule I of the Regulations, as the greater of fair market value or actual selling price, the Executive Director now seeks to collect royalties based on a price that exceeds fair market value which would not be open to him under subsection 21(7). There is no evidence that the TCRL actual selling price at plant gate was less than fair market value. In fact, the evidence discloses that Mr. DeSorcy asked whether IOGC was asserting that the actual price was less than fair market value, and IOGC did not answer but re-asserted that deducting the marketing fee was improper.⁶ It is not an unreasonable expectation, given subsection 21(7) of the Regulations, that if the Minister was concerned that the TCRL selling price was less than fair market value, that this would have become apparent at or about the time the sales took place. Whatever the reason, the Executive Director and the Minister have deliberately avoided invoking the obvious remedial provision available to them to deal with non arm's-length transactions and instead have opted for an approach that is not authorized by the Regulations.

[27]      Counsel for the respondents submits that subsection 21(7) should not be considered a complete code for dealing with non arm's-length situations. He points out that section 47 of the Regulations entitles the Minister to go so far as cancelling a lease for failure by a lessee to comply with the Regulations. However, section 47 is not itself a rationale as to why subsection 21(7) is not the only mechanism envisaged by the Regulations for the Executive Director to deal with non arm's-length situations. The respondent's argument seems to be that the authority provided to the Executive Director under section 47 enables him to make whatever determination he considers appropriate. This is tantamount to saying the Executive Director has unfettered discretion to take whatever remedial action he pleases. If that were the intent, the extensive Regulations passed by the Governor in Council detailing specific powers would be redundant. This cannot be a correct interpretation of the Regulations.

     THE AUDIT

[28]      My determination with respect to the five percent marketing fee may make it unnecessary to deal with the question of audit. However, for completeness, I now turn to that portion of the Minister's decision dealing with the right of the Executive Director of IOGC to conduct an audit of pre-1986 records of TCRL and TCI. There are two issues. The first is whether IOGC may conduct the audit. The second is, if the answer to the first question is "yes", whether the may audit include affiliates of an operator.

[29]      The second question may be disposed of summarily. For the same reasons that preclude treating affiliates and operators as one entity in order to characterize the selling price of the affiliate as the selling price of the operator and the charges of an affiliate as an expense of the operator, the Executive Director of IOGC cannot audit the records of the affiliates of an operator. There is no express provision in the Regulations for doing so and the scheme is to the contrary. Paragraph 42(1)(b) entitles examination of "the records of an operator at the operator's location and at the office of the operator [emphasis added]". Counsel for the Minister argues that the power of audit should extend to other corporations over whose documents the applicant "has dominion". Other than TCRL and TCI being in a non arm's length relationship, I have no evidence as to whether TCRL has dominion over the records of TCI. In any event, this is simply another version of the attempt to treat TCRL and TCI as one entity which argument I have rejected. Subsection 21(7) is the Executive Director's remedy.

[30]      Counsel for the respondents submits that even for purposes of subsection 21(7), it would be necessary for the Executive Director to be able to have access to the records of non arm's-length affiliates. However, the Executive Director's authority under subsection 21(7) is to establish what, in his opinion, is the fair market value in comparison to the actual selling price of the operator. Fair market value is information obtained from the market place. The actual selling price of the operator can be obtained from the operator himself. Neither requires access to the records of a non arm's-length affiliate. Absence in subsection 27(1) of reference to access to records of persons other than an operator supports this view.

[31]      This leaves the question of whether the Executive Director may audit the records of an operator. Much argument was addressed to various definitions of "examine" and "audit". The respondents say that examine includes audit. The applicant says that audit is something much more formal than an examination and connotes the requirement to maintain records for specified periods of time and contemplates verification or proving the truth of the records, neither of which is expressly contemplated by the Regulations. Counsel for the respondents was not able to identify any specific reason why the Minister considered an audit as opposed to an examination of the records of the operator necessary.

[32]      A review of the Regulations as a whole indicates an elaborate record keeping scheme including the power in the Executive Director to specify the types of records to be submitted for different purposes. The indication is that the Governor in Council was specific in delegating to the Executive Director the power to require and examine records. This leads me to the view that had the intent been to permit an audit, this would have been expressly stated. I cannot subscribe to the view that "examine" includes "audit". Clearly, audit is a more formal procedure which, as applicant's counsel points out, places specific obligations on both an operator and the Executive Director that do not appear in the Regulations.

