Hutchinson,
J.:—Two
companies,
Precambrian
Shield
Resources
Limited
(the
plaintiff
or
Precambrian)
and
Dover
Park
Development
Corporation
Ltd.
(Dover
Park)
entered
into
a
conveyance
and
management
agreement
dated
May
14,
1985
(the
carve-out
agreement).
By
virtue
of
a
direction
of
the
Provincial
Treasurer
for
Alberta
dated
October
31,
1986
issued
by
the
Director
of
Audits
for
the
Alberta
Treasury
Corporate
Tax
Administration,
the
two
companies
were
deemed
to
be
associated
with
each
other
and
hence
could
only
claim
the
maximum
allowable
Alberta
Royalty
Tax
Credit
allocated
between
them.
The
effect
of
the
direction
was
to
reduce
the
amount
of
Alberta
Royalty
Tax
Credit
claimed
by
the
plaintiff
Precambrian
in
1985
by
approximately
$490,000
and
a
similar
reduction
in
1986.
Precambrian
filed
a
notice
of
objection
pursuant
to
the
Alberta
Corporate
Income
Tax
Act,
R.S.A.
1980,
ch.
A-17
(the
Act)
setting
out
the
reasons
for
the
objection
and
all
relevant
facts
stating
that
it
wished
to
appeal
immediately
to
the
court
and
waived
reconsideration
of
the
assessment
by
the
Provincial
Treasurer.
This
prompted
a
reply
to
the
notice
of
appeal
by
the
Provincial
Treasurer
pursuant
to
subsection
51(1)
of
the
Act.
Precambrian
then
filed
a
statement
of
particulars
and
the
Provincial
Treasurer
replied
to
the
statement
of
particulars.
All
of
the
foregoing
documents
constitute
the
pleadings
in
this
action.
The
powers
of
the
court
defined
as
the
Court
of
Queen's
Bench,
are
found
in
subsections
(3)
and
(4)
of
Section
52
of
the
Act
quoted
as
follows:
52
(3)
The
court
may
(a)
dismiss
the
appeal,
or
(b)
allow
the
appeal,
and
(i)
vacate
the
assessment,
(ii)
vary
the
assessment,
(iii)
restore
the
assessment,
or
(iv)
refer
the
assessment
back
to
the
Provincial
Treasurer
for
reconsideration
and
reassessment.
(4)
The
court
may,
in
delivering
judgment
on
an
appeal,
order
payment
or
repayment
of
tax,
a
refundable
tax
credit,
interest
and
penalties
or
costs
by
the
taxpayer
or
the
Provincial
Treasurer.
For
the
reasons
expressed
below
I
have
dismissed
the
plaintiff's
appeal.
The
main
issue
to
be
considered
is
whether
the
discretion
given
to
the
Provincial
Treasurer
pursuant
to
subsection
26.1(10)
of
the
Act
to
direct
that
the
two
corporations
shall
be
deemed
to
be
associated
with
each
other
was
properly
exercised.
This
issue
concerns
not
only
the
legitimacy
of
invoking
the
statutory
discretion
to
deem
two
companies
to
be
associated,
but
also
involves
a
consideration
of
the
way
in
which
the
discretion
came
to
be
exercised.
That
is
whether
the
Director
of
Audits
could
issue
the
direction
contemplated
by
subsection
26.1(10)
of
the
Act.
The
Royalty
Tax
Credit
program
came
into
effect
in
1982
and
was
a
royalty
reduction
credit
aimed
primarily
at
small
companies
producing
oil
and
gas
on
which
Alberta
crown
royalties
were
payable.
The
program
was
part
of
the
fallout
resulting
from
the
confrontation
which
had
taken
place
between
the
federal
government
and
the
western
oil
and
gas
producing
provinces
and
Alberta
in
particular
over
the
division
of
resource
revenues
resulting
from
the
increase
in
oil
and
gas
prices
due
to
the
activities
of
the
oil
producing
and
exporting
countries
(OPEC).
When
OPEC
began
to
dramatically
increase
the
price
of
oil
in
the
early
1970s,
the
Alberta
government
determined
to
increase
its
historical
share
of
crown
royalties
resulting
from
the
leasing
of
oil
and
gas
underlying
Alberta
crown
lands.
The
federal
government
enacted
legislation
which
disallowed
the
deduction
of
the
provincial
crown
royalties
when
calculating
federal
income
tax.
By
disallowing
the
provincial
crown
royalty
payments
when
calculating
federal
income
tax,
the
oil
and
gas
companies
became
taxable
on
"phantom
income"
that
is
income
that
they
had
never
received
having
paid
it
to
the
provincial
government
in
the
form
of
crown
royalties.
The
oil
and
gas
companies
became
pawns
in
the
confrontation
between
the
two
levels
of
government.
Oil
and
gas
activity
in
the
western
provinces
declined
dramatically
and
various
federal
and
provincial
incentive
programs
were
introduced
to
stimulate
the
oil
and
gas
industry.
In
1982
the
Alberta
government
introduced
a
Royalty
Tax
Credit,
which
was
limited
by
the
producer's
"maximum
allowable
credit"
and
the
"specified
percentage"
of
crown
royalty
which
could
be
used
in
each
year
in
order
to
calculate
the
amount
of
credit
that
could
be
gained
in
each
year.
In
the
year
in
question,
that
is
to
say
1985,
the
specified
percentage
was
50
per
cent
and
the
maximum
royalties
affected
were
$4
million
resulting
in
a
maximum
allowable
credit
of
$2
million.
The
existence
of
the
maximum
allowable
credit
led
some
oil
and
gas
producers
who
had
reached
or
were
about
to
reach
the
maximum
allowable
credit
to
try
to
find
means
to
expand
the
scope
of
Alberta
Royalty
Tax
Credits
by
splitting
off
production
to
small
producers
who
in
turn
could
claim
their
own
Alberta
Royalty
Tax
Credit
up
to
a
separate
maximum
allowable
credit.
The
multiplication
of
credits
was
met
by
the
Alberta
government
enacting
antiavoidance
rules
whereby
associated
companies
could
only
claim
or
share
one
maximum
allowable
credit
in
any
one
year
regardless
of
the
amount
of
production
in
any
one
of
the
associated
corporations.
The
Act
adopted
and
expanded
the
association
rules
developed
in
the
federal
act
to
prevent
multiplication
of
the
small
business
deduction.
Subsections
(9)
and
(10)
of
section
26.1
of
the
Act
provide
as
follows:
(9)
Notwithstanding
section
26(3),
if
the
Provincial
Treasurer
is
satisfied
that
(a)
the
separate
existence
of
2
or
more
corporations
in
a
taxation
year
is
not
solely
for
the
purpose
of
carrying
out
the
business
of
those
corporations
in
the
most
effective
manner,
and
(b)
1
of
the
main
reasons
for
the
separate
existence
of
the
corporations
in
that
year
is
to
increase
the
amount
of
royalty
tax
credit
that
would
otherwise
be
determined
under
this
Act,
the
Provincial
Treasurer
may
direct
that
all
of
the
corporations
shall
be
deemed
to
be
associated
with
each
other
for
the
purposes
of
this
Division.
(10)
Notwithstanding
section
26(3),
if
in
the
opinion
of
the
Provincial
Treasurer,
2
or
more
corporations
have
at
any
time
entered
into
1
or
more
sales,
exchanges,
declarations
of
trust
or
other
transactions
that
(a)
lack
of
any
substantial
business
purpose,
other
than
increasing
the
aggregate
amount
of
the
royalty
tax
credit
that
may
be
claimed,
or
(b)
artificially
increase
the
royalty
tax
credit
that
may
be
claimed,
the
Provincial
Treasurer
may
direct
that
all
of
those
corporations
shall
be
deemed
to
be
associated
with
each
other
for
the
purposes
of
this
Division.
We
are
here
dealing
with
the
effect
of
a
carve-out
agreement
entered
into
between
Precambrian
and
Dover
Park.
In
general
terms
a
carve-out
agreement
in
the
oil
and
gas
industry
is
an
agreement
whereby
a
producing
company
sells
or
conveys
an
interest
in
a
producing
property
to
a
third
party
on
terms
that,
given
the
receipt
by
the
purchaser
of
a
predetermined
sum
of
money
from
the
proceeds
of
production,
the
property
is
then
reconveyed
to
the
original
vendor.
The
interest
conveyed,
sometimes
called
a
“terminating
working
interest",
has
been
"carved-out"
of
the
vendor's
interest
but
only
for
that
period
of
time
which
is
required
in
order
to
match
an
agreed
upon
return
to
the
purchaser.
The
vendor's
incentive
is
to
obtain
immediate
cash
to
apply
to
its
own
corporate
objectives
and
the
purchaser
is
often
in
need
of
income
to
offset
tax
losses
and
to
take
advantage
of
tax
incentives
available
to
producers
of
oil
and
gas.
In
this
case
the
catalyst
in
the
formation
of
the
carve-out
agreement
was
a
firm
of
chartered
accountants
which
acted
for
each
of
Precambrian
and
Dover
Park.
Precambrian
is
a
producing
oil
and
gas
company
and
Dover
Park
had
large
losses
carried
over
from
previous
years.
Dover
Park
had
not
previously
been
in
the
oil
and
gas
business
in
any
capacity.
The
proposed
arrangement
would
work
this
way.
Dover
Park
would
borrow
$14
million
from
a
bank
to
finance
the
purchase
from
Precambrian
of
a
working
interest
in
several
producing
oil
and
gas
properties
in
Alberta.
When
the
net
proceeds
of
production
received
by
Dover
Park
from
the
oil
and
gas
interest
conveyed
to
it
by
Precambrian
equalled
the
“termination
amount",
all
but
a
small
percentage
of
the
working
interest
would
be
reconveyed
to
Precambrian
with
an
option
granted
to
Precambrian
to
repurchase
the
small
percentage
interest
remaining
for
a
specified
sum
(the
Option
Price).
This
latter
transaction
involved
a
recapture
of
certain
Canadian
oil
and
gas
property
expenses
with
which
we
are
not
concerned
here.
Precambrian
would
be
free
to
use
the
purchase
moneys
of
$14
million
for
whatever
purpose
it
deemed
most
appropriate,
as
for
example
the
redemption
of
certain
preferred
shares
which
had
to
be
redeemed
in
the
year
of
the
sale
and
Dover
Park
could
expect
to
receive
some
cash
flow
over
and
above
the
repayment
of
the
bank
loan
taken
out
to
finance
the
purchase.
The
calculation
of
the
net
proceeds
amount
and
the
termination
amount
are
quite
complex
but
in
essence
the
two
funds
represent
accumulating
amounts.
I
have
attached
as
Exhibit
A
to
my
judgment
a
further
explanation
of
the
calculations
which
has
been
approved
by
the
solicitors
for
each
party.
The
termination
amount
represents
the
initial
purchase
price
of
$14
million
plus
15
per
cent
of
Dover
Park’s
notional
taxable
income
plus
interest
at
prime
plus
3/4
per
cent
(the
amount
charged
to
Dover
Park
on
its
bank
loan
financing
the
purchase)
and
the
Option
Price
of
$75,000.
The
net
proceeds
amount
represents
the
proceeds
received
from
the
production
of
oil
and
gas
from
the
working
interest
conveyed
by
Precambrian
to
Dover
Park
less
operating
costs,
Federal
Petroleum
and
Gas
Revenue
Tax
(PGRT)
net
of
PGRT
tax
credits,
Alberta
crown
Royalty
net
of
Alberta
Royalty
Tax
Credits
and
management
costs.
Precambrian
purchased
a
portion
of
the
Dover
Park's
tax
losses
by
having
15
per
cent
of
Dover
Park's
notional
taxable
income
added
to
the
termination
amount
and
Precambrian
also
expanded
its
Alberta
Royalty
Tax
Credits
by
having
only
the
net
amount
of
Alberta
crown
royalty
deducted
from
the
net
proceeds
amount
thus
accelerating
the
time
when
the
two
funds
would
equal
one
another,
the
“termination
point"
at
which
time
the
working
interest
would
be
reconveyed
to
Precambrian
and
the
proceeds
of
production
would
then
return
to
it.
It
is
the
application
of
Alberta
Royalty
Tax
Credit
towards
the
recovery
of
the
working
interest
by
Precambrian
which
concerned
the
Alberta
Corporate
Tax
Administration
Department
because
the
formula
by
which
the
funds
were
created
had
the
effect
of
increasing
the
maximum
allowable
credit
available
to
Precambrian
beyond
the
$2
million
maximum
allowable
credit
by
employing
the
Alberta
Royalty
Tax
Credit
available
to
Dover
Park
as
a
deduction
from
Alberta
Crown
Royalty
when
calculating
the
net
proceeds
fund.
The
effect
of
these
so-called
"carve-out"
agreements
on
the
use
of
Alberta
Royalty
Tax
Credit
in
the
oil
and
gas
industry
concerned
the
Corporate
Tax
Administration
of
the
Alberta
Treasury
and
that
branch
of
the
Alberta
Treasury
began
a
review
of
such
agreements
including
the
conveyance
and
management
agreement
dated
May
14,
1985
entered
into
between
Precambrian
and
Dover
Park.
On
July
7,
1986
the
Alberta
Corporate
Tax
Administration
wrote
to
Precambrian
advising
that
the
department
"considers
that
it
may
be
appropriate
to
issue
a
direction
under
subsection
26.1(10)
of
the
Act
deeming
Precambrian
and
Dover
Park
to
be
associated
with
each
other
for
the
purpose
of
part
6
division
1
of
the
Act.
The
solicitors
for
Precambrian
responded
by
letter
dated
July
31,
1986
setting
out
why
Precambrian,
its
auditors
and
tax
advisors
and
themselves
believed
that
such
action
would
be
inappropriate.
There
followed
a
meeting
between
the
officers
of
the
department,
the
chartered
accountants
and
the
solicitors
for
Precambrian
on
August
18,
1986
where
the
issues
involved
were
again
canvassed
as
well
as
the
findings
of
the
audit
undertaken
by
the
Alberta
Corporate
Tax
Administration.
Again
the
solicitors
for
Precambrian
responded
to
the
matters
raised
in
the
meeting
by
letter
dated
August
22,
1986
addressed
to
Alberta
Corporate
Tax
Administration.
