Pan Ocean Oil Limited v. Her Majesty the Queen, [1993] 2 CTC 236, 93 DTC 5330

Jerome, A.C.J.:—In this action, the plaintiff appeals from two reassessments dated July 5, 1978 issued by the defendant in respect of the plaintiff's 1974 and 1975 taxation years.

The facts in this case, although lengthy and complex, are not in dispute, and have been set out by the parties in an agreed statement of facts. Of critical importance in this appeal is the creation of the plaintiff company by way of amalgamation, pursuant to the corporate laws of the province of Alberta, as well as the history of the amalgamating companies of which the plaintiff is comprised.

In 1970 and early 1971, a series of transactions was entered into between two companies, United Bata Resources Ltd. ("Bata"), a British Columbia public company, and Pan Ocean Oil Corporation (“Pan Ocean”), an American company, for the ultimate purpose of achieving a merger of their operations. Both companies were engaged in the acquisition, exploration and development of interests in oil, gas and other minerals. The merger was realized in four steps.

First, the incorporation by Bata, of United Bata Resources (Canada) Ltd. occurred on December 3, 1970 under the laws of Alberta. On July 5, 1971, this company, which was at all material times engaged in oil and gas activities in Canada, changed its name to Pan Ocean Oil Ltd. ("Pool").

Second, Bata sold to Pool, under an agreement of conveyance, certain of its assets and specified petroleum and natural gas interests.

Third, Bata transferred by way of deed of gift to Pool, certain assets of Bata, namely, its rights, licences and privileges to explore for, drill or take in Canada petroleum, natural gas or other related hydrocarbons.

Fourth, Bata then transferred all the shares of Pool which it owned, to Pan Ocean (Alberta) Ltd. (“Alberta”), a wholly-owned subsidiary of Pan Ocean. In exchange, “Alberta” delivered to Bata shares of the common stock of Pan Ocean on the basis of one Pan Ocean share for three issued and outstanding Pool shares. As a result of the exchange of shares between Bata and "Alberta", Pool became wholly owned by “Alberta”. Subsequently, Bata was liquidated and its shares of Pan Ocean were distributed to the shareholders of Bata upon its winding up.

On October 5, 1971, Pool, together with others, purchased all of the shares of a group of companies known as the Dynamic Companies. These companies, which were principally engaged in oil and gas activities and mining exploration and development in Canada, had common management and head offices, interlocking directorates and interlocking shareholdings. The shares of the Dynamic Companies were listed for trading on Canadian stock exchanges.

Following the acquisition, Pan Ocean consolidated certain of its operations with those of the Dynamic Companies, again through a number of steps. Each Dynamic Corporation, pursuant to the laws of Alberta, incorporated a wholly- owned subsidiary corporation, referred to as the New Dynamic Subsidiaries. Each Dynamic company then sold certain of its assets to its respective New Dynamic Subsidiary, in exchange for the assumption of liabilities and a promissory note. All rights, licences and privileges to explore for, drill or take in Canada petroleum, natural gas or other hydrocarbons and mining claims and mining properties of each Dynamic Company, were transferred by way of gift to its respective New Dynamic Subsidiary. Each Dynamic Company then transferred all the shares of its New Dynamic Subsidiary and promissory notes receivable therefrom, to Pan Ocean in consideration of shares of Pan Ocean which were, on the winding up of each Dynamic Company, to be distributed to its shareholders other than Pool.-Pan Ocean designated its wholly-owned subsidiary, Pan Ocean Oil (Canada) Ltd. ("Canada"), as the company to hold the shares of the New Dynamic Subsidiaries. The New Dynamic Subsidiaries then conveyed to Pool all assets conveyed to them by their parent company, following which each New Dynamic Subsidiary was liquidated and dissolved.

In computing its income for its 1971 and 1972 taxation years, Pool deducted part of the exploration and drilling expenses that had been incurred by each of the Dynamic Companies before the end of the 1971 taxation year, and which had not been deducted by them or the New Dynamic Subsidiary Companies in the computation of their income for a previous taxation year.

