Antares Oil & Gas LTD (In Liquidation) v. Minister of National Revenue, [1983] CTC 2157, 83 DTC 139

The Assistant Chairman:—Antares Oil & Gas Ltd (hereinafter referred to as the “appellant” or “Antares”) has appealed to this Board from assessments of income tax for the 1977 and 1978 taxation years. Prior to 1977, another company, Clark Oil Producing Ltd (hereinafter referred to as “Clark”), a corporation carrying on business in Canada, was alleged to have incurred about $4,657,000 in undeducted Canadian exploration and development expenses, which expenses it is alleged were substantially on property subsequently transferred to the appellant. Concurrently, Hudson’s Bay Oil and Gas Company Limited (hereinafter referred to as “H Bay”) was a corporation carrying on business in the Province of Alberta.

The appellant’s contention was that H Bay agreed to buy certain Arctic permits on December 31, 1975 and that, also on that same date at 5:00 pm (after the H Bay deal), Antares agreed to buy all remaining resources. As a result, the appellant deducted $634,038 in Canadian exploration and development expenses pursuant to subsection 66(6) of the Income Tax Act, RSC 1970-71-72, c 63 as amended. That subsection reads in part as follows:

66. (6) Where a corporation.. .has.. .acquired.. .from another corporation... all or substantially all of the property of the predecessor corporation used by it in carrying on in Canada such of the businesses described in any of subparagraphs .. .as were carried on by it, there may be deducted by the successor corporation in computing its income under this Part for a taxation year. ..

Counsel for the appellant submits that the appellant comes within the ambit of that section and so the appeal should be allowed. Counsel for the Minister concurs that, if I find true that what was sold was “all or substantially all of the property of the predecessor corporation used by it in carrying on in Canada such of the businesses described in any of subpara- graphs. . then the appellant otherwise satisfies the requirements of that section and subsection.

Exactly what transpired? The only evidence given was by a Mr John Brown, who described himself as a “land man”. He is familiar with Clark history in Canada. At first he was employed by Clark Oil Producing Ltd (same name as Clark, except the US parent company). He was with that company until 1975. That US company had a permit in the Arctic islands, and refining and marketing operations in the US. It was successful and wanted to get into production in foreign countries. Because of the political climate in Canada, Clark (Canadian) was formed as a subsidiary. This company opened its office in 1960, closed it down and subsequently reopened it, and in 1970 hired Mr Brown as Canadian manager. Initially he was involved in the Arctic permits and later got involved in Saskatchewan, Manitoba and Alberta production. It wanted to get production for the US operation. Canadian legislation with respect to oil and gas land requiring that Canadian companies have an interest in the permits, slowed down the arctic effort. It was at this time that Panarctic was created. The only cost to Clark for the permits was the filing fee for the claims. Those permits ran out in 12 years. However, in doing everything necessary to keep the permits alive, Clark’s interest was reduced to 20%. Clark had only a passive interest in Panarctic— really down to what is called a “carried interest”. Clark did nothing in the Arctic islands but worked in southern Canada. When oil was discovered at Prudhoe Bay in 1968 or thereabouts, interest in Arctic exploration was stimulated. Clark sold all producing properties in Canada to the appellant. Panarctic Oils Ltd did the Arctic exploration but stopped because of the cost.

In 1975 Clark decided to sell its assets and close out its activities. Mr Brown was put in charge of selling and he did sell:

1. The Saskatchewan operation;

2. The Arctic island permits; and

3. Some wildcat acreage;

and the closing date was December 31, 1975. According to the agreements, the sale to H Bay was first (12:01 am—December 31) and the sale to the appellant was at 5:00 pm—December 31.

Based on the agreements, I find the sale of the property to H Bay was anterior in time to the sale to the appellant and so, when the property was sold to the appellant, the appellant was within the section and so the appeal is allowed and the assessments remitted to the respondent for variation to assess the appellant as filed.

Appeal allowed.