On
October
6,
1986
the
then
president
of
Precambrian
wrote
to
the
Provincial
Treasurer
for
Alberta
expressing
concern
over
the
proposed
action
by
his
department
and
the
effect
such
action
would
have
on
the
cash
flow
available
to
his
company
and
the
consequences
on
the
company's
exploration,
seismic
and
drilling
programs.
The
Provincial
Treasurer
responded
by
letter,
apparently
received
by
Precambrian
on
October
15,
1986
stating
as
follows:
Further
to
your
letter
of
October
6,
1986,
I
have
reviewed
these
matters
with
my
officials
and
am
informed
that
it
appears
we
have
a
basis
to
consider
deeming
Precambrian
Shield
Resources
Limited
and
Dover
Park
Development
Corporation
Ltd.
associated
for
purposes
of
sharing
the
maximum
Royalty
Tax
Credit
pursuant
to
section
26
of
the
Alberta
Corporate
Income
Tax
Act.
If
the
final
decision
is
to
exercise
the
discretion,
then
a
detailed
explanation
would
be
provided
outlining
the
rationale
that
was
used.
The
explanation
would
address
the
concerns
that
you
have
raised
in
your
correspondence
to
us.
As
you
may
be
aware,
Alberta
Treasury
has
long
been
concerned
with
the
multiplication
of
Royalty
Tax
Credits
as
evidenced
by
the
extensive
antimultiplication
provisions
in
the
legislation
and
the
recent
amendments
to
further
strengthen
the
Act
in
this
area.
Although
there
may
be
a
benefit
to
Alberta
through
the
additional
cash
flow
generated
by
the
Royalty
Tax
Credit,
the
Act
clearly
sets
out
limits
to
the
credits
that
are
available
to
corporations.
The
Royalty
Tax
Credit
was
not
intended
to
provide
the
type
of
financing
in
the
manner
as
contemplated
by
the
above-noted
transaction.
I
am
sorry
I
cannot
respond
more
favourably
at
this
time.
Maintaining
the
integrity
of
the
Royalty
Tax
Credit
program
is
of
paramount
importance
which
is
demonstrated
by
the
granting
of
discretionary
powers
to
the
Provincial
Treasurer
by
the
Legislature.
The
exercise
of
the
application
of
a
discretionary
provision
is
not
a
matter
that
is
taken
lightly
and
great
care
is
being
taken
to
ensure
that
all
information
submitted
by
the
parties
to
this
transaction
is
taken
into
consideration,
in
arriving
at
an
appropriate
decision.
The
officials
of
the
Alberta
Corporate
Tax
Administration
and
in
particular
Mr.
C.J.
Calarco,
Director
of
Audits,
continued
to
study
the
matter
and
in
October
of
1986
a
direction
was
prepared
for
the
signature
of
C.J.
Calarco
and
submitted
to
A.H.
Kalke,
the
Assistant
Deputy
Provincial
Treasurer
for
Revenue,
for
his
approval.
The
issuance
of
the
direction
was
approved
by
Mr.
Kalke
on
October
30,
1986
and
Mr.
Calarco
was
authorized
to
exercise
the
discretion
of
the
Provincial
Treasurer
as
provided
in
subsection
26.1(10)
of
the
Act
to
direct
that
Precambrian
and
Dover
Park
be
deemed
to
be
associated
with
each
other
for
the
purposes
of
division
1
of
part
6
of
the
Act
for
the
1985
taxation
year.
This
Mr.
Calarco
did
on
October
21,
1986
by
letter
entitled
“Direction”
addressed
to
Precambrian
summarizing
the
reasons
given
for
the
direction,
the
representations
made,
the
facts
found
by
the
department,
the
Provincial
Treasurer's
opinion
as
well
as
the
taxpayers'
submissions.
Some
of
the
pertinent
portions
of
the
direction
letter
are
quoted
as
follows:
In
April
1986,
Alberta
Treasury
officials
commenced
an
audit
of
the
Vendor
and
the
Purchaser
with
a
view
to
reviewing
royalty
tax
credits
claimed
by
the
Vendor
and
the
Purchaser
under
the
Act.
The
audit
was
carried
out
principally
at
the
premises
of
the
Vendor
and
Purchaser
in
Calgary,
with
the
participation
and
full
co-operation
of
the
Vendor
and
the
Purchaser.
It
included
a
review
of
the
carve-out
agreement
and
various
ancillary
and
supporting
agreements,
documents
and
opinions,
financial
projections
and
proposals
and
correspondence
relating
to
the
Carve-Out
Transactions,
and
interviews
with
officials
of
the
Vendor
and
the
Purchaser.
The
Vendor
and
the
Purchaser
were
made
aware
of
the
documentation
which
was
being
collected
and
reviewed
by
Alberta
Treasury,
and
the
parties
who
were
being
interviewed.
The
direction
letter
summarized
the
documents
and
evidence
that
had
been
relied
upon
as
well
as
the
facts
or
inferences
relating
to
the
carve-out
transactions
which
were
found
to
be
of
particular
relevance
in
connection
with
direction.
Portions
of
the
letter
entitled
“Provincial
Treasurer's
Opinion"
are
quoted
from
the
direction
letter
as
follows:
In
this
particular
case,
the
Provincial
Treasurer
is
of
the
opinion
that
the
Carve-
Out
Transactions
artificially
increase
the
royalty
tax
credit
that
may
be
claimed,
within
the
meaning
of
paragraph
26.1
(10)(b)
of
the
Act.
The
“business
purpose"
of
the
Carve-Out
Transactions,
as
may
be
inferred
from
the
documents
and
as
has
been
explained
to
Alberta
Treasury
officials,
appears
to
be
raising
funds
for
the
Vendor
at
the
lowest
after-tax
cost,
and
providing
the
Purchaser
with
secure
revenue
at
the
highest
after-tax
rate.
The
reduction
of
current
income
taxes
payable
by
the
Vendor
was
made
possible,
in
part,
by
the
ability
of
the
Purchaser
to
"shelter"
income
with
its
non-capital
losses.
Whether
or
not
reduction
of
income
tax
can
be
regarded
as
a
"business
purpose"
for
purposes
of
paragraph
26.1
(10)(a),
the
“financing”
motivation
has
been
accepted
by
the
Provincial
Treasurer
as
a
business
purpose.
However
that
purpose
is
relevant
in
considering
the
application
of
paragraph
26.1(10)(b).
The
Provincial
Treasurer
is
of
the
opinion
that
the
Carve-Out
Transactions
increase
the
royalty
tax
credit
artificially
because
such
an
increase
was
not
the
result
of
normal
commercial
transactions,
viewed
in
the
context
of
Division
1
of
Part
6
of
the
Act.
The
scheme
of
the
royalty
tax
credit
suggests
that
the
credit
may
be
increased
where
there
is
additional
business
activity
which
creates
additional
Alberta
crown
royalty.
That
is
not
the
case
in
the
Carve-Out
Transactions.
As
well,
aside
from
the
rules
relating
to
restricted
resource
properties,
there
may
be
additional
royalty
tax
credits
where
a
producing
resource
property
is
sold
outright
in
a
anormal
commercial
transaction
to
another
corporation
with
which
the
seller
is
not
associated.
In
such
a
purchase
and
sale
of
resource
properties,
resulting
in
an
acceptable
and
normal
increase
in
royalty
tax
credits
which
would
not
be
regarded
as
“artificial”,
the
purchaser
would
generally
assume
the
economic
risks
relating
to
production
and
prices,
and
be
seen
to
be
embarking
upon
a
lasting
business
undertaking.
Such
a
purchaser
would
derive
benefit
from
the
royalty
tax
credit
as
an
effective
reduction
or
rebate
of
his
Alberta
crown
royalties.
While
the
Provincial
Treasurer
has
not
concluded
that
the
Carve-Out
Transactions
were
legally
ineffec-
tive,
or
that
they
constituted
a
"sham",
in
the
circumstances
the
case
is
an
appropriate
one
for
invoking
the
discretionary
provisions
of
section
26.1(10).
While
the
legal
result
of
the
Carve-Out
Agreement
may
be
to
"grant
and
convey”
an
item
of
property,
in
particular
the
terminating
Term
Interest,
the
overall
economic
result
and
purpose
of
the
transactions
is
to
enable
the
Vendor
to
obtain
temporary
funds
at
an
attractive
after-tax
rate,
and
to
enable
the
Purchaser
to
earn
income
for
a
determinable
period
at
an
attractive
rate.
This
is
confirmed
by
several
aspects
of
the
Carve-Out
Agreement
referred
to
above.
Alberta
royalty
tax
credit
may
be
increased
where
there
is
additional
Alberta
crown
royalty,
or
where
there
is
a
normal
commercial
sale
of
property
to
a
purchaser
producing
lasting
economic
results
and
where
the
business
purposes
of
the
transaction
may
be
said
to
be
an
outright
sale
of
resource
properties
with
all
the
usual
commercial
consequences
as
to
risk
and
reward.
The
Provincial
Treasurer
is
of
the
opinion
that
one
result
of
the
Carve-Out
Transactions
is
to
synthesize
an
abnormal
or
artificial
amount
of
royalty
tax
credit,
having
regard
to
the
substance
and
effect
of
the
Carve-Out
Transactions,
the
scheme
of
Division
1
of
Part
6
of
the
Act
and
the
object
and
spirit
of
these
statutory
provisions
and
the
discretionary
requirements
in
section
26.1(10).
The
direction
letter
then
reviewed
the
taxpayers'
submissions
and
purported
to
answer
each
one.
The
testimony
of
Theodore
Henry
Renner
who
was
president
and
chief
executive
officer
of
Precambrian
in
1985
was
to
the
effect
that
Alberta
Royalty
Tax
Credit
did
not
play
a
role
as
to
whether
it
would
continue
negotiations
with
Dover
Park.
In
using
the
tax
pools
of
Dover
Park
it
was
understood
that
there
were
possible
ramifications
but
there
was
no
comfort
given
that
the
use
of
tax
pools
would
be
there.
Dover
Park
would
be
assuming
all
production
risks
and
pricing
risks
and
Precambrian
gave
no
assurances
or
guarantees
relating
to
Dover
Park's
bank
loans.
His
primary
concern
with
Dover
Park
lay
in
the
viability
of
the
company.
The
prospect
of
having
to
deal
with
a
receiver
disturbed
him.
He
said
that
this
concern
proved
to
be
justified
as
events
unfolded
when
Dover
Park
went
into
receivership
in
1986.
Renner
confirmed
this
was
the
only
carve-out
transaction
in
which
Precambrian
had
been
involved
and
that
the
result
of
the
carve-out
was
to
postpone
the
time
when
Precambrian
would
find
itself
in
a
taxable
position.
Renner
also
acknowledged
that
Precambrian
would
be
paying
something
for
the
utilization
of
Dover
Park's
tax
pool.
Royalty
Tax
Credit
was
a
factor
but
there
was
no
comfort
that
it
would
be
there.
The
whole
concept
was
in
jeopardy
having
regard
to
the
possibility
of
legislative
changes.
James
Kenneth
Wilson
was
the
controller
of
Precambrian
in
1985
and
is
now
the
vice-president
of
finance.
In
large
measure
he
was
responsible
for
negotiating
the
carve-out
agreement
following
the
introduction
of
the
concept
by
the
accountants
and
the
identification
of
Dover
Park
as
a
potential
party
to
the
agreement.
He
together
with
Paul
King,
the
then
vice-president
of
finance,
chose
the
properties
to
be
conveyed
to
Dover
Park
and
Wilson
was
aware
of
the
letters
from
the
accountants
outlining
the
transaction
and
the
opinions
expressed
in
the
letters.
Wilson
confirmed
that
the
properties
to
be
conveyed
to
Dover
Park
were
not
restricted
properties.
Dover
Park
did
not
then
have
any
restricted
properties.
He
testified
that
there
were
twofold
reasons
for
the
transaction,
the
first
to
provide
Precambrian
with
funds
to
assist
in
the
redemption
of
$20
million
issue
of
preferred
shares
and
secondly
to
assist
in
a
large
corporate
exploration
program
involving
drilling,
seismic
exploration,
land
acquisition
and
expansion
of
production
facilities.
The
carve-out
arrangement
was
a
more
tax
effective
method
of
raising
capital.
Although
originally
interested,
the
Continental
Bank
declined
to
finance
the
transaction
for
Dover
Park
because
it
felt
that
[there]
were
too
few
producing
properties
to
support
the
loan
and
that
the
risk
was
too
high.
Precambrian's
bank
was
substituted
and
the
$50,000
banker's
fee
was
advanced
to
Dover
park
by
Precambrian
and
repaid
out
of
the
first
month's
production.
Wilson
testified
that
even
without
the
Alberta
Royalty
Tax
Credit
being
credited
to
Precambrian
as
a
result
of
the
transaction,
Precambrian
would
have
entered
into
the
transaction
in
any
event.
He
confirmed
that
Dover
Park
assumed
all
of
the
risks
of
production
being
shut
down
as
well
as
the
risks
of
prorationing
and
price
reduction.
At
that
time
oil
prices
were
$35
per
barrel
compared
to
subsequent
prices
of
one-half
of
that
in
1986
resulting
in
the
deal
being
projected
to
last
for
a
much
longer
term.
Precambrian
remained
as
manager
of
the
properties
because
it
had
the
experience
whereas
Dover
Park
did
not
and
the
terms
of
the
operating
agreement
in
which
a
third
company
was
named
as
operator
would
not
permit
recognition
of
Dover
Park.
Wilson
confirmed
on
cross-examination
that
if
the
Alberta
Royalty
Tax
Credit
payable
to
Dover
Park
and
which
accelerated
the
pay-out
to
Precambrian
were
added
to
the
Alberta
Royalty
Tax
Credit
received
by
Precambrian,
then
the
combined
total
would
exceed
Precambrian's
maximum
allowable
credit
of
$2
million.
He
also
confirmed
that
the
disposition
of
Precambrian's
interest
in
an
undivided
interest
in
the
producing
properties
to
Dover
Park
was
made
for
legal
and
tax
purposes
that
had
financing
ramifications
and
that
the
risks
to
Dover
Park
were
not
onerous.