On February 4, 1974 the plaintiff company, Pan Ocean Oil Ltd., was formed by the statutory amalgamation of Pool and "Alberta" pursuant to the provisions of the Companies Act (Alberta), R.S.A. 1970, c. 60 as amended. Section 87 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") applied to this amalgamation.

At the time of the amalgamation, the exploration and development expenses of the Dynamic Companies, which had been incurred by them prior to 1972, and which had not been deducted in computing their income for a previous taxation year, stood at $2,950,445. This was the amount which Pool, prior to its amalgamation with "Alberta", was entitled to deduct by virtue of the fact that it was a second successor corporation within the meaning of subsections 29(25) and 29(29) of the Income Tax Application Rules.

In computing its income for the’1974 and 1975 taxation years, the plaintiff sought to deduct the amounts of $560,022 and $629,972 respectively, as Canadian exploration and development expenses. These expenses had been incurred by the Dynamic Companies before the 1972 taxation year and had not been deducted by them in computing their income, nor had they been deducted by the New Dynamic Subsidiaries or by Pool from a previous taxation year.

By notices of reassessment dated July 5, 1978, the Minister of National Revenue reassessed the plaintiff for its 1974 and 1975 taxation years, disallowing the deductions sought for the following reasons:

(a) the transfer of properties from the Dynamic companies to the New Dynamic Subsidiaries was an acquisition within the meaning of subsection 83A(8a) of the Income Tax Act, in such a manner that each Dynamic Company became a "predecessor corporation" and each New Dynamic Subsidiary became a "successor corporation”, with the result that the drilling and exploration expenses of the Dynamic Companies flowed through to their respective New Dynamic Subsidiary.

(b) the transfer of properties by each New Dynamic Subsidiary to Pool in 1971 constituted an acquisition by Pool within the meaning of section 83A(8d) of the Act, so that each New Dynamic Subsidiary became a "first successor corporation" with the result that said drilling and exploration expenses of the Dynamic Companies flowed through to Pool.

(c) the amalgamation of Pool with "Alberta" constituted a new corporation. There is no specific authority for the succession of drilling and exploration expenses to a third corporation. The expenses in question therefore, being only deductible by a successor or second successor corporation, were lost.

The plaintiff filed notices of objection in respect of the reassessments, but by notice dated October 15, 1979, the Minister of National Revenue confirmed them. The plaintiff now appeals to this Court from the reassessments and seeks to have them vacated.

Issue

The issue now before the Court is whether, in computing its income for the 1974 and 1975 taxation years, the plaintiff is entitled to deduct the Canadian exploration and development expenses which were incurred by the Dynamic Companies before the 1972 taxation year, and which Pool, as a second successor corporation, was entitled to deduct; or, whether the amalgamation of Pool and "Alberta" resulted in the plaintiff being a third successor corporation and therefore disentitled to the deductions.

Plaintiff's argument

There are two aspects to the argument relied on by the plaintiff in support of its position that it is a second successor corporation within the meaning of the Income Tax Act and ITAR 29(29), and therefore entitled to the deductions.

First, it is submitted that the legal implications of a statutory amalgamation of two corporations is governed by the general common law and the corporate statute law under which the amalgamation took place. In this respect, the amalgamation of Pool and "Alberta" occurred pursuant to the provisions of The Companies Act (Alberta). Section 156 of that Act provides that an amalgamation does not result in a new corporation nor in the extinguishment of the amalgamating corporations. Rather, the result is simply two corporations continuing as one with all the assets, rights and liabilities of the amalgamating corporations continuing in the amalgamated corporation. The most important feature of the process, according to the plaintiff, is that there is no acquisition of property by the amalgamated corporation from the amalgamating corporations. In order to determine the history of ownership and acquisition of the assets of the amalgamated company, one simply looks to the companies of which it is now comprised.

Accordingly, the plaintiff's position is that the resource properties owned by it are the resource properties which were acquired by Pool as a second successor corporation. In the same manner that Pool was entitled to deduct the resource expenses, the plaintiff is also so entitled because Pool continues to exist in the plaintiff. The plaintiff owns the properties, not because it acquired them, but because Pool owned them. Therefore, they are properties which the plaintiff acquired from the New Dynamic Subsidiaries and which the New Dynamic Subsidiaries acquired from the Dynamic Companies. The result is that, by operation of the general law relating to amalgamations, the plaintiff is a principal business corporation that acquired from the New Dynamic Companies all of their resource properties. As such, it is entitled, as a second successor corporation, to deduct the resource expenses of the Dynamic Companies in accordance with the provisions of the Income Tax Act and ITAR 29(29).