[33]      It is also of some significance that the relevant period of time in this case is some twelve to eighteen years in the past. Nothing in the Regulations seems to preclude an examination of records of the operator, no matter how old. On the other hand, I find it difficult to think that the Regulations envisage a formal audit of ancient records and transactions and the requirement for the operator to maintain such records indefinitely in case, at some unspecified future time, an audit is required. The applicant says that many of the records of that period are no longer in existence and individuals who might have to provide information for an audit are, by reason of death or retirement, no longer available. There is no suggestion that the records have been wilfully or recklessly destroyed. Nor is there any indication of fraud which might give rise to the application of criminal or other laws under which audits or more extensive searches may be authorized.

[34]      It appears that in the past, audits may have been conducted. However, past practice does not assist in interpreting the scope of the Regulations. There is also a suggestion that the Regulations, involving Indian lands and, by implication, the fiduciary obligation of the federal Crown towards First Nations mandates a broad interpretation including the right to conduct an audit (see [1983] 1 S.C.R. 29">Nowegijick v. The Queen, [1983] 1 S.C.R. 29 at 36 per Dickson J., (as he then was)). However, the fiduciary duty is not a basis on which to change the meaning of relatively clear legislation, particularly when doing so will introduce uncertainty into business arrangements involving Indians or Indian land. In this respect, I think the observation of La Forest J. in Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85 at 147 is applicable:

I think it is safe to say that businessmen place a great premium on certainty in their commercial dealings, and that, accordingly, the greatest possible incentive to do business with Indians would be the knowledge that business may be conducted with them on exactly the same basis as with any other person. Any special considerations, extraordinary protections or exemptions that Indians bring with them to the market-place introduce complications and would seem guaranteed to frighten off potential business partners.

[35]      Finally, it is of some significance that we are not dealing here with a contract to which agreement must be obtained from the parties thereto. The Regulations are subordinate legislation and it is within the authority of the Governor in Council at any time, should he consider it desirable in public interest, to amend the Regulations to confer a power of audit on the Executive Director and an obligation to maintain records for a specified period of time on an operator.

[36]      For these reasons, I think the Regulations confer a right of inspection of records in existence on the Executive Director but not a right to conduct an audit. The right of inspection suggests that an operator must maintain records for a reasonable period of time. To the extent records some twelve to eighteen years in the past are no longer in existence does not indicate to me that the applicant has acted in an unreasonable manner.

[37]      Having said all of this, it is not clear what the Executive Director is being denied by conducting an examination as opposed to an audit. I would have thought it a more practical approach for the Executive Director to conduct an examination and then, to the extent he is not satisfied, demand further information. For some reason, he did not take this approach.

     CONCLUSION

[38]      The applicant raised several other arguments such as breach of natural justice, acquiescence and estoppel. In view of my determination based on the wording of the Regulations, it is not necessary to address these arguments. The Minister's decision is quashed. In order to ensure that the Order that issues grants effective relief to the applicant, applicant's counsel shall arrange for a conference call between counsel for both parties and the Court in early January 1998..

[39]      The applicant has sought costs but the parties did not argue the matter of costs and in particular, whether special circumstances justify the awarding of costs in this case as required by Rule 1618 of the Federal Court Rules. If the applicant wishes to recover costs, counsel should inform the Court and the matter will be dealt with at the time of the conference call to settle the terms of the Order.

    

     ________________________

                                     Judge

OTTAWA, ONTARIO

DECEMBER 16, 1997

__________________

     ¹      Letters dated November 14, 1994 and December 16, 1994 from the Executive Director to the applicant.

     ²      In 1989, Imperial Oil Resources Limited under a share purchase agreement became successor entitled to the interest of TCRL. Imperial Oil Limited succeeded TCI (record, page 71).

     ³      The procedural provisions that are applicable are those in force when the appeal to the Minister was taken. That was section 57 of the Indian Oil and Gas Regulations , 1995. The substantive provisions were those applicable to the relevant period in respect of which the Minister required royalties to be recalculated, namely the Indian Oil and Gas Regulations, C.R.C., 1978, c. 963 as amended by SOR/81-340. This application of amended legislation is authorized by sections 43 and 44 of the Interpretation Act, R.S.C. 1985, c. I-21.

     ⁴      Apparently there was a further adjustment in price to reflect "whole volume price" but that is not relevant for purposes of this case.

     ⁵      The record (pages 420 to 422) indicates that the reasons given for the audit were to determine exactly what and with respect to which product the five percent marketing fee was charged and to prove that the royalty calculations were improper. These reasons, however, still do not explain why the Executive Director did not invoke subsection 21(7) of the Regulations.

     ⁶      Application Record, pages 423-424.