The
only
other
witness,
Charles
Joseph
Calarco,
was
called
on
behalf
of
the
Province
of
Alberta.
He
was
the
Director
of
Audits
in
1985
and
as
the
name
implies
he
was
responsible
for
the
Administration
of
Audits
under
the
Alberta
Corporate
Income
Tax
Act.
Audits
are
carried
out
on
a
random
basis
and
on
a
representative
number
[of]
organizations
as
well
as
special
audits
on
new
companies
or
a
number
of
companies
where
there
was
a
claim
for
particular
benefit
under
the
Act.
In
the
summer
of
1985,
carve-out
transactions
were
under
review
because
of
a
significant
increase
in
royalty
tax
credits
being
claimed.
The
effect
of
carve-out
agreements
on
corporate
income
tax
had
previously
been
reviewed
and
legislative
amendments
put
in
place
thereafter.
Dover
Park
was
identified
as
a
first
time
claimant
for
Royalty
Tax
Credits
and
upon
investigation
the
source
of
its
producing
interest
was
given
as
Precambrian.
The
review
by
the
Calgary
office
of
the
Audit
Department
found
its
way
to
the
Director
of
Audits
and
was
discussed
with
the
Director
of
Interpretation
and
Appeal,
counsel
and
subordinate
staff
and
the
audit
report
and
supporting
documentation
was
sent
to
J.R.
Allen,
the
Director
of
Interpretation
and
Appeals.
The
transmittal
letter
from
Calarco
to
Allen
dated
June
18,
1986
states
in
part
as
follows:
There
is
no
evidence
to
suggest
that
this
transaction
is
incomplete
or
otherwise
a
sham.
The
parties
apparently
attempted
to
structure
the
transaction
in
accordance
with
the
transaction
that
was
at
issue
in
the
Alberta
and
Southern
case.
The
result
was
that
an
opinion
was
given
that
the
transaction
between
Precambrian
and
Dover
Park
could
be
regarded
as
artificially
increasing
royalty
tax
credit
and
it
was
decided
to
hear
from
the
taxpayers
as
mentioned
previously.
The
sources
of
the
department's
information
were
revealed
to
Precambrian
and
copies
of
the
interview
notes
with
Dover
Park
were
requested
and
subsequently
sent
to
the
solicitors
for
Precambrian
following
clearance
from
Dover
Park
but
after
the
direction
letter
had
issued.
Mr.
Calarco
assisted
in
preparing
the
letter
from
the
Provincial
Treasurer
to
Mr.
Renner
in
response
to
the
letter
written
by
Mr.
Renner
to
Mr.
Johnston.
After
additional
consultation
within
the
department,
Mr.
Calarco
formed
the
opinion
that
royalty
tax
credit
had
been
artificially
increased
as
a
result
of
the
conveyancing
and
management
agreement
and
he
drafted
a
direction
letter
for
review
by
counsel.
A
resulting
clean
draft
was
then
passed
on
to
the
Assistant
Deputy
Provincial
Treasurer
for
Revenue,
A.H.
Kalke,
with
a
request
for
permission
to
release
the
letter.
This
occurred
and
the
letter
was
sent
to
Precambrian
and
Dover
Park.
Mr.
Calarco
had
the
administrative
authorization
from
the
Provincial
Treasurer
under
the
Financial
Administration
Act
to
exercise
the
discretion
given
to
the
Provincial
Treasurer
under
subsection
26.1(10)
subject
only
to
the
restriction
of
obtaining
any
direction
that
may
be
given
by
the
Assistant
Deputy
Provincial
Treasurer,
Mr.
Kalke.
On
cross-examination
Mr.
Calarco
testified
that
carve-out
agreements
were
"grandfathered"
for
income
tax
purposes
in
respect
of
property
acquired
before
July
20,
1985
where
contractual
arrangements
were
in
place
that
could
not
be
terminated
by
October
31,
1985.
He
stated
that
these
provisions
did
not
supplant
anti-avoidance
legislation
and
in
particular
section
13
of
the
Act
continued
to
apply
federal
tax
legislation
to
artificial
transactions
as
well
as
the
specific
provisions
of
the
Act
relating
to
Alberta
Royalty
Tax
Credits.
Before
Precambrian
entered
into
the
carve-out
agreement,
it
attempted
on
several
occasions
to
gain
reassurance
from
its
accountants
that
the
transaction
was
free
from
the
risk
of
loss
of
any
portion
of
Alberta
Royalty
Tax
Credits.
Such
assurance
was
not
forthcoming.
Plaintiffs
Argument
The
plaintiff
advises
that
it
is
not
pursuing
its
objection
that
certain
of
the
documents
obtained
or
compiled
by
the
Alberta
Corporate
Income
Tax
Administration
were
not
made
available
to
the
plaintiff
until
after
the
direction
had
issued.
These
documents
were
in
the
form
of
notes
of
interviews
which
took
place
between
representatives
of
the
Alberta
Corporate
Tax
and
Finance
Administration
and
Dover
Park
officials
whose
permission
to
circulate
the
notes
was
sought
before
they
were
distributed.
Neither
is
the
plaintiff
pursuing
its
initial
objection
wherein
it
challenged
the
delegation
of
authority
from
the
Provincial
Treasurer
to
Mr.
Calarco,
to
issue
the
direction
deeming
Precambrian
and
Dover
Park
to
be
associated
for
the
purpose
of
calculating
maximum
Alberta
Royalty
Tax
Credits.
The
plaintiff
continues
to
challenge
the
validity
of
the
direction
letter
on
two
grounds,
firstly
on
the
ground
that
the
discretion
given
to
the
Provincial
Treasurer
pursuant
to
paragraph
26.1(10)(b)
to
direct
that
Precambrian
and
Dover
Park
shall
be
deemed
to
be
associated
with
each
other
was
improperly
or
illegally
exercised
and
secondly,
that
the
decision
was
effectively
made
by
Mr.
Kalke
who
was
someone
other
than
the
person
who
heard
the
submissions
and
who
received
the
written
submissions,
that
is
to
say
Mr.
Calarco,
Director
of
Audits.
In
pursuing
its
arguments
the
plaintiff
has
assumed
that
the
defendant
province
has
conceded
that
the
direction
was
not
made
pursuant
to
paragraph
26.1(10)(a)
of
the
Act
where
the
Provincial
Treasurer
must
form
an
opinion
that
two
or
more
corporations
have
at
any
time
entered
into
one
or
more
sales,
exchanges,
declarations
of
trust
or
other
transactions
that
lack
any
substantial
business
purpose,
other
than
increasing
the
aggregate
amount
of
the
royalty
tax
credit
that
may
be
claimed.
Accordingly
the
plaintiff
focuses
its
attention
on
paragraph
(b)
of
the
above
section
where
the
Provincial
Treasurer
may
direct
that
corporations
shall
be
deemed
to
be
associated
where
he
forms
the
opinion
that
two
or
more
corporations
have
at
any
time
entered
into
one
or
more
sales,
exchanges,
declarations
of
trust
of
other
transactions
that
artificially
increase
the
royalty
tax
credit
that
may
be
claimed.
The
section
of
the
direction
letter
previously
quoted
makes
that
clear
but
I
note
that
the
direction
letter
does
not
concede
that
the
financing
motivation
which
meets
the
"business
purpose"
test
in
paragraph
26.1(10)(a)
is
not
relevant
in
considering
the
application
of
paragraph
26.1(10)(b).
The
argument
of
the
plaintiff
concentrates
upon
the
relatively
small
portion
of
the
direction
letter
dated
August
31,
1986
already
quoted
in
facts
set
out
above.
The
plaintiff
argues
that
a
claim
for
Alberta
Royalty
Tax
Credit
does
not
depend
upon
the
quality
of
the
transaction
for
its
entitlement
but
rather
Alberta
Royalty
Tax
Credit
does
depend
for
its
entitlement
upon
whether
or
not
crown
royalty
has
been
paid
and
whether
the
taxpayer
is
unable
to
deduct
the
crown
royalty
under
the
Income
Tax
Act.
It
says
that
both
of
such
requirements
have
been
met
here.
The
plaintiff
contends
that
the
Provincial
Treasurer's
opinion
when
interpreting
the
scheme
of
the
Act
is
dependent
upon
several
erroneous
assumptions
which
are
not
supported
by
the
wording
of
the
Act.
The
first
is
that
there
is
a
need
for
additional
business
activity
which
creates
additional
Alberta
crown
royalty.
The
plaintiff
argues
that
the
scheme
or
purpose
of
the
Act
is
to
reduce
the
royalty
burden
for
those
charged
with
the
responsibility
of
paying
crown
royalties
in
order
to
improve
the
financial
position
of
such
parties
and
not
to
increase
the
amount
of
royalties
being
received
by
the
province
by
creating
additional
business
activity.
The
plaintiff
says
that
there
is
no
linkage
contained
within
the
Act
between
the
reduction
of
the
burden
of
crown
royalties
and
activity
creating
more
crown
royalty.
Alberta
Royalty
Tax
Credit
is
not
a
drilling
incentive
program.
No
strings
are
attached
to
the
payment
of
Alberta
crown
royalty
credit.
Secondly
the
plaintiff
questions
the
Provincial
Treasurer's
assumption
that
additional
royalty
tax
credits
are
only
available
where
a
producing
resource
property
is
sold
outright
in
a
normal
commercial
transaction
where
the
purchaser
would
generally
assume
the
economic
risks
related
to
production
and
prices
and
where
the
purchaser
would
be
seen
to
be
embarking
upon
a
lasting
business
undertaking.
The
plaintiff
says
that
such
an
assumption
is
absent
from
the
plain
wording
of
the
Act
and
in
any
event
argues
that
here
the
production
interests
conveyed
are
not
abnormal
and
in
any
event
such
interests
need
not
be
of
a
permanent
or
lasting
effect
in
order
to
be
normal.
The
Act
does
not
differentiate
between
types
of
petroleum
interests
and
to
infer
otherwise
would
result
in
an
undue
reading
down
of
the
Alberta
Royalty
Tax
Credit
entitlement.
The
plaintiff
points
out
that
as
of
May
1985
restricted
resource
properties
were
defined
as
“any
right
or
interest
of
any
nature.”
Paragraph
26(1)(f)
defines
restricted
resource
properties
as
follows:
(f)
.
.
.
any
right
or
interest
of
any
nature
whatsoever
or
howsoever
described
or
part
thereof
in
any
production
from
a
petroleum
or
natural
gas
well
in
Alberta
with
a
finished
drilling
date
on
or
before
August
24,
1982
where
the
right
or
interest
or
part
thereof
was
owned
by
an
above-limit
corporation
..
.
.
Nowhere
does
the
Act
say
that
a
disposition
of
property
by
an
above-limit
corporation
would
result
in
no
royalty
tax
credit
except
as
it
relates
to
the
concept
of
a
restricted
resource
property
and
that
restriction
relates
to
any
right
or
interest
of
any
nature
whatsoever
or
howsoever
described
tied
to
a
drilling
date
of
on
or
before
August
24,
1982.
Such
an
interest
will
not
attract
a
tax
credit.
The
plaintiff
says
that
these
definitions
are
useful
in
interpreting
the
scope
of
the
Act
on
this
point.
An
above-limit
corporation
is
defined
in
paragraph
26(1)(a)
of
the
Act
to
mean:
(a)
“above-limit
corporation"
means
a
corporation
that
(i)
would,
if
its
taxation
year
for
the
purposes
of
computing
its
income
under
the
federal
Act
and
this
Act
had
been
the
12
month
period
ending
August
31,
1982,
have
had
Alberta
crown
royalty
for
that
taxation
year
in
excess
of
$5
333
333.
(ii)
was
associated
with
one
or
more
corporations
on
August
24,
1982
pursuant
to
subsection
(1.6)
and
the
corporation
and
all
of
the
corporations
with
which
it
was
associated
at
that
time
would,
if
the
taxation
year
of
the
corporation
and
each
of
the
corporations
with
which
it
was
associated
at
that
time
for
the
purposes
of
computing
their
income
under
the
federal
Act
and
this
Act
had
been
the
12
month
period
ending
August
31,
1982,
have
had
Alberta
crown
royalty
for
that
taxation
year
that
would
in
aggregate
exceed
$5
333
333,
or
(iii)
is
deemed
to
be
an
above-limit
corporation
by
the
Provincial
Treasurer
pursuant
to
subsection
(1.3);
By
casting
such
a
very
wide
net
in
an
attempt
to
exclude
interests
having
a
drilling
date
on
or
before
August
24,
1982,
the
general
scope
of
the
Act
would
appear
to
include
the
same
wide
interests
after
that
date
under
the
general
entitlement
provisions
contained
in
section
26.1
because
all
of
such
interests,
whether
held
before
or
after
August
24,
1982,
fell
within
the
general
scope
of
the
Act.
The
plaintiff
submits
that
the
standard
of
review
concerning
the
Provincial
Treasurer's
exercise
of
discretion
can
be
found
in
certain
cases
interpreting
sections
of
the
Income
Tax
Act
dealing
with
the
exercise
of
a
discretion
by
the
Minister
concerning
expenses
or
allowances.
In
such
cases
the
Minister's
discretion
has
been
held
to
be
reviewable
where
it
was
not
exercised
legally
or
where
relevant
considerations
are
not
taken
into
account.
Even
where
the
discretion
can
be
exercised
in
a
subjective
manner,
the
person
exercising
the
discretion
remains
under
a
number
of
constraints.
First
of
all
it
is
necessary
to
construe
the
Act
in
order
to
determine
the
policy
and
objectives
of
the
legislation.
Unlawful
behaviour
on
the
part
of
the
person
exercising
the
discretion
can
be
constituted
by
outright
refusal
to
consider
the
relevant
matters,
misdirecting
himself
on
a
point
of
law,
taking
into
account
some
wholly
irrelevant
or
extraneous
consideration
or
by
wholly
omitting
to
take
into
account
a
relevant
consideration.
We
are
here
referred
to
Pad
field
et
al.
v.
The
Minister
of
Agriculture,
Fisheries
and
Food
et
al.,
[1968]
A.C.,
997
(H.L.(E.))
as
well
as
Anisminic
Ltd.
v.