Once the plaintiff's entitlement to make the deductions is established under corporate law, the next issue is whether there is any provision in the Income Tax Act which would negate or override the result obtained from the application of the general law pertaining to amalgamations.

It is not in dispute that section 87 of the Income Tax Act applies to the amalgamation of Pool and "Alberta". However, the plaintiff argues that, contrary to the defendant's submission, there is nothing in section 87, and more specifically in paragraph 87(2)(a), which deems there to be an acquisition by the amalgamated company of the resource properties owned by the amalgamating companies. The purpose of paragraph 87(2)(a), it is submitted, is not to designate an amalgamated company as a new company for all purposes of the Act. The section merely defines the commencement of the company's fiscal year to commence at the time of amalgamation. The conclusion is that the common law principle, that an amalgamation is a mere blending and continuation of two or more corporations into one, remains applicable and the plaintiff maintains the right which Pool had to deduct the expenses.

Defendant's argument

The defendant agrees that the result of the amalgamation under The Companies Act (Alberta) was to fuse Pool and “Alberta” so that both entities are continued in the plaintiff corporation. However, while that Act bestows upon the new corporation all the property, rights, privileges and franchises, and renders it subject to all the liabilities, contracts and debts of each of the amalgamating companies, it does not follow that the plaintiff, in computing its income, is entitled to deduct expenditures that were incurred by the amalgamating corporations. In order for the plaintiff to avail itself of any unused deduction of the predecessor corporation, there must be a specific provision in the Income Tax Act authorizing it to do so.

The defendant's position is based on sections 66 and 87 of the Act. Because section 87 applies to the amalgamation of Pool and “Alberta”, the plaintiff is entitled to the benefit of the provisions in the section which operate to vest in it the right to deduct, within the limits prescribed, the particular unused expenses of the amalgamating corporations.

The defendant also relies on subsections 66(6) to 66(9) of the Act, commonly referred to as "successor rules”, that govern the utilization of unused exploration and development expenses of one corporation by another. Pursuant to these provisions, a successor corporation and a second successor corporation are permitted to deduct, within the limits prescribed, the unused deductions of the predecessor corporation. However, if the same resource properties are transferred to a third or subsequent successor corporation, there is no provision in the Income Tax Act to permit that corporation to deduct the unused resource deductions. Therefore, to the extent that the predecessor's unused resource expenses have not been deducted by the first or second successor corporations, they are lost as deductions.

The unused deductions went from the Dynamic Companies to the New Dynamic Subsidiaries, thereby resulting in a first successoring of those deductions; and then from the New Dynamic Subsidiaries to Pool thereby resulting in a second successoring of those deductions. The defendant maintains that the amalgamation of Pool and “Alberta” constituted, for the purposes of the Income Tax Act, an acquisition of property. The result was a third successoring of the deductions sought by the plaintiff and for that reason it is not permitted to claim them in computing its income. The essence of the plaintiff's case, that the amalgamation of Pool and “Alberta” did not result in a "third acquisition” by the plaintiff of the particular resource properties and that the second successor status of Pool vests in the plaintiff is, according to the defendant, inconsistent with the purpose and language of the Income Tax Act.

Statutory provisions

The relevant statutory provisions are subsections 66(6) and (7), 87(1), (2) and (6) of the Income Tax Act:

66(6) Where a corporation (in this subsection referred to as the “ successor corporation") has, at any time after 1971, acquired by purchase or otherwise (including an acquisition as a result of an amalgamation described in subsection 87(1), from another corporation (in this subsection referred to as the "predecessor corporation") all or substantially all of the property of the predecessor corporation used by it in carrying on in Canada its business, there may be deducted by the successor corporation, in computing its income under this Part for a taxation year, the lesser of. . ..

66(7) Where a corporation (in this subsection referred to as the "second successor corporation") has, at any time after 1971, acquired by purchase or otherwise (including an acquisition as a result of an amalgamation described in subsection 87(1)), from another corporation (in this subsection referred to as the "first successor corporation") that was a successor corporation within the meaning of subsection (6), all or substantially all of the property of the first successor corporation used by it in carrying on in Canada its business, there may be deducted by the second successor corporation, in computing its income under this Part for a taxation year, the lesser of. . ..

87(1) In this section, an amalgamation means a merger of two or more corporations each of which was, immediately before the merger, a Canadian corporation (each of which corporations is referred to in this section as a“ predecessor corporation") to form one corporate entity (in this section referred to as the "new corporation") in such a manner that

(a) all of the property of the predecessor corporations immediately before the

merger becomes property of the new corporation by virtue of the merger,

(b) all of the liabilities of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger, and

(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger become shareholders of the new corporation by virtue of the merger,

otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of such property by the other corporation or as a result of the distribution of such property to the other corporation upon the winding-up of the corporation.

87(2) Where there has been an amalgamation of two or more corporations after 1971 the following rules apply:

(a) for the purposes of this Act, the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation;

87(6) Where there has been an amalgamation of two or more corporations after 1971 and the new corporation is a principal-business corporation within the meaning assigned by subsection 66(15), there may be deducted by the new corporation in computing its income for a taxation year the aggregate of the following amounts in respect of expenses incurred by the predecessor corporations, namely, in respect of each individual predecessor corporation, the amount that is the lesser of. . .

Analysis

Counsel for the Minister acknowledges that when two companies amalgamate, there is no acquisition in corporate law. Indeed, there is considerable jurisprudence to the effect that the amalgamated company is the fusion of two or more corporations with the resulting company regarded as a continuation of the predecessor corporations and not as a new corporation. This concept was perhaps best captured in the following language of former Chief Justice Dickson, as he then was, in The Queen v. Black and Decker Mfg. Co., [1975] 1 S.C.R. 411, 43 D.L.R. (3d) 393 at pages 420-21 (D.L.R. 399-400):

The word “amalgamation” is not a legal term and is not susceptible of exact definition : In re South African Supply and Cold Storage Company, [1904] 2 Ch. 268. The word is derived from mercantile usage and denotes, one might say, a legal means of achieving an economic end. The juridical nature of an amalgamation need not be determined by juridical criteria alone, to the exclusion of consideration of the purpose of amalgamation. Provision is made under the Canada Corporations Act [R.S.C. 1970, c. C-32, s. 137] and under the Acts of the various provinces whereby two or more companies incorporated under the governing Act may amalgamate and form one corporation. The purpose is economic: to build, to consolidate, perhaps to diversify, existing businesses; so that through union there will be enhanced strength. It is a joining of forces and resources in order to perform better in the economic field. If that be so, it would surely be paradoxical if that process were to involve death by suicide or the mysterious disappearance of those who sought security, strength and, above all, survival in that union. Also, one must recall that the amalgamating companies physically continue to exist in the sense that offices, warehouses, factories, corporate records and correspondence and documents are still there, and business goes on. In a physical sense an amalgamating business or company does not disappear although it may become part of a greater enterprise.

There are various ways in which companies can be put together. The assets of one or more existing companies may be sold to another existing company or to a company newly-incorporated, in exchange for cash or shares or other consideration. The consideration received may then be distributed to the shareholders of the companies whose assets have been sold, and these companies wound up and their charters surrendered. In this type of transaction a new company may be incorporated or an old company wound up but the legal position is clear. There is no fusion of corporate entities. Another form of merger occurs when an existing company or a newly-incorporated company acquires the shares of one or more existing companies which latter companies may then be retained as subsidiaries or wound up after their assets have been passed up to the parent company. Again there is no fusion. But in an amalgamation a different result is sought and different legal mechanics are adopted, usually for the express purpose of ensuring the continued existence of the constituent companies. The motivating factor may be the Income Tax Act or difficulties likely to arise in conveying assets if the merger were by asset or share purchase. But whatever the motive, the end result is to coalesce to create a homogeneous whole. The analogies of a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands have been suggested by others.