Foreign
Compensation
Commission,
[1969]
2
A.C.,
147
(H.L.)
and
the
list
of
jurisdictional
errors
found
there
although
such
list
was
held
not
to
be
exhaustive.
In
the
Secretary
of
State
for
Education
and
Science
v.
Thameside
Metropolitan
Borough
Council,
[1977]
A.C.,
1014
(H.L.(E.))
we
are
reminded
of
the
following
statement
made
by
Lord
Diplock
at
pages
1064
and
1065:
It
was
for
the
Secretary
of
State
to
decide
that.
It
is
not
for
any
court
of
law
to
substitute
its
own
opinion
for
his:
but
it
is
for
a
court
of
law
to
determine
whether
it
has
been
established
that
in
reaching
his
decision
unfavourable
to
the
council
he
had
directed
himself
properly
in
law
and
had
in
consequence
taken
into
consideration
the
matters
which
upon
the
true
construction
of
the
Act
he
ought
to
have
considered
and
excluded
from
his
consideration
matters
that
were
irrelevant
to
what
he
had
to
consider:
Counsel
for
the
plaintiff
here
proposes
that
there
were
errors
made
in
the
direction
letter
which
were
fundamental
and
which
minsconstrued
the
object
and
scope
of
the
Act
by
linking
royalty
tax
credits
to
additional
activity
resulting
in
the
creation
of
more
crown
royalty.
He
argues
that
this
misdirection
constituted
an
error
in
law
being
an
irrelevant
consideration.
Further
it
is
stated
on
the
plaintiff's
behalf
that
the
standard
of
normalcy
attached
to
drilling
activities
is
an
unnecessary
restriction
on
the
scope
of
the
Act,
that
is
to
say
that
only
certain
types
of
interests
with
certain
characteristics
attract
royalty
tax
credits.
He
says
that
this
also
constituted
misdirection,
an
irrelevant
consideration
and
a
misconstruction
of
the
scope
of
the
Act
resulting
in
an
error
of
law.
The
suggestion
that
Dover
Park's
entitlement
to
royalty
tax
credits
went
to
the
benefit
of
Precambrian
is
said
to
be
a
preoccupation
of
the
direction
letter
and
the
plaintiff's
counsel
contends
that
such
was
an
irrelevant
consideration
and
an
error
of
law.
It
is
argued
that
the
transaction
was
a
bona
fide
sale
of
property
and
not
a
transaction
or
sale
that
artificially
increased
any
royalty
tax
credit
that
may
be
claimed
just
because
royalty
tax
credit
fell
out
of
the
transaction.
Counsel
for
the
plaintiff
stresses
that
this
is
only
incidental
and
that
fact
is
that
both
Dover
Park
and
Precambrian
were
obliged
to
pay
crown
royalty
and
accordingly
have
a
claim
for
royalty
tax
credits
pursuant
to
the
Act.
Alternatively
the
plaintiff
proposes
that
the
discretion
to
be
exercised
by
the
Provincial
Treasurer
is
not
entirely
subjective
in
nature
because
the
discretion
is
modified
by
the
words
“artificially
increase
the
royalty
tax
credit
that
may
be
claimed”
(26.1(10)(b)).
This
introduces
the
concept
of
artificiality.
The
word
“artificially”
has
received
judicial
consideration
when
interpreting
section
245
of
the
Federal
Income
Tax
Act
(formerly
s.
137(1)).
The
plaintiff
points
out
that
apart
from
paragraph
245(2)(b)
of
the
federal
Act,
section
245
of
the
federal
Act
applies
because
it
has
been
incorporated
into
the
Act
by
subsection
13(1)
of
the
Act.
Subsection
245(1)
of
the
federal
Act
is
quoted
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
income.
Carrying
on
with
the
argument
that
the
exercise
of
the
Provincial
Treasurer's
discretion
was
not
entirely
subjective,
the
plaintiff
said
that
the
ordinary
meaning
of
artificially
is
"not
in
accordance
with
normalcy,
bizarre
or
contrived.”
The
court
is
asked
to
focus
on
the
actual
transaction
between
Precambrian
and
Dover
Park.
According
to
the
direction
letter
itself,
the
transaction
was
not
constituted
as
a
sham.
It
is
argued
that
none
of
the
above
definitions
can
apply
to
the
transaction.
It
is
further
suggested
that
it
is
up
to
the
court
to
define
the
word
“artificially”
because
such
word
sets
the
parameters
on
the
exercise
of
the
discretion.
The
case
of
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
C.T.C.
294;
84
D.T.C.
6305
(S.C.C.)
is
cited
by
the
plaintiff
as
an
example
of
the
strict
requirements
laid
down
by
the
Supreme
Court
of
Canada
in
order
to
find
artificiality.
There
a
business
purpose
test
was
applied
to
subsection
137(1)
now
245(1)
of
the
Income
Tax
Act.
In
that
case
Mr.
Justice
Estey
said
at
page
316
(D.T.C.
6323):
Where
the
facts
reveal
no
bona
fide
business
purpose
of
the
transaction,
section
137
may
be
found
to
be
applicable
depending
upon
all
the
circumstances
of
the
case.
It
has
no
application
here.
In
1986
the
definition
of
restricted
resource
property
was
amended
to
include
any
production
properties
sold
by
a
restricted
company
(a
company
with
royalties
in
excess
of
$4,000,000)
after
the
amendment
date.
If
the
1986
amendment
had
been
included
in
the
1983
definition
of
restricted
resource
property
there
would
have
been
no
question
as
to
its
effect
on
the
carve-out
agreement
entered
into
in
1985,
that
is
to
say
once
Precambrian
had
reached
its
limit
then
there
would
have
been
no
question
as
to
the
effect
of
the
restriction
placed
on
the
ability
of
a
purchaser
of
a
resource
property
to
claim
Royalty
Tax
Credit.
Counsel
for
the
plaintiff
suggests
that
the
defendant
had
the
choice
of
including
such
a
broad
definition
of
restricted
resource
property
in
the
1983
amendments
to
the
Act.
In
Lloyds
Bank
Canada
v.
International
Warranty
Company
Limited,
[1989]
1
C.T.C.
401
a
provision
of
the
Income
Tax
Act
was
under
consideration
which
purported
to
give
the
Minister
priority
over
secured
creditors.
The
Court
of
Appeal
held
that
it
was
a
presumption
of
construction
in
dealing
with
Acts
which
interfere
with
rights
that
the
words
should
be
plain
and
unambiguous
in
taking
away
or
interfering
with
an
existing
right
of
a
taxpayer.
The
court
noted
that
an
unproclaimed
amendment
in
the
Income
Tax
Act
would
have
made
the
Crown's
case
impregnable.
It
was
the
Crown's
statute
and
the
Crown
could
have
proclaimed
the
amendment
but
it
did
not.
In
the
present
case
it
is
argued
that
the
Provincial
Treasurer
has
ascribed
a
scheme
or
interpretation
concerning
the
scope
of
the
Act
as
it
was
in
1985
in
an
attempt
to
invoke
his
opinion
that
a
transaction
was
artificial
in
the
absence
of
plain
words
to
that
effect.
The
plaintiff
says
that
the
specific
restriction
in
the
1983
amendment
to
the
Act
belies
such
a
wide
interpretation
because
the
1986
wording
was
available
to
the
Provincial
Treasurer
at
the
time
of
the
1983
amendments
which
only
prohibited
multiplication
transactions
on
those
properties
which
were
drilled
or
had
finished
drilling
on
or
before
August
24,
1982.
Multiplication
of
credit
per
se
or
transactions
not
outside
the
general
scope
of
the
Act
were
permissible
prior
to
1983.
As
a
result
of
the
1983
amendments
specific
limited
restrictions
were
brought
into
the
Act
in
order
to
prevent
such
schemes.
The
1986
amendments
enlarged
on
the
previous
restrictions.
The
plaintiff's
final
argument
relates
to
the
effectiveness
of
the
exercise
of
the
discretion
by
someone
other
than
the
person
who
heard
the
submissions
from
the
oil
and
gas
producers
and
other
than
the
person
who
received
the
producer's
written
submissions.
The
direction
was
subject
to
the
permission
of
the
Assistant
Deputy
Treasurer
for
Revenue
who
was
only
given
a
draft
direction
letter
to
review.
The
Financial
Administration
Act
permits
the
Provincial
Treasurer
to
authorize
employees
of
the
department
to
do
any
act
or
thing
required
or
permitted
to
be
done
by
the
Provincial
Treasurer
under
the
Act.
The
delegation
of
authority
to
the
Director
of
Audits
in
respect
of
subsection
26.1(10)
was
subject
to
the
restriction
that
he
could
not
issue
a
direction
letter
without
the
permission
of
the
Assistant
Deputy
Provincial
Treasurer
for
Revenue,
Mr.
A.H.
Kalke.
The
plaintiff
argues
that
Mr.
Kalke
ought
to
have
been
given
the
written
submissions
at
least
of
Precambrian
and
the
submissions
made
at
the
meeting
held
between
the
representatives
of
the
department
and
Precambrian.
Therefore
it
is
contended
that
Mr.
Kalke
was
not
in
a
position
to
assess
whether
or
not
he
should
give
permission
to
Mr.
Calarco
to
issue
the
direction
letter
which
exercised
the
discretion
given
to
the
Provincial
Treasurer
to
deem
the
two
companies
to
be
associated
for
purposes
of
part
6
division
1
of
the
Act.
In
support
of
this
proposition
the
plaintiff
cites
a
Privy
Council
decision,
James
Edward
Jeffs
et
al.
v.
New
Zealand
Dairy
Production
and
Marketing
Board
et
al.,
[1967]
A.C.
551.
In
that
case
the
board
had
referred
a
matter
to
a
committee
and
the
committee
heard
evidence
and
arguments
and
made
a
submission
back
to
the
board
which
adopted
the
recommendation
of
the
committee
without
any
further
hearing
and
without
consideration
of
any
further
submissions.
There
the
board
was
held
to
have
failed
to
discharge
its
duty
to
hear
the
interested
parties
before
deciding
on
the
zoning
application.
Counsel
for
the
plaintiff
submits
that
a
relevant
portion
of
the
letter
written
by
Precambrian's
solicitors
to
the
Alberta
Corporate
Income
Tax
Administration
Department
was
not
set
out
in
the
direction
letter
although
the
opinion
was
dealt
with
in
the
reasons
expressed
in
the
direction
letter.
However
it
is
felt
that
this
was
an
inadequate
consideration
in
that
the
actual
submission
was
not
passed
on
to
the
attention
of
the
assistant
deputy
provincial
treasurer,
Mr.
Kalke.
Defendant's
Argument
The
defendant
defines
the
issue
in
this
case
to
be
whether
the
carve-out
agreement
is
the
type
of
sale
or
other
transaction
which
artificially
increases
the
Royalty
Tax
Credit
in
the
opinion
of
the
Provincial
Treasurer
and
whether
that
opinion
has
been
properly
formed.
The
plaintiff
says
that
this
issue
is
not
the
same
issue
as
when
considering
whether
companies
are
associated
under
the
federal
income
tax
provisions
which
deal
with
common
control
and
cross
ownership
because
here
Dover
Park
and
Precambrian
are
entirely
different
corporations.
Royalty
Tax
Credit
is
a
discreet
system
and
the
words
"associated
corporations"
used
in
the
Act
are
there
for
a
different
purpose.
The
refundable
tax
credit
is
essentially
a
grant
or
subsidy
delivered
through
the
tax
system
out
of
the
Heritage
Trust
Fund
which
takes
this
case
outside
of
the
usual
income
tax
cases.
The
defendant
points
out
that
the
plaintiff's
appeal
under
the
Act
is
from
an
assessment
and
not
from
the
direction
letter
which
deemed
the
two
companies
to
be
associated
and
thereby
limited
both
companies
to
one
maximum
allowable
credit
for
each
year
to
be
allocated
between
each
of
them.
This
shifts
the
emphasis
away
from
the
usual
tax
cases
relating
to
methods
of
assessment
to
the
law
relating
to
the
exercise
of
a
ministerial
discretion
where
the
role
of
the
court
in
reviewing
the
transaction
is
concerned
only
with
a
review
of
the
direction
limited
to
what
the
statute
says.
An
appeal
from
an
assessment
is
an
appeal
from
the
amount
and
not
an
appeal
from
the
method
by
which
the
assessment
is
arrived
at
and
here
the
direction
was
not
part
of
the
assessment.
The
defendant
argues
that
the
ministerial
discretion
must
be
determined
before
the
assessment
operation
can
be
performed
and
that
the
court
cannot
interfere
with
the
Minister's
discretion
when
such
discretion
is
the
means
through
which
legislative
policy
is
implemented.
The
court
can
only
step
in
where
there
has
been
an
improper
exercise
of
a
discretion
but
the
court
cannot
substitute
its
own
opinion
for
that
of
the
Minister.
In
other
words
judicial
deference
is
required.
It
is
pointed
out
by
the
defendant
that
the
Act
does
not
say
that
the
Provincial
Treasurer's
opinion
must
be
reasonable.
The
plaintiff's
main
argument
that
irrelevant
facts
and
principles
were
considered
by
Alberta
Treasury
and
that
the
direction
was
issued
without
the
consideration
of
certain
relevant
facts
and
principles
is
countered
by
the
defendant's
assertion
that
the
plaintiff
has
failed
to
satisfy
the
onus
on
it
to
prove
that
the
Provincial
Treasurer
or
those
persons
authorized
to
act
on
his
behalf,
failed
to
exercise
his
discretion
properly
or
in
a
manner
which
would
invite
intervention
by
the
Court.
The
defendant
contends
that
all
of
the
allegations
made
by
the
plaintiff
in
the
notice
of
objection
and
in
particular
paragraph
10
of
the
notice
of
objection
as
expanded
by
the
statement
of
particulars,
must
be
proved
by
the
plaintiff,
that
is
to
say
the
onus
is
on
the
plaintiff
to
prove
its
case.
In
support
of
this
contention,
the
defendant
refers
to
a
1948
decision
of
the
Supreme
Court
of
Canada,
Johnston
v.
M.N.R.,
[1948]
S.C.R.
486;
[1948]
C.T.C.
195
at
page
199
(S.C.R.
489):
Notwithstanding
that
it
is
spoken
of
in
section
63(2)
as
an
action
ready
for
trial
or
hearing,
the
proceedings
is
an
appeal
from
the
taxation;
and
since
the
taxation
is
on
the
basis
of
certain
facts
and
certain
provisions
of
law,
either
those
facts
or
the
application
of
the
law
is
challenged.
Every
such
fact
found
or
assumed
by
the
assessor
or
the
Minister
must
then
be
excluded
as
it
was
dealt
with
by
these
persons
unless
questioned
by
the
appellant.
The
defendant
also
quotes
from
M.N.R.
v.
Wrights'
Canadian
Ropes,
Limited,
[1947]
C.T.C.
1;
2
D.T.C.
927;
[1947]
A.C.
109
a
decision
of
the
Privy
Council
on
appeal
from
the
Supreme
Court
of
Canada
at
pages
13-14
(D.T.C.
931;
A.C.
122)
as
follows:
.
.
.
This
right
of
appeal
must,
in
their
lordships'
opinion,
have
been
intended
by
the
legislature
to
be
an
effective
right.
This
involves
the
consequence
that
the
Court
is
entitled
to
examine
the
determinaton
of
the
Minister
and
is
not
necessarily
to
be
bound
to
accept
his
decision.
Nevertheless,
the
limits
within
which
the
Court
is
entitled
to
interfere
are
in
their
lordships'
opinion
strictly
circumscribed.
It
is
for
the
taxpayer
to
show
that
there
is
ground
for
interference
and
if
he
fails
to
do
so
the
decision
of
the
Minister
must
stand.
Moreover,
unless
it
be
shown
that
the
Minister
has
acted
in
contravention
of
some
principle
of
law
the
Court,
in
their
lordships'
opinion,
cannot
interfere:
the
section
makes
the
Minister
the
sole
judge
of
the
fact
of
reasonableness
or
normalcy
and
the
Court
is
not
at
liberty
to
substitute
its
own
opinion
for
his.
.
.
.
The
defendant
also
cites
Associated
Provincial
Picture
Houses,
Limited
v.
Wednesbury
Corporation,
[1948]
1
K.B.
223
at
page
228
for
the
proposition
that
it
is
for
those
who
assert
that
the
local
authority
has
contravened
the
law
to
establish
that
proposition.
That
case
also
contains
a
useful
discussion
concerning
the
power
of
the
courts
to
interfere
with
an
act
of
executive
authority.
The
plaintiff
has
conceded
that
it
is
not
pursuing
the
suggestion
that
the
Provincial
Treasurer
could
not
delegate
his
authority
to
exercise
the
discretion
given
to
him
under
the
Act
to
direct
that
two
companies
may
be
deemed
to
be
associated
for
the
purposes
of
part
6
division
1
of
the
Act.
The
Financial
Administration
Act
and
the
ministerial
authorizations
passed
pursuant
to
that
Act
clearly
permit
the
Treasury
Department
employees
named
in
the
ministerial
authorizations,
including
Mr.
Calarco
as
Director,
Audits,
to
do
any
act
or
thing
required
or
permitted
to
be
done
by
the
Provincial
Treasurer
under
certain
designated
sections
of
the
Act
including
subsection
26.1(10).
As
to
the
argument
that
the
decision
was
in
fact
made
by
Mr.
Kalke,
the
Assistant
Deputy
Provincial
Treasurer,
Revenue
and
not
by
Mr.
Calarco,
Director,
Audits
and
that
Mr.
Kalke
was
not
furnished
with
appropriate
material
upon
which
to
base
the
exercise
of
a
discretion,
the
defendant
argues
that
the
decision
was
in
fact
made
by
Mr.
Calarco,
the
person
who
was
in
charge
of
the
investigation
conducted
by
the
Treasury
Department
and
who
was
present
when
all
submissions
were
made
and
who
reviewed
all
of
the
material
presented
by
or
on
behalf
of
the
plaintiff.
I
accept
the
defendant's
submission
in
this
regard
and
if
I
had
any
doubts,
which
I
do
not,
as
to
whether
or
not
it
was
Mr.
Calarco’s
decision,
such
doubts
are
put
to
rest
as
a
result
of
the
memorandum
written
by
Mr.
Kalke
to
Mr.
Calarco
on
October
30,
1986
where
Mr.
Calarco
states:
I
understand
that
you
are
proposing
to
exercise
the
discretion
of
the
Provincial
Treasurer
under
section
26.1(10)
of
the
Alberta
Corporate
Income
Tax
Act
to
direct
these
corporations
to
be
deemed
to
be
associated
with
each
other
for
royalty
tax
purposes
for
the
1985
taxation
year.
Clearly
it
was
Mr.
Calarco
exercising
the
discretion,
as
he
was
authorized
to
do
and
not
Mr.
Kalke.
I
do
not
find
it
necessary
to
review
the
cases
in
support
of
the
proposition
that
the
person
making
the
decision
must
hear
the
submissions
and
the
counter
proposals
because
in
this
case
I
am
satisfied
that
Mr.
Calarco,
the
decision
maker,
was
in
possession
of
all
of
the
facts
and
heard
all
of
the
relevant
submissions
which
were
made
by
or
on
behalf
of
the
plaintiff.
Likewise
I
reject
the
plaintiff's
complaint
that
Mr.
Kalke
should
have
reviewed
the
plaintiff's
solicitor's
initial
letter
of
objection
where
such
letter
was
reviewed
by
Mr.
Calarco
and
mentioned
in
the
direction
letter
as
part
of
the
representations
made
by
the
vendor
(Precambrian).
The
defendant
says
that
it
is
necessary
to
look
at
the
substance
of
the
transaction
in
order
to
understand
how
the
Provincial
Treasurer
came
to
the
opinion
that
the
transaction
artificially
increased
the
Royalty
Tax
Credit
claimed
by
Precambrian.
When
reference
is
made
to
Provincial
Treasurer
I
am
really
talking
about
Mr.
Calarco
who
exercised
the
Provincial
Treasurer's
discretion
in
the
direction
letter
signed
by
Mr.
Calarco
as
Director,
Audits.
The
defendant
says
that
the
Provincial
Treasurer
considered
the
carve-out
agreement
from
a
business
and
practical
point
of
view
to
be
some
kind
of
financing
transaction
economically
equivalent
to
a
loan
and
quite
different
from
an
outright
sale
of
properties.
He
came
to
this
conclusion
as
a
result
of
a
consideration
of
various
factors.
The
defendant
says
that
Dover
Park
had
really
no
role
in
the
transaction
at
all
other
than
to
sell
its
tax
losses
and
that
Dover
Park
received
a
non-
recourse
loan
secured
by
the
assets
purchased
by
it
from
Precambrian
where
Dover
Park
kept
a
percentage
income
amount
(a
payment
of
15
per
cent
of
its
tax
losses)
and
all
of
the
rest
of
the
production
income
went
to
amortize
the
loan.
In
essence
the
defendant
says
the
real
relationship
was
between
Precambrian
and
its
bank,
the
same
bank
which
lent
the
money
to
Dover
Park.
Other
factors
considered
by
the
Provincial
Treasurer
were
summarized
by
the
defendant
as
follows.
Firstly
the
financing
effect.
The
defendant
says
that
this
was
supported
by
the
evidence
of
the
witnesses
Renner
and
Wilson
who
acknowledged
that
the
arrangement
was
really
a
borrowing
plus
a
purchase
of
tax
losses
and
that
the
terminating
interest
sold
to
Dover
Park
would
not
have
been
sold
outright.
The
disclosures
in
the
annual
report
and
in
the
evaluation
made
for
management
used
loan
terminology
in
order
to
explain
the
transaction.
The
defendants
submits
[sic]
that
this
is
consistent
with
the
Provincial
Treasurer's
view
of
the
business
purpose
and
the
business
effect
of
the
transaction
which
justified
the
invocation
of
the
discretion.
In
all
of
the
calculations
Royalty
Tax
Credit
was
a
very
significant
contribution
to
the
transaction.
As
originally
constituted
Royalty
Tax
Credit
formed
approximately
one-third
of
the
total
benefit
flowing
back
to
Precambrian
which
meant
that
the
retirement
of
the
moneys
advanced
by
Dover
Park
to
Precambrian
was
to
be
financially
assisted
by
Alberta
Royalty
Tax
Credit
to
the
extent
of
approximately
one-third.
I
do
not
accept
the
statements
made
by
Messrs.
Renner
and
Wilson
which
downgraded
the
significance
of
Royalty
Tax
Credits.
The
defendant
argues
that
there
was
really
no
shifting
of
risk
to
Dover
Park
which
would
normally
be
the
case
in
the
event
of
an
outright
sale
to
a
purchaser.
The
defendant
contends
that
the
witnesses
called
for
Precambrian
support
this
view
despite
the
apparent
reluctance
of
the
Continental
Bank
which
was
approached
to
lend
the
money
to
Dover
Park
in
the
first
instance.
In
looking
at
the
role
Royalty
Tax
Credit
played
in
the
carve-out
transaction,
the
defendant
says
that
there
is
no
suggestion
that
the
underlying
purpose
of
the
transaction
was
to
increase
Royalty
Tax
Credit
and
that
it
is
not
pursuing
the
test
set
out
in
paragraph
26.1
(10)(a)
of
the
Act.
The
defendant
therefore
concedes
that
there
was
a
business
purpose
for
the
transaction
other
than
increasing
Royalty
Tax
Credit.
Precambrian
was
interested
in
securing
moneys
in
return
for
a
sale
of
a
terminating
interest
of
some
of
its
producing
properties
which
meant
that
it
was
giving
up
production
income
for
a
period
of
time,
thereby
reducing
its
taxable
income
and
Dover
Park
was
securing
some
cash
flow
resulting
from
the
sale
of
a
percentage
of
its
tax
losses
to
Precambrian.
However
the
defendant
says
that
what
is
relevant
is
the
identification
of
the
party
who
in
fact
got
the
benefit
of
the
Royalty
Tax
Credit
and
that
in
this
instance
the
economic
benefit
flowed
directly
to
Precambrian.
The
evaluation
of
the
carve-out
deal
prepared
for
the
management
of
Precambrian
and
submitted
in
evidence
shows
Alberta
Royalty
Tax
Credit
as
a
part
of
the
total
benefit
flowing
from
Dover
Park
to
Precambrian.
Precambrian
was
also
aware
of
the
risk
that
such
benefits
might
not
be
available
to
it.
Its
concern
was
clearly
demonstrated
through
its
exchange
of
correspondence
with
its
accountants
and
the
lack
of
assurances
that
were
forthcoming.
In
Precambrian's
annual
report
for
1985,
entered
in
evidence,
the
producing
properties
transferred
to
Dover
Park
were
still
treated
as
part
of
Precambrian's
operations.
Reference
was
made
in
the
annual
report
to
a
deferred
production
arrangement.
Production
from
the
property
"sold"
to
Dover
Park
was
still
shown
as
Precambrian’s
net
of
royalties.
Royalty
Tax
Credit
payable
to
Dover
Park
was
shown
as
a
reduction
in
deferred
revenue
and
accordingly
reduced
the
liability
of
Precambrian.
Therefore,
the
defendant
submits,
Royalty
Tax
Credit
received
by
Dover
Park
is
shown
as
belonging
to
Precambrian.
The
defendant
argues
that
the
Provincial
Treasurer
was
entitled
to
look
to
the
income
tax
motivation
of
the
plaintiff
when
entering
into
the
carve-out
transaction
in
order
to
determine
the
substance
of
the
transaction.
The
defendant
says
that
income
tax
savings
were
a
paramount
factor
to
the
parties.
In
so
far
as
Dover
Park
was
considered
that
was
essentially
the
whole
deal.
For
Precambrian
it
was
a
paramount
consideration
other
than
the
primary
consideration
which
was
to
raise
money.
The
defendant
suggests
that
by
itself
the
tax
motivation
does
not
run
afoul
of
subsection
26.1(10)
but
it
helps
to
understand
what
the
business
purpose
and
effect
of
the
transaction
was
and
in
that
sense
is
relevant
to
the
exercise
of
the
Provincial
Treasurer's
discretion.
The
last
factor
examined
by
the
defendant
was
the
fact
that
the
common
use
of
carve-out
agreements
suggests
that
they
are
neither
abnormal
or
unusual
at
least
until
July
of
1985
when
the
income
tax
benefits
were
removed.
The
defendant
says
that
the
fact
the
transaction
may
have
been
in
common
use
does
not
prove
a
great
deal
when
looking
at
the
substance
of
the
transaction.
In
advancing
his
legal
arguments,
counsel
for
the
defendant
discussed
the
role
of
the
court
in
reviewing
the
carve-out
transaction
and
the
exercise
of
the
minister's
discretion.
He
stresses
that
this
is
an
appeal
from
the
assessment
rather
than
from
the
direction
letter
and
that
the
appeal,
being
a
statutory
right
is
therefore
limited
to
what
the
statute
says.
The
case
of
Okalta
Oils
Limited
v.
M.N.R.,
[1955]
S.C.R.
824;
[1955]
C.T.C.
271;
55
D.T.C.
1176
at
page
273
(D.T.C.
1176;
S.C.R.
825)
is
cited
for
the
proposition
that
the
word
"assessment"
found
in
subsection
69a
and
69b
of
the
Income
War
Tax
Act
R.S.C.1927,
c.
97
means
the
actual
amount
of
tax
which
the
taxpayer
is
called
upon
to
pay
by
the
decision
of
the
Minister
and
not
the
method
by
which
the
assessed
tax
is
arrived
at.
The
defendant
says
that
the
direction
was
not
part
of
the
assessment
in
this
case.
In
Pure
Spring
Company
Limited
v.
M.N.R.,
[1946]
Ex.
C.R.
471;
[1946]
C.T.C.
169;
2
D.T.C.
844,
President
Thorson
is
quoted
at
pages
196-97
(D.T.C.
856;
Ex.
C.R.
498)
where
he
discusses
the
difference
between
the
Minister's
discretionary
determination
under
subsection
6(2)
of
the
Income
Tax
War
Act
and
the
assessment
levied
by
him
under
the
powers
conferred
by
part
7,
particularly
section
55.
There
Thorson,
P.
said:
.
.
.