[Emphasis in original.]

In Stanward Corporation v. Denison Mines Ltd., [1966] 2 O.R. 585, 57 D.L.R. (2d) 674 (Ont. C.A.); aff'd [1966] S.C.R. 641, 56 W.W.R. 768, the Court considered the effect of an amalgamation under section 96 of the Corporations Act, 1953 (Ontario), $.O. 1953, c. 19. Kelly, J.A. writing for the Court stated at page 592 (D.L.R. 681):

Returning to the view that the amalgamated companies do not form a new company but continue to subsist as one, the conclusion that there is no acquisition is, if anything, more apparent. The language of section 96 is in my opinion unambiguous in providing that the two amalgamating companies shall continue as one company. While it may be difficult to comprehend the exact metamorphosis which takes place, it is within the Legislature’s competence to provide that what were hitherto two shall continue as one. Having done so it is apparent that there was no acquisition by a new entity; the corporate entities were continued in the amalgamated corporation. Acquisition connotes a beginning of title or possession in the acquirer, and since the corporate entities continued there was not acquisition by Can-Met of the Consolidated Denison group.

[Emphasis added.]

I therefore conclude that at corporate law this amalgamation transaction does not constitute an acquisition. The plaintiff's right to make these deductions should therefore survive unless specifically prohibited by subsections 66(6) and (7) and 87(1), (2) or (6) of the Income Tax Act.

Dealing first with section 87, in Guaranty Properties Ltd. v. Canada, [1990] 2 C.T.C. 94, 90 D.T.C. 6363 (F.C.A.), MacGuigan, J.A. made the following comments at page 101 (D.T.C. 6368):

Unfortunately for the respondent's analysis of paragraph 87(2)(a), it seems to me that the purpose Parliament had in mind was not to bring amalgamating corporations to an end but merely to give them a deemed year-end and the new corporation a deemed year-beginning. The words "shall be deemed to be a new corporation" are immediately followed by the clause "the first taxation year of which shall be deemed to have commenced at the time of the amalgamation.” This subsequent clause I find to be a defining or restrictive relative clause, which limits to the scope of the antecedent principal clause to the combined concept expressed by the two clauses. The amalgamated corporation is deemed new in that its first taxation year commences at the time of the amalgamation. To have created a non-defining or non-restrictive relative clause, the Parliamentary drafter would at the very least, have had to insert a comma after"a new corporation,” or otherwise vary the syntax. The principal effect of paragraph 87(2)(a) is that, for income tax purposes, the amalgamated corporation is deemed to be a new taxpayer with a fresh taxation year as of the date of amalgamation. In sum, nothing in the paragraph evinces an intention on the part of Parliament to deem that the amalgamating taxpayer ceased to exist, much less that it should be relieved of liability for its own income taxes prior to the date of amalgamation.

[Emphasis added.]

Similarly with subsections 66(6) and (7), I accept both arguments advanced by the plaintiff. First, since these successor rules apply only when there has been an acquisition of property, and since I have found that these transactions do not constitute an acquisition of property, they have no application here. Second, that acceptance of the defendant's submissions would give these subsections the effect of creating an acquisition where none exists. This can only be done by deeming provisions which must be set out in clear and unequivocal language. It is not necessary for me to make exhaustive reference to the many examples of such deeming provisions to emphasize the point that where Parliament wishes a transaction to have a certain consequence for tax purposes, it uses language that leaves no room for uncertainty. The failure to do so here supports my conclusion that Parliament did not intend to do so.

In summary, the successor rules in the Income Tax Act apply when there has been an acquisition of property. The amalgamation of Pool and "Alberta" to form the plaintiff company did not constitute an acquisition of property pursuant to the corporate laws of the province of Alberta. Neither is there anything in the Income Tax Act which would permit the conclusion that an acquisition of property is deemed to have occurred upon an amalgamation. Accordingly, the plaintiff is entitled to the same resource expense deductions as was Pool.

For these reasons, I would allow the plaintiff's appeal with costs and vacate the Minister's reassessments of July 5, 1978.

Appeal allowed.