The
two
operations
are
quite
separate
and
distinct
in
point
of
time
and
scope
of
substance
and
the
Minister’s
functions
in
respect
of
them
are
fundamentally
different
in
character.
The
Minister’s
discretionary
determination
must
be
made
before
the
assessment
operation
can
be
performed.
It
is,
of
necessity,
antecedent
in
point
of
time,
for
the
amount
of
excessive
expense
to
be
disallowed
in
the
assessment
cannot
be
taken
into
account
in
the
computations
involved
in
it,
until
after
such
amount
has
been
determined
by
the
Minister
under
his
statutory
power.
The
amount
so
determined
is
only
one
of
many
items
entering
into
the
assessment.
and
at
page
197
(D.T.C.
857;
Ex
C.R.
499):
.
.
.
The
two
functions
also
differ
fundamentally
in
character.
In
so
far
as
the
Minister's
determination
may
involve
duties
of
a
quasi-judicial
nature
such
as,
for
example,
giving
the
taxpayer
an
opportunity
to
make
his
representations,
he
must
perform
them.
In
the
assessment
operation,
on
the
other
hand,
there
are
no
quasi-
judicial
duties
of
any
kind
to
be
performed.
The
operation
is
solely
administrative.
There
is
an
even
more
vital
difference.
The
determination
involves
the
exercise
of
a
discretion
of
a
policy
nature,
that
is
legislative
in
effect.
When
that
function
is
finished,
all
that
the
Minister
need
consider
in
respect
of
this
item,
when
he
comes
to
the
assessment
operation,
is
the
amount
of
his
statutory
determination.
The
assessment
operation
is
quite
different;
no
exercise
of
discretion
is
involved.
.
.
.
The
defendant
contends
that
there
is
an
appeal
from
the
assessment
but
not
from
the
direction
but
that
the
court
still
has
a
power
to
review
the
exercise
of
the
discretion.
The
defendant
refers
again
to
Wrights’
Canadian
Ropes,
supra,
in
defining
the
role
of
the
court
and
the
standard
of
deference
to
be
employed
by
the
court
involving
the
exercise
of
ministerial
discretion.
The
defendant
quotes
from
pages
13-14
(D.T.C.
927;
A.C.
122)
of
the
report
as
follows:
.
.
.
This
right
of
appeal
must,
in
their
Lordships'
opinion,
have
been
intended
by
the
legislature
to
be
an
effective
right.
This
involves
the
consequence
that
the
court
is
entitled
to
examine
the
determination
of
the
Minister
and
is
not
necessarily
to
be
bound
to
accept
his
decision.
Nevertheless,
the
limits
within
which
the
court
is
entitled
to
interfere
are,
in
their
Lordships'
opinion,
strictly
circumscribed.
It
is
for
the
taxpayer
to
show
that
there
is
ground
for
interference,
and
if
he
fails
to
do
so
the
decision
of
the
Minister
must
stand.
Moreover,
unless
it
be
shown
that
the
Minister
has
acted
in
contravention
of
some
principle
of
law
the
court,
in
their
Lordships'
opinion,
cannot
interfere:
the
section
makes
the
Minister
the
sole
judge
of
the
fact
of
reasonableness
or
normalcy
and
the
court
is
not
at
liberty
to
substitute
its
own
opinion
for
his.
The
defendant
also
quotes
from
Pioneer
Laundry
and
Dry
Cleaning
Ltd.
v.
M.N.R.,
[1939]
S.C.R.
1;
[1938-39]
C.T.C.
411;
1
D.T.C.
499-69;
rev'd
[1940]
A.C.
127;
2
D.T.C.
595
(P.C.)
and
in
particular
pages
416-17
(D.T.C.
499-71
to
499-72;
A.C.
136)
of
the
Privy
Council
decision
where
their
Lordships
agreed
with
the
opinion
[of]
Davis,
J.
in
which
he
states:
.
.
.
The
appellant
was
entitled
to
an
exemption
or
deduction
in
“such
reasonable
amount
as
the
Minister,
in
his
discretion,
may
allow
for
depreciation.”
That
involved,
in
my
opinion,
an
administrative
duty
of
a
quasi-judicial
character—a
discretion
to
be
exercised
on
proper
legal
principles.
In
their
Lordships'
opinion,
the
taxpayer
has
a
statutory
right
to
an
allowance
in
respect
of
depreciation
during
the
accounting
year
on
which
the
assessment
in
dispute
is
based.
The
Minister
has
a
duty
to
fix
a
reasonable
amount
in
respect
of
that
allowance
and,
so
far
from
the
decision
of
the
Minister
being
purely
administrative
and
final,
a
right
of
appeal
is
conferred
on
a
dissatisfied
taxpayer;
but
it
is
equally
clear
that
the
Court
would
not
interfere
with
the
decision,
unless—as
Davis
J.
states—"it
was
manifestly
against
sound
and
fundamental
principles.”
On
the
basis
of
the
foregoing
the
defendant
says
that
the
court
is
not
to
place
itself
in
the
position
of
the
Provincial
Treasurer
and
rehear
the
evidence
and
re-exercise
the
discretion
given
to
the
Minister
in
the
Act.
The
defendant
says
that
the
court's
role
is
judicial
review
and
not
the
right
of
appeal
from
the
exercise
of
the
discretion
by
the
Minister.
Again
the
Pure
Spring
case,
supra,
is
quoted
at
pages
487
and
494
and
Nicholson
Limited
v.
M.N.R.,
[1945]
Ex.
C.R.
191
at
page
205;
[1945]
C.T.C.
263;
[1945]
4
D.L.R.
63.
The
defendant
says
that
the
court's
role
in
the
judicial
review
of
the
exercise
of
ministerial
discretion
is
one
of
deference
and
cites
the
Supreme
Court
of
Canada
case
Oakwood
Development
Ltd.
v.
Rural
Municipality
of
St.
François
Xavier,
[1985]
2
S.C.R.
164
at
pages
173
and
174;
20
D.L.R.
(4th)
641
at
648:
.
.
.
the
general
rule
regarding
interference
with
the
discretionary
decisions
made
by
administrative
bodies
acting
under
statutory
authority
has
been
one
of
deference.
Lord
Halsbury
stated
in
Westminster
Corporation
v.
London
and
North
Western
Railway
Co.,
[1905]
A.C.
426,
at
p.
427:
Assuming
the
thing
done
to
be
within
the
discretion
of
the
local
authority,
no
Court
has
power
to
interfere
with
the
mode
in
which
it
has
exercised
it.
Where
the
Legislature
has
confided
the
power
to
a
particular
body,
with
a
discretion
how
it
is
to
be
used,
it
is
beyond
the
power
of
any
Court
to
contest
that
discretion.
Of
course,
this
assumes
that
the
thing
done
is
the
thing
which
the
Legislature
has
authorized.
.
.
.
More
recently,
and
dealing
specifically
with
applications
for
subdivision,
the
Supreme
Court
of
Canada
in
City
of
Vancouver
v.
Simpson,
supra,
at
p.
76,
approved
the
following
statement
of
Kirke
Smith
J.
in
the
Court
below:
Where,
as
here,
there
is
direct
statutory
foundation
for
the
ground
given
for
the
decision
to
approve
or
disapprove,
and
where
it
is
not
shown
that
that
decision,
despite
its
impact
on
an
individual,
was
made
in
bad
faith,
or
with
the
intention
of
discriminating
against
that
individual,
or
on
a
specious
or
totally
inadequate
factual
basis,
there
should,
in
my
opinion,
be
no
interference
by
the
court
with
municipal
officials
honestly
endeavouring
to
comply
with
the
duties
imposed
on
them
by
the
Legislature
in
planning
the
coherent
and
logical
development
of
their
areas.
In
his
review
of
whether
the
Minister
took
irrelevant
consideration
into
account
or
failed
to
take
relevant
considerations
into
account
when
forming
his
decision,
counsel
for
the
defendant
submits
that
this
concept
does
not
mean
an
examination
of
the
facts,
but
only
the
basic
factors
which
influenced
the
Minister’s
decision.
These
factors
come
out
of
the
statute
which
is
to
be
consulted
to
see
whether
or
not
the
considerations
are
relevant
or
irrelevant.
That
is
to
say
in
this
case
whether
the
carve-out
transaction
artificially
increased
the
Royalty
Tax
Credit.
Beyond
the
statutory
criteria
the
court
may
consider
whether
or
not
the
Provincial
Treasurer
failed
to
turn
his
mind
to
all
of
the
relevant
factors
or
took
irrelevant
factors
into
consideration.
Here
the
standards
are
very
high
and
we
are
not
concerned
with
trivial
matters
or
clearly
extraneous
matters.
They
must
be
all
highly
relevant
matters.
The
defendant
also
says
the
courts
are
not
concerned
with
the
weight
to
be
attached
to
the
various
factors.
That
is
within
the
Minister's
own
discretion.
Here
the
defendant
quotes
from
Elliot
and
Others
v.
London
Borough
of
Southwark,
[1976]
2
All
E.R.
781
(C.A.)
at
page
788.
.
.
It
is
not
for
the
court
to
prescribe
a
list
of
matters
which
must
always
be
considered
or
to
prescribe
which
factors
should
be
given
more
weight
than
others.
It
is
worth
repeating
that
the
function
of
the
court,
where
such
issues
are
raised,
is
not
to
substitute
its
own
opinion
or
decision
on
matters
which
Parliament
has
left
to
the
judgment
of
the
local
authority
but
to
decide
whether
the
local
authority
in
reaching
its
decision
has
acted
in
accordance
with
the
statutory
provisions.
The
defendant
contends
that
it
is
not
sufficient
for
the
plaintiff
to
demonstrate
that
some
kind
of
irrelevant
factors
may
have
been
taken
into
account.
Such
factors
must
have
had
a
substantial
influence
on
the
Minister's
decision.
We
are
referred
to
a
case
of
the
appellant
division
of
the
Alberta
Supreme
Court,
Re
United
Association
of
Journeymen
and
Apprentices
of
the
Plumbing
and
Pipefitting
Industry
of
the
United
States
and
Canada,
Local
488
and
Reynolds
et
al.,
[1976]
3
W.W.R.
303
at
page
323;
69
D.L.R.
(3d)
74
at
92
where
Moir,
J.A.
quotes
from
S.A.
de
Smith
in
Judicial
Review
of
Administrative
Action,
3rd
ed.
(1973),
page
297
as
follows:
.
It
is
immaterial
that
an
authority
may
have
considered
irrelevant
matters
in
arriving
at
its
decision
if
it
has
not
allowed
itself
to
be
influenced
by
those
matters.
.
.
.
In
applying
the
above
principles
the
defendant
says
that
the
Provincial
Treasurer
took
a
number
of
considerations
into
account
in
reaching
his
opinion
that
the
carve-out
transaction
artificially
increased
the
Royalty
Tax
Credits
claimed
by
Precambrian
and
that
such
considerations
were
relevant
and
reasonable.
Such
considerations
are
apparent
from
an
examination
of
the
direction
letter
(that
portion
already
quoted)
where
the
Provincial
Treasurer
considered
the
business
or
economic
purpose
and
result
of
the
transaction
versus
the
legal
result
that
is
a
loan
transaction
taking
advantage
of
the
tax
losses
and
Royalty
Tax
Credit
versus
a
sale
of
an
oil
and
gas
interest
and
also
his
consideration
of
who
bore
the
economic
cost
of
Royalty
Tax
Credit
and
who
reaped
the
economic
benefit
of
any
additional
Royalty
Tax
Credit.
This
information
came
from
the
disclosures
made
by
the
management
of
Precambrian
and
Dover
Park,
the
financial
statements,
the
terms
of
the
carve-out
agreement
itself,
a
consideration
of
the
risks
undertaken
by
Dover
Park,
the
importance
of
Royalty
Tax
Credit
in
the
financing
scheme,
the
purchase
of
tax
losses
from
Dover
Park
and
the
flow
of
the
Royalty
Tax
Credit
benefit
to
Precambrian.
All
of
the
above
matters
were
reasonably
considered
and
relevant
having
regard
to
the
policy
of
the
Act
which
was
to
prevent
multiplication
of
tax
credits.
The
plaintiff's
argument
that
the
public
trustee
linked
the
availability
of
Royalty
Tax
Credit
to
business
activity
is
countered
by
the
defendant
who
submits
that
such
was
not
an
error
at
all
but
resulted
from
the
plaintiff's
misunderstanding
of
the
text
of
the
direction
and
the
plaintiff's
misapplication
of
the
principles
of
law
relating
to
relevant
and
irrelevant
considerations.
As
to
the
distinction
made
by
the
Provincial
Treasurer
between
the
carve-out
transaction
and
a
normal
commercial
sale,
the
defendant
says
if
the
Provincial
Treasurer
cannot
distinguish
between
sales
resulting
in
Royalty
Tax
Credits
or
no
Royalty
Tax
Credits,
then
what
is
the
purpose
of
subsection
26.1(10)
which
refers
to
“sales”
which
artificially
increase
credit.
Such
a
consideration
can
hardly
be
held
to
be
an
irrelevant
issue.
Some
sales
do
not
artificially
increase
credits
but
the
Provincial
Treasurer
must
look
at
the
sale
to
determine
into
which
category
the
sale
fits.
In
opposition
to
the
plaintiff's
argument
that
the
Provincial
Treasurer
misinterpreted
the
word
“artificially”
the
defendant
says
that
the
real
issue
has
nothing
to
do
with
the
meaning
of
that
word.
The
issue
concerns
how
the
Provincial
Treasurer
applied
the
word
to
the
facts
and
that
is
where
his
discretion
lies.
The
Provincial
Treasurer
has
only
to
use
a
meaning
which
the
word
can
reasonably
bear
and
that
is
the
ordinary
meaning
of
the
word
in
the
ordinary
usage
of
the
English
language
as
opposed
to
a
narrow
judicial
interpretation
of
the
word.
Here
the
defendant
quotes
from
Brutus
v.
Cozens,
[1973]
A.C.
854
(H.L.(E.))
at
page
861
as
follows:
.
.
.
The
meaning
of
an
ordinary
word
of
the
English
language
is
not
a
question
of
law.
The
proper
construction
of
a
statute
is
a
question
of
law.
If
the
context
shows
that
a
word
is
used
in
an
unusual
sense
the
court
will
determine
in
other
words
what
that
unusual
sense
is.
But
here
there
is
in
my
opinion
no
question
of
the
word
“insulting”
being
used
in
any
unusual
sense.
It
appears
to
me,
for
reasons
which
I
shall
give
later,
to
be
intended
to
have
its
ordinary
meaning.
It
is
for
the
tribunal
which
decides
the
case
to
consider,
not
as
law
but
as
fact,
whether
in
the
whole
circumstances
the
words
of
the
statute
do
or
do
not
as
a
matter
of
ordinary
usage
of
the
English
language
cover
or
apply
to
the
facts
which
have
been
proved.
If
it
is
alleged
that
the
tribunal
has
reached
a
wrong
decision
then
there
can
be
a
question
of
law
but
only
of
a
limited
character.
The
question
would
normally
be
whether
their
decision
was
unreasonable
in
the
sense
that
no
tribunal
acquainted
with
the
ordinary
use
of
language
could
reasonably
reach
that
decision.
The
defendant
also
refers
to
Transalta
Utilities
Corporation
v.
Public
Utilities
Board
(1960),
21
Admin.
L.R.
1
(Alta.
C.A.)
at
page
11
where
Kerans,
J.A.
held:
.
.
.
Sometimes
a
Legislature
invites
limited
review
not
by
purporting
to
limit
the
power
of
the
reviewing
Court
but
rather
by
conferring
delegated
legislative
powers
on
the
tribunal.
When
the
delegation
is
manifest,
as
when
the
tribunal
is
empowered
to
“make
regulations”,
the
matter
is
beyond
dispute.
In
other
cases,
the
delegation
is
not
so
obvious
but
is
found
in
the
description
of
the
powers
of
a
tribunal
in
terms
which
are
at
once
imprecise
and
evocative.
The
use
of
elastic
adjectives
is
usually
considered
by
a
Court
as
an
implicit
granting
of
a
power
to
the
tribunal
to
form
its
own
“opinion”
or
make
“policy”
or
to
exercise
a
"discretion"—
in
fine,
to
make
law.
The
key
power
of
this
board
is
to
fix
“fair
and
reasonable”
rates.
This
is
a
good
example
of
a
grant
of
wide
discretion.
The
defendant
also
cites
TransMountain
Pipe
Line
Co.
Ltd.
v.
National
Energy
Board,
[1979]
2
F.C.
118
(F.C.A.)
at
page
121
as
follows:
Whether
or
not
tolls
are
just
and
reasonable
is
clearly
a
question
of
opinion
which,
under
the
Act,
must
be
answered
by
the
Board
and
not
by
the
Court.
The
meaning
of
the
words
“just
and
reasonable”
in
section
52
is
obviously
a
question
of
law,
but
that
question
is
very
easily
resolved
since
those
words
are
not
used
in
any
special
technical
sense
and
cannot
be
said
to
be
obscure
and
need
interpretation.
What
makes
difficulty
is
the
method
to
be
used
by
the
Board
and
the
factors
to
be
considered
by
it
in
assessing
the
justness
and
reasonableness
of
tolls.
The
statute
is
silent
on
these
questions.
In
my
view,
they
must
be
left
to
the
discretion
of
the
Board
which
possesses
in
that
field
an
expertise
that
judges
do
not
normally
have.
If,
as
it
has
clearly
done
in
this
case,
the
Board
addresses
its
mind
to
the
right
question,
namely,
the
justness
and
reasonableness
of
the
tolls,
and
does
not
base
its
decision
on
clearly
irrelevant
considerations,
it
does
not
commit
an
error
of
law
merely
because
it
assesses
the
justness
and
reasonableness
of
the
tolls
in
a
manner
different
from
that
which
the
Court
would
have
adopted.
In
the
present
instance
the
defendant
says
that
the
Provincial
Treasurer
has
given
the
word
artificially
a
meaning
that
such
word
can
reasonably
bear
and
the
question
to
be
answered
is
the
application
of
the
word
to
the
facts
found
by
him.
The
defendant
points
out
that
the
use
of
section
245
of
the
Federal
Income
Tax
Act
in
interpreting
subsection
26.1(10)
concerning
the
use
of
the
word
artificially
cannot
help
the
plaintiff.
In
Don
Fell
Limited,
et
al.
v.
The
Queen,
[1981]
C.T.C.
363;
81
D.T.C.
5282
(F.C.T.D.)
Justice
Cattanach
held
at
page
375
(D.T.C.
5291-92):
But,
in
my
view,
subsection
137(1)
and
subsection
245(1)
are
directed
not
only
to
sham
transactions
but
to
something
less
as
well
where
the
expense,
although
real,
would
unduly
or
artificially
reduce
a
taxpayer's
income.
In
Seramco
Ltd
Superannuation
Fund
Trustees
v.
ITC,
[1976]
2
All
ER
28,
Lord
Diplock
said
at
35:
"Artificial"
is
an
adjective
which
is
in
general
use
in
the
English
Language.
It
is
not
a
term
of
legal
art;
it
is
capable
of
bearing
a
variety
of
meanings
according
to
the
context
in
which
it
is
used.
.
.
.
He
added
that
it
is
not
synonymous
with
“fictitious”
and
he
went
on
to
say:
Where
in
a
provision
of
an
Act
an
ordinary
English
word
is
used
it
is
neither
necessary
nor
wise
for
a
court
of
construction
to
attempt
to
lay
down
in
substitution
for
it,
some
paraphrase
which
would
be
of
general
application
to
all
cases
arising
under
the
provision
to
be
construed.
Judicial
exegesis
should
be
confined
to
what
is
necessary
for
the
decision
of
the
particular
case.
.
.
.
That
being
so
and
bearing
Lord
Diplock’s
admonition
in
mind
consideration
must
be
directed
to
how
the
bonus
arrangement
came
into
being,
all
circumstances
surrounding
how
it
came
into
effect,
if
it
was
carried
out
and
if
it
was
not,
the
circumstances
why
it
was
not
carried
out
all
in
order
to
see
if
the
particular
transactions
under
review
are
properly
described
as
“artificially”
reducing
income
within
the
meaning
of
those
words
as
used
in
the
subsections.
Standard
dictionaries
are
not
authoritative
as
to
the
meaning
of
a
word
used
in
the
context
of
a
Statute
but
where
that
word
is
an
ordinary
English
word
used
in
that
sense
resort
may
be
had
to
those
works
to
ascertain
the
popular
meaning
of
the
word.
The
word
"unduly"
relates
to
quantum
and
means
"excessively"
or
"unreasonably"
and
“artificially”
means
"not
in
accordance
with
normality”.
As
to
the
effect
of
the
1986
amendments,
the
defendant
says
subsection
26.1(10)
was
in
the
statute
at
all
relevant
times
and
therefore
the
1986
amendments
cannot
be
used
in
support
of
an
inference
that
the
Act
was
deficient
in
1985
to
prevent
the
Provincial
Treasurer
from
exercising
his
discretion
to
deem
the
two
companies
to
be
associated.
Section
33
of
the
Interpretation
Act
R.S.A.
1980
c.
1-7
is
offered
by
the
defendant
as
authority
for
the
propostion
that
subsequent
statutory
amendments
are
not
normally
used
to
interpret
a
prior
statute.
Subsection
33(2)
provides
as
follows:
The
amendment
of
an
enactment
shall
not
be
construed
to
be
or
to
involve
a
declaration
that
the
law
under
the
enactment
prior
to
the
amendment
was
or
was
considered
by
the
Legislature
or
other
body
or
person
by
whom
the
enactment
was
enacted
to
have
been
different
from
the
law
as
it
is
under
the
enactment
as
amended.
Finally
the
defendant
argues
that
Alberta
and
Southern
Gas
Co.
Ltd.
v.
The
Queen,
[1977]
1
F.C.
395;
[1978]
C.T.C.
780;
78
D.T.C.
6566
(F.C.T.D.)
has
no
application
to
the
present
case
regarding
any
potential
error
of
law
made
by
the
Minister
in
exercising
his
statutory
discretion.
In
the
Alberta
and
Southern
case
both
parties
to
a
carve-out
agreement
were
in
the
petroleum
business
and
the
carve-out
permitted
the
purchaser
to
take
production
in
kind.
The
reasoning
in
the
Federal
Court
of
Appeal
affirmed
by
the
Supreme
Court
of
Canada
was
specific
to
the
statutory
scheme
under
the
Income
Tax
Act.
There
the
purchaser
was
entitled
to
certain
deductions
under
the
Income
Tax
Act
referred
to
as
Canadian
oil
and
gas
property
expenses.
This
was
a
statutory
exemption
to
promote
the
type
of
expenditure
made
by
the
purchaser.
Section
245
of
the
Income
Tax
Act
was
held
to
be
inappropriately
applied
as
a
general
anti-avoidance
rule
to
stop
the
allowance
of
such
an
expenditure.
The
defendant
says
that
the
court
in
the
Alberta
and
Southern
case
had
to
find
that
the
general
anti-avoidance
rule
under
section
245
was
sufficient
to
override
the
specific
incentive
deduction
found
elsewhere
in
the
Income
Tax
Act.
In
the
case
before
us
just
the
reverse
is
true
where
subsection
26.1(10)
specifically
and
exclusively
deals
with
Royalty
Tax
Credits
being
its
only
function.
Where
Royalty
Tax
Credit
is
the
incentive
with
a
maximum
allowable
limit,
subsection
26.1(10)
is
there
to
preserve
that
maximum
allowable
limit
and
to
protect
the
integrity
of
the
Royalty
Tax
Credit
system.
The
defendant
points
out
that
section
245
is
not
discretionary,
it
is
just
another
tax
rule
whereas
subsection
26.1(10)
is
discretionary
and
therefore
the
role
of
the
Provincial
Treasurer
is
completely
different
than
as
if
he
were
applying
a
non-discretionary
income
tax
provision.
Further
the
defendant
says
that
the
Alberta
and
Southern
case
does
not
hold
that
the
carve-out
agreement
there
was
not
artificial.
That
case
holds
that
one
result
of
the
carve-out
transaction,
the
deduction
allowed
to
the
purchaser
for
the
cost
of
acquiring
properties,
does
not
artificially
decrease
income.
Here
we
are
considering
a
different
result
of
a
carve-out
that
is
an
unusual
result
unlike
deductions
allowed
to
a
purchaser
which
is
a
necessary
result
of
all
carve-outs.
Furthermore
the
defendant
says
that
section
245
of
the
Income
Tax
Act
does
not
refer
to
a
sale,
just
to
a
"transaction
or
operation".
Subsection
26.1(10)
of
the
Act
does
refer
to
a
sale
and
therefore
the
Provincial
Treasurer
must
examine
sale
transactions
to
determine
if
such
a
transaction
artificially
increases
the
Royalty
Tax
Credit.
The
defendant
submits
that
unlike
the
case
in
section
245,
there
have
to
be
two
or
more
corporations
involved
when
the
Minister
considers
whether
there
has
been
a
multiplication
in
Royalty
Tax
Credits
as
a
result
of
artificial
increases
in
the
Royalty
Tax
Credits.
The
defendant
concludes
that
the
Provincial
Treasurer
made
it
clear
in
his
direction
letter
that
he
considered
the
Alberta
and
Southern
case
and
considered
it
not
to
be
binding
on
his
decision.
Decision
There
is
no
doubt
that
without
the
exercise
by
the
Minister
of
his
discretion
to
deem
the
two
companies
to
be
associated
with
each
other
for
the
purpose
of
calculating
their
entitlement
to
Alberta
Royalty
Tax
Credit,
both
Dover
Park
and
Precambrian
would
have
been
entitled
to
receive
Alberta
Royalty
Tax
Credits
totalling
in
the
aggregate
an
amount
in
excess
of
the
maximum
allowable
credit
of
two
million
dollars.
Each
company
was
in
receipt
of
production
income
on
which
crown
royalties
were
payable
and
which
royalties
were
not
allowed
to
be
used
as
a
deduction
from
income
under
the
provisions
of
the
Federal
Income
Tax
Act.
The
carve-out
agreement
was
entered
into
for
legitimate
business
purposes
on
the
part
of
each
company.
Precambrian,
for
the
purpose
of
raising
capital
to
meet
anticipated
expenditures,
and
Dover
Park
to
recapture
a
portion
of
its
previous
tax
losses.
The
defendant
has
conceded
that
paragraph
26.1(10)(a)
does
not
apply
where
the
sale
or
transaction
lacks
any
substantial
business
purpose
other
than
increasing
the
aggregate
amount
of
Royalty
Tax
Credit
that
may
be
claimed.
However
paragraph
(b)
does
not
limit
the
Provincial
Treasurer
from
exercising
his
discretion
to
deem
two
companies
to
be
associated
where
the
effect
of
the
sale
or
transaction
is
limited
only
to
an
artificial
increase
in
the
Royalty
Tax
Credit
that
may
be
claimed.
There
may
be
business
purposes
beyond
any
increase
in
Royalty
Tax
Credit
and
the
Minister
is
still
able
to
invoke
his
discretion
in
the
event
he
is
of
the
opinion
that
the
sale
or
transaction
also
artificially
increases
the
Royalty
Tax
Credit
notwithstanding
any
accompanying
business
purpose
for
the
transaction.
Hence
any
discussion
concerning
the
legitimate
business
purposes
for
the
sale
or
transaction
becomes
superfluous
once
the
Provincial
Treasurer
has
formed
the
opinion
that
the
sale
or
transaction
artificially
increases
the
Royalty
Tax
Credit.
I
agree
that
it
is
necessary
to
review
the
Act
in
order
to
determine
the
policy
and
objectives
of
the
legislation.
This
presents
no
great
difficulty
in
the
present
instance.
The
Provincial
Legislature
wished
to
relieve
certain
oil
and
gas
producers
from
the
adverse
effects
of
having
Alberta
crown
royalties
disallowed
as
a
deduction
from
income
when
calculating
federal
income
tax.
A
credit
was
to
be
allowed
to
such
producers
on
crown
royalties
payable
by
them
up
to
certain
prescribed
limits
in
each
year.
In
order
to
provide
against
a
multiplication
of
credits
beyond
the
maximum
allowable
credit,
certain
safeguards
had
to
be
built
into
the
Act
including
the
provision
deeming
corporations
to
be
associated
and
therefore
entitled
to
receive
only
one
maximum
allowable
credit
to
be
shared
or
allocated
between
them.
The
Act
does
not
distinguish
between
types
of
interests
sold
nor
the
permanency
of
sales
nor
does
it
require
an
increase
in
crown
royalties
as
a
result
of
such
sales
or
transactions
in
setting
guidelines
covering
the
application
of
the
anti-multiplication
provisions
of
the
Act.
The
discretion
as
to
whether
corporations
shall
be
deemed
to
be
associated
lies
entirely
with
the
Minister.
In
order
to
entertain
the
opinion
that
there
has
been
an
artificial
increase
in
Royalty
Tax
Credits,
the
Minister
must
take
as
many
relevant
factors
into
consideration
as
the
circumstances
of
the
transaction
open
to
him.
If
a
sale
or
transaction
results
in
greater
drilling
activity
which
in
turn
produces
greater
resulting
crown
royalties,
I
can
hardly
think
that
that
would
not
be
a
factor
in
the
Minister
deciding
that
such
a
sale
or
transaction
did
not
artificially
increase
Royalty
Tax
Credits.
The
factors
mentioned
by
the
defendant
in
its
argument
which
assist
in
the
determination
of
the
substance
and
effect
of
the
carve-out
agreement
as
well
as
the
comparables
mentioned
in
the
Minister's
opinion
do
not
appear
to
me
to
be
irrelevant
considerations.
Such
comparables
as
normal
commercial
transactions,
additional
business
activity
which
creates
additional
crown
royalty,
sold
outright,
economic
risks
and
a
lasting
business
enterprise
were
of
obvious
concern
to
the
Minister
in
reaching
a
conclusion
as
to
whether
or
not
the
carve-out
agreement
had
the
effect,
even
amongst
other
consequences,
of
artificially
increasing
Royalty
Tax
Credit.
The
cases
quoted
by
both
the
plaintiff
and
the
defendant
pursuade
me
that
in
the
circumstances
of
this
case,
the
Minister
did
not
take
into
account
any
irrelevant
factors
nor
did
he
fail
to
take
into
account
any
relevant
considerations
when
he
examined
the
substance
of
the
carve-out
agreement
and
concluded
that
"one
result
of
the
carve-out
transaction
was
to
synthesize
an
abnormal
or
artificial
amount
of
Royalty
Tax
Credit".
The
Provincial
Treasurer
had
the
task
of
determining
whether
the
carve-out
agreement
could
stand
the
test
between
what
he,
in
his
opinion,
considered
would
artificially
increase
Alberta
Royalty
Tax
Credits
and
what
would
not
in
order
to
carry
out
the
legislative
objectives
of
the
Act.
The
discretion
was
his
alone
to
exercise
as
well
as
the
weight
to
be
attached
to
each
factor.
The
cases
cited
by
the
defendant
concerning
the
exercise
of
ministerial
or
administrative
discretion
do
not
permit
the
court
to
interfere
with
the
exercise
of
such
discretion
where,
as
here,
a
review
of
the
Minister’s
actions
does
not
disclose
anything
unfairly,
improperly
or
illegally
done
by
the
Minister.
Judicial
deference
is
required
in
this
case.
I
accept
the
defendant's
argument
concerning
the
Minister's
use
of
the
word
“artificial”.
I
find
from
reading
the
Minister's
opinion
set
out
in
the
direction
letter
that
the
Minister
used
a
meaning
which
the
word
can
be
[sic]
reasonably
bear
and
that
is
the
ordinary
meaning
of
the
word
in
the
ordinary
usage
of
the
English
language.
Without
the
intervention
of
the
carve-out
agreement,
Precambrian
would
only
have
been
entitled
to
the
benefit
of
the
maximum
allowable
amount
of
Royalty
Tax
Credits.
The
carve-out
agreement
provided
an
ingenious
strategy
by
which
additional
Royalty
Tax
Credits
accrued
to
the
benefit
of
Precambrian.
It
is
not
stretching
the
meaning
of
the
word
artificial
used
in
its
ordinary
sense
for
the
Minister
to
form
the
opinion
that
in
these
circumstances
the
carve-out
transaction
artificially
increased
the
Royalty
Tax
Credit
claimed
by
Precambrian.
Nor
is
the
fact
that
Dover
Park's
entitlement
to
Alberta
Royalty
Tax
Credits
accrued
to
the
benefit
of
Precambrian
an
irrelevant
consideration
and
therefore
an
error
of
law.
Such
a
result
was
relevant
in
determining
whether
such
an
arrangement
artificially
increased
Royalty
Tax
Credit.
Precambrian's
own
witnesses
acknowledged
that
the
carve-out
agreement
pushed
Royalty
Tax
Credits
claimed
by
Dover
Park
and
Precambrian
and
flowing
to
the
sole
benefit
of
Precambrian
beyond
the
two
million
dollar
maximum
allowable
credit
in
1985
and
1986.
Surely
it
is
not
irrelevant
for
the
Provincial
Treasurer
to
look
through
the
transaction
in
order
to
determine
what
in
fact
was
the
effective
result
of
the
transaction.
What
the
Provincial
Treasurer
found
here
was
a
sophisticated
scheme
designed
to
raise
capital
at
the
lowest
possible
cost
taking
advantage
of
the
Alberta
Royalty
Tax
Credit
incentive
program
where
the
benefits
of
the
program
were
not
retained
by
an
active
participant
in
the
oil
and
gas
industry
but
passed
on
to
a
company
about
to
reach
the
upper
limit
of
its
Royalty
Tax
Credits.
The
initial
recipient
of
the
Royalty
Tax
Credits
was
nothing
more
than
a
conduit
through
which
the
tax
credits
passed
in
return
for
a
nominal
payment
for
its
otherwise
unutilized
tax
losses.
I
find
that
1986
amendments
[sic]
to
the
Act
have
no
bearing
on
the
interpretation
of
the
Act
as
it
was
in
1985.
Not
only
were
the
anti-multiplication
provisions
set
out
in
subsection
26.1(10)
of
the
Act
available
to
the
Minister
in
1985
but
having
regard
to
subsection
33(2)
of
the
Interpretation
Act,
supra,
I
do
not
believe
that
it
is
possible
for
me
to
take
such
amendments
[sic]
into
consideration
when
interpreting
the
Act
as
it
stood
in
1985.
The
reference
to
the
Alberta
and
Southern
case,
supra,
was
an
interesting
analogy
because
that
case
and
this
case
both
dealt
with
carve-out
agreements.
However,
for
the
reasons
advanced
by
the
defendant,
I
find
that
the
Alberta
and
Southern
case
has
no
application
here.
The
onus
was
on
the
plaintiff
to
prove
that
the
direction
by
the
Minister
that
Precambrian
and
Dover
Park
are
deemed
to
be
associated
corporations
for
the
purpose
of
claiming
Alberta
Royalty
Tax
Credits
was
in
error.
The
plaintiff
has
not
discharged
that
onus
and
accordingly
the
plaintiff's
appeal
is
dismissed.
Costs
may
be
spoken
to
if
required.
Appeal
dismissed.
EXHIBIT
“A”
Conveyance
and
Management
Agreement
The
basic
concept
behind
the
conveyance
and
management
agreement
is
that
when
the
net
proceeds
(which
was
a
running
cumulative
amount)
caught
up
to
the
termination
amount
(which
was
a
running
cumulative
amount)
then
the
term
interest
would
terminate.
The
termination
amount
meant,
at
any
point
in
time,
the
aggregate
of:
(i)
the
purchase
price
=
$14,000,000,
plus
(ii)
the
designated
amount
pegged
at
the
end
of
the
calendar
month
immediately
prior
to
the
particular
time,
plus
(iii)
the
percentage
income
amount
pegged
at
the
end
of
the
calendar
month
immediately
prior
to
the
particular
time,
minus
(iv)
the
option
price
$75,000
The
designated
amount
was
a
cumulative
amount
calculated
at
the
end
of
each
month
equal
to:
|
1.
Prime
+
3/4%
X
|
(i)
$14,000,000,
plus
|
|
12
|
|
|
(ii)
the
designated
amount
(at
the
|
|
previous
month
end),
plus
|
|
(iii)
the
precentage
income
amount
(at
|
|
the
previous
month
end),
minus
|
|
(iv)
net
cash
proceeds
(at
the
start
of
|
|
the
month)
|
|
plus
|
|
2.
The
cumulative
designated
amount
at
the
end
of
the
immediately
prior
calendar
month.
The
designated
amount
was
deemed
to
be
nil
at
April
30,
1985
and
deemed
to
be
$71,000
at
May
31,
1985.
The
percentage
income
amount
was
a
cumulative
amount
determined
at
the
end
of
a
month
equal
to
the
aggregate
of
a
series
of
monthly
calculated
amounts
including
a
calculation
for
that
month.
Each
of
these
series
of
monthly
amounts
equalled
15
per
cent
of
the
notional
taxable
income
of
the
purchaser
for
that
month
calculated
as
if
the
month
was
a
tax
year
and
the
purchaser's
only
source
of
income
was
production
from
the
assets.
The
notional
taxable
income
was
calculated
on
the
basis
that
the
purchaser
deducted
each
month
the
deductible
expenses
for
the
month
attributable
to
the
production
from
the
assets
including
a
deemed
expense
equal
to
the
amount
to
be
added
to
the
designated
amount
for
the
month
and
certain
tax
deductions
such
as
the
resources
allowance.
The
termination
point
meant
the
the
earliest
of:
(i)
12:01
a.m.
on
the
day
immediately
following
the
day,
if
ever,
net
proceeds
first
equalled
or
exceeded
the
termination
amount;
(ii)
12:01
a.m.
on
the
day
immediately
preceding
the
day
on
which
all
the
leases
terminated;
and
(iii)
12:01
a.m.
on
May
1,
2005.
For
the
purposes
of
calculating
the
termination
point,
net
proceeds
meant
a
cumulative
amount
equal
to
the
aggregate
of:
(i)
proceeds
received
by
the
purchaser
for
production
(other
than
injection
gas)
on
the
basis
that
such
proceeds
were
receivable
on
delivery
to
a
purchaser;
plus
(ii)
government
incentives
and
grants
(other
than
ARTC
and
reductions
of
Crown
royalty);
plus
(iii)
proceeds
of
business
interruption
insurance
relating
to
the
assets;
plus
(iv)
take-or-pay
or
similar
prepayments
received
in
respect
of
the
assets;
less
the
aggregate
of:
(v)
Alberta
Crown
royalty
net
of
any
ARTC
attributable
thereto
(and
net
of
any
other
reductions
to
such
Crown
royalty);
p/us
(vi)
operating
costs;
p/us
(vii)
PGRT
net
of
any
PGRT
tax
credits;
plus
(viii)
intangible
development
costs;
plus
(ix)
other
taxes,
royalties
and
charges
(net
of
credits)
levied
by
government
but
not
income
tax
or
capital
tax);
plus
(x)
other
costs
and
expense
charged
to
the
purchaser
by
Precambrian
as
manager
of
the
assets.
It
should
be
noted
that
in
calculating
the
designated
amount,
net
cash
proceeds
is
used
rather
than
net
proceeds.
Net
cash
proceeds
is,
generally,
net
proceeds
converted
to
some
extent
to
a
cash
receipt
basis
from
an
accrual
basis.
Examples
Month
7—ending
May
31,
1985
Net
Proceeds
Net
Cash
Proceeds
Proceeds
$125,000
$0
Crown
royalties
($
30,000)
($30,000)
ARTC
$
15,000
$15,000
Operating
costs
($
15,000)
($15,000)
PGRT
(net
of
credit)
($
2,500)
($
2,500)
Net
proceeds
$92,500
($32,500)
Designated
Amount
=
$71,000
(deemed
amount)
Percentage
Income
Amount
Proceeds
$125,000
Operating
costs
($
15,000)
Resource
allowance
($
27,500)
Designated
amount
expense
($
71,000)
$
11,500
Percentage
Income
Amount
=
$11,500
x
15%
=
$1,725
Termination
Amount
|
Purchase
price
|
$14,000,000
|
|
Designated
amount
|
|
$0
|
|
Percentage
income
amount
|
|
$0
|
|
Less
option
price
|
($
|
75,000)
|
|
Termination
amount
|
$13,925,000
|
|
Month
2—ending
June
30,1985
|
|
|
Net
Proceeds
|
Net
Cash
Proceeds
|
|
Proceeds
|
$250,000
|
$0
|
|
Crown
royalties
|
($
60,000)
|
($60,000)
|
|
ARTC
|
$
30,000
|
$30,000
|
|
Operating
costs
|
($
30,000)
|
($30,000)
|
|
PGRT
(Net
of
credits)
|
($
5,000)
|
($
5,000)
|
|
$185,000
|
($65,000)
|
|
Previous
net
proceeds
|
$
92,500
|
|
|
Net
proceeds
|
$277,500
|
|
Designated
Amount
1.
10.75
x
$14,000,000
purchase
price
$
71,000
designated
amount
(previous
month
end)
$
1,725
percentage
income
amount
(previous
month
end)
$
32,500
(—
1
X
negative
net
cash
proceeds
at
start
of
month)
.896%
x
$14,105,225
$126,383
1.
$126,383
plus
2.
$
71,000
Previous
month
end
cumulative
designated
amount
$197,383
Designated
amount
at
June
31,
1985
$197,383
Percentage
Income
Amount
Proceeds
$
25,000
Operating
costs
($
30,000)
Resource
allowance
($
55,000)
Designated
amount
expense
($126,383)
$
38,617
Percentage
income
amount
(month)
$38,617
x
15%
=
$5,793
Cumulative
percentage
income
amount
$
5,793
4-
$1,725
=
$7,518
|
Termination
Amount
|
|
|
Purchase
price
|
|
$14,000,000
|
|
Designated
amount
(at
previous
month
end)
|
$
|
71,000
|
|
Percentage
income
amount
(at
previous
month
|
|
|
end)
|
|
$
|
1,725
|
|
Less
option
price
|
|
($
|
75,000)
|
|
Termination
amount
|
=
|
$13,997,725
